SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year ended December 31, 1997

Commission file number 0-3680

INDUSTRIAL ACOUSTICS COMPANY, INC.
(Exact name of registrant as specified in its charter)

New York 13-1713318
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1160 Commerce Avenue, Bronx, New York 10462
(Address of principal executive office) (Zip Code)

Registrant's telephone number, including area code (718) 931-8000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common stock, $0.10 par value

Indicate by check mark whether the registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [X]

The aggregate market value of the Common Stock held by
non-affiliates of the registrant on March 23, 1998 was $6,250,570.

The number of shares outstanding of registrant's common stock, as
of December 31, 1997, was 2,978,961.

Documents Incorporated by Reference.

A portion of the Proxy Statement to be filed in connection
with the Annual Shareholders' Meeting to be held in 1998 is incorporated by
reference in Item 11, Part III hereof. The Form 8-K to be filed on or about
March 31, 1998 is incorporated by reference in Item 13, PART III hereof.

The Exhibit Index is located on sequential page 27.

Part I

Item 1. Business

Industrial Acoustics Company, Inc. (hereafter with its
subsidiaries referred to as the "Company," except where distinction is made
between it and a subsidiary or subsidiaries, in which event it will be referred
to as "IAC") was incorporated under the laws of the State of New York on July
27, 1951. The Company is engaged in essentially one business: the development,
manufacture, fabrication, installation and sale of a line of products designed
to suppress noise and to condition the acoustical environment inside enclosed
spaces.
The Company operates in two primary geographic areas: (1) North
America, consisting of the United States and Canada, and (2) Europe, including
principally the United Kingdom and Germany. Reference is made to Note I to the
Consolidated Financial Statements in Item 8 of this Report, for the amount of
net sales, operating profits and assets of the Company for each of the last
three years, attributable to its North American and European operations.

For the year ended December 31, 1997, there were no changes in the
mode of conducting the business of the Company that were material and not in
the ordinary course of its business.

The Company's products include acoustically controlled modular
rooms or enclosures (in which outside noise is reduced or which contain the
noise produced inside them), and silencer units and systems (which

are products designed to reduce air/gas flow noise from particular sources or
items of equipment). Regardless of size, application or marketplace
nomenclature, the products, in the main, possess a commonality of technology,
engineering, design and manufacturing know-how.

Acoustically controlled environments include soundproof medical
life sciences rooms which are used for research on, and the examination of,
humans and animals, and which may be assembled in suites according to the
customer's needs; completely assembled industrial soundproof offices; music
practice rooms; components for modular noise suppression enclosures; and
structures to house industrial, processing, electrical, power plant and air
conditioning machinery. The foregoing items are largely standard items sold by
catalog. The products are used both in new construction and in existing
buildings because the products provide predictable acoustical performance
characteristics, which the Company believes are not achievable on an equivalent
cost basis with conventional construction. These installations are demountable
and can be reassembled at another site without loss of performance.

Also included, as acoustically controlled environments, are
movable ceiling-track operable acoustical walls and integrated acoustical
ceilings, reverberant and anechoic (echo-free) chambers for medical and
industrial research, manufactured to customers' dimensional specifications and
specific acoustical requirements.

A more recent product involves security rooms, which include the
following three characteristics: acoustic shielding, radio frequency

shielding and maximum security against physical assault.

Silencer units and systems include silencers for large and small
central air conditioning systems, which are standard items; silencers
manufactured or significantly adapted to customers' specifications for
mechanical draft fans, diesel engines, steam ejectors and air compressors;
housings and silencers for gas turbine and diesel engine operated power plants,
including marine installations, jet engine test cells, jet aircraft Hush House
Test Facilities, wind tunnel silencers and ground run-up noise suppressors for
testing of subsonic and supersonic jet aircraft engines and silencers for
aircraft cabin pressure and environment control systems. There is also a strong
interest in silencers, rooms and enclosures with severe low frequency noise
control requirements, technologies which the Company considers part of its
expertise.

In certain cases, where the technical sophistication of the
products being installed by the Company, or their sensitivity to end use
conditions, requires the Company to supervise the work of construction,
electrical, computer and mechanical engineering, design or other
subcontractors, the Company has been retained to act as turnkey general
contractor for the customer. Market conditions for the Company's products may
require the Company increasingly to perform in this capacity, which entails an
additional risk to the Company when the Company is required to hire, supervise
and be responsible for subcontractors, and to guarantee substantial compliance
with the customer's performance specifications. See "Contract Risks", below.

In 1997, 1996 and 1995, revenues from the Company's Hush House
Test Facilities accounted for 2%, 15% and 8% of consolidated revenues of the
Company. In 1997, 1996 and 1995, revenues from the Company's Engine Test Room
product line accounted for 17%, 15% and 7% of consolidated revenues of the
Company. No other single product or service of the Company accounted for more
than 10% of its consolidated revenues in any of the last three years.

For sales purposes, the Company has identified market areas where
representatives promote its products. Market areas include medical life
sciences, doors and windows, heating, ventilation and air conditioning
("HVAC"), aviation and marine gas turbines, acoustical structures and
architectural applications. The Company's products are constantly being
modernized and improved through research and development, and, as discussed
below, new products are regularly introduced to expand the Company's sales
base.

Recently Developed Products. The Company has introduced or is
introducing several recently developed products, including:
1) Fiberfree wall and ceiling sound absorbers to answer
concerns about indoor air quality and health associated with conventional
fibrous materials.
2) Fiberfree air/gas flow attenuators to take the place
of fibrous duct lining in HVAC systems. Again, the purpose is to improve indoor
air quality and answer health concerns due to the presence of fibrous
materials.
3) New mini-booth for hearing testing designed to provide

easier access and greater comfort during testing.

4) Quad Series VIII Studio line provides 65dB noise
reduction for TV/radio broadcasting, recording and music practice. It includes
an adjustable acoustical environment and an STC 64 Noise-Lock Dual-Mode Door.

5) The improved high-performance Noise-Lock Doors have
certified ratings up to STC 64. New tooling has been introduced to further
improve quality while allowing manufacturing flexibility.

6) More Hybrid Active Dissipative Test Silencers have
been designed and IAC is able to offer such silencers for selected
applications.

7) On-going research into materials and finishes
compatible with the latest manufacturing processes ensures that the Company's
products maintain the highest possible standard of quality.

8) Higher performance requirements for Operable Walls
resulted in the development of a new product: The Super-Mega Wall(TM) is
lab-rated at STC, probably the highest acoustical rating for a single operable
wall. IAC's Operable Walls are used worldwide in convention centers, hotels,
conference rooms and wherever halls/rooms are subdivided for multiple functions
or conferences.

9) Another new product is the 150 Hz Metadyne(TM)
Anechoic Wedge offering more economical free-field testing space. It is only
19.5in (495mm) deep against a conventional wedge requiring 28in (711mm) for a
cut-off frequency of 150 Hz. It is a lower cost version of the highly
successful Metadyne Anechoic Wedge where test activities focus on sound
frequencies higher than 150 Hz.

IAC on the Internet. To take advantage of modern communications
technology, the Company introduced its Website
HTTP://WWW.INDUSTRIALACOUSTICS.COM, giving customers instant on-line access to
new product information, specifications and news releases and other acoustical
resources. The Company has also established E-mail for all departments and
INFO@INDUSTRIALACOUSTICS.COM has been established as the address for all
inquiries.
In 1997, the Company began distributing its "MAKING THE WORLD A
QUIETER PLACE" Multimedia CD providing extensive product and technical
information. This compliments IAC's current participation in the SweetSource(R)
CD program and IAC's presence on the Internet.

The Website, the Multimedia CD ROM and SweetSource will enable
architects, engineers, designers and others to download drawings and
specifications as part of their professional proposals.

Distribution. Domestically, IAC sells primarily through 149 North
American and 22 foreign manufacturers' representatives. The representative's
contract typically assigns products and territory and provides for the payment
of commissions, varying from approximately 5% to 25% of the selling price. Such
contracts are normally cancelable by either party upon 30 days' written notice.
In addition, there are 14 sales managers at the home office in New York. In the
United Kingdom, IAC's wholly-owned British subsidiary, Industrial Acoustics
Company, Limited ("IAC, Ltd."), sells through 135 manufacturers'
representatives and employs 3 sales managers and 10 direct salesmen. In
Germany, Industrial Acoustics Company Gmbh, a wholly-owned subsidiary of IAC,
Ltd., employs 10 persons and acts primarily as a marketing, sales and

engineering arm for IAC, Ltd.

Raw Materials and Manufacturing. The domestic operation
manufactures the major portion of its products, utilizing steel, fibrous
acoustical materials, electronic and electrical systems and miscellaneous
hardware, all of which are obtainable from a number of suppliers. In the United
Kingdom, certain components for silencers for gas turbine and diesel engines
and jet engine test cells are manufactured by subcontractors.

An increasing volume of the Company's product line is being fully
manufactured and assembled (including installation of lighting, temperature,
humidity, and radio frequency control systems) in the Company's plants in New
York, South Carolina and the United Kingdom. Many contracts require
installation on site. Assembly is accomplished by subcontracting or by hiring
the necessary labor and supervising the installation. The Company does not
anticipate any substantial difficulties in fulfilling customer requirements in
1998.

Patents. It has been the Company's policy, whenever possible, to
obtain patent protection with respect to its product line, both in and outside
the United States. The Company owns or has expired patents covering its
"Dura-Stack" Jet Engine Noise Suppression System, QuietDuct and Packless
Silencers, Movable Wall Systems, Security Rooms, Strong Abuse Resistance
Ceilings for correctional institutions, Metadyne Perforated Metal Protected
Wedges and several other products. The Company's patents have expiration dates
ranging from the year 1998 through the year 2011.

The Company believes that although its patents are valuable, the

loss of any of its patents would not have a material adverse impact on its
operations. The patents owned by the Company are not included as assets in the
consolidated balance sheet of the Company.

Contract Risks. The Company is increasingly being requested to
oversee and be responsible for not only the manufacture of its products but
also their installation. In such instances where the Company is retained as
turnkey contractor, it may be required to act as a general contractor and
guarantee substantial compliance with customers' performance specifications; as
a result, the Company may be required to cover certain unanticipated costs to
ensure proper installation of the Company's products or satisfactory completion
of work subcontracted to other suppliers by the Company.

Some of the Company's contracts with the United States Government,
which are fixed price contracts, have delivery schedules extending for more
than one year. Under applicable United States Government procedures, such
contracts may be subject to annual funding. Accordingly, there is some risk,
even after a United States Government contract has been awarded to the Company,
that the necessary funding for purposes of the contract may not be made
available in subsequent years to the relevant United States Government agency.
United States Government contracts may also be subject to termination for
convenience by the government, in which event the Company would be entitled to
recover incurred costs on completed units, work in progress and profits
associated with such costs.

Customers. The Company sells its products to a broad spectrum
of business enterprises, institutions and governmental agencies. In

1997, 1996 and 1995, sales to institutional, industrial and commercial
customers, state, local and foreign government agencies accounted for
approximately 83%, 79% and 81% of net revenues, respectively; sales to the
United States Government and its agencies, both directly and as subcontractor
for general contractors in "defense related" industries performing contracts
for the government, accounted for the balance of net sales.

Backlog. The Company's backlog of firm orders at December 31, 1997
was approximately $46,000,000 and unbilled backlog was approximately
$52,000,000, compared to approximately a $46,000,000 backlog of firm orders and
unbilled backlog of approximately $50,000,000 at December 31, 1996. The Company
expects that approximately 90% of the 1997 year-end backlog will be delivered
in 1998. See "Liquidity and Sources of Capital," in Item 7 of this Report.

Working Capital. The Company does not normally stockpile
substantial inventories, because most of its products are custom
engineered to specific requirements.

United States Government contracts normally provide for progress
or milestone payments, which affect the cash flow of the Company. See
"Liquidity and Sources of Capital," in Item 7 of this Report, for information
concerning other working capital items.

Competition. Other organizations, for the most part smaller than
the Company (but some of which are owned by larger corporations), compete with
the Company in the sale of similar products or alternative methods of
construction designed to have comparable performance or

effects.

The Company believes it is the largest United States manufacturer
of engineered products for the acoustical control of environments, but there
can be no assurance that this situation will continue. Competition is an
important factor in both domestic and foreign markets.

The Company believes that the principal factors affecting
competitiveness in the industry are price, service, engineering capability,
technology and terms of delivery. The Company believes that its main
competitive advantages are its long history in the industry, technological
capabilities, the variety of its products and its ability to provide a wide
range of services to its customers, from the design stage through installation.

Research and Development. While involved with a technology which
may be considered "mature", the Company is committed to the improvement of its
present product line and the development of new products to provide the
opportunity for growth into the 21st century. The Company employs 3 engineers
and technicians, who devote themselves full-time to research and development
activities (other personnel are involved on a part-time basis). In addition,
the Company conducts research and development work for customers on a contract
basis, or as necessary to meet performance requirements on its noise control
systems, the value of which may be charged against specific jobs; excluding
such activities, the Company's expenditures for research and development during
1997, 1996 and 1995 amounted to $825,000, $944,000 and $872,000, respectively,
all of which were charged to operations in

each of these years. The Company believes that such expenditures are imperative
in maintaining its position as a technological leader in the industry.

Employees. The Company has approximately 600 employees in its
North American operations. At its New York manufacturing facility, the
Company's production employees are covered by a collective bargaining agreement
negotiated with Local 28 of the Sheet Metal Workers International Association
(AFL-CIO), which is scheduled to expire in September, 1998. At its South
Carolina manufacturing facility, the production employees are covered by a
collective bargaining agreement with Local 399 of the Sheet Metal Workers
International Association (AFL-CIO), which is scheduled to expire in April,
2000. For employees of IAC, Ltd., see "Foreign Operations and Export Sales,"
below.

Foreign Operations and Export Sales. IAC, Ltd. manufactures and
markets the Company's product line in the United Kingdom and elsewhere
in Europe. IAC, Ltd. has approximately 140 employees, including
employees of its marketing subsidiary in Niederkruchten, Germany. For
additional data on the operations of Industrial Acoustics Company,
Ltd., see Note I to the Consolidated Financial Statements in Item 8 of
this Report.

The Company's foreign operations and its export sales are subject
to certain risks, such as fluctuating exchange rates. Risks are minimized by
requiring letters of credit in U.S. dollars for foreign contracts. Business in
Southeast Asia, particularly South Korea, may be affected due to changes in
economic conditions there.

Year 2000 Computer Issue

The Company has assessed the potential issues associated with
programming codes in its existing computer systems with respect to a two-digits
year value for the year 2000 and believes that addressing such issues is not a
material event or uncertainty that would cause reported financial information
not to be indicative of future operating results or financial condition. The
Company is currently upgrading its accounting software and expects this to be
completed by the third quarter of 1999.

Item 2. Properties

The Company owns its principal offices, laboratory and a portion
of production facilities in the Bronx, New York, the total manufacturing
facilities in Moncks Corner, South Carolina and the recently acquired facility
located in Winchester, U.K. It leases manufacturing, warehouse and land
properties in the Bronx, New York and its office facilities in the United
Kingdom.

Property Transactions in the United States.

On March 27, 1998, the Company purchased, for $4 million, the
approximately 72,500 square feet of manufacturing space which it had previously
leased from PDJ Simone Realty Company L.P. The purchase price was funded by a
loan from Chase Manhattan Bank, secured by a mortgage on the Company's real
property.

Property Transactions in the United Kingdom.

In 1995, IAC, Ltd. completed the acquisition of a 90,000 square

foot factory in Winchester for $3,146,000. This purchase price and costs
related to factory renovations were substantially financed with the proceeds of
a short-term loan from Midland Bank. IAC Ltd. moved to the Winchester
facilities during the second quarter of 1996.

In March 1996, IAC, Ltd. entered into a lease of administrative
offices adjacent to the Winchester factory which provides 18,000 square feet of
office space. The lease term is for twenty-five years, however, the Company has
an option to terminate the lease after fifteen years, providing twelve months
notice is given to the landlord. The lease provides for annual rent of $112,000
plus insurance costs and maintenance fees to be determined annually. The rent
adjusts every five years based on market rental values. On July 14, 1997,
10,000 square feet of office space was sub-leased to an engineering firm, for
approximately seven years, at an annual rent of $96,000 plus insurance and
maintenance costs to be determined annually. There is a rent review after four
years.

On December 31, 1997, the Board approved the purchase of the
Winchester factory by IAC from IAC, Ltd. for $6.6 million. IAC is expected
to consummate a sale and leaseback arrangement in the near future with a
third party. The sale price is expected to be $6.6 million. IAC, Ltd. will
lease back approximately 94,000 square feet, for 20 years at an annual rent of
$557,000 with rent reviews every 5 years. Approximately 20,000 square feet have
been subleased to two manufacturers at annual rentals totaling $132,000, one for
5 years and the other for 10 years duration with rent reviews.

The following table sets forth the principal properties in which
the Company operates, all of which are in sound condition:

Approx. Annual Lease
Location Area (Sq.Ft.) Description Rental* Expiration Date
- -------- ------------- ----------- ------- ---------------

The Bronx, 145,500 manufacturing owned owned
NY facility, land,
laboratory and
executive
offices

The Bronx, 105,000 land underneath $ 30,000 2032 to 2062
NY executive office
facility and
parking area

The Bronx, 30,000 land and $143,000 1998
NY** manufacturing
and warehouse
facility

Winchester, 18,000 office $112,000 2021, subject to
UK facility termination by
Company in 2011

Winchester, 94,000 land and owned*** owned***
UK manufacturing
facility

Moncks 198,000 land and owned owned
Corner, SC manufacturing
facility

* Including real estate taxes.
** Entire premises sublet in 1997 through end of rental term.
*** Subject to proposed sale/leaseback described above.

In addition, the Company leases office space in Niederkruchten,
Germany.

Item 3. Legal Proceedings

The Company is not involved in any material pending legal
proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Report.

Item 4A. Executive Officers of the Registrant

Name Age Position Officer Since
- ---- --- -------- -------------

Martin Hirschorn 77 President; July 27, 1951
Director

Frederic M. Oran 65 Executive June 12, 1962
Vice President;
Director

Arnold W. Kanarek 71 Senior Vice December 31, 1966
President;
Secretary

John M. Handley 71 Senior Vice March 12, 1969
President,
Market Development

Robert E. Schmitt 49 Senior Vice April 14, 1978
President, General
Manager, IAC, SC

Robert N. Bertrand 43 Vice President, April 9, 1990
Finance; Treasurer

Jasjit T. Ahluvalia 61 Vice President, May 2, 1981
Management
Information
Systems

Peter Kohner 50 Vice President, September 18, 1986
Manufacturing

Albert J. Cirulli 68 Vice President, October 12, 1987
Design Services

Robert A. Schmidt 45 Vice President, April 1, 1987
Marketing

T. Joseph Looney 40 Controller June 14, 1993

All officers are elected each year by the Board of Directors to
serve until the next annual election and at the pleasure of the Board of
Directors. There are no arrangements or understandings between any nominees and
any other person pursuant to which he or she has been nominated or previously
elected as an officer.

PART II

Item 5. Market for the Registrant's Common Stock
and Related Stockholders Matters

Price Range of Common Stock & Dividends

The Company's Common Stock, which continues to be traded in the
over-the-counter market, is traded on the NASDAQ National Market System under
the symbol "IACI". The following table shows the per share range of prices of
the Company's Common Stock for the most recent two-year period.

Quarter-Ended
Year Mar 31 June 30 Sept 30 Dec 31
- ---- ------ ------- ------- ------

1997 High $16 $11 1/4 $ 9 1/2 $11 1/4
- ----
Low $ 8 3/4 $ 8 $ 8 1/4 $ 8 1/2
1996 High $11 $11 1/2 $11 $11 1/4
- ----
Low $ 9 3/4 $10 $ 9 1/2 $ 8 1/2

Approximate Number of Equity Security Holders At December 31, 1997,
the approximate number of holders of record of the Company's Common Stock was
1,200.

Dividends

On March 20, 1998, the Board of Directors of the Company voted not
to pay a dividend in respect of 1997 results. A dividend of $0.10 per share was
paid in 1997, 1996 and 1995, and a dividend of $0.30 per share was paid in 1994
and 1993, each representing a distribution from the respective prior year
earnings. The Company has no present policy with respect to the declaration or
payment of regular dividends.

Item 6. Selected Financial Data

The following table sets forth selected consolidated financial
data of the Company for each of the last five years:

1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands except per share amounts)

Net Sales $ 72,911 $73,623 $ 70,633 $ 71,736 $86,571

Net (Loss) Income ($ 1,218) $ 364 ($ 448) ($ 1,701) $ 3,918

Basic and Diluted
(Loss) Income per common share ($ 0.41) $ 0.12 ($ 0.15) ($ 0.57) $ 1.32
======== ======= ======== ======== =======

Total Assets $ 74,262 $72,845 $ 75,716 $ 71,730 $73,124

Long Term
Obligations $ 5,081 $ 4,499 $ 4,683 $ 2,431 $ 2,504

Cash Dividends per
Common Share* None $ 0.10 $ 0.10 $ 0.10 $ 0.30

*Declared and paid in March of subsequent year.

Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
Analysis of Operations

1997 Compared to 1996. A 4% increase in domestic revenues
was offset by reduced revenues at IAC, Ltd. resulting in a 1% decrease in
consolidated revenues. Domestic Door Department revenues increased 46% and
domestic Industrial and Air Conditioning Department Revenues increased by 9%
and 8%, respectively. Domestic Architectural revenues decreased 3% below 1996
levels (however, 1996 revenues were 107% higher than 1995) and domestic Special
Products revenue was the same as 1996. In Europe, Standard Products revenues
decreased 19%, primarily a result of the decrease in the Acoustics Structures
group where large industrial orders were delayed by the customers and medical
products were delayed due to budget shortages. Special Products revenues
decreased 9% due to further cuts in defense mainly in Italy.

Interest income, at $1,615,000, was consistent with 1996 and Other
income decreased $180,000 primarily due to an additional $200,000 in gains on
the sale of investments in 1996 over the amount of gains in 1997.

Cost of products sold in 1997, as a percentage of net sales, was
85% compared to 84% in 1996.

Selling, administrative and general expenses (excluding interest
expense and foreign currency translation gains and losses) increased by 6%, and
as a percentage of revenues increased from 17% to 18%, primarily due to the
strengthening of the Company's marketing and sales

program domestically, while IAC, Ltd. was adversely affected by
approximately $340,000 in one-time charges associated with overhead
reductions.

Interest expense decreased 13% because 1996 contained $154,000 in
interest payments to federal, state and local taxing authorities for the
settlement of tax audits from 1988 through 1994.

Net cash provided by the Company's operations was $3.7 million
compared to $3.8 million in 1996, both as a result of large decreases in
accounts receivable. The Company's funds, which consist of cash and cash
equivalents, short-term investments and marketable securities increased by 17%
from $22.1 million to $25.8 million. Accounts receivable decreased both in
dollars and as a measurement of percentage of sales due to strong collections
in the fourth quarter of 1997. The allowance for doubtful accounts is deemed
adequate by the Company as the historical write off of accounts receivable has
been negligible.

Shareholder's equity decreased by $1,511,000 as a result of the
1997 losses, the dividend paid in 1997 for the prior year and a loss on
currency translation of $269,000. These decreases were partially offset by
recording unrealized gains on marketable securities as required by FASB 115 of
$274,000.

As a result of the implementation of overhead reduction programs
introduced in 1996, IAC, Ltd. operated at approximately break even for the
second half of 1997 after a loss for the first six months of $1,775,000.

1996 Compared to 1995. Company net sales rose 4.2%

largely due to a domestic Standard Products increase of 24.5%. While domestic
Air Conditioning and Door sales decreased slightly, Industrial sales increased
10.5% and Architectural sales increased 107.2% because of increased volume in
Anechoic Rooms and several large contracts for Trackwalls. Domestic Special
Products sales decreased 14.5% from last year primarily in the OEM Gas Turbine
business. In England, Standard Product sales decreased slightly while in
Germany, sales were down 16.8%. Aviation sales also decreased in England due to
the continued reduction in European defense spending.

Interest income increased 3.6% because of higher returns on
investments as the Company is moving away from municipal bonds and into
corporate bonds to raise yields. Other income increased 27.7% as a result of
gains on the sale of investments compared to losses in 1995 and an insurance
claim recovery of $185,000 relating to fire damage sustained in England.

Cost of products sold increased by 4.1%, approximately the same as
the increase in sales. As a percentage of net sales, these costs were 84.4%,
the same as last year.

Selling, administrative and general expenses (excluding interest
expense and foreign currency translation gains and losses) decreased by 1.0%.
Domestic expenses were approximately the same as last year while expenses in
England decreased 8.4%. These reductions were due to lower facilities costs as
the Company moved into its newly owned manufacturing facility, and the
implementation of a cost reduction

program mandated by lower volume resulting in lower head count and
spending. The reductions in the U.K. expenses were offset by costs of
$683,000 incurred due to the relocation of the U.K. operation to the
Winchester facility during the second quarter of 1996.

Interest expense rose 84.0% due to the borrowings in England for
the purchase of the new manufacturing facility and related
improvements(interest of $217,000), plus the domestic Company's payment of
$154,000 in interest to federal, state and local taxing authorities for the
settlement of tax audits from 1988 through 1994.

Net cash provided by the Company's operations was $3.8 million
compared to a usage of $167,000 in 1995. The major change was due to the
billing and collection of accumulated costs in excess of billings on long term
contracts in 1996. The Company's funds, which consist of cash and cash
equivalents, short-term investments and marketable securities decreased by 9.7%
from $24.4 million to $22.1 million as the Company used maturing funds to
decrease outstanding debt. Accounts receivable decreased both in dollars and as
a measurement of percentage of sales due to collections on long term contracts
outstanding. The allowance for doubtful accounts is deemed adequate by the
Company as the write off of accounts receivable has been less than .7% of the
receivables balance.

Shareholder's equity decreased by $57,000 as a result of recording
unrealized losses on marketable securities as required by FASB 115 and the
dividend paid by the Company during the year. These decreases were partially
offset by net income and a gain in cumulative

currency translation.

Liquidity and Sources of Capital. Net cash provided by
operations was $3,718,000 primarily due to a decrease in accounts receivable
of $4,489,000, an increase in accounts payable and accrued expenses of $820,000
and an increase in customer deposits of $346,000. These were partially offset
by an increase in inventories and costs in excess of billings of $3,114,000.
At December 31, 1997, the Company's funds, made up of cash and cash
equivalents, short-term investments and marketable securities increased by 17%
or $3,761,000. Loans payable increased $881,000 as the Company borrowed funds
against its line of credit. This amount was used primarily to fund the
negative results of operations of the Company.

The Company had a backlog of approximately $46 million at December
31, 1997, including approximately $8 million in multi-year contracts. This
backlog will require a commitment of working capital to fund inventories and
operating expenses. Due to the nature of the contractual terms for payments on
long-term contracts and the time and recognition of revenue and expenses, cash
flow may be affected. As a result, the Company anticipates that these
commitments will be financed from internal as well as outside sources. See Note
D to the Consolidated Financial Statements, Item 8 of this Report. As of
December 31, 1997, the Company had borrowed $9,656,000 from commercial banks
for global operations and the purchase of land and buildings in the United
Kingdom, which amount will be substantially reduced upon the sale and leaseback
of land and buildings anticipated in 1998. In addition, in March 1998, the

Company purchased, for approximately $4,000,000, the 72,500 square feet of
manufacturing space it had previously leased in New York, which purchase was
financed through a mortgage loan from Chase Manhattan Bank.

Much of the Company's products are used in the specialty
construction market. Changes in the relationship between costs and revenues are
uncertain, because of the nature of that market. In response to changing
requirements, and in support of a major effort to remain competitive, the
Company is continuing to invest in modernizing its manufacturing facilities.

Impact of Inflation. Because of the Company's multi-year
contracts, there is exposure to profit fluctuations in the event of high
inflation periods. The Company was not adversely impacted during 1997 and,
under the present economic conditions, does not anticipate any material impact
in 1998.

Recently Issued Accounting Standards. In June 1997, the
FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." SFAS No.
130 established standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in full set general
purpose financial statements. SFAS No. 131 establishes accounting standards for
the way that public business enterprises report selected information about
operating segments and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 130 and SFAS No. 131 are required to

be adopted by 1998. The Company is currently evaluating the impact, if
any, of SFAS No. 130 and SFAS No. 131.

Item 8. Financial Statements and Supplementary Data

Incorporated by reference herein are pages F-1 through
F-17, in the Section immediately following the signature page of this
Report.

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure

None.

Part III

Item 10. Directors and Executive Officers of the Registrant

The information required to be furnished under this Item
shall be incorporated by reference from the Company's definitive Proxy
Statement to be filed in connection with its Annual Meeting of
Shareholders to be held in May 1998.

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and
Management

Item 13. Certain Relationships and Related Transactions

The information required to be furnished under this Item
shall be incorporated by reference from the Company's Form 8-K to be filed on
March 31, 1998.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) The following documents are filed as part of this Report:

1. Financial Statements - See pages F-1 through F-18 of Item 8 in
the section following the signature page of this Report.

2. Financial Statement Schedule required by Item 8 and paragraph (d)
below - See page F-19 of Item 8 in the section following the
signature page of this Report.

3. Exhibits
Filed Herewith
Exhibit or Incorporated
Number Title of Document by Reference
------- ----------------- ---------------
3 Restated Certificate 1
of Incorporation and
by-laws, as amended

10(iii) Stock Option Plan 2

21 Subsidiaries 3

(b) Reports on Form 8-K filed in the fourth quarter of 1997:

None.

(d) Financial Statement Schedules required by this paragraph - See
page references in subparagraph (a) 2 above.

- ----------------

1 Filed as an Exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1980.

2 Incorporated by reference from the Company's definitive Proxy
Statement filed in connection with its 1996 Annual Meeting of Shareholders.

3 Filed Herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

INDUSTRIAL ACOUSTICS COMPANY, INC.

March 30, 1998 By: /s/ Arnold W. Kanarek
---------------------
Arnold W. Kanarek,
Senior Vice President

March 30, 1998 /s/ Robert N. Bertrand
----------------------
Robert N. Bertrand,
Vice-President - Finance

Pursuant to the requirements of the Securities Exchange
Act of 1934, as amended, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.

March 30, 1998 /s/ Martin Hirschorn
--------------------
Martin Hirschorn,
President, Chief Executive
Officer and Director

March 30, 1998 /s/ Frederic M. Oran
--------------------
Frederic M. Oran,
Executive Vice President
and Director

March 30, 1998 /s/ James A. Read
-----------------
James A. Read,
Director

March 30, 1998 /s/ Robert M. Davies
--------------------
Robert M. Davies,
Director

March 30, 1998 /s/ Maarten D. Hemsley
----------------------
Maarten D. Hemsley,
Director

March 30, 1998 /s/ Martin P. Dineen
--------------------
Martin P. Dineen,
Director

March 30, 1998 /s/ Robert N. Haidinger
-----------------------
Robert N. Haidinger,
Director

FORM 10-K -- ITEM 14(a)(1) AND 2
INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

The following consolidated financial statements of Industrial Acoustics
Company, Inc. and Subsidiaries are included in Item 8:

Report of Independent Acountants .................................... F-2,F-3

Consolidated Balance Sheets -- December 31, 1997 and 1996 ........... F-4

Consolidated Statements of Operations -- for the years ended
December 31, 1997, 1996 and 1995 .................................... F-5

Consolidated Statements of Shareholders' Equity -- for the years
ended December 31, 1997, 1996 and 1995 .............................. F-6

Consolidated Statements of Cash Flows -- for the years ended
December 31, 1997, 1996 and 1995 .................................... F-7

Notes to Consolidated Financial Statements .......................... F-8-16

The following consolidated financial statement schedule of
Industrial Acoustics Company, Inc. and Subsidiaries is included
in Item 14(d):

Schedule II - Valuation and Qualifying Accounts ..................... F-17

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
INDUSTRIAL ACOUSTICS COMPANY, INC.:

We have audited the consolidated financial statements and financial statement
schedule of INDUSTRIAL ACOUSTICS COMPANY, INC. and SUBSIDIARIES as listed in
Item 14(a) of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We did not audit the financial statements and
financial statement schedule of Industrial Acoustics Company Limited and
Subsidiaries, a wholly owned subsidiary, which statements reflect total assets
of $17,104,000 and $18,690,000 at December 31, 1997 and 1996, respectively, and
total revenues of $19,310,000, $22,126,000 and $23,731,000 for the years ended
December 31,1997, 1996 and 1995, respectively. Those statements and schedule
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Industrial Acoustics
Company Limited and Subsidiaries, is based solely on the report of the other
auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Industrial Acoustics Company, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. In addition, in our opinion, based on our audits and the report of
other auditors, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.

Coopers & Lybrand L.L.P.

New York, New York
March 11, 1998

F-2

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS OF
INDUSTRIAL ACOUSTICS COMPANY LIMITED

We have audited the consolidated balance sheets of Industrial Acoustics Company
Limited and subsidiaries (a wholly owned subsidiary of Industrial Acoustics
Company Inc.) as of 31st December 1997 and 1996 and the related consolidated
statements of income and retained earnings, and cash flows and the financial
statement schedule for each of the three years in the period ended 31st
December 1997. These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Industrial
Acoustics Company Limited and subsidiaries as of 31st December 1997 and 1996
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended 31st December 1997 in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.

Kidsons Impey
Registered Auditors
Chartered Accountants

London
February 12, 1998

F-3

INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)

1997 1996
--------- ---------

ASSETS:
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 3,032 $ 1,254
Short-term investments, available for sale..................... 457 218
Receivables.................................................... 17,843 22,713
Costs and estimated earnings in excess of billings on
uncompleted contracts......................................... 6,774 5,108
Inventories.................................................... 5,856 4,605
Income tax receivable.......................................... 685
Deferred income taxes.......................................... 215 130
Prepaid expenses............................................... 1,609 1,473
--------- ---------
TOTAL CURRENT ASSETS.......................................... 35,786 36,186

MARKETABLE SECURITIES, available for sale....................... 22,328 20,584

PROPERTY, PLANT AND EQUIPMENT, net.............................. 12,540 13,028

DEFERRED INCOME TAXES........................................... 975 124

OTHER ASSETS.................................................... 2,633 2,923
--------- ---------
TOTAL ASSETS.................................................. $74,262 $72,845
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Loans payable.................................................. $ 9,656 $ 8,775
Accounts payable and accrued expenses.......................... 16,167 15,606
Income taxes................................................... 193
Customer deposits.............................................. 730 389
Current portion of long-term debt and capital lease
obligations................................................... 78 71
Billings in excess of costs and estimated earnings on
uncompleted contracts......................................... 1,491 1,128
--------- ---------
TOTAL CURRENT LIABILITIES..................................... 28,315 25,969

CAPITAL LEASE OBLIGATIONS....................................... 3,055 3,132

DEFERRED INCOME TAXES........................................... 687

DEFERRED COMPENSATION........................................... 1,339 1,367
--------- ---------
TOTAL LIABILITIES............................................. 33,396 30,468
--------- ---------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common Stock, par value $.10 per share; authorized 5,000
shares; issued and outstanding 2,979 shares, excluding 87
shares held in treasury at par value.......................... 298 298
Additional paid-in capital..................................... 2,223 2,223
Equity Adjustments:
Cumulative currency translation adjustment.................... (117) 152
Net unrealized gain (loss) on marketable securities .......... 107 (167)
Retained earnings.............................................. 38,355 39,871
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.................................... 40,866 42,377
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $74,262 $72,845
========= =========

See notes to consolidated financial statements.

F-4

INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)

1997 1996 1995
---------- --------- ---------

REVENUES
Net sales........................................... $72,911 $73,623 $70,633
Interest............................................ 1,615 1,609 1,553
Other............................................... 738 918 574
---------- --------- ---------
75,264 76,150 72,760
---------- --------- ---------
COST AND EXPENSES
Cost of products sold............................... 61,934 62,105 59,657
Selling, administrative and general................. 13,474 12,680 13,068
Interest............................................ 939 1,078 586
---------- --------- ---------
76,347 75,863 73,311
---------- --------- ---------

(Loss) income before income taxes.................... (1,083) 287 (551)

Provision (benefit) for income taxes................. 135 (77) (103)
---------- --------- ---------
Net (loss) income.................................... ($ 1,218) $ 364 ($ 448)
========== ========= =========
Basic and diluted net (loss) income per common
share............................................... ($ 0.41) $ 0.12 ($ 0.15)
========== ========= =========
Weighted Average Number of Shares Outstanding:
Basic............................................... 2,979 2,979 2,979
========== ========= =========
Diluted............................................. 2,979 2,990 2,979
========== ========= =========

See notes to consolidated financial statements

F-5

INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)

COMMON STOCK* EQUITY ADJUSTMENTS
------------------ -----------------------------
NET
UNREALIZED
NUMBER ADDITIONAL CUMULATIVE GAIN (LOSS) ON
OF PAID-IN CURRENCY MARKETABLE RETAINED
SHARES AMOUNT CAPITAL TRANSLATION SECURITIES EARNINGS TOTAL
-------- -------- ------------ ------------- -------------- ---------- ---------

Balance at December 31, 1994. 2,979 $298 $2,223 ($ 325) ($ 580) $40,550 $42,166
Net loss for 1995........... (448) (448)
Cash dividends paid--
$.10 per share............. (298) (298)
Equity adjustments:
Currency translation....... (20) (20)
Net unrealized gain on
marketable securities,
net of income taxes of
$306...................... 1,034 1,034
-------- -------- ------------ ------------- -------------- ---------- ---------
Balance at December 31, 1995. 2,979 298 2,223 (345) 454 39,804 42,434
Net income for 1996......... 364 364
Cash dividends paid--
$.10 per share............. (297) (297)
Equity adjustments:
Currency translation....... 497 497
Net unrealized loss on
marketable securities,
net of income taxes of
$111...................... (621) (621)
-------- -------- ------------ ------------- -------------- ---------- ---------
Balance at December 31, 1996. 2,979 298 2,223 152 (167) 39,871 42,377
Net loss for 1997........... (1,218) (1,218)
Cash dividends paid--
$.10 per share............. (298) (298)
Equity adjustments:
Currency translation....... (269) (269)
Net unrealized gain on
marketable securities,
net of income taxes of
$182...................... 274 274
-------- -------- ------------ ------------- -------------- ---------- ---------
Balance at December 31, 1997. 2,979 $298 $2,223 ($ 117) $ 107 $38,355 $40,866
======== ======== ============ ============= ============== ========== =========

- ------------
* Excluding common stock held in treasury of 87 shares for all years presented.

See notes to consolidated financial statement

F-6

INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)

1997 1996 1995
---------- ---------- ---------

OPERATING ACTIVITIES
Net (loss) income....................................... ($ 1,218) $ 364 ($ 448)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 1,267 1,305 1,204
Deferred income taxes.................................. (431) (184) 102
Deferred compensation.................................. (28) 90 50
Changes in operating assets and liabilities:
Receivables........................................... 4,489 4,731 2,736
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ (1,667) 2,230 (3,288)
Inventories and prepaid expenses...................... (1,447) (834) 395
Income tax receivable................................. 685 (685) --
Accounts payable and accrued expenses................. 820 (776) 400
Income taxes.......................................... 193 (131) 1,329
Billings in excess of costs and estimated earnings on
uncompleted contracts................................ 364 103 (2,105)
Customer deposits..................................... 346 103 (444)
Other assets.......................................... 345 (2,537) (121)
---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES . 3,718 3,779 (190)
---------- ---------- ---------
INVESTING ACTIVITIES
Purchase of property, plant and equipment............... (1,024) (1,956) (3,964)
Sales of short-term investments and marketable
securities............................................. 3,564 15,184 3,176
Purchases of short-term investments and marketable
securities............................................. (5,091) (14,103) (3,738)
---------- ---------- ---------
NET CASH USED IN INVESTING ACTIVITIES................ (2,551) (875) (4,526)
---------- ---------- ---------
FINANCING ACTIVITIES
Loans payable, net...................................... 1,018 (2,720) 3,412
Payments on long-term debt and capital lease
obligations............................................ (72) (13) (194)
Dividends paid.......................................... (298) (297) (298)
---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES . 648 (3,030) 2,920
---------- ---------- ---------
FOREIGN EXCHANGE
Effect of exchange rate changes on cash ................ (37) (126) 29
---------- ---------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .... 1,778 (252) (1,767)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .......... 1,254 1,506 3,273
---------- ---------- ---------

CASH AND CASH EQUIVALENTS AT END OF YEAR............. $ 3,032 $ 1,254 $ 1,506
========== ========== =========

See notes to consolidated financial statements.

F-7

INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. All significant intercompany
accounts and transactions have been eliminated.

MANAGEMENT'S USE OF ESTIMATES:

In conformity with generally accepted accounting principles, management must
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.

CASH EQUIVALENTS:

The Company considers all highly liquid investments with an original maturity
of three months or less when purchased to be cash equivalents.

INVENTORIES:

Inventories are stated at the lower of cost (first-in, first-out method) or
market.

LONG-TERM CONSTRUCTION CONTRACTS:

Estimated earnings on long-term construction type contracts are recognized on
the percentage-of-completion method, measured by the percentage of costs
incurred to date to estimated total costs for each contract. Periodic reviews
of estimated final revenues and costs during the terms of such contracts may
result in revisions of contract estimates, the effects of which are
recognized in the periods in which the revisions are determined. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined.

Included in receivables are retainages of $1,054 and $844 at December 31,
1997 and 1996, respectively. The Company expects to collect the open
retainage in 1998.

Before tax operating results for 1997 and 1996 were decreased by $1,066 and
$2,250, net, due to changes in revenues and cost estimates on long-term
contracts.

PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment are carried at cost. Depreciation and
amortization of property, plant and equipment, including leased property, are
provided principally by the straight-line method based over the estimated
useful lives of the depreciable assets or the terms of the related leases, if
less. The cost and accumulated depreciation or amortization of assets retired
or sold are removed from the respective accounts and any gain or loss is
recognized in operations.

RESEARCH AND DEVELOPMENT:

Research and development expenditures, which are expensed as incurred,
amounted to $825, $944 and $872 in 1997, 1996 and 1995, respectively.

SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES:

The company primarily invests its available funds into U.S. federal, state
and local government and corporate debt securities. The Company considers
such investments to be "available-for-sale" as defined by Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". SFAS 115 requires that the
difference between the carrying value and market value, as of the balance
sheet date, of available for-sale-investments be recorded as an adjustment to
shareholders' equity.

In the event of a decline in market value below carrying value ("Decline"),
which is other than temporary and resulting from factors other than changes
in interest rate, such Decline would be included in the operating results of
the Company in the period in which it occurs. In addition, if a Decline
exists for an investment which has been identified to be sold, such Decline
would also be included in operating results in the period in which it is
identified to be sold. During the year ended December 31, 1997, there were no
Declines.

EARNINGS PER COMMON SHARE DATA:

The Company adopted SFAS No. 128, "Earnings per Share," in 1997. As required
by the statement, the Company restated all prior-period per share data
presented. SFAS No. 128 requires presentation of both basic and diluted
earnings per share. Basic earnings per share are calculated based on the
weighted average number of shares of common stock outstanding during the
reporting period. Diluted earnings per share are calculated giving effect to
all potentially dilutive common shares, assuming such shares were outstanding
during the reporting period.

As requird by SFAS No. 128, the Company has provided a reconciliation of
basic weighted average shares to diluted weighted average shares within the
table outlined below. The conversion of diluted shares has no impact on the
Company's operating results. Options to purchase 200,000 shares of common
stock were also outstanding at December 31, 1997 and 1995 but were not
included in the computation of diluted earnings per share because they would
have had an anti-dilutive effect on the earnings per share.

1997 1996 1995
------- ------- -------

Weighted average number of shares-basic......................... 2,979 2,979 2,979
Dilutive effect of shares issuable as of year end under the
stock option plan............................................... -- 11 --
------- ------- -------
Weighted average number of shares-diluted....................... 2,979 2,990 2,979
======= ======= =======

CONCENTRATION OF CREDIT RISK:

Financial instruments which potentially subject the Company to concentrations
of credit risk include cash, cash equivalents, short-term investments,
marketable securities and accounts receivable. The Company holds no
collateral for these financial instruments. The Company places its available
funds into government and corporate debt securities as well as investments
with financial institutions and, by policy,limits the amount of credit
exposure to any one issuer. Except for contracts with the United States
Government, concentration of credit risk with respect to accounts receivables
are limited due to a large diversified customer base which is not
concentrated in any

F-8

INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(IN THOUSANDS, EXCEPT PER SHARE DATA)

one geographic area. Some of the Company's contracts with the United States
Government have delivery schedules extending for more than one year. Under
applicable United States Government procedures, such contracts may be subject
to annual funding. Accordingly, there is some risk, even after a United
States Government contract has been awarded to the Company, that the
necessary funding for purposes of the contract may not be made available, in
subsequent years, to the relevant United States Government agency. United
States Government contracts may also be subject to cancellation, in which
event, the Company would be entitled to recover incurred costs on completed
units, work in progress and profits associated with such costs.

RECENTLY ISSUED ACCOUNTING STANDARDS:

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in full set general purpose financial statements. SFAS No. 131
establishes accounting standards for the way that public business enterprises
report selected information about operating segments and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 130 and SFAS No. 131 are
required to be adopted by 1998. The Company is currently evaluating the
impact, if any, of SFAS No. 130 and SFAS No. 131.

FOREIGN CURRENCY TRANSLATION:

All non-U.S. subsidiaries consider their local currencies to be their
functional currencies. Net assets of non-U.S. subsidiaries are translated
into U.S. dollars based on the current rates of exchange. Income and expense
items are translated at the average exchange rate for the year. The resulting
translation adjustments are recorded directly into a separate component of
shareholders' equity.

Foreign currency transaction gains and losses result from the periodic
fluctuation in exchange rates, as measured at the respective balance sheet
dates, for transactions denominated in currencies other than the respective
functional currencies used by the Company and its subsidiaries. Such gains
and losses are included in the Company's operating results in the period in
which the exchange rate changes. The net foreign currency transaction
(losses) gains included in (loss) income before taxes for 1997, 1996 and 1995
were ($169), $211 and ($52), respectively. These net foreign currency
translation (losses) gains include ($149) and $366 in 1997 and 1996,
respectively, applicable to a U.S. dollar demand loan payable to the Company
by its subsidiary, Industrial Acoustics Company Ltd (IAC Ltd).

RECLASSIFICATION:

Certain items in 1996 and 1995 have been reclassified to conform to the 1997
presentation.

NOTE B -- SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES

The Company considers its marketable securities to be "available-for-sale",
as defined by SFAS 115, and, accordingly, unrealized holding gains and losses
are excluded from operations and reported as a net amount in a separate
component of shareholders' equity.

The following table summarizes the aggregate fair value of short-term
investments and marketable securities, gross unrealized holding gains and
losses, and the amortized cost basis of short term investments and
marketable securities at December 31, 1997:

UNREALIZED HOLDING
AMORTIZED MARKET --------------------------
DESCRIPTION COST BASIS VALUE GAINS (LOSSES) NET
- -------------------------------------- ------------- --------- -------- --------- -------
Maturities within one year:

Corporate debt securities............. $452 $457 $5 $0 $5
------------- --------- ------- -------- ------
452 457 5 0 5
------------- --------- ------- -------- ------
Maturities between one and five years:
Corporate debt securities............. 3,616 3,698 116 (34) 82
U.S. Government securities............ 501 518 17 0 17
State and Local Government
securities........................... 186 191 5 0 5
------------- --------- ------- -------- ------
4,303 4,407 138 (34) 104
------------- --------- ------- -------- ------
Maturities between five and ten years:
Corporate debt securities............. 7,393 7,393 103 (103) (0)
U.S. Government securities............ 254 251 0 (3) (3)
State and local government
securities........................... 120 122 3 (1) 2
------------- --------- ------- -------- ------
7,767 7,766 106 (107) (1)
------------- --------- ------- -------- ------
Maturities after ten years:
Corporate debt securities............. 9,495 9,572 165 (88) 77
State and local government
securities........................... 590 583 9 (16) (7)
------------- --------- ------- -------- ------
10,085 10,155 174 (104) 70
------------- --------- ------- -------- ------
$22,607 $22,785 $423 ($ 245) $178
============= ========= ======= ======== ======

F-9

INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

The aggregate net unrealized gain of $178, less applicable taxes of $71, has
been included as a $107 addition to shareholders' equity at December 31,
1997. At December 31, 1996, the aggregate net unrealized loss of $278, less
applicable taxes of $111, was included as a $167 reduction in shareholders'
equity.

Realized gains and losses are included as a component of other income. For
the year ended December 31, 1997, gross realized gains were $89 and gross
realized losses were $38 for a total net realized gain of $51. For the years
ended December 31, 1996 and 1995, net realized gains (losses) were $249 and
($120), respectively. In computing realized gains and losses, the Company
computes the cost of its investments on a specific identification basis. Such
cost includes the direct costs to acquire the securities, adjusted for the
amortization of any discount or premium. The fair value of investments has
been estimated based on quoted market prices.

NOTE C -- SUPPLEMENTAL BALANCE SHEET INFORMATION

DECEMBER 31
----------------------
1997 1996
---------- ----------

RECEIVABLES:
Completed orders, less allowances for doubtful accounts (1997
--$534 1996--$913)............................................. $ 15,266 $ 18,082
Billings on uncompleted contracts............................... 1,560 3,648
Other........................................................... 1,017 983
---------- ----------
$ 17,843 $ 22,713
========== ==========
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:
Direct costs incurred on uncompleted contracts.................. $ 32,983 $ 45,776
Estimated earnings.............................................. 15,376 21,049
---------- ----------
48,359 66,825
Less billings to date........................................... (43,076) (62,845)
---------- ----------
$ 5,283 $ 3,980
========== ==========
The above balance is included in the accompanying balance sheets
under the following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts.......................................... $ 6,774 $ 5,108
Billings in excess of costs and estimated earnings on
uncompleted contracts.......................................... (1,491) (1,128)
---------- ----------
$ 5,283 $ 3,980
========== ==========
INVENTORIES:
Materials and supplies.......................................... $ 2,246 $ 1,492
Work in process................................................. 3,610 3,113
---------- ----------
$ 5,856 $ 4,605
========== ==========
PROPERTY, PLANT AND EQUIPMENT:
Land............................................................ $ 203 $ 203
Buildings ...................................................... 12,252 12,537
Machinery, fixtures and equipment............................... 10,796 9,931
Leasehold improvements.......................................... 565 539
Lab and wind tunnel............................................. 245 245
---------- ----------
24,061 23,455
Less allowances for depreciation and amortization............... (11,521) (10,427)
---------- ----------
$ 12,540 $ 13,028
========== ==========

F-10

INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

In 1995, IAC Ltd. completed the acquisition of a 90,000 square foot factory
in Winchester, England for $3,146. This purchase price and costs related to
factory renovations were substantially financed with the proceeds of a
short-term loan from Midland Bank. IAC Ltd. moved to the Winchester facilities
during the second quarter of 1996. For 1996, selling, administrative and
general expenses include $683 attributable to the relocation.

Fully depreciated assets were $4,181 and $3,317 in 1997 and 1996,
respectively.

OTHER ASSETS:

In 1992, the Company entered into a Split-Dollar Life Insurance Agreement
with Michael Hirschorn, a director of the Company, wherein the Company agreed
to advance up to one-half of the amount of premiums on an insurance policy
owned by Michael Hirschorn on the life of Martin Hirschorn, his father and
President of the Company. The Company shall be reimbursed for such advances,
which are non-interest bearing, by Michael Hirschorn upon the earlier to occur
of the surrender of such policy or the payment of proceeds upon the death of
Martin Hirschorn. As of December 31, 1997 and 1996, advances totaling
approximately $391 and $344, respectively, are included in other assets.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

1997 1996
---- ----

Accounts payable................. $ 9,374 $ 9,764
Accrued commissions.............. 1,726 1,844
Salaries, wages and related
items........................... 2,267 1,752
Accrued expenses................. 2,800 2,246
--------- ---------
$16,167 $15,606
========= =========

NOTE D -- BORROWINGS

Loans Payable--The Company, as of December 31, 1997 and 1996, had
outstanding $9,656 and $8,775 of short-term borrowings. At December 31, 1997,
the Company borrowed $6,250 ($5,150 at December 31, 1996) under a $10,000
line of credit from a commercial bank. Such amount accrues interest, payable
monthly, at a variable rate of 7.31% (7.1% at December 31, 1996) and is
collateralized by marketable securities with a market value of $11,850. In
addition, the Company owes $3,406 in the United Kingdom ($3,625 at December,
31, 1996) in connection with the purchase of property. The loan is payable on
demand, is collateralized by the purchased property, and accrues interest,
payable monthly, at 8.75% per annum at December 31, 1997 (8% at December 31,
1996). For the years ended December 31, 1997 and 1996, the weighted average
interest rate on all short-term loans payable was 7.52% and 7.35%
respectively. Interest paid amounted to $940, $1,100 and $563 in 1997, 1996
and 1995, respectively.

The carrying amount for the bank borrowings approximates fair value because
the loans are short term.

NOTE E -- INCOME TAXES

The components of (loss) income before income taxes are as follows:

1997 1996 1995
--------- ------- ---------

Domestic .. $ 703 ($ 28) $ 985
Foreign.... (1,786) 315 (1,536)
--------- ------- ---------
$(1,083) $287 $( 551)
========= ======= =========

Provision (benefit) for federal, foreign, state and local income taxes
consist of the following:

1997 1996 1995
------- ------- -------

Current:
Federal........ $ 352 ($ 72) $ 304
Foreign........ (21) 32 (471)
State and
local......... 235 95 60
------- ------- -------
556 55 (107)
------- ------- -------
Deferred:
Federal........ (231) (212) (102)
Foreign........ (259) 86 (22)
State and
local......... 59 (6) 128
------- ------- -------
(431) (132) 4
------- ------- -------
$ 135 ($ 77) ($ 103)
======= ======= =======

continued

F-11

INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

Deferred taxes at December 31, 1997 and 1996 consist of the following:

1997 1996
------- -------

Deferred tax assets:
Inventory and accounts receivable reserves........................ $ 135 $ 106
Accrued expenses.................................................. 80 115
Deferred compensation............................................. 701 618
Marketable securities............................................. -- 111
Deferred gain in United Kingdom from intercompany sale of
building ........................................................ 309 --
State and local net operating loss carry forwards................. 274 120
------- -------
Total deferred tax assets.......................................... 1,499 1,070
------- -------
Deferred tax liabilities:
Property, plant and equipment .................................... 297 534
Marketable securities............................................. 71 --
Pension liability................................................. 319 282
------- -------
Total deferred tax liabilities .................................... 687 816
------- -------

Net deferred tax asset............................................ $ 812 $ 254
Less: valuation allowance......................................... (309) --
------- -------
$ 503 $ 254
======= =======

The valuation allowance was established for the amount by which deferred tax
assets exceed deferred tax liabilities in the United Kingdom as a result of
the recent losses at IAC Ltd.

The following table accounts for the differences between the actual provision
and the amounts obtained by applying the statutory U.S. Federal income tax
rate of 34% to the income before income taxes:

1997 1996 1995
------- ------- -------

Federal statutory tax rates.......................... (34)% 34% (34)%
State and local income taxes, net of federal
benefit............................................. 18 (1) 29
Nontaxable interest.................................. -- (69) (19)
Different effective tax rate in the United Kingdom .. 30 4 6
Other................................................ (2) 5 (1)
------- ------- -------
12% (27)% (19)%
======= ======= =======

Accumulated undistributed earnings of foreign subsidiaries at December 31,
1997 aggregated $2,229. No federal income taxes have been provided, since the
Company plans to reinvest undistributed earnings of the subsidiaries to
finance expansion and meet operating requirements. If such earnings were
distributed, foreign tax credits should become available under current law to
reduce or eliminate the resulting U.S. income tax liability.

Federal, foreign, state and local income taxes paid amounted to approximately
$118, $488 and $70 in 1997, 1996 and 1995, respectively.

NOTE F -- EMPLOYEE BENEFIT PLANS

The Company has a Defined Contribution Tax Deferred Savings Plan covering all
U.S. employees not covered by collective bargaining agreements. The Company's
elective contribution is allocated to employees based on a five year average
salary basis and is integrated with Social Security. In 1997, the Company
expensed $300 in connection with this Plan.

The Company has a defined benefit pension plan in the United Kingdom covering
certain eligible employees. The Plan provides benefits based on years of
service and an employee's average compensation
for the last three years of employment before retirement. The

continued
F-12

INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

Company's funding policy is to contribute amounts sufficient to meet the
minimum funding requirements. Assets of the plan are comprised of a "with
profits group" bond effected with an United Kingdom assurance company.

Pension costs include the following components:

1997 1996 1995
------- ------- ---------

Service cost--benefits earned during the period . $ 312 $ 309 $ 450
Interest cost on projected benefit obligation ... 465 389 1,137
Actual return on plan assets..................... (373) (891) (2,125)
Net amortization and deferral.................... (378) 275 1,026
------- ------- ---------
Pension cost of the defined benefit plans ....... $ 26 $ 82 $ 488
======= ======= =========

The funded status of the defined benefit plan and amounts recognized in the
consolidated balance sheets at December 31, 1997 and 1996 are as follows:

1997 1996
--------- ---------

Accumulated benefit obligation....................... $ 5,535 $ 5,233
========= =========
Projected benefit obligation........................ $ 5,989 $ 5,696
Plan assets at fair value........................... 8,043 7,890
--------- ---------
Plan assets in excess of projected benefit
obligation......................................... 2,054 2,194
Unrecognized net gain............................... (1,924) (2,332)
Unrecognized prior service cost..................... 1,053 1,195
Unrecognized net transition asset................... (155) (202)
--------- ---------
Prepaid pension costs recognized in the balance
sheet.............................................. $ 1,028 $ 855
========= =========

Assumptions used to calculate the actuarial present value of the projected
benefit obligation and the expected long-term return on assets for the
defined benefit plan are as follows:

1997 1996
-------- --------

Discount rate....................................... 8.5% 8.5%
Rate of increase in future compensation levels ..... 6.5% 6.5%
Expected long term rate of return on plan assets ... 8.5% 8.5%

The Company contributes to multi-employer pension plans on behalf of
employees who are members of collective bargaining units. Benefit and asset
information comparable to that shown above for the Company's plans are not
determinable. Under the Employee Retirement Income Security Act of 1974, as
amended, an employer upon withdrawal from a multi-employer plan is required
to continue funding its proportionate share of the plan's unfunded vested
benefits. The plan administrator has not provided the Company with
information regarding its proportionate share of the plan's unfunded vested
benefits (for withdrawal liability purposes); however, the Company has no
immediate intention of withdrawing from the plan. Expenditures incurred
amounted to $122, $145 and $119 in 1997, 1996 and 1995 respectively.

The Company has deferred compensation agreements with certain present and
past key officers, directors and employees ("participants"). The agreements
provide for the participants to receive defined amounts after reaching age
65. The Company provides for the cost of the benefits payable under the
agreements over the participants' active employment. During the years ended
December 31, 1997, 1996 and 1995, the Company incurred expenses related to
these agreements of $178, $202 and $164, respectively. As of December 31,
1997 and 1996, the accured liability totaled $1,339 and $1,367, respectively.
The Company has insured the lives of the participants to assist in the
funding of this liability.

continued

F-13

INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE G -- LEASES

The Company conducts a large part of its operations from leased facilities
which include manufacturing and office facilities. Certain leases include
options to renew for periods ranging from 5 to 67 years. Certain Company
leases also require it to pay all real estate taxes and operating costs and
one lease is subject to periodic rental escalations.

The following represents the amounts of assets under capital leases included
in property, plant and equipment:

DECEMBER 31
1997 1996
-------- --------

Buildings and computer
equipment....................... $3,295 $3,295
Less accumulated amortization ... (693) (554)
-------- --------
$2,602 $2,741
======== ========

The building lease pertains to the New York manufacturing facility which
expires in 2019. However, the Company has entered into an agreement with the
landlord to purchase for $4,000 the approximately 72,500 square feet of
manufacturing space it now leases from the landlord.

Future minimum payments, by year and in the aggregate, under capital leases
and noncancellable operating leases with initial or remaining terms of one
year or more consist of the following at December 31, 1997 (net of annual
sub-lease income of $98 through 2002):

CAPITAL OPERATING
LEASES LEASES
--------- -----------

Year ending December 31:
1998................................... $ 304 $ 409
1999................................... 304 383
2000................................... 304 110
2001................................... 304 59
2002................................... 291 19
Later years............................ 4,645 851
--------- -----------
Total minimum lease payments $ 6,152 $1,831
===========
Less amounts representing interest ..... (3,019)
---------
Present value of minimum lease
payments............................... (3,133)
Less current portion.................... (78)
---------
$ 3,055
=========

The composition of rental expense is as follows:

YEAR ENDED DECEMBER 31
1997 1996 1995
-------- ------ --------

Minimum rentals........ $1,030 $908 $1,275
Sublease rental
income................ (145) -- (33)
-------- ------ --------
$ 885 $908 $1,275
======== ====== ========

continued

F-14

INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE H -- STOCK OPTION PLAN

On September 20, 1995, the Company adopted a stock option plan and granted
options to key employees to purchase 200,000 shares of common stock, the
maximum amount permitted under the plan, at $9.75 per share, the market value
on the date of grant. Options became exercisable after one year at the rate
of 25% per year for four consecutive years.

In January 1997, the options granted in 1995 were rescinded and new options
to purchase another 200,000 shares of common stock were granted at $8.00 per
share, the market value on the date of grant. The options will become
exercisable after one year at the rate of 25% per year for four consecutive
years.

Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation", which allows companies to measure compensation
cost in connection with employee stock compensation plans using a fair value
based method or to continue to use an intrinsic value based method. The
Company will continue to use the intrinsic value based method which generally
does not result in compensation cost. Had compensation cost been determined
under the fair value based method for the stock options granted in 1995,
the Company's 1997 and 1996 net (loss) income per common share would have
been changed to the pro forma amounts indicated below:

AS REPORTED PRO FORMA
------------- -----------

Net (loss) income
1997.............................. ($1,218) ($1,366)
1996.............................. $ 364 $ 275
Net (loss) income per common share
1997
Basic and diluted................ ($ 0.41) ($ 0.46)
1996
Basic and diluted................ $ 0.12 $ 0.09

The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for the options granted in 1995: -dividend yield 1.17%;
expected volatility 40%; risk free interest rate of 6.33%; and expected lives
of 6 years.

continued

F-15

INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE I -- GEOGRAPHIC INFORMATION

The Company and its subsidiaries operate within a single industry segment
which is the development, manufacturing, fabrication, and sale of products
designed for noise control and acoustically conditioned environments. The
Company's customers include governmental entities and companies in
diversified industries.

The Company primarily operates in two geographic areas: North America and
Europe. North America includes the United States and Canada. Europe includes
the United Kingdom and Germany. The following information sets forth the data
by geographic area.

During 1997, 1996 and 1995, revenues from the United States Government
amounted to approximately $12,282, $15,510 and $13,169, respectively.

NORTH
AMERICAN(1) EUROPEAN(2) ELIMINATION CONSOLIDATED
----------- ----------- ------------- --------------

YEAR ENDED DECEMBER 31,1 997:
Net sales to unaffiliated
customers......................... $53,645 $19,266 $72,911
Inter-area net sales............... 139 ($ 139)
----------- ----------- ------------- --------------
$53,784 $19,266 ($ 139) $72,911
=========== =========== ============= ==============
Operating profit (loss)(3) ....... 1,322 (1,107) (359) (144)(4)
Identifiable assets(5)............. 57,158 17,104 74,262
YEAR ENDED DECEMBER 31, 1996:
Net sales to unaffiliated
customers......................... $51,521 $22,102 $73,623
Inter-area net sales............... 226 1,864 ($2,090) --
----------- ----------- ------------- --------------
$51,747 $23,966 ($2,090) $73,623
=========== =========== ============= ==============
Operating profit(3)................ 832 791 (258) 1,365 (4)
Identifiable assets(5)............. 54,155 18,690 72,845
YEAR ENDED DECEMBER 31, 1995:
Net sales to unaffiliated
customers......................... $46,974 $23,659 $70,633
Inter-area net sales(3)............ 336 1,368 ($1,704)
----------- ----------- ------------- --------------
$47,310 $25,027 ($1,704) $70,633
=========== =========== ============= ==============
Operating profit (loss)(3)......... 1,572 (1,537) 35 (4)
Identifiable assets(5)............. 58,850 16,866 75,716

- ------------
(1)--Includes Canadian sales of $25, $114 and $448 in 1997, 1996 and 1995,
respectively.
(2)--Includes German sales of $4,000, $3,891 and $4,691 in 1997, 1996 and
1995, respectively.
(3)--North American operating profit includes royalty income of $101 (1997),
$74 (1996) and $419 (1995) charged against European operating profit and
Canadian operating profit of $1 (1997), $1 (1996), and $1 (1995).
European operating (loss) profit includes German operating profit (loss)
of $61 (1997), ($152) (1996) and $124 (1995).
(4)--Excludes interest expense of $940, $1,078 and $586 in 1997, 1996 and
1995, respectively. The 1997 and 1996 elimination of $359 and $258,
respectively, relates to interest on an intercompany loan.
(5)--North American includes Canadian assets of $202 (1997), $253 (1996) and
$244 (1995). European includes German assets of $1,722 (1997), $2,041
(1996) and $1,862 (1995).

NOTE J -- SUBSEQUENT EVENT

The principal stockholder of the Company entered into a stock-purchase
agreement, in January 1998, to sell his shareholdings, representing
approximately 64% of the outstanding common stock of the Company, to IAC
Holding Corp. whose principal investor is a European investment company.

continued

F-16

INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS (DEDUCTIONS)
-------------------------
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS- DEDUCTIONS- END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE(1) DESCRIBE(2) OF PERIOD
------------ ------------ ----------- ------------- ------------

Year ended December 31, 1997
Allowances for doubtful
accounts....................... $ 913 ($ 391) ($ 8) $ 20 $534
Year ended December 31, 1996:
Allowances for doubtful
accounts....................... $ 613 302 20 (22) $913
Year ended December 31, 1995:
Allowances for doubtful
accounts....................... $1,090 (362) 1 (116) $613

- ------------
(1) Represents the effect of exchange rate changes on translation of foreign
currencies into U.S. dollars.
(2) Represents write-offs (recoveries)

F-17