UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K

(Mark One)
|X|      Annual  report  pursuant  to  Section  13  or  15(d)  of the Securities
         Exchange Act of 1934 for the fiscal year ended December 31, 1998
| |      Transition  report pursuant  to Section  13 or 15(d)  of the Securities
         Exchange Act of 1934

                         Commission File Number 0-16572

                            Avondale Industries, Inc.
             (Exact name of registrant as specified in its charter)

                                    
          Louisiana                                      39-1097012
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)
                                   
                      
5100 River Road, Avondale, Louisiana                        70094
(Address of principal executive offices)                 (Zip Code)

                                 (504) 436-2121
                         (Registrant's telephone number,
                              including area code)

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

                                      None

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

                     Common Stock, $1.00 par value per share
                                (Title of Class)

         Indicate by check mark whether the registrant (1) has filed all reports
required 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 voting stock held by  non-affiliates
(affiliates being directors,  executive  officers and holders of more than 5% of
the  Company's  common  stock)  of the  Registrant  at  December  31,  1998  was
approximately $331,156,568.

         The number of shares of the Registrant's  common stock, $1.00 par value
per share, outstanding at December 31, 1998 was 13,254,066.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions  of the  Registrant's  Proxy  Statement  for its  1999  Annual
Meeting have been incorporated by reference into Part III of this Form 10-K.
<PAGE>
                                     PART I

Item 1.           Business.

Overview

      Avondale  Industries,  Inc.  ("Avondale"  or the  "Company") is one of the
largest  shipbuilders  in  the  United  States,   specializing  in  the  design,
construction,   conversion,   repair  and  modernization  of  various  types  of
ocean-going  vessels for the  military  and  commercial  markets.  A majority of
Avondale's  contracts in recent years has been for the construction of U.S. Navy
surface ships,  although it secured its largest ever commercial contract in 1997
from ARCO  Marine,  Inc.  for the  construction  of two 125,000 Dead Weight Tons
("DWT")  crude oil  carriers  for the Jones Act Trade.  Management  believes the
Company's low cost structure,  experienced and skilled work force, technological
capabilities,  sophisticated  construction processes and extensive experience in
building a variety of military and commercial  vessels,  position the Company as
one of the most cost-efficient and versatile  shipbuilders in the United States.
At December 31, 1998, the Company's  shipbuilding  backlog (the "firm  backlog")
was  approximately  $2.0  billion  (including  estimated  contract  escalation),
exclusive of unexercised options aggregating  approximately $490 million held by
the U.S. Navy (including  estimated contract  escalation) and approximately $330
million held by a commercial customer for additional ship orders.

      In  December  1996,  an  alliance  led by the  Company  was awarded a $641
million  contract to construct  the initial ship in the U.S.  Navy's LPD program
(see glossary of selected  industry terms).  The original  contract provided for
options  exercisable by the U.S. Navy for two additional LPD vessels.  The first
of these options was exercised in December 1998.  For additional  information on
the LPD-17 award, see "-U.S. Government." Also, in June 1997, the Company signed
a  $332  million  contract  with  ARCO  Marine,   Inc.("ARCO")  of  Long  Beach,
California,  for the  construction of two 125,000 DWT crude oil carriers for the
Jones Act Trade.  These  vessels are to be built with double hulls in compliance
with  the  Oil  Pollution  Act of 1990  (see  "-Commercial  Shipbuilding").  The
contract,  which is the largest  commercial  contract in the Company's  history,
also  provided  for  options  valued  at  approximately  $500  million  that are
exercisable by ARCO for three  additional  ships. The first option was exercised
in September 1998.  Management believes that securing the LPD and ARCO contracts
has conferred several immediate and substantial benefits upon the Company. Among
other  things,  the Company  has  substantially  bolstered  its  visibility  and
competitive  posture by  demonstrating  the ability to compete  successfully for
contracts  based on the high level of its technical,  engineering and production
skills, as well as its competitive prices. In addition, the backlog created from
these contract awards  provides a strong  foundation that will allow the Company
to compete aggressively for future shipbuilding opportunities.
<PAGE>
      On  January  19,  1999,  Avondale  announced  a  proposed  merger  with  a
subsidiary  of Newport  News  Shipbuilding  Inc.  which would result in Avondale
becoming a  subsidiary  of Newport  News.  The  proposed  merger  would create a
broad-based  shipbuilding company capable of designing,  building and maintining
every type of ship used in the U. S. Navy, Coast Guard,  and commercial  fleets.
The  proposed  merger  is  structured  as  a stock-for-stock  transaction and is
subject to regulatory  and  shareholder  approval.   Upon  consummation  of  the
proposed  merger,  each  Avondale share would be exchanged for a maximum of 1.25
and  a  minimum of  1.15 of Newport News  Shipbuilding Inc.  shares based on the
average closing  price  of  Newport  News shares during the fifteen day  trading
period ending on the  fourth  trading  day prior to  the  shareholder  vote.  If
such  average  closing  price  is  $28.40 or less,  Avondale shareholders  would
receive  1.25  Newport  News  shares  for  each Avondale share. If such price is
$30.87 or more,  Avondale  shareholders  would receive 1.15  Newport News shares
for each Avondale share.  If such price is between $28.40 and $30.87,   Avondale
shareholders  would  receive  that  number of Newport News shares determined  by
dividing  $35.50 by such price,  or  between  1.25 and 1.15 Newport News shares.
Avondale  and Newport News  expect to finalize the transaction during the second
quarter of 1999.

      On  February 22,  1999,  Avondale  and  Newport News  announced that their
proposed  merger  had been  cleared by the Department of Justice under the Hart-
Scott-Rodino  Antitrust  Improvements  Act  of 1976.   The  antitrust  clearance
satisfies  an  important  condition  to  the  closing of the transaction,  which
remains subject to the approval of the shareholders of both companies and to the
consent of the Administrator of the Maritime Administration of the Department of
Transportation.

      In addition, on February 18,  1999, the Company announced that it had been
advised by Newport News that Newport News had received an unsolicited offer from
General Dynamics Corporation ("General Dynamics") proposing  to  acquire Newport
News  for  $38.50  per  share in cash,  subject to due diligence and  regulatory
clearance.  Although the General Dynamics offer did not specifically ask Newport
News to terminate its agreement with Avondale, the offer  did state that Newport
News'  proposed  merger  with  Avondale  would  create  antitrust  problems in a
combination of General Dynamics and Newport News.

      Newport  News  has  advised  General  Dynamics  that it is not prepared to
evaluate  the General Dynamics proposal until it obtains reliable assurance that
a combination  of General Dynamics and Newport News  would not be opposed by the
Department of Defense and Department of Justice.  To that end, Newport News made
a request to  the  Department  of  Defense seeking a prompt  indication  of  the
Department's  position  on  the General Dynamics proposal.   At the date of this
Form 10-K,  the  Department of Defense has not responded  to  the  Newport  News
request.  Pending any such determination, Newport News and the Company have each
publicly expressed their full commitment to the Newport News-Avondale merger.

<PAGE>
      Historical Information. Avondale is a versatile shipyard that has been the
successful bidder for a variety of marine  construction  projects.  Organized in
1938, Avondale first began building ocean-going ships in the 1950s. From 1959 to
1985, the Company operated as a subsidiary of Ogden  Corporation,  a diversified
New York Stock  Exchange  listed  company  headquartered  in New York, New York.
Prior to the 1980s,  Avondale  built both military and  commercial  vessels.  In
addition to the construction of 27 destroyer escorts for the U.S. Navy, Avondale
successfully  completed a variety of  construction  projects during that period,
including  general  cargo  and  multi-product  carriers,  such as LASH  vessels,
container vessels,  crude oil tankers and product carriers.  In the early 1980s,
however,  several measures were implemented that changed the marine construction
industry  significantly.  The termination of the U.S.  construction-differential
subsidy program in 1981 significantly curtailed the ability of U.S. shipyards to
compete successfully for international  commercial  shipbuilding  contracts with
foreign  shipyards,  many of which are heavily  subsidized by their governments.
The effects of the elimination of these subsidies were largely offset,  however,
by  the  initiative  to  expand  the  U.S.  Navy  fleet  to 600  ships,  thereby
significantly  increasing the U.S. Navy shipbuilding  opportunities available to
Avondale.

      Initially,   Avondale   capitalized   on  the   U.S.   Navy   shipbuilding
opportunities  through its  construction of five auxiliary oilers ("AOs") during
the early 1980s.  Since AOs are essentially oil tankers modified to meet certain
military  requirements,  they  were a  natural  extension  of the types of ships
previously built by Avondale.

      During  the  remainder  of the 1980s and the  first  part of this  decade,
Avondale steadily expanded the range of vessels that it built for the U.S. Navy.
The  Company   principally  focused  on  those  vessels  that  were  related  to
predecessor  vessels  constructed  by  Avondale,  where the  Company  could best
capitalize on its prior experience and proven capabilities.  Among the U.S. Navy
vessels built or under construction  during this period were sixteen T-AOs, five
LSDs, four LSD-CVs,  five AOJs (which constituted  conversions of AOs previously
built by  Avondale),  one  T-AGS  45,  fifteen  LCACs,  four MHCs and three SL 7
conversions.  The  Company's  workload in the second half of the 1990's has been
dominated by the Sealift, ARCO, and LPD vessels.

      With  the  end of the  Cold  War  and  the  pressure  of  domestic  budget
constraints,  spending  for new vessel  construction  by the U.S.  Navy has been
reduced  substantially,  with the rate of new  vessel  construction  reduced  to
approximately  50% of that in the 1980s.  However,  in January  1999,  President
Clinton  announced a plan to increase the budget for military  spending over the
next  six  fiscal  years  thereby   increasing   the  U.  S.  Navy's  budget  by
approximately  $2.7  billion  for fiscal  year 2000.  Management  believes  that
Avondale's  versatility will continue to  be a significant factor in its ongoing
<PAGE>
efforts  to   obtain  shipbuilding  contracts,  which  efforts  have  also  been
bolstered  by  Avondale's  experience  in  building  vessels comparable to those
currently in demand.

      U.S.  Government.  In addition to the contract  award by the U.S.  Navy to
build the first LPD ship, the alliance was awarded  options,  exercisable by the
U.S.  Navy, for two  additional  ships of the LPD class,  the first of which was
exercised in December  1998. It is expected that a total of twelve ships will be
built  under the LPD  program.  The  members  of the  alliance,  Bath Iron Works
("Bath"),  Raytheon Company  ("Raytheon") and the Company  submitted a joint bid
with the  Company  as the prime  contractor.  Under  the  terms of an  agreement
between the alliance  members,  the Company will build the vessel covered by the
December 1996 contract  and  the December 1998 option that was exercised,  while
Bath would construct the third of the three LPD  vessels  if  exercised  by  the
Navy.  Raytheon  will be responsible for total  ship integration.  The  alliance
will  use  an  advanced  three-dimensional  ship  design  and  product  modeling
technology for the design and manufacture of these ships.

      The first  three  vessels of the LPD program  will be built  pursuant to a
cost-plus-award  fee  contract,  with the Company,  Raytheon and Bath each being
entitled to reimbursement  for its respective  allowable costs in performing the
contracts as such costs are incurred.  The contract  provides for the payment of
an award fee to the members of the  alliance,  the amount of which is  dependent
upon the results of periodic  evaluations  of contract  performance  and will be
paid incrementally upon completion of each periodic evaluation.  Pursuant to the
subcontracting agreements between the Company and each of Bath and Raytheon, any
award fees earned by the alliance will be distributed to the alliance members in
proportion to each member's performance and participation in the construction of
the  vessel  during  the  period  for which the award was  granted.  Unlike  the
Company's  other principal  shipbuilding  contracts where profits are recognized
under the percentage-of-completion method of accounting, the Company will record
profits  on the LPD  contract  as the  incremental  awards  are  determined.  In
addition,  although  the LPD  contract is on a  cost-plus-award  fee basis,  the
ability of Avondale to realize any  incremental  award fee is dependent not only
upon  its  ability  to  perform  its   contractual   obligations  but  also  the
satisfactory performance by other members of the alliance.

      In  accordance  with  the  U.S.   Navy's   requirement  of  a  streamlined
contractual  relationship,  the alliance's  agreement  provides that the Company
will act as the prime contractor for all three vessels, and as such, the Company
will be responsible for submitting invoices for not only its own costs, but also
any costs incurred by Bath and Raytheon.  Accordingly, all such amounts relating
to contract  performance by alliance members Bath and Raytheon will be reflected
as sales and cost of sales in the Company's consolidated financial statements.

      The Company's LPD backlog at December 31, 1998 includes approximately $910
million,  which amount is the  aggregate of the  estimated  cost to complete the
LPD-17  and the  LPD-18  plus the  maximum  award fee that  could be  payable to
Avondale  and the  alliance.  However,  a  substantial  portion of the  reported
backlog  for the first  vessel is related to work to be  performed  by the other
alliance  members.  To the extent  that the  Company's  revenues  include  costs
incurred by and award fees paid to the other  alliance  members,  such  revenues
will be recorded with no corresponding operating profit margin.
<PAGE>
      If the U.S.  Navy  proceeds  with its  previously  announced  intention to
construct  additional  LPD ships  beyond  the  original  contract,  the  Company
anticipates  that future  contracts for such vessels may provide for alternative
pricing  arrangements,  such as  fixed-price  incentive or  fixed-price  (see "-
Government Contracting").

      The U.S. Navy has stated its  expectation  that the LPD vessels will be an
important  element in its  amphibious  operations  over the next three  decades,
replacing  more  than  36  ships  nearing  the end of  their  useful  lives  and
approaching  decommissioning.  In 1995, Congress appropriated $974.0 million for
the  construction  of the first of an  anticipated  twelve  ships  under the LPD
program.  During 1998, the Company was awarded a contract for approximately $391
million for the LPD-18.  In addition,  the President's  initial fiscal year 2000
budget provides funding for both the LPD-19 and LPD-20. Management believes that
the award to the  Company-led  alliance of the contract to construct the initial
LPD  ship  and  the  subsequent  exercise  of the  option  for the  second  ship
significantly enhance the competitive position of the alliance in its pursuit of
the  remaining  nine LPD ships.  Should the U.S.  Navy  award  contracts  to the
alliance to construct all twelve ships,  the Company would construct eight ships
and Bath would construct four ships.

      Also  included in the current firm backlog for the military are  contracts
to construct six Sealift ships with a remaining  backlog of  approximately  $669
million (including  estimated contract  escalation).  The Sealift ships, each of
which contains approximately 400,000 square feet of cargo space, are designed to
assist  in the  rapid  transportation  and  deployment  of  military  personnel,
equipment and supplies,  and are comparable to other vessels,  such as auxiliary
and amphibious support ships that have been previously  delivered by Avondale to
the  military.  The first Sealift ship was delivered in 1998 with the final ship
scheduled for delivery in 2001.

      While it represents only $30.9 million of the funded backlog, the contract
to construct  the  Icebreaker,  which is scheduled for delivery in the middle of
1999, will occupy a significant  portion of  management's  time and resources in
the first half of the year.  The  Icebreaker is a research  vessel for the U. S.
Coast  Guard  that will be able to  operate in polar  regions.  The fixed  price
incentive contract for this vessel was awarded in 1993.

      Although  no  significant   new  U.S.  Navy   shipbuilding   programs  are
anticipated to be contracted  during 1999, it is expected that  additional  U.S.
Navy  shipbuilding  opportunities,  including a series of ADC(X) vessels and the
Joint  Command  and  Control  Ship  (JCC(X))  will  become   available   shortly
thereafter.  The ADC(X) is a new class of auxiliary  vessels designed to deliver
food, ammunition and other supplies to the U.S. Navy fleet. It has been reported
that the Navy has a projected  need for ten to twelve of these  vessels with the
first vessel expected to be awarded in 2000 and enter service in 2006.

      The  JCC(X)  is  envisioned  as a new  class  of ships  designed  to house
sophisticated  and unified command and control  capabilities that coordinate the
operational  activities  of all of the  military  branches.  It is believed that
improved coordination of the services' command and control functions is possible
because of improvements in communication  technology.  It has been reported that
the Navy has a projected  need for four of these  vessels  with the first vessel
expected to be awarded in the 2004-2005 timeframe.
<PAGE>
      Finally,  during  August 1998,  the  Avondale  Deepwater  Alliance,  which
includes Avondale as the prime contractor,  Boeing,  DAI, Inc., John J. McMullen
Associates, Inc. and Raytheon Systems Company, was one of three teams which were
selected to proceed  with a Phase I study  related to the Coast Guard Deep Water
project.  This funded  contract  is  designed to assist the U.S.  Coast Guard in
developing  a  strategy  to acquire  30-40  multi-purpose  ships to replace  its
existing high and medium endurance  cutters,  as well as aircraft,  patrol boats
and  certain  command and control  systems.  The total value of this  program is
estimated at approximately $8 billion.  Upon completion of the Phase I study, it
is  anticipated  that the U.S. Coast Guard will move into Phase II, during which
the remaining team or teams will refine their proposals.  Phase III will involve
the  selection of one team for  procurement.  It is  anticipated  that the first
construction contract will be awarded to the successful bidder during 2002.

      Commercial  Shipbuilding.  Two  legislative  enactments in the early 1990s
enhanced U.S.  commercial  shipbuilding  opportunities.  In late 1993,  Congress
amended the loan  guarantee  program under Title XI of the Merchant  Marine Act,
1936, to permit the U.S.  government to guarantee  loan  obligations  of foreign
vessel  owners for  foreign-flagged  vessels  that are built in U.S.  shipyards.
Title XI authorizes  MARAD to guarantee debt with a term of up to 25 years in an
amount up to 87.5% of the vessel cost,  thereby  enabling  shipowners  to obtain
financing  on more  favorable  terms  than  those  currently  offered  by  other
countries having guarantee or subsidy programs for foreign  nationals similar to
Title XI. These 1993  amendments  expanded Title XI in a manner that has created
commercial shipbuilding opportunities for U.S. shipyards.

      The Oil Pollution Act of 1990, which requires the phased-in  transition of
single-hulled  tankers and product carriers to double-hulled  vessels  beginning
January 1, 1995,  created a demand for the retro-fitting of existing tankers and
the construction of new double-hulled  tankers,  as oil and energy companies and
other ship  operators  upgrade  their  fleets to comply  with this  legislation.
Industry  analysts  believe that other countries may pass laws comparable to the
Oil Pollution Act of 1990,  which would further  increase  worldwide  demand for
double-hulled product carriers.

      The demand for  double-hulled  tonnage  manifested  itself for Avondale in
1997  when  the  Company  signed  a $332  million  contract  with  ARCO  for the
construction of two double-hulled crude oil carriers. This contract, the largest
commercial  contract  ever  signed  by  Avondale,   also  provided  for  options
exercisable by the customer for three additional  ships. In September 1998, ARCO
exercised the first of these options for a third  vessel.  The Company  believes
that the  receipt  of these  commercial  contracts  was  assisted  by its  prior
experience in constructing three  double-hulled T-AOs on behalf of the U.S. Navy
and the $143.9 million  contract  completed in 1997 to retrofit four single hull
tankers with double-hulled  forebodies for a U.S. shipping company.  The options
for the fourth and fifth vessels under the 1997 contract expire June 1, 1999 and
January 1, 2000,  respectively.  With the  depressed  state of crude oil prices,
ARCO announced plans to reduce costs and capital spending. To this end, ARCO and
the Company agreed to delay the deliveries of the three vessels  currently under
contract by up to 16 months and the  customer  has agreed to pay the Company its
estimated  out-of-pocket  expenses  for  completing  the vessels in a later time
frame.  There can be no assurance that ARCO will exercise its remaining  options
given its cost and spending reduction plans.

      Prior to 1997,  legislation was introduced in the U.S. Congress that would
implement a December 1994 trade agreement among the United States,  the European
Union, Finland, Japan, Korea, Norway and Sweden (which collectively control over
<PAGE>                                 
75% of the market share for worldwide vessel construction)  negotiated under the
auspices of the Organization for Economic Cooperation and Development (the "OECD
Agreement").  The OECD Agreement and related  accords seek,  among other things,
to  eliminate  government subsidies  provided to commercial  shipbuilders and to
adopt a uniform standard of government credit assistance for foreign  nationals.
Under these multilateral  accords,  each  participating  nation  agreed  not  to
provide credit assistance  to foreign  nationals  in excess of 80% of the vessel
construction  price,  and  to  limit credit  assistance  to a term not to exceed
twelve years.  Congress failed to adopt or ratify the OECD Agreement in 1997 and
in 1998.  Proponents of the OECD Agreement may seek to have it  reconsidered  in
1999 and, if such  legislation were enacted by Congress in its current form, the
Title XI guarantee  program  would be modified to be in accord  with the uniform
credit   assistance  standards  mandated  under  the  OECD  Agreement,   thereby
eliminating  the  advantages available to U.S. shipyards under the 1993 Title XI
amendments.

      Avondale is currently  unable to assess whether  legislation  implementing
the OECD Agreement will be enacted by Congress or the ultimate  impact that such
legislation may have on its prospects for additional  commercial work.  Although
the OECD  Agreement  promotes the goal of  eliminating  commercial  shipbuilding
subsidies  by  signatory  nations,  there  can  be  no  assurance  that  certain
safeguards  in the  agreement  will not be  circumvented  or will be  adequately
enforced.  In addition,  Avondale  cannot predict whether  worldwide  commercial
shipbuilding opportunities will continue to flow to foreign shipyards located in
signatory nations (which may have developed structural competitive advantages as
a result of their  long  histories  of  subsidization)  or will be  diverted  to
non-signatory  nations.  If the  competitive  advantages of the current Title XI
guarantee  program are eliminated  and the OECD  Agreement  fails to achieve its
objectives,   Avondale's   ability  to  compete  for  international   commercial
shipbuilding  contracts will be further limited,  notwithstanding  the increased
opportunities  that are expected to arise as vessels of the worldwide tanker and
product carrier fleet approach the end of their useful lives.

      Legislative  initiatives  seeking to rescind or  substantially  modify the
provisions of the Jones Act, which  mandates the use of U.S.-built  ships for U.
S.  coastwise  trade,  are  introduced  in Congress  from time to time,  and are
expected to be  introduced  in the future.  Although  management  believes it is
unlikely  the  Jones  Act  will  be  rescinded  or  materially  modified  in the
foreseeable future, there can be no assurance to this effect with respect to the
Jones Act or any other law or regulation benefitting U.S. shipbuilders.

      Although  current  Jones Act  opportunities  have been  diminished  as the
continued low prices of oil and natural gas have caused exploration companies to
cut their capital  budgets,  the Company  believes that, if oil prices  recover,
significant   domestic  commercial   shipbuilding   opportunities  could  become
available during the next five years.  Future commercial  opportunities  include
the retrofitting of existing tankers or product carriers and construction of new
double-hulled  tankers  or product  carriers  for the Jones Act Trade to replace
vessels  taken  out of  service  pursuant  to the  Oil  Pollution  Act of  1990.
Management  believes a significant volume of such work as described herein could
become  available  before 2005, with orders being placed during the next several
years.

      Technological Innovations.   To assure that its shipyard remains among the
most  modern  in  the  world,  Avondale  regularly  reviews  and  assesses   its
construction and production processes.  In this regard,  Avondale often consults
<PAGE>
with  other  highly  successful  shipbuilding  companies  concerning advances in
shipbuilding  technology.   In the early 1980s,  the Company was among the first
of U.S.  shipyards  to  successfully  implement modular construction  techniques
that  had  been  previously  perfected  by  Japanese  shipbuilders.   Management
believes  these  techniques  were a major  factor  in  Japan's  dominance of the
commercial  shipbuilding  market during the 1970s and 1980s.   Avondale obtained
its modular  construction  capabilities and "know-how" pursuant to an  agreement
with  Ishikawajima-Harima  Heavy  Industries Co., Ltd., one  of Japan's  largest
shipbuilders,  which worked with Avondale to change its manufacturing and design
processes and  to train  Avondale's  employees.   Modular construction  afforded
Avondale  significant  production  efficiencies  in   the  installation  of ship
systems,  largely  due  to  the  greater  ease  with which such systems could be
installed in open modules  rather than  closed-in  hulls.  As a result of  these
efforts,  Avondale realized substantial improvements in labor productivity.

      In  addition,  in 1994  the  Company  entered  into a  technology  sharing
agreement  with  AESA  of  Spain,  regarded  as  an  innovative  and  successful
world-class shipyard. After an on-site review of Avondale's shipyard by AESA, as
well as a  review  by  Avondale  of  current  shipbuilding  technology  in other
countries,  Avondale invested  approximately $20 million in capital improvements
designed to increase efficiency by improving production flow. In particular, the
Company   integrated   certain   assembly-line   techniques   with  its  modular
construction  processes.  To that end, the Company built a covered facility that
houses  production  lines  dedicated  to both  military  and  commercial  ships.
Avondale  believes  that  the  sheltering  of the  production  process  and  the
introduction  of  assembly  line   procedures  have  both  enhanced   production
efficiencies and lowered unit production costs.

      Because the construction of commercial  vessels,  particularly the product
carriers  that  Avondale has  traditionally  built,  places an emphasis on steel
fabrication rather than the complex  technological  outfitting  involved in U.S.
naval  construction,  Avondale's  ability to compete  effectively for additional
commercial work has been enhanced by this new assembly-line process.

      An important  element in the  Company's  success in  obtaining  the LPD-17
contract  award was the  Company's  enhanced  computer-aided  design and product
modeling  capabilities.  The enhancement was made possible through a cooperative
endeavor between the Company, the University of New Orleans (the "University" or
"UNO"), the University of New Orleans Research and Technology  Foundation,  Inc.
(the "Foundation") and the State of Louisiana.  Pursuant to the terms of various
agreements,  the  Foundation  has  purchased  hardware and software  required to
implement the extensive  three-dimensional  ship design and  Integrated  Product
Data  Environment  ("IPDE")  technology.   This  technology  also  provides  for
sophisticated  storage,  management  and retrieval of data for future  projects.
Among its other features,  the technology  permits  engineering,  production and
material  procurement  tasks to be performed  cooperatively,  thus enhancing the
efficiency  of the design  phase.  The IPDE  captures  data in  digital  form at
creation and then organizes, integrates, maintains and makes available such data
to all program  participants.  The  Foundation  has also  constructed  a 200,000
square foot  building  on property  donated to the  University  by the  Company,
adjacent  to  the  Company's  main  shipyard.   This  facility,   known  as  the
"UNO/Avondale  Maritime  Technology  Center  of  Excellence,"  houses  this  new
technology  and is an integral part of the Company's  efforts to design the lead
ship in the LPD program. In addition to the amounts expected to be funded by the
State,  the Foundation,  at the Company's  request,  is incurring  approximately
$15.5 million  in additional costs  to enhance the integration and functionality
<PAGE>
of  the  ship  design  and IPDE  technology.   The  Company  is  reimbursing the
Foundation for these  additional  amounts as incurred and will capitalize  these
costs and amortize them over their estimated useful lives in accordance with the
Company's  stated  policies  (See  Note 1 of the Notes to Consolidated Financial
Statements).

Shipbuilding

      The  Company  is  predominantly  engaged  in  the  design,   construction,
conversion, repair and modernization of various types of military and commercial
ships.

      The main  shipyard  facility,  which is located on a 270-acre  site on the
Mississippi  River near New  Orleans,  includes  multiple  building  ways,  side
launching facilities,  a 900-foot floating dry dock/launch platform that permits
construction of vessels up to 1,000 feet in length,  and a 650-foot floating dry
dock  principally  used for ship repair.  The main shipyard is equipped to build
almost any type of vessel  other than  nuclear-powered  submarines  and aircraft
carriers and surface vessels of the largest classes,  such as ultra-large  crude
carriers. Avondale also operates several other facilities in the vicinity of the
main  shipyard,  including  its  Westwego,  La.  shipyard,  which  has been used
primarily for boat construction and repair, and its Algiers, La. shipyard, which
is used  primarily  for the repair  and  overhaul  of  ocean-going  vessels.  In
addition,  the Company  operates  marine  fabrication  facilities  in  Gulfport,
Mississippi, and Tallulah,  Louisiana, which are currently being used to support
marine construction activities.

      The Company  continues to be materially  dependent on the U.S. Navy's ship
construction  and  conversion  programs.  The  following  table  sets  forth the
distribution of marine  construction and repair  activities during the last five
years  based on  contract  billings.  As the  table  indicates,  a  majority  of
Avondale's  work in the  year  ended  December  31,  1998 was  comprised  of new
military construction.

               Distribution of Marine Construction and Repair Work
<TABLE>
<CAPTION>
                                                                    Years Ended December 31,                       
                                               1998           1997            1996           1995           1994 
                                               ----           ----            ----           ----           ----
<S>                                            <C>            <C>             <C>            <C>            <C>
U.S. MILITARY:
  New construction                              78%            86%             81%            80%            81%

COMMERCIAL:
  New construction                              21%            12%             17%            16%            11%
  Repair, overhaul and
    conversion                                   1%             2%              2%             4%             8%
                                               ----           ----            ----           ----           ----
       TOTAL                                   100%           100%            100%           100%           100%
                                               ====           ====            ====           ====           ====
</TABLE>

      The percentage of new construction has remained  relatively constant since
1994. New commercial  construction  decreased and new U.S. military construction
correspondingly  increased  in 1997 as  compared to 1996 and 1995 as the Company
substantially completed the double-hulled forebodies and the river hopper barges
in early 1997.  In addition,  new commercial construction increased and new U.S.
<PAGE>
military  construction  correspondingly  decreased in 1998  as compared to prior
years as the Company began construction of the ARCO crude carriers in late 1997.
Also,  the  percentage  of  commercial  repair,  overhaul  and  conversion  work
decreased in recent years as compared to 1994 as the Company's  work on  several
contracts with a private contractor for the repair of existing Sealift ships was
completed. See "-Other Operations - Repair Operations."

      Government  Contracting.  Avondale's principal U.S. government business is
currently being performed under  fixed-price  incentive  contracts  although the
recent LPD-17 contract is a cost- plus-award fee contract. Fixed-price incentive
contracts  provide for sharing between the government and the contractor of cost
savings and cost overruns based  primarily on a specified  formula that compares
the contract  target cost with actual cost. In addition,  fixed-price  incentive
contracts  generally  provide  for  payment  of  escalation  of  costs  based on
published  indices  relating to the  shipbuilding  industry.  Although  all cost
savings are shared  under  fixed-price  incentive  contracts,  cost  overruns in
excess of a specified  amount  must be borne  entirely  by the  contractor.  The
Sealift vessels and the Icebreaker are each being  constructed under fixed-price
incentive  contracts.  The LPD-17 contract provides for the payment of all costs
that are reimbursable under government  contracts.  In addition, an award fee is
payable  periodically after the Navy's evaluation of the alliance's  performance
in  executing  the  contract's  performance  goals and  objectives.  See "- U.S.
Government."

      Contracts  for the  construction  and  conversion of U.S. Navy vessels are
typically   subject   to   competitive   bidding.   As   a   safeguard   against
anti-competitive  bidding  practices,  the U.S. Navy has employed the concept of
"cost realism,"  which requires that each bidder submit  information on pricing,
estimated costs of completion and anticipated profit margins. The U.S. Navy uses
this and other data to  determine an  estimated  cost for each bidder.  The U.S.
Navy may then  re-evaluate  a bid by using the greater of either the bidder's or
the U.S. Navy's cost estimates.

      Under government  regulations,  certain costs, including certain financing
costs,  portions of research  and  development  costs and certain  lobbying  and
marketing expenses, are not allowable costs under fixed-price incentive and cost
reimbursable  contracts.  The  government  also  regulates  the methods by which
overhead costs are allocated to government contracts.

      U.S.  government  contracts are subject to  termination  by the government
either for its convenience or upon default by the contractor. If the termination
is  for  the  government's convenience, the contracts  provide for payment  upon
termination for items  delivered to and accepted by the  government,  payment of
the contractor's  costs incurred plus the costs of settling and paying claims by
terminated  subcontractors,  other settlement  expenses and a reasonable profit.
However, if a contract  termination results from the contractor's  default,  the
contractor is paid such amount as may be agreed upon for completed and partially
completed  products and services  accepted by the government.  The government is
not liable for the  contractor's  costs with respect to unaccepted  items and is
entitled to repayment of advance payments and progress payments, if any, related
to the terminated portions of the contract.  In addition,  the contractor may be
liable for excess costs  incurred by the  government  in  procuring  undelivered
items from another source.

      The continuation of any U.S. Navy  shipbuilding  program is dependent upon
the continuing availability of Congressional appropriations for that program. It
is customary for the U.S.  Navy to award  contracts to build one or more vessels
of  a  program  to  a contractor together with options (exercisable  by the U.S.
<PAGE>
Navy) to purchase  additional  vessels in the program.  Generally, contracts  to
build  vessels are not awarded  until funds to pay the full contract  have  been
appropriated.  However, because Congress  usually appropriates funds on a fiscal
year basis,  funds may never be appropriated to permit the U.S. Navy to exercise
options that have been  awarded.  In addition, even if funds  are  appropriated,
the U.S. Navy is not required to exercise such options.

      Because  its U.S.  Navy  contracts  require  the Company to have access to
classified  information,  Avondale  must  maintain a security  clearance for its
facility. Among other things,  facilities with such clearances must restrict the
access of non-U.S.  citizens  to  classified  information.  If in the future the
percentage of foreign  ownership of the Company's common stock is increased to a
level that could result in foreign  dominance or control of its activities,  the
Company  would be  required  to  implement  additional  measures  to insure that
classified  material  would not be  compromised or risk the loss of its security
clearance.

      Due to the complexity of government contracts and applicable  regulations,
contract  disputes with the government  may occur in the ordinary  course of the
Company's  business.  Based upon management's  analysis of each such dispute and
advice of  counsel,  the Company  records,  if  appropriate,  an estimate of the
amount  recoverable  upon  resolution  of  such  disputes.  Although  management
believes its estimates are based upon a reasonable analysis of such disputes, no
assurance  can be given  that its  estimates  will be  accurate,  and  variances
between such estimates and actual results can be material.  The Company believes
that adequate  provision has been made in its financial  statements for this and
other normal uncertainties incident to its business with the U.S. Government.

      The Company  currently has an issue with the U. S. Navy related to certain
materials  purchased  from a  subcontractor  for  use in the  Strategic  Sealift
program.   The   materials   were   purchased   based   on   government-provided
specifications  which have  proven to be  defective.  In  addition  to delay and
disruption costs, the Company has incurred approximately $12.5 million in direct
costs through December 31, 1998 related to this issue. The Company believes that
it is entitled to recovery from the U. S. Navy of these costs and has recorded a
receivable  for the  amount of the  direct  costs  incurred  to date.  While the
Company hopes to resolve this issue through negotiation, the Company has engaged
legal counsel to assist in the development of a claim.

      There is significant  oversight of defense contractors to prevent waste in
the defense procurement  process.  Areas of contract dispute are reviewed by the
government  for evidence of criminal  misconduct  such as  mischarging,  product
substitution and false certification of pricing and other data. In the event the
government  alleges a  violation  of its  procurement  regulations,  it may seek
compensatory, treble or punitive damages in substantial amounts and indictments,
fines,  penalties and forfeitures.  In addition, the government has the right to
suspend  or debar a  contractor  from  government  contracting  for  significant
violations  of  government  procurement  regulations.  Avondale  has never  been
subject to suspension or debarment.

      Vessel  Deliveries  and Backlog.  At December 31, 1998,  the Company had a
firm backlog of shipbuilding  contracts of approximately $2.0 billion (exclusive
of unexercised options  aggregating  approximately $490 million held by the U.S.
Navy (including  estimated  contract  escalation) and approximately $330 million
held  by a  commercial customer  for additional ship  orders) compared with firm
<PAGE>
backlogs approximating $1.8 billion at December 31, 1997 and 1996, respectively.
The   Company's  firm  backlog  at  December  31,  1998  primarily consisted  of
approximately    $669   million  to  complete  the  remaining six Sealift ships,
approximately    $910   million    related   to   the  LPD-17  and  LPD-18,  and
approximately  $365 million to complete the 125,000 DWT double-hulled  crude oil
carriers.

      Vessel  deliveries in 1998 and 1997 included one MHC minehunter,  the last
of four single- hulled  commercial  tankers  retrofitted  with double hulls, the
remainder  of the  river  hopper  barges,  one  LSD-CV,  and the  first of seven
Strategic Sealift ships.  Vessel  deliveries  expected in 1999 include the Coast
Guard Icebreaker and the second and third Strategic Sealift vessels. The Company
plans  to  continue  to  actively  pursue  other  government   construction  and
conversion opportunities,  as well as commercial  opportunities,  as they become
available.

      The   Company  has  been   actively   pursuing   commercial   shipbuilding
opportunities but has focused its efforts on the Jones Act market. International
commercial  shipbuilding  opportunities  remain limited because  shipbuilders in
foreign countries are often subsidized by their governments, which allow them to
sell  their  ships  for  prices  below  their   construction   costs.   Domestic
shipbuilding  opportunities that are not affected by foreign subsidies therefore
offer  better  possibilities  for  the  Company.  See  "-Overview  -  Commercial
Shipbuilding."

      In connection  with the bids and proposals  that the Company has submitted
or plans to submit to various commercial and government customers,  no assurance
can be given that the Company will be the successful  bidder or that the vessels
bid on will actually be built.

Other Operations

      Overview.  Although the Company has from time to time, on a limited basis,
pursued  opportunities to diversify its business,  management  strongly believes
that  the   Company's   resources  are  most   profitably   employed  in  marine
construction.  In the past,  the  Company  sold or  discontinued  certain of its
non-core  operations  in order to focus on its core  shipbuilding  business  and
improve   liquidity.   The  Company   will   continue   to   evaluate   suitable
diversification  opportunities,  principally  those that would not detract  from
Avondale's  core  business  but  that  would  utilize  the  Company's   existing
facilities and complement the Company's current business activities.

      Modular  Construction.  The  Company  has been able to apply  its  modular
construction methods to a variety of non-marine industrial fabrication projects,
including a sulphur  recovery plant that was shipped to Saudi Arabia for on-site
assembly and  installation,  two cryogenic  gas  separation  systems,  two waste
disposal units, six gas turbine-driven compressors, six gas turbine- driven salt
water injection  pumps,  six condenser  modules for inclusion in a nuclear power
plant, and two sled and receiver modules for sub-sea pipeline  connections.  The
Company has also  fabricated  steel bridge  components,  a  hydroelectric  power
plant,  and an 800-bed  floating  detention  facility that is 625 feet long, 125
feet wide,  and five stories  high.  Sales by this  division to unrelated  third
parties  for the years  ended  December  31,  1998,  1997,  and 1996 were  $10.3
million, $10.5 million, and $8.5 million, respectively.
<PAGE>
      Boat  Division.   The  Company   leases  a  facility   equipped  for  boat
construction  at its  Westwego,  Louisiana  shipyard that is capable of building
vessels  up  to  450  feet  in  length,  as  well  as a  facility  in  Gulfport,
Mississippi.  In 1994 and 1995, the Boat Division delivered three gaming vessels
ranging  from 210 to 350 feet in  length.  In 1996 and 1997,  the  division  was
primarily  engaged in the  construction  of river hopper barges under a contract
signed in 1995. The Boat Division is actively pursuing other projects  involving
the  construction  of additional  gaming boats as well as passenger  vessels and
ferries,  towboats,  offshore supply boats and other vessels. While the division
had no active  contracts  in 1998,  sales by this  division to  unrelated  third
parties for the years  ended  December  31, 1997 and 1996 were $6.0  million and
$10.2 million, respectively.

      Steel Operations.  Through its Steel Sales operation, Avondale sells steel
plate and  structural  steel to the  marine and  industrial  markets in the Gulf
Coast region of the United  States.  Sales by this  division to unrelated  third
parties for the years ended December 31, 1998, 1997 and 1996 were  approximately
$45.8 million, $42.8 million, and $40.1 million,  respectively. The higher sales
in 1998 reflect  principally  the  increased  construction  activity in the Gulf
South driven by a resurgence in the oil and gas industry. However,  particularly
in the second half of 1998,  oil and gas  construction  activity  slowed and the
devaluation  of most Far East  currencies  resulted in a flood of foreign  steel
into the U.S.  These  factors  resulted  in an  oversupply  of steel and pricing
pressure.  As a result, in December 1998, management reviewed the carrying value
of its Steel Sales  inventory  and  recorded a $2.2  million  pre-tax  charge to
reduce its carrying value to market prices.

      Repair Operations. At its main shipyard and the Algiers shipyard, Avondale
engages in the repair,  overhaul and conversion of ocean-going vessels. With the
900 and 650 foot drydocks located at the Company's main shipyard, the Company is
capable of offering a complete  range of vessel  repairs and overhaul  services.
The  Algiers  shipyard  is  operated  under a  long-term  lease and is  designed
primarily  for the topside  repair and  overhaul of large  ocean-going  vessels.
Although  historically  Avondale  has engaged in the repair and overhaul of U.S.
Navy vessels, these opportunities have been curtailed by the U.S. Navy's current
policy of  requiring  such work to be  conducted  at or near the  vessels'  home
ports.  Sales by this  division to unrelated  third  parties for the years ended
December  31, 1998,  1997 and 1996 were $8.5  million,  $10.3  million and $13.5
million, respectively.

Competition

      The  shipbuilding  industry is divided  into two  distinct  markets,  U.S.
government  contracts,  which is dominated by contracts for the U.S.  Navy,  and
domestic and international  shipbuilding contracts for commercial customers. The
reduced level of shipbuilding  activity by the U.S.  government  during the past
decade has significantly intensified competition. With respect to the market for
U.S.  military  contracts,  there are  principally  six private U.S.  shipyards,
including  Avondale,  that  compete for  contracts  to  construct or convert the
largest surface vessels and submarines.  Within certain of the product lines for
which it  competes,  Avondale  also faces  competition  from a number of smaller
shipyards.  Three of the principal competitors are subsidiaries of a much larger
corporation with  substantially  greater resources than Avondale.  The fourth is
likewise a subsidiary  of a much larger  corporation  with  diverse  defense and
non-defense product lines. In January 1999, the Company announced that its Board
of Directors had unanimously  approved the execution of an Agreement and Plan of
Merger  with  Newport  News  Shipbuilding  Inc.  which  would  combine  the  two
<PAGE>
remaining independent shipyards into a single  entity.  It is believed that this
strategic  combination  will enhance the  operating  efficiencies  and  increase
value for the U.S.  Navy by creating a broad-based shipbuilding  company capable
of  designing,  building,  and maintaining every type of ship in the Navy, Coast
Guard and commercial fleets.

      A recent trend in certain  government  contracts is the concept of several
shipbuilders and a weapon systems integrator forming an alliance to bid on major
procurements.  This is  evidenced by the bidding  process for the recent  LPD-17
program where a Company-led alliance which includes Bath Iron Works and Raytheon
was awarded the contract against competition which included an alliance of other
major shipbuilders and a weapon systems integrator.  This trend continued in the
DD-21  program  and Coast  Guard Deep  Water  project.  For the ADC(X)  program,
Congress  has  required  that the  construction  of the ships be performed by at
least two shipyards.  Management believes that the most cost-effective means for
the Navy to accomplish  this mandate is to award the contract for the design and
construction  of the ADC(X) to a  shipbuilding  team  consisting  of two or more
shipyards.  The Company's  success in participating in future Navy programs such
as the  ADC(X)  and  the  JCC(X)  may be  influenced  by its  ability  to form a
competitive bidding team.

      With  respect to  commercial  vessels that must be  constructed  by a U.S.
shipyard under the Jones Act, there are approximately 20 private U.S.  shipyards
that can accommodate the  construction of vessels up to 400 feet in length,  ten
of  which  Avondale  considers  to be  its  direct  competitors  for  commercial
contracts.  Because of the current  overcapacity at U.S. shipyards,  the current
small volume of commercial work available,  and the fact that most contracts are
awarded on the basis of competitive  bidding,  price competition is particularly
intense.  With  respect to the  international  commercial  shipbuilding  market,
Avondale competes with numerous  shipyards in several  countries,  many of which
are heavily subsidized by their governments. See "- Commercial Shipbuilding."

      The Company has been  successful  recently in securing  competitively  bid
contracts in large part because the Company  submitted  the most  cost-effective
bids for the available  contracts.  However,  the Company also believes that its
receipt of the LPD and ARCO  contract  awards has  demonstrated  its  ability to
successfully  bid for shipbuilding  work based on its technical  capabilities as
well as its cost efficient production methods. The Company believes that it will
continue to be  competitive  in bidding for selected  U.S.  Navy and  commercial
shipbuilding  contracts in the future.  However,  no assurance can be given that
the Company will be the  successful  bidder on any future  contracts or that, if
successful, it will realize profits on such contracts.

Marketing

      The Company's  marketing effort is decentralized and conducted  separately
by each division.  Generally,  the Company and its  competitors are all aware of
the  shipbuilding,  repair  and  conversion  plans  of the  U.S.  Navy  and most
prospective commercial customers, and are invited to bid on all major projects.

      The  Company's  boat  building and repair  operations  are marketed by the
sales and business development  personnel of the appropriate divisions primarily
through direct, personal sales calls.  The services of the Steel Sales operation
<PAGE>
are  marketed  through  industry  advertising,  personal  sales  calls and prior
business relationships.

Materials and Supplies

      The principal  materials used by Avondale in its shipbuilding,  conversion
and repair  business are standard  steel  shapes,  steel plate and paint.  Other
materials used in large quantities  include  aluminum,  copper-nickel  and steel
pipe, electrical cable and fittings.  The Company also purchases component parts
such as propulsion  systems,  boilers,  generators and other  equipment.  All of
these  materials  and parts are  currently  available  in  adequate  supply from
domestic and foreign sources.  Generally,  for all its long-term contracts,  the
Company obtains price  quotations for its materials  requirements  from multiple
suppliers  to  ensure  competitive  pricing.  In  addition,   through  the  cost
escalation  provisions contained in its U.S. military contracts,  the Company is
protected from increases in its materials costs to the extent that the increases
in the Company's costs are in line with industry indices.

      In connection  with its government  contracts,  the Company is required to
procure certain  materials and component  parts from supply sources  approved by
the  U.S.  Government.   Although  certain  components  and  sub-assemblies  are
manufactured by  subcontractors,  the Company's  reliance on subcontractors  has
been and is expected by management to continue to be limited. The Company is not
dependent  upon any one supply source and believes  that its supply  sources are
adequate to meet its future needs.

Insurance

      The Company  maintains  insurance  against property damage caused by fire,
explosion and similar  catastrophic events that may result in physical damage or
destruction to the Company's premises and properties. The Company also maintains
general  liability  insurance in amounts it deems  appropriate for its business.
The Company is self-insured for workers'  compensation  liability and employees'
health insurance except for losses in excess of $1.0 million per occurrence, for
which the Company maintains insurance in amounts it deems appropriate.

Environmental and Safety Matters

      General.  Avondale  is subject to federal,  state and local  environmental
laws and regulations that impose limitations on the discharge of pollutants into
the environment and establish standards for the treatment,  storage and disposal
of toxic and hazardous wastes.  Stringent fines and penalties may be imposed for
non-compliance   with  these  laws  and   regulations.   In  addition,   certain
environmental  laws impose joint and several "strict  liability" for remediation
of spills and  releases  of oil and  hazardous  substances,  rendering  a person
liable for  environmental  damage  without  regard to negligence or fault on the
part of such  person.  Such laws and  regulations  may  expose  the  Company  to
liability for the conduct of or conditions  caused by others, or for acts of the
Company which are or were in  compliance  with all  applicable  laws at the time
such acts were  performed.  The Company is covered  under its various  insurance
policies for some, but not all, potential environmental liabilities. See Note 10
of the Notes to Consolidated Financial Statements.
<PAGE>
      The Company is also subject to the federal  Occupational Safety and Health
Act ("OSHA") and similar state statutes. The Company has an extensive health and
safety program and employs a staff of safety  inspectors and industrial  hygiene
technicians,  whose primary  functions are to develop Company policies that meet
or exceed the safety  standards set by OSHA,  train  supervisors  and make daily
inspections  of  safety  procedures  to insure  their  compliance  with  Company
policies on safety and  industrial  hygiene.  All  supervisors  are  required to
attend safety training  meetings at which the importance of full compliance with
safety procedures is emphasized.

      During  the  fourth   quarter  of  1998,   the  Company   consented  to  a
comprehensive  inspection of its main facility by OSHA. It is believed that this
inspection  was based on a  complaint  filed by the  union  that is  seeking  to
organize  certain of the Company's  employees.  At the conclusion of the initial
inspection,  representatives  of  OSHA  sought  judicial  authority  for a  more
thorough  review of  substantially  all of the Company's  medical  records.  The
Company  proposed to the court and the court ordered the Company to provide OSHA
access to the Company's records on Company property.  The results of the initial
review and the review of the medical  records are not known at this time but are
not expected to have a material  adverse  effect on the  Company's  consolidated
financial statements.

      Waste  Disposal.   Avondale's  operations  produce  a  limited  amount  of
industrial  waste  products  and  certain  hazardous  materials.  The  Company's
industrial  waste  products,  which consist  principally of residual  petroleum,
other combustibles and blasting  abrasives,  are shipped to third party disposal
sites that are licensed to handle such materials.

Employees

      At December 31, 1998, Avondale had approximately 5,550 employees,  many of
whom have been  employed  by the  Company  for many  years.  None of  Avondale's
employees is currently covered by any collective bargaining agreement.  However,
on June 23, 1993 an election was conducted to determine  whether  certain of the
New Orleans  area  employees  desired to have union  representation.  A total of
3,914 workers cast votes,  of which  approximately  850 votes were challenged by
the National Labor Relations Board ("NLRB") and union organizers on a variety of
grounds. The Company filed objections with the NLRB seeking to have the election
set aside. In February 1997, the NLRB decided that certain of the disputed votes
should be counted and that the Company's  objections  to the election  should be
rejected.  The NLRB then  counted the disputed  votes,  resulting in a favorable
outcome for the union,  and certified the union.  The final vote count  included
1,950  votes for  forming  a union,  1,632  votes  against  forming a union,  59
disputed votes,  with 273 ballots  remaining  sealed.  The Company  continues to
believe  that it has  substantive  and  meritorious  bases for  overturning  the
decision  of the NLRB and has  appealed  the  decision.  In October  1998,  oral
arguments  were made  before the 5th  Circuit  Court of Appeals  and the Company
expects the 5th Circuit's  decision in 1999. If the NLRB's  certification of the
union is enforced as a result of the proceedings, the Company  would be required
under the federal labor laws to bargain in good faith with the union on  matters
such as wages,  hours and working  conditions.  Even though Avondale will  agree
only  to   bargaining  demands  that  can  be   economically  justified,   union
certification  may result in an  increased  risk that the union  will  engage in
potentially  disruptive  activities  such as strikes or  picketing,  or that the
Company may incur higher labor and operating costs.
<PAGE>
      The union has also filed numerous  unfair labor practice  charges with the
NLRB  alleging  that  Avondale  has  committed  a variety of  violations  of the
National Labor  Relations Act principally  involving  claims that employees were
wrongfully  disciplined or discharged.  In February 1998, an administrative  law
judge ordered the Company to reinstate  twenty-six  fired  workers,  and rescind
disciplinary  actions  taken  against  another  fifteen.  Although  the  Company
disputes these claims and is currently  appealing the decision,  if the decision
is upheld, the respective  employees would be entitled to back pay from the time
of his or her claim until the resolution of the case. However,  even if there is
a finding in favor of some of the  claimants  with respect to one or more of the
unfair labor practice  claims,  management  believes that any judgment would not
have a material impact on Avondale's consolidated financial statements.
<PAGE>
GLOSSARY OF SELECTED INDUSTRY TERMS

ADC(X)            A class of  auxiliary  vessels  designed  to  deliver a steady
                  stream of fuel,  ammunition and stores to the U.S. Navy fleet.
                  It is  currently  envisioned  that  these  vessels  will  have
                  "Refuel at Sea" capabilities  similar to the T-AOs constructed
                  by Avondale.

AO                An  auxiliary  oil  tanker constructed  for the U. S. Navy and
                  crewed  by  U. S.  Navy  personnel.  Avondale  has  built  and
                  delivered five AOs.

AOJ               An  AO  which  has  been  "jumboized"  (i.e. lenghtened by the
                  Company   by   inserting   a  108 foot midbody).  Avondale has
                  converted five AOs to AOJs.

DD-21             "Surface  Combatant  21st  Century,"  the  next  generation of
                  surface combatant to be built for the U.S. Navy.

Icebreaker        WAGB-20 Polar  Icebreaker,  currently  under  construction  at
                  Avondale,  was  ordered by the U.S.  Coast Guard for its polar
                  operations.

IPDE              An Integrated  Product Data Environment which captures data in
                  digital  format at the point of creation  and then  organizes,
                  integrates,  maintains and makes the information  available to
                  all program participants.

JCC(X)            A class of auxiliary  vessels  that would house  sophisticated
                  communications  and computerized  packages designed to enhance
                  coordination  among the various  branches of the  military and
                  combine the  strengths  of all the  services  within a unified
                  framework   in   order   to   make    interchangeability   and
                  interoperability options possible.

Jones Act         Merchant  Marine  Act  of  1920,  as  amended.  The  principal
                  requirements  of  the act are  that ships engaged in coastwise
                  trade must be owned by a U.S. company, crewed by U.S. citizens
                  and built by a U.S. shipbuilder.

LCAC              "Landing  craft  air  cushion,"  a  surface  vessel  that  was
                  constructed  at  the  Company's   previously   owned  Gulfport
                  facility. Avondale has built and delivered fifteen LCACs.

LPD               The  newest  class  of  amphibious transport ship for the U.S.
                  Navy.   Avondale was awarded a contract,  with options for two
                  ships, for the design, construction and support of the initial
                  LPD  ships.   The  first  of  these  options  was exercised in
                  December 1998.

LSD               "Landing ship dock,"  designed to carry troops,  materials and
                  up to four LCACs. Avondale has built five LSDs.

LSD-CV            An LSD with a "cargo  variant"  design  allowing  for carrying
                  more  cargo  and only 2 LCACs.  Avondale  has  delivered  four
                  LSD-CVs and delivered a fifth during 1998.

MARAD             United   States   Maritime   Administration,   Department   of
                  Transportation.
<PAGE>
MHC               MHC-51  class  fiberglass  coastal  minehunter.  Avondale  has
                  constructed and delivered four MHCs to the U. S. Navy.

Sealift           TAKR 300 Class Sealift vessels are transport vessels built for
                  the U.S. Navy.  Avondale has contracts to build  seven Sealift
                  vessels.

T-AGS 45          An oceanographic research vessel constructed by  Avondale  and
                  delivered to the U.S. Navy in May 1993.

T-AO              Same as an "AO" but operated by the Military  Sealift  Command
                  and  crewed by a civilian  crew.  Avondale  has built  sixteen
                  T-AOs.
<PAGE>
Cautionary  Statement  for  Purposes of "Safe Harbor"  Provisions of the Private
Securities Litigation Reform Act of 1995

      Certain statements, other than statements of historical fact, contained in
this  Annual  Report  on  Form  10-K  are  forward-looking   statements.   These
forward-looking  statements are generally  accompanied by such terms and phrases
as "anticipates,"  "estimates,"  "expects,"  "believes,"  "should,"  "projects,"
"scheduled,"  or similar  statements.  Although  the Company  believes  that the
expectations reflected in such forward-looking statements are reasonable, it can
give no  assurance  that such  expectations  will  prove to have  been  correct.
Important  factors that could cause the Company's  results to differ  materially
from the  results  discussed  in such  forward-looking  statements  include  the
Company's  reliance on U.S. Navy  contracts,  including its ability to replenish
its  backlog  by  securing  additional  contracts  from  the U.S.  Navy,  profit
recognition  on government  contracts,  the outcome of the Company's  litigation
involving  efforts  to  unionize  the  Company's   production  workers  and  the
competitive  impact of a resolution  in favor of the union,  the  importance  of
obtaining commercial contracts,  the Company's ability to complete its contracts
within its cost  estimates,  intense  competition  for government and commercial
contracts,  labor,  regulatory  and other risks in the  shipbuilding  and marine
construction  industries and other unanticipated  events affecting the Company's
efforts  and  the  efforts  of  its  suppliers,  subcontractors,  and  customers
(including  the U. S. Navy) to timely  correct  Year 2000  problems  inherent in
essential computer systems,  which could impair the Company's  operations or the
ability of its customers to timely pay for products and services  provided.  All
forward-looking  statements in this Form 10-K are  expressly  qualified in their
entirety by the  cautionary  statements  in this  paragraph  and the matters set
forth below:

Labor Matters

      As  discussed  in  "Business  -  Employees",  the Company is involved in a
dispute  involving the NLRB's  certification of a union to represent  certain of
the Company's New Orleans area employees.  The Company continues to believe that
it has  substantive  and  meritorious  bases for overturning the decision of the
NLRB and has appealed the decision.  In October 1998,  oral  arguments were made
before  the 5th  Circuit  Court  of  Appeals  and the  Company  expects  the 5th
Circuit's decision in 1999. If the NLRB's certification of the union is enforced
by subsequent  judicial  proceedings,  the Company  would be required  under the
federal  labor laws to  bargain in good faith with the union on matters  such as
wages,  hours and working  conditions.  Even though  Avondale will agree only to
bargaining demands that can be economically  justified,  union certification may
result in an increased risk that the union will engage in potentially disruptive
activities  such as strikes or  picketing,  or that the Company may incur higher
labor and operating costs.

      The union has also filed numerous  unfair labor practice  charges with the
NLRB  alleging  that  Avondale  has  committed  a variety of  violations  of the
National Labor  Relations Act principally  involving  claims that employees were
wrongfully  disciplined or discharged.  In February 1998, an administrative  law
judge ordered the Company to reinstate  twenty-six  fired  workers,  and rescind
disciplinary  actions  taken  against  another  fifteen.  Although  the  Company
disputes these claims and is currently  appealing the decision,  if the decision
is upheld, the respective  employees would be entitled to back pay from the time
of his or her claim until the resolution of the case.
See "Business - Employees."

      The Company is also subject to the federal  Occupational Safety and Health
Act ("OSHA") and similar state statutes. The Company has an extensive health and
<PAGE>
safety program  and employs a staff of safety inspectors and industrial  hygiene
technicians, whose primary functions are to develop Company policies  that  meet
or exceed  the  safety standards set by OSHA,  train  supervisors and make daily
inspections  of  safety  procedures  to insure  their  compliance  with  Company
policies  on safety and industrial  hygiene.  All  supervisors  are  required to
attend safety training meetings at which the importance of full compliance  with
safety procedures is emphasized.

During the fourth  quarter of 1998,  the Company  consented  to a  comprehensive
inspection of its main facility by OSHA.  Avondale believes that this inspection
was based on a complaint filed by the union that is seeking to organize  certain
of the Company's  employees.  At  the  conclusion  of  the  initial  inspection,
representatives  of OSHA sought judicial authority for a more thorough review of
substantially all of the Company's medical records.  The Company proposed to the
court and the court  ordered the Company to provide OSHA access to the Company's
records on Company property. The results of the initial review and the review of
the medical  records  are not known at this time but are not  expected to have a
material adverse effect on the Company's consolidated financial statements.

Reliance on Major Customer

      Avondale's  business is primarily dependent upon the ship construction and
conversion  programs of the U.S. Navy and other  branches of the military,  with
over 80% of its $2.0 billion firm  backlog at December  31, 1998  consisting  of
contracts to build vessels for the U.S. Navy and U.S. Coast Guard.  There can be
no assurance that the shipbuilding and conversion programs currently in progress
will continue to be funded, or that those planned in the future by the U.S. Navy
and other branches of the U.S.  military will be  implemented.  Any  significant
reduction in the level of congressional appropriations for shipbuilding programs
would have a material adverse effect on Avondale.

      The prospects of U.S. shipyards,  including the Company, can be materially
affected by their success in securing  significant  contract awards.  Although a
contract for the first two of an  anticipated  12 vessels  under the LPD program
was awarded to an alliance  led by the Company,  there can be no assurance  that
the U.S. Navy will exercise its option for the remaining  ship under the initial
LPD contract or that Congress will  appropriate  funds for the anticipated  nine
additional ships not in the original contract. It is also possible that the U.S.
Navy may hold a competition  for the  additional  vessels,  or that it may delay
implementation of the construction program. In addition, while Avondale believes
that it should be a viable  competitor for the ADC(X),  JCC(X),  and Coast Guard
Deepwater  programs,  no assurance can be given that  sufficient  monies will be
appropriated to fund these programs,  that the timing of the appropriations will
permit the award of construction  contracts in the time frame currently planned,
or that the Company will be the successful bidder. With a substantial portion of
Avondale's  current firm backlog scheduled for completion by the end of 2001, it
is important that Avondale,  or an alliance including Avondale,  be a successful
bidder for all or a  substantial  portion of the  remaining LPD vessels or other
U.S.  Navy  or  commercial  work  if it is to  maintain  its  current  level  of
shipbuilding activity beyond 2001.

Commercial Contracts

      Although  the LPD  contract is expected to provide,  assuming the award of
additional ships by the U.S. Navy, a substantial base of work continuing  beyond
the year 2000,  the Company has  significant  fixed  costs  associated  with its
operations.  As a  result,  in  order  for  the  Company  to  achieve  desirable
operational  efficiencies and profit levels during that period,  it is important
<PAGE>
that  the  Company  complement  its  firm  backlog  with additional shipbuilding
orders.  Other  than  the follow-on LPD ships,  the ADC(X)  program,  the JCC(X)
program and the Coast Guard Deepwater program,  the  Company is  unaware  of any
significant  relevant  military  shipbuilding  initiatives  that  are  likely to
commence  before  2005.  If  the  Company  is unsuccessful at securing additonal
military  contracts,  it  will  be  important that the Company secure additional
commercial shipbuilding orders.  Although for the  reasons  discussed  elsewhere
herein,   the   Company   believes  that  significant   commercial  shipbuilding
opportunities will become available  during the next five years, competition for
such work is expected to be intense,  and  there  can  be  no assurance that the
Company will be successful in obtaining such work, or if awarded,   that it will
complete such work profitably.  In  addition, the current low level of crude oil
prices  has  resulted  in  many  of  the  major oil companies  reducing  capital
spending.  No assurance can be given that this reduced spending will  not  delay
or  eliminate  the  purchase  of additional  crude oil tankers.  See "Business -
Overview - U.S. Government" and "Business - Overview - Commercial Shipbuilding."

Profit Recognition - Government Contracting

      Similar to other companies  principally engaged in long-term  construction
projects,  Avondale recognizes profits under the percentage of completion method
of  accounting,  with profit  recognition  commencing  when  progress  under the
contract is  sufficient  to estimate  final  results with  reasonable  accuracy.
Because contract profit  recognition is dependent upon reliable estimates of the
costs to complete  such  contract,  profits  recognized  upon  completion of the
contract may be significantly less than anticipated,  or the Company may incur a
loss with respect to such contract,  if it proves  necessary to revise such cost
estimates.  Moreover,  much of  Avondale's  principal  construction  activity is
currently being performed under fixed-price or fixed-price  incentive contracts,
which wholly or partially shift the risk to Avondale of construction  costs that
exceed the  contract  price.

      In  addition,   although  the  LPD-17   contract   award  was  made  on  a
cost-plus-award  fee basis,  the ability of Avondale to realize its award fee is
dependent not only upon its ability to perform its  contractual  obligations but
also the satisfactory performance by other members of the alliance.

      In certain  circumstances,  the Company may submit Requests for  Equitable
Adjustment ("REAs") to the U.S. Navy seeking adjustments to the contract  prices
to compensate the Company when it incurs costs for which it does not believe  it
is  responsible.  As  discussed  in  "Business - Government  Contracting,"   the
Company  has  identified  an issue which,   if  unresolved,  will  result in the
Company filing a claim or REA.  Although the Company  pursues REAs and all other
contractual disputes vigorously,  there is no assurance that the U.S.  Navy will
resolve  REAs  or any of these  disputes in  a manner  favorable to the Company.
See "Business - Shipbuilding."

      There is significant  oversight of defense contractors to prevent waste in
the defense procurement  process.  Areas of contract dispute are reviewed by the
government  for evidence of criminal  misconduct  such as  mischarging,  product
substitution and false certification of pricing and other data. In the event the
government  alleges a  violation  of its  procurement  regulations,  it may seek
compensatory, treble or punitive damages in substantial amounts and indictments,
fines,  penalties and forfeitures.  In addition, the government has the right to
suspend  or debar a  contractor  from  government  contracting  for  significant
violations  of  government  procurement  regulations.  Avondale  has never  been
subject to suspension or debarment.
<PAGE>
Competition and Regulation

      The reduced level of shipbuilding  activity by the U.S.  government during
the past decade has  increased  competition  significantly.  With respect to the
market for U.S.  military  contracts,  there are  principally  six private  U.S.
shipyards,  including  Avondale,  that  compete for  contracts  to  construct or
convert vessels for the U.S. Navy. Within certain of the product lines for which
it competes, Avondale also faces competition from a number of smaller shipyards.
Three of these  companies  are  subsidiaries  of a single  corporation  that has
substantially greater resources than Avondale.  Another is likewise a subsidiary
of a larger  corporation  with diverse defense and commercial lines of business.
The remaining  shipyard,  Newport News Shipbuilding Inc., is independent but has
annual  revenues of more than twice those of the Company.  No  assurance  can be
given that the superior  corporate  resources  and critical mass of these larger
companies will not put the Company at a competitive disadvantage for future U.S.
Government  programs.  As a result,  as  described  elsewhere,  the  Company has
proposed to merge with Newport News Shipbuilding Inc.

      With  respect  to  commercial  vessels  that must be constructed by a U.S.
shipyard under the Jones Act, there are approximately 20 private U.S.  shipyards
that can accommodate the construction  of vessels up to 400 feet in length,  ten
of  which   Avondale  considers  to   be  its  direct competitors for commercial
contracts.   With  respect  to the international commercial shipbuilding market,
Avondale competes with numerous shipyards in several countries.  See "Business -
Competition."

      The termination of the U.S.  construction-differential  subsidy program in
1981   significantly   curtailed  the  ability  of  U.S.  shipyards  to  compete
successfully for international  commercial  shipbuilding  contracts with foreign
shipyards, many of which are heavily subsidized by their governments. Currently,
Avondale's  commercial  shipbuilding  opportunities are materially  dependent on
certain U.S. laws and  regulations,  including (1) the Jones Act, which requires
that all vessels transporting products between U.S. ports be constructed by U.S.
shipyards,  (2) the Oil  Pollution  Act of 1990,  which  requires the  phased-in
transition  of  single-hulled  tankers  and product  carriers  to  double-hulled
vessels  beginning  January 1,  1995,  and (3) the 1993  amendments  to the loan
guarantee  program under Title XI of the Merchant Marine Act, 1936, which permit
the U.S.  government to guarantee loan  obligations of foreign vessel owners for
foreign-flagged vessels built in U.S. shipyards. In connection with U.S. efforts
to  implement  a 1994  multilateral  agreement  designed  in part  to  eliminate
government subsidies to commercial shipbuilders, legislation has been introduced
each of the last several  years in the U.S.  Congress  that would  eliminate the
competitive  advantages  afforded to U.S. shipyards under the 1993 amendments to
the Title XI guarantee program although each year Congress has adjourned without
adopting or ratifying the agreements. In addition,  legislative bills seeking to
rescind or  substantially  modify the  provisions of the Jones Act mandating the
use of U.S.-built  ships for coastwise  trade are introduced  from time to time,
and are expected to be introduced in the future. Although management believes it
is  unlikely  the Jones Act will be  rescinded  or  materially  modified  in the
foreseeable future, there can be no assurance to this effect with respect to the
Jones Act or any other law or  regulation  benefitting  U.S.  shipbuilders.  See
"Business - Overview - Commercial Shipbuilding."

Environmental Matters

      The Company is subject to various federal,  state and local  environmental
laws and regulations that impose limitations on the discharge of pollutants into
the  environment  and establish  standards for the  transportation,  storage and
disposal  of  toxic  and  hazardous wastes. Stringent fines and penalties may be
<PAGE>
imposed  for  non-compliance.   In addition,  certain environmental laws  impose
joint and several  "strict liability" for remediation of spills and releases  of
oil  and  hazardous  substances  rendering  a  person  liable  for environmental
damage,  without regard to negligence or fault on the part of such person.  Such
laws and  regulations  may expose the Company to liability for the conduct of or
conditions  caused  by  others,  or for acts of the Company which are or were in
compliance with all applicable laws at the time such acts were performed.
<PAGE>
Item 2.           Properties.

      The Company's corporate  headquarters and main shipyard are located on the
west bank of the  Mississippi  River at Avondale,  Louisiana,  approximately  15
miles from downtown New Orleans. That facility includes  approximately 229 acres
of Company-owned  land with 174 buildings  enclosing  approximately  2.0 million
square feet of space, approximately 41 acres of leased land, a 900-foot floating
dry  dock/launch  platform  that permits  construction,  conversion or repair of
vessels up to approximately  1,000 feet in length,  and a 650-foot  floating dry
dock  principally  used for ship  repair  and  multiple  building  ways and side
launching  facilities.  The main shipyard includes  approximately  5,800 feet of
wharves, 1,200 feet of launch ways and 2,900 feet of unimproved waterfront along
the Mississippi  River. The Company's  shipyard  facilities have the capacity to
build  virtually any type of vessel other than  nuclear-powered  submarines  and
aircraft  carriers  and  surface  vessels  of  the  largest  classes,   such  as
ultra-large crude carriers.

      The  Company's  900-foot  floating  drydock  was  constructed  in 1975 and
financed  pursuant to Title XI of the  Merchant  Marine Act,  1936,  as amended.
These  mortgage  bonds were  refinanced in February 1995 with mortgage  bonds of
approximately $4.3 million. The 900-foot drydock is currently subject to a Title
XI  mortgage  of  approximately  $1.6  million  (see  Note  4 of  the  Notes  to
Consolidated Financial Statements).

      The  Company's  650-foot  floating  drydock  and support  facilities  were
constructed in 1982 and financed with $36.3 million of industrial revenue bonds.
The 650-foot  drydock is currently  subject to $34.4 million of these industrial
revenue bonds (see Note 4 of the Notes to Consolidated Financial Statements).

      As part of its program to  significantly  improve its efficiency,  in 1995
the  Company  completed  a capital  expenditure  program  of  approximately  $20
million,  financed principally through $17.8 million of bonds issued in February
1995  utilizing a Title XI  guarantee.  The  modernization  program is currently
subject to a Title XI mortgage of approximately $14.2 million (see Note 4 of the
Notes to Consolidated Financial Statements).  The modernization program included
construction  of a covered  facility,  which  allows for  productivity  gains by
eliminating  weather-related  problems, and adoption of a more automated process
for building the various modules which are assembled into a completed vessel.

      The Company has also made significant capital  improvements,  particularly
enhancing its computer-aided design and product modeling  capabilities.  In this
effort,  the Company teamed with the University of New Orleans (the "University"
or "UNO"),  the University of New Orleans  Research and  Technology  Foundation,
Inc.  (the  "Foundation")  and the State of Louisiana in a  cooperative  effort.
Pursuant to the terms of various agreements,  the Foundation  purchased hardware
and software required to implement the extensive  three-dimensional  ship design
and Integrated  Product Data  Environment  technology and  constructed a 200,000
square foot  building on property  donated to the  University by the Company and
located  adjacent to the Company's main shipyard.  This facility is complete and
is  currently  an  integral  part of the  design of the first  vessel in the LPD
class.  This  investment  in new  technology  and the  facility are known as the
"UNO/Avondale  Maritime Technology Center of Excellence" (the "Center"),  and is
being  financed by the  Foundation  using third party debt and lease  financing,
both of which are guaranteed by the Company. In 1997, the Company entered into a
fifty-year lease for the  Center requiring a nominal annual lease  payment.  The
<PAGE>
Company will provide access to the  University for  its use in  research and the
development of  educational  curricula related to naval architecture  and marine
engineering. In addition to the amounts expected to be funded by the State,  the
Foundation, at the Company's request, is incurring  approximately $15.5  million
in additional costs to  enhance  the integration  and functionality  of the ship
design and IPDE technology.  The Company is reimbursing the Foundation for these
additional amounts as incurred and will capitalize these costs and amortize them
over  their  estimated  useful  lives  in  accordance with the Company's  stated
policies (See Note 1 of the Notes to Consolidated Financial Statements.)

      The Company also operates  several other facilities in the vicinity of the
main shipyard.  The Westwego Yard is located five miles down-river from the main
shipyard on 16.6 acres of land leased through June 2001 and includes  facilities
for the  construction  or repair of boats and  vessels up to 450 feet in length.
The Algiers  Yard is located 19 miles  down-river  from the main  shipyard on 22
acres of land leased through December 1999 and includes construction  facilities
used predominantly for the repair and overhaul of large ocean-going vessels. The
Steel Sales operation is located on Company-owned property in Harvey, Louisiana,
where a steel  warehouse  is  located.  The  location  has direct  access to the
Mississippi  River via the Harvey  Canal.  The Modular  Construction  operation,
located  in  an  approximately   70,000  square  foot  facility  on  a  58  acre
Company-owned  site a few miles up-river from the main  shipyard,  consists of a
complete machine shop with steel fabricating facilities.

      The  Avondale   Enterprises,   Inc.  ("AEI")  facility  is  located  on  a
Company-owned  121.5  acre  site near  Gulfport,  Mississippi  on an  industrial
seaway. The facility includes a 263,447 square foot manufacturing facility and a
6,300 square foot  administration  building.  This facility was acquired in 1989
for construction of the Minehunters ("MHC") for the U.S. Navy. AEI has pledged a
portion of the  facility to secure a $3 million  loan it entered into in 1991 to
finance a portion of its 1989  acquisition  debt.  This  facility  is  currently
subject to $1.7 million of general  obligation  industrial  bonds (see Note 4 of
the Notes to Consolidated Financial Statements).  Upon the transfer of the final
MHC hull to the main  shipyard in December  1994,  this  facility  became  idle.
During 1996 and 1997,  the Company  utilized the facility for the  completion of
the river hopper barge contract. The Company is currently utilizing the facility
to support shipbuilding activities.

      Finally,  in June 1998,  the  Company,  in  conjunction  with the State of
Louisiana announced the opening of a new steel fabrication facility in Tallulah,
Louisiana.  The state funded certain repairs and improvements to a site owned by
the Port of Madison  Parish in north  Louisiana  on which a 100,000  square foot
facility is being leased to the Company. The Company is in the process of hiring
100  employees to fabricate  steel  subassemblies  needed at the main  shipyard.
These  subassemblies will be transported to the main yard and joined together to
form  units,  or  modules,  that are the  building  blocks  in  Avondale's  ship
construction process.

      The  Company  believes  that  its  core  marine  construction  and  repair
facilities  provide  it with  sufficient  capacity  to handle  any  business  it
reasonably  expects  to  obtain  in the  foreseeable  future.  In  general,  the
Company's productive capacity is limited less by physical facilities than by the
number of employees the Company can effectively  supervise.  Management believes
that the Company would be operating at full capacity  with  approximately  8,000
employees.  The Company's core business  currently  operates with  approximately
5,550 employees.
<PAGE>
Item 3.           Legal Proceedings.

      Environmental  Proceedings.  Various governmental and private parties have
from time to time alleged that the Company is a  potentially  responsible  party
("PRP") with respect to certain  hazardous waste sites,  including,  among other
things, the site listed below.

      In January 1986, the Louisiana Department of Environmental Quality ("DEQ")
advised the Company  that it could be a PRP with  respect to an oil  reclamation
site operated by an unaffiliated  company in Walker, La. The Company sold to the
operator  a  substantial  portion  of the  waste oil that was  processed  at the
reclamation  site during the period 1978 through 1982.  The Company's  potential
liability,  if any, for cleanup of this site will be based on the  Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or the
Louisiana  Environmental  Quality Act. Under these  statutes,  such liability is
presumptively  joint  and  several,  but  is  typically  apportioned  among  the
responsible  parties  based on the volume of material  sent by each to the waste
site.  The  Company  has  cooperated  with  other  PRPs to study  the  potential
aggregate liability under these statutes.  Moreover, the Company believes it has
substantial  defenses  against  liability and defenses  that could  mitigate the
portion of liability, if any, that would otherwise be attributable to it.

      To date,  the Company and certain of the other PRPs (the "Funding  Group")
for the site have funded the site's  remediation  expenses,  PRP  identification
expenses and related  costs for the  participating  parties.  As of December 31,
1998, such costs totaled  approximately  $19.5 million, of which the Company has
funded approximately $4.0 million. Since 1988, the Funding Group filed petitions
to add a number  of  companies  as  third-party  defendants  with  regard to the
remedial  action.  The Funding  Group has agreed to settle with the  majority of
these  companies.  All funds collected  through these  settlements are placed in
escrow to fund future expenses.  At December 31, 1998, the balance of the escrow
was  approximately  $9.9  million,  which  is to be  used to  fund  any  ongoing
remediation expenses.  The Company will not owe any future assessments until the
balance in escrow is depleted. There are additional settlements being negotiated
which should add to the balance in escrow.

      Additional  remedial work  scheduled  for the site includes  completion of
studies and if required by the results of these studies, subsequent remediation.
Following  completion of any such required  additional  remediation,  it will be
necessary to obtain Environmental  Protection Agency approval to close the site,
which consent may require subsequent post-closure activities such as groundwater
monitoring  and site  maintenance  for many  years.  The  Company is not able to
estimate the final costs for any such  additional  remedial work or post-closure
costs that may be required; however, the Company believes that its proportionate
share of expenditures for any additional work will not have a material impact on
the Company's consolidated financial statements. In addition, the members of the
Funding Group have entered into a final cost sharing  agreement  under which all
parties have agreed that there would be no re-allocation of previous remediation
costs,  but that future  remediation  costs would be  established  by a formula.
Under this agreement,  the Company's share of future costs will not exceed 17.5%
for any additional costs.

      Furthermore,  the Company has initiated litigation against its insurer for
a declaration of coverage of the liability, if any, that may arise in connection
with the  remediation of the  site referred  to above.  The court has ruled that
<PAGE>
the  insurer  has  the duty to defend the  Company,  but  has not yet  ruled  on
whether  the  carrier  has a duty to  indemnify the  Company if any liability is
ultimately  assessed against it. After consultation with counsel, the Company is
unable to predict the eventual outcome of this litigation or the degree to which
such potential liability would be indemnified by its insurance carrier.

      In  addition to the above,  the  Company is also named as a  defendant  in
other lawsuits and proceedings arising in the ordinary course of business,  some
of which involve substantial claims.

      The Company has  established  accruals as  appropriate  for certain of the
matters discussed above.  While the ultimate outcome of lawsuits and proceedings
against the Company cannot be predicted  with  certainty,  management  believes,
based on current facts and circumstances and after review with counsel, that the
eventual  resolution of these matters is not expected to have a material adverse
effect on the Company's consolidated financial statements.


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

      The  Company  did not submit any  matters  to a vote of  security  holders
during the fourth quarter of its fiscal year ended December 31, 1998.
<PAGE>
                                     PART II

Item 5.           Market for  Registrant's Common Equity and Related Stockholder
                  Matters.

      The Company's  common stock trades on the Nasdaq National Market under the
symbol AVDL. The following  table sets forth the range of high and low per share
sales prices, as reported by Nasdaq, for the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,              High              Low
      <S>                                   <C>               <C>
      1997

         First Quarter                      $23 1/2           $17

         Second Quarter                     $21 3/8           $16 1/4

         Third Quarter                      $29               $20 5/8

         Fourth Quarter                     $30               $24 3/4

      1998

         First Quarter                      $29 7/8           $25

         Second Quarter                     $29 3/4           $25

         Third Quarter                      $29 1/4           $23 3/16

         Fourth Quarter                     $30               $22 1/4
</TABLE>
      At December  31, 1998,  there were 585 holders of record of the  Company's
Common Stock.

      The Company does not  currently  pay  dividends on its Common Stock and no
dividends  were paid on the  Company's  Common  Stock during the two years ended
December 31, 1998. As discussed in Note 4 of the Notes to Consolidated Financial
Statements,  the terms of the Company's  revolving credit agreement require bank
approval for the payment of cash dividends over a specified amount.
<PAGE>
Item 6.           Selected Consolidated Financial Data.

      The following table contains selected consolidated  financial data for the
Company  and its  subsidiaries  for each of the  fiscal  years in the  five-year
period ended  December  31,  1998.  The data for each of the fiscal years in the
five-year  period  ended  December  31, 1998 are derived  from the  consolidated
financial  statements  of the Company  and its  subsidiaries.  The  consolidated
financial statements as of December 31, 1998 and 1997, and for each of the years
in the  three-year  period ended December 31, 1998, and the report of Deloitte &
Touche LLP thereon, have been included in this Form 10-K.
<TABLE>
<CAPTION>
                                                                          Years Ended December 31,                      
                                                                (in thousands, except per share data)
                                                    1998         1997(1)       1996(1)       1995          1994
                                               -----------   -----------   -----------  -----------    ----------
<S>                                            <C>           <C>           <C>          <C>            <C>   
INCOME STATEMENT DATA:
Continuing operations:
   Sales ...................................   $   748,936   $   613,993   $  624,929   $   576,308    $  475,810
   Gross profit.............................        84,361        75,478       81,827        58,671        47,485
   Income from operations...................        46,900        43,593       36,790        26,548        16,949
   Income from continuing operations........        38,991        26,833       30,795        28,180        13,075
Loss from discontinued operations...........         --            --           --            --           (4,552)
Cumulative effect of accounting change(2)...        (2,046)        --           --            --            --
Net income(3)...............................        36,945        26,833       30,795        28,180         8,523
Income/(loss) per share of common stock:
   BASIC:
   Continuing operations....................   $      2.83   $      1.85   $     2.13   $      1.95    $     0.90
   Discontinued operations..................          --           --           --            --            (0.31)
   Cumulative effect of accounting change...         (0.15)        --           --            --            --
   Total ...................................   $      2.68   $      1.85   $     2.13   $      1.95    $     0.59
   DILUTED:
   Continuing operations....................   $      2.82   $      1.85   $     2.13   $      1.95    $     0.90
   Discontinued operations..................          --           --           --            --            (0.31)
   Cumulative effect of accounting change...         (0.15)        --           --            --            --
   Total ...................................   $      2.67   $      1.85   $     2.13   $      1.95    $     0.59

BALANCE SHEET DATA:
Working capital.............................   $   122,269   $   145,224   $  119,475   $    80,988    $   34,836
Total assets................................       397,202       375,615      362,872       316,727       273,503
Long-term debt..............................        48,682        51,819       54,866        60,593        45,875
Shareholders' equity........................       210,415       208,977      181,853       151,058       122,878
CASH FLOW DATA:
Net cash provided by operating activities...   $    37,173   $    50,557   $   26,470   $    27,995    $   69,128
Net cash used for investing activities......       (27,544)      (13,083)     (10,449)      (16,799)      (11,931)
Net cash (used for) provided by
   financing activities.....................       (39,119)       (4,666)      (5,601)       11,914       (44,978)
OTHER FINANCIAL DATA:
EBITDA(4)...................................   $    55,834   $    54,052   $   47,599   $    36,367    $   28,501
OPERATIONAL DATA:
Firm backlog(5).............................   $ 1,988,000   $1,802,000     $1,766,000   $1,413,000    $1,424,000
--------------------
</TABLE>
<PAGE>
(1)      See " Management's  Discussion and Analysis of Financial  Condition and
         Results  of  Operations"  and  the  Notes  to  Consolidated   Financial
         Statements  relating to, among other things, the impact of revisions of
         estimated  profits on previously  completed  shipbuilding  contracts in
         1998, 1997 and 1996.
(2)      See  "Management's  Discussion and Analysis of Financial  Condition and
         Results  of  Operations"  and  the  Notes  to  Consolidated   Financial
         Statements relating to, among other things, the impact of the Company's
         early   adoption  of  the  American   Institute  of  Certified   Public
         Accountants' Statement of Position 97-3.
(3)      Net income for the years ended December 31,1998, 1996 and 1995 includes
         income tax  benefits of $9.6  million  ($.69 per  share-diluted),  $9.0
         million ($.62 per share - diluted), and $13.0 million ($.90 per share -
         diluted),  respectively,  attributable  to certain net  operating  loss
         carry forwards, tax credits and certain prior year tax deductions.
(4)      As  used  herein,   EBITDA  is  income  (loss)  from   operations  plus
         depreciation and amortization.  EBITDA is frequently used by securities
         analysts and is presented here to provide additional  information about
         the  Company's  operations.  EBITDA  should  not  be  considered  as an
         alternative  to  net  income  (loss)  as a  measure  of  the  Company's
         operating  performance  or as an alternative to cash flows as a measure
         of the  Company's  liquidity  and may not be  comparable  to  similarly
         titled measures of other companies.
(5)      As used herein,  firm backlog  represents the total dollar value of all
         contracts  (including  estimated  contract  escalation)  net  of  costs
         incurred  and  profits  recorded  for  which  the  Company  has  signed
         contracts  with its  customers  but  exclusive of  unexercised  options
         (including the respective  estimated contract  escalation) within those
         contracts.
<PAGE>
Item 7.            Management's  Discussion and Analysis of Financial  Condition
                   and Results of Operations.

      The  following  discussion  should be read in  conjunction  with  Avondale
Industries,   Inc.'s  (the  "Company"  or  "Avondale")   Consolidated  Financial
Statements and Notes thereto included elswhere in this Form 10-K.


Overview

      The improvement in the Company's  operating  results continued during 1998
with the Company  reporting  record  income  from  operations  of $46.9  million
compared to Avondale's previous high of $43.6 million in 1997.  Further,  income
from  operations  increased  8% above the level of the prior year  while  income
before income taxes increased 13% compared to 1997.

      The  Company's  firm backlog at December 31, 1998 was  approximately  $2.0
billion  (including  estimated  contract  escalation)  exclusive of  unexercised
options  aggregating  approximately  $490  million  held by the U.S.  Navy  (the
"Navy") (including estimated contract escalation) and approximately $330 million
held by a commercial  customer  for  additional  ship  orders.  The firm backlog
includes two Navy vessels  awarded in 1998,  the first of which was the exercise
of a  previously  awarded  option to construct  an  additional  Sealift ship for
approximately  $240  million  (including  estimated  contract  escalation).  The
exercise of this option  represents  the seventh ship which the Company has been
awarded in the Sealift  program,  the first of which was delivered  during 1998.
The six  Strategic  Sealift  ships  remaining to be delivered  have a backlog of
approximately  $669  million  (including  estimated  contract  escalation).  The
Company anticipates delivering two of the Sealift ships during 1999.

      As  previously  disclosed,  in December  1996 the U.S. Navy awarded a $641
million  contract to a  Company-led  alliance,  which  includes  Bath Iron Works
("Bath") and Raytheon Company ("Raytheon"), to design and construct the first of
an anticipated twelve ships under the Navy's LPD program.  The original contract
provided  for  options  exercisable  by the Navy for two  additional  LPD ships.
During  1998,  the U. S. Navy  exercised  the first  such  option for the second
vessel  of the  program,  LPD-18,  at a  contract  price of  approximately  $391
million.  Under the terms of an  agreement  between the  alliance  members,  the
Company will build the ships  covered  under the December 1996 and December 1998
contracts,  and, if the Navy  exercises  the remaining  option,  Bath Iron Works
would  construct  the third of the three LPD ships to be built under the initial
contract. Raytheon is responsible for total ship integration and the alliance is
using an advanced  three-dimensional ship design and product modeling technology
for the design and  manufacture of the ship. As the prime  contractor  under the
LPD-17 contract, the Company is required to report in its consolidated financial
statements as sales and cost of sales the entire contract amount for each vessel
in the  LPD  program  constructed  by the  alliance.  Under  the  subcontracting
agreements  entered into between the Company and each of Bath and Raytheon,  the
award fees that can be earned under the LPD contract are distributable among the
alliance members in proportion to each member's performance and participation in
the  construction  of the  vessel  during  the  period  for  which the award was
granted. To the extent that the Company's revenues include  costs  incurred  and
<PAGE>
award  fees  paid to the other  alliance members, such revenues will be recorded
with  no corresponding  operating profit margin.  For additional  information on
the terms of the LPD-17  contract award, the relationship between the members of
the alliance and certain accounting considerations, see "Business - Overview."

      Also included in the firm backlog is the largest commercial  contract ever
awarded to  Avondale.  In June 1997,  the  Company  was  awarded a $332  million
contract  for the  construction  of two 125,000 DWT crude oil  carriers  for the
Jones  Act  Trade to be built  with  double  hulls  in  compliance  with the Oil
Pollution  Act  of  1990.  The  original  contract  also  provided  for  options
exercisable by the customer for three additional  ships, and, in September 1998,
the customer  exercised  the first such  option,  valued at  approximately  $164
million.  The first ship is scheduled for delivery in 2000. With the current low
level of crude oil  prices,  ARCO  announced  plans to reduce  costs and capital
spending.  To this end, ARCO and the Company  agreed to delay the  deliveries of
the three vessels  currently  under contract by up to 16 months and the customer
has  agreed  to  pay  the  Company  its  estimated  out-of-pocket  expenses  for
completing  the vessels in a later time frame.  There can be no  assurance  that
ARCO will exercise its remaining  options given its cost and spending  reduction
plans.

      Vessel  deliveries in 1998 and 1997 included one MHC minehunter,  the last
of four double-  hulled  commercial  tankers,  the remainder of the river hopper
barges,  one LSD-CV,  and the first of seven  Strategic  Sealift  ships.  Vessel
deliveries  expected in 1999 include the Coast Guard  Icebreaker  and the second
and third Strategic Sealift vessels.

      The Company's  operating  results for 1999 are expected to be  principally
related to the Strategic  Sealift,  the Icebreaker,  the ARCO tanker and the LPD
contracts. Except for the LPD contracts for which the Company records award fees
as earned, the Company records profits under the percentage-of-completion method
of accounting based on direct labor charges. See "Business - Overview". Although
the Company  generally does not begin to record  profits on its contracts  until
contract  performance  is sufficient to estimate  final results with  reasonable
accuracy, actual profits taken with respect to such contracts may be affected if
the  Company is  required  in the future to revise its  estimate  of the cost to
complete of one or more of such contracts.
<PAGE>
      On  January  19,  1999,  Avondale  announced  a  proposed  merger  with  a
subsidiary  of Newport  News  Shipbuilding  Inc.  which would result in Avondale
becoming a  subsidiary  of Newport  News.  The  proposed  merger  would create a
broad-based  shipbuilding company capable of designing, building and maintaining
every type of ship used in the U. S. Navy, Coast Guard,  and commercial  fleets.
The  proposed  merger  is  structured  as  a stock-for-stock  transaction and is
subject  to  regulatory  and  shareholder  approval.   Upon  consummation of the
proposed merger,  each Avondale  share  would be exchanged for a maximum of 1.25
and  a  minimum of 1.15 of Newport News  Shipbuilding  Inc.  shares based on the
average closing  price of Newport  News shares  during the  fifteen  day trading
period ending on the fourth trading day prior to the shareholder  vote.  If such
average closing price is $28.40  or less,  Avondale shareholders  would  receive
1.25 Newport News shares for each  Avondale  share.   If such price is $30.87 or
more, Avondale  shareholders  would  receive  1.15  Newport News shares for each
Avondale  share.   If  such  price  is  between  $28.40  and  $30.87,   Avondale
shareholders  would  receive  that  number  of Newport News shares determined by
dividing  $35.50  by  such price,  or between 1.25 and 1.15 Newport News shares.
Avondale  and  Newport News expect to finalize the transaction during the second
quarter of 1999.

      On  February 22,  1999,  Avondale  and  Newport News  announced that their
proposed  merger  had been  cleared by the Department of Justice under the Hart-
Scott-Rodino  Antitrust  Improvements  Act  of 1976.   The  antitrust  clearance
satisfies  an  important  condition  to  the  closing of the transaction,  which
remains subject to the approval of the shareholders of both companies and to the
consent of the Administrator of the Maritime Administration of the Department of
Transportation.

      In addition, on February 18, 1999,  the Company announced that it had been
advised by Newport News that Newport News had received an unsolicited offer from
General Dynamics Corporation ("General Dynamics") proposing  to acquire  Newport
News  for  $38.50  per share in cash,  subject  to due diligence and  regulatory
clearance.  Although the General Dynamics offer did not specifically ask Newport
News to terminate its agreement with Avondale,  the offer did state that Newport
News'  proposed  merger  with  Avondale  would  create  antitrust  problems in a
combination of General Dynamics and Newport News.

      Newport  News  has  advised  General  Dynamics  that it is not prepared to
evaluate  the General Dynamics proposal until it obtains reliable assurance that
a combination  of General Dynamics and Newport News  would not be opposed by the
Department of Defense and Department of Justice.  To that end, Newport News made
a request to  the  Department  of  Defense seeking a prompt  indication  of  the
Department's  position  on  the General Dynamics proposal.   At the date of this
Form 10-K,  the  Department of Defense has not responded  to  the  Newport  News
request.  Pending any such determination, Newport News and the Company have each
publicly expressed their full commitment to the Newport News-Avondale merger.
<PAGE>
Results of Operations

      1998 vs. 1997. The Company recorded net income of $36.9 million,  or $2.67
per diluted  share,  for 1998  compared to $26.8  million,  or $1.85 per diluted
share, in 1997 and operating income increased 7.5% over the year-earlier period.
Net income for 1998 included  income tax benefits of $9.6 million,  or $0.69 per
diluted  share,  to  recognize  for  financial  statement  purposes  adjustments
associated  with certain prior year tax  deductions  and income tax credits.  No
similar benefit was recorded in 1997. In addition, 1998 net income reflected the
impact of the Company's  adoption of the American  Institute of Certified Public
Accountants'  Statement  of  Position  97-3.  The  adoption  of this SOP,  which
prescribes  accounting  treatment for entities  which are subject to assessments
related  to  insurance   activities,   resulted  in  an   after-tax   charge  of
approximately  $2.0  million,  or  $0.15  per  diluted  share.  (See  additional
discussion  in  Note  1 of  the  Notes  to  Consolidated  Financial  Statements,
contained elsewhere in this Form 10-K.)

      The  improvement in the Company's  operating  results for 1998 compared to
the  same  period  of  the  prior  year  primarily  reflects  operating  profits
recognized on the contracts to construct the seven Strategic  Sealift ships, the
Icebreaker and the LSD-CV 52 as substantial  progress  toward  completion of all
these  contracts was achieved in 1998.  Also  contributing  to the improved 1998
operating  results were operating  profits  recorded by the Company's  wholesale
steel, modular construction and marine repair operations.  However, particularly
in the second half of 1998,  the  Company's  wholesale  steel  sales  division's
operating profits were adversely  impacted as oil and gas construction  activity
slowed and the  depressed  economic  conditions  in the Far East  resulted  in a
significant  increase in the importation of low cost foreign steel into the U.S,
resulting in an  oversupply  of steel and  significant  pricing  pressure.  As a
result, at year end,  management  reviewed the carrying value of its Steel Sales
inventory  and  recorded a $2.2  million  pre-tax  charge to reduce its carrying
value to market prices. Nevertheless, total 1998 operating income increased $3.3
million, or 7.6% over the year-earlier period.

      Sales in 1998 increased $134.9 million, or 22%, to $748.9 million compared
to $614.0  million in 1997.  The increase in sales in 1998 is primarily a result
of  increased  costs   associated  with  contracts  in  the  initial  stages  of
construction.  In 1998, the Company recorded increased sales on the contracts to
construct the three 125,000 DWT double-hulled  crude oil carriers,  (the last of
which is scheduled for delivery in 2002),  the six remaining  Strategic  Sealift
ships (the last of which is expected to be  delivered  in 2001),  and the LPD-17
(expected to be delivered in 2002). The double-hulled crude oil carriers and LPD
contracts are in the initial  stages of  construction  resulting in  significant
engineering  design and material  acquisition  costs.  The increases noted above
were  partially  offset by decreased  sales recorded on contracts that are at or
near  completion.  The  Company  recorded  decreased  sales on the  contract  to
retrofit four  single-hulled  commercial tankers with new double hulls (the last
of which was  delivered in September  1997) and the  contracts to construct  the
Icebreaker  (expected  to be  delivered  in the third  quarter  of 1999) and the
LSD-CV 52 (delivered in February 1998). Also, the Company recognized revenues in
1997 on contracts to construct  the 100 river hopper barges and the four coastal
<PAGE>
MHCs all of which were delivered in 1997.

      Gross profit for 1998  increased $8.9 million,  or 12%,  compared to 1997.
However,  the gross profit margin  percentage  decreased  approximately  1.0% as
compared to the prior year.  The decrease in gross profit  margin  percentage is
primarily  attributable  to three factors.  First,  as noted above,  the Company
recorded a $2.2 million write down of the carrying value of the inventory of its
wholesale steel sales operation.  Second,  the LPD and ARCO contracts are in the
initial stages of contract  performance which result in significant  engineering
design and  material  acquisition  costs  recorded  as sales  with  little or no
corresponding  gross profit. The Company does not begin profit recognition until
final results can be estimated with reasonable accuracy. (Refer to Note 1 of the
Notes to Consolidated  Financial  Statements,  contained  elsewhere in this Form
10-K,  for a discussion of the  Company's  policies and  procedures  for revenue
recognition.) Finally, as stated above, the Company includes in its consolidated
financial  statements costs incurred and award fees paid to other members of the
alliance  in the LPD  program as sales and cost of sales  with no  corresponding
gross profit margin.

      The Company  currently has an issue with the U. S. Navy related to certain
materials  purchased  from a  subcontractor  for  use in the  Strategic  Sealift
program.   The   materials   were   purchased   based   on   government-provided
specifications  which have  proven to be  defective.  In  addition  to delay and
disruption costs, the Company has incurred approximately $12.5 million in direct
costs through December 31, 1998 related to this issue. The Company believes that
it is entitled to recovery from the U. S. Navy of these costs and has recorded a
receivable  for the  amount of the  direct  costs  incurred  to date.  While the
Company hopes to resolve this issue through negotiation, the Company has engaged
legal counsel to assist in the development of a claim.

      Selling,  general and  administrative  ("SG&A")  expenses  increased  $5.6
million, or 17%, during 1998. The increase in SG&A expenses was due primarily to
an increase in proposal preparation and related costs in 1998 in connection with
U.S.  Government and commercial  shipbuilding  opportunities  and the rental and
maintenance  of advanced  technology in connection  with the Company's  focus on
enhancing overall efficiency.

      Other  income  increased  $0.9  million,  or 27%, in 1998,  reflecting  an
increase in interest income  resulting from  significantly  higher cash and cash
equivalents  available for investment  during the period preceding the June 1998
stock repurchase.

      1997 vs. 1996. The Company recorded net income of $26.8 million,  or $1.85
per diluted  share,  for 1997  compared to $30.8  million,  or $2.13 per diluted
share,  for 1996.  Net income for 1996  included  an income tax  benefit of $9.0
million,  or $0.62 per diluted share, which recognized,  for financial reporting
purposes,  the benefit of certain net operating loss carry forwards available to
offset estimated future earnings. No similar benefit was recorded in 1997.

      Income from operations for 1997 increased $6.8 million,  or 18%,  compared
with  1996.  This  improvement  is  primarily  reflected  by  operating  profits
recognized on the contracts to construct the six  Strategic  Sealift  ships, the
<PAGE>
Icebreaker and the LSD-CV 52.  Profit recognition began in 1996 for the  Sealift
and 1997 for the  Icebreaker  as contract  progress was not sufficient  to begin
profit  recognition   until  that  time.  Also  contributing   to  the  improved
operating results during 1997 were operating  profits of $7.8 million  generated
by  the  Company's  marine  repair,  modular  construction  and  wholesale steel
operations.

      These operating profits were offset, in part, by operating losses recorded
on two commercial marine construction contracts.  During 1997, Avondale recorded
additional losses of $4.3 million on the contract to retrofit four single-hulled
commercial  tankers with new  double-hulls  (the last of which was  delivered in
September  1997),  and an  additional  $1.5  million  loss  on the  contract  to
construct  100 river hopper  barges (the last of which was delivered in November
1997).  These losses  resulted  primarily from increases in the estimated  labor
needed to complete the contracts.

      Sales for 1997 decreased $10.9 million,  or 2%, to $614.0 million compared
to $624.9  million for 1996.  The decrease in 1997 sales was due  primarily to a
reduction in production  activity  associated with contracts that are at or near
completion.  The Company  recorded  decreased  sales on the contract to retrofit
four single-hulled commercial tankers with new double hulls and the contracts to
construct  the seven T-AOs (the last of which was  delivered  in May 1996),  the
four MHCs (the last of which was  delivered  in  January  1997),  the  LSD-CV 52
(expected to be delivered in February  1998) and the three  LSD-CVs (the last of
which was delivered in March 1996).  These  decreases were  partially  offset by
increased sales recorded on the contracts to construct the six Strategic Sealift
ships (the  first of which is  expected  to be  delivered  in 1998),  the LPD-17
(expected to be delivered in 2002),  the  Icebreaker  (scheduled for delivery in
1999) and the two  125,000 DWT  double-hulled  crude oil  carriers  (the last of
which is scheduled  for delivery in 2000).  The  contracts to construct  the six
Strategic  Sealift ships, the LPD-17,  the Icebreaker and the two  double-hulled
crude oil carriers collectively accounted for 75% of the Company's 1997 sales.

      Gross profit for 1997  decreased  $6.3 million,  or 8%,  compared to 1996.
This decrease is primarily  attributable  to the early stages of construction of
the majority of the Company's contracts in progress.  The Company does not begin
profit  recognition  until  final  results  can  be  estimated  with  reasonable
accuracy.  Refer to Note 1 of the Notes to  Consolidated  Financial  Statements,
contained  elsewhere  in this  Form  10-K,  for a  discussion  of the  Company's
policies and procedures for revenue recognition. In addition, the LPD-17 and the
two  double-hulled  crude oil  carriers  are in the  initial  stages of contract
performance  which  result  in  significant   engineering  design  and  material
acquisition costs recognized without any operating  margins.  As a result of the
factors  discussed  herein,  contracts  which  account  for a  majority  of  the
Company's 1997 net sales have little or no operating margins recognized.

      Selling,  general and  administrative  ("SG&A")  expenses  decreased $13.2
million,  or 29%,  for 1997  compared  to 1996.  The  overall  decrease  in SG&A
expenses  was due  primarily to a decrease in proposal  preparation  and related
costs compared with those recorded in 1996 in connection with the preparation of
the successful LPD-17 proposal.
<PAGE>
Recent Accounting Pronouncements

      Statement of  Financial  Accounting  Standards  No. 123,  "Accounting  for
Stock-Based Compensation" ("SFAS 123") encourages but does not require companies
to record compensation cost for stock-based employee  compensation plans at fair
value.   The  Company  has  chosen  to  continue  to  account  for   stock-based
compensation   using  the  intrinsic  value  method   prescribed  in  Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related  Interpretations and has adopted the disclosure-only  provisions of SFAS
123.  Implementation of the provisions of SFAS 123 had no material effect on the
financial statements.  See disclosure-only  provisions in Note 9 of the Notes to
Consolidated Financial Statements, contained elsewhere in this Form 10-K.

      During 1997, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income"  ("SFAS 130") and Statement of Financial  Accounting  Standards No. 131,
"Disclosures  about  Segments of an Enterprise and Related  Information"  ("SFAS
131"). The Company has adopted SFAS 130 and has included the required Statements
of Comprehensive  Income within its consolidated  financial  statements with the
same prominence as its other consolidated financial statements. In addition, the
Company has  considered the  implications  of SFAS 131 and has concluded that no
additional disclosure is required at this time. (Refer to Note 1 of the Notes to
Consolidated Financial Statements,  contained elsewhere in this Form 10-K, for a
discussion of SFAS 130 and SFAS 131.)

      In December 1997, the American  Institute of Certified Public  Accountants
promulgated  Statement of Position  97-3,  "Accounting  by  Insurance  and Other
Enterprises  for   Insurance-related   Assessements"   ("SOP  97-3").  SOP  97-3
prescribes  certain  accounting  treatment  for  entities  that are subject to a
variety of assessments related to insurance activities, including assessments by
workers'  compensation  second-injury  funds.  SOP 97-3 requires that  companies
estimate  and  record  the  entity's   future   liabilities   related  to  these
assessments.  Although SOP 97-3 is not  effective  until fiscal years  beginning
after  December  15,  1998,  it does  encourage  entities  to  early  adopt  its
requirements.  As Avondale has ceded certain workers'  compensation  claims to a
second injury fund  administered by the U.S.  Department of Labor and is subject
to annual  assessement,  the Company  has elected to adopt SOP 97-3 early.  As a
result,  the Company has recorded as a liability the estimated  present value of
its future  assessments.  Thus,  in  accordance  with SOP 97-3,  the Company has
recorded the after-tax  impact of the early adoption of SOP 97-3 as a cumulative
effect of  accounting  change within the  Company's  Consolidated  Statements of
Operations.

      In  February  1998,  the  Financial   Accounting  Standards  Board  issued
Statement of Financial  Accounting  Standards No. 132,  "Employers'  Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises
the standards for disclosure of pension and other  postretirement  benefit plans
by standardizing the disclosure  requirements,  requiring additional information
on  changes in the  benefit  obligations  and fair  values of plan  assets,  and
eliminating  certain disclosure  requirements no longer considered to be useful.
These new disclosure  requirements are designed to improve the understandability
of benefit disclosures for financial  analysis.  The Company, in accordance with
SFAS 132, has adopted this standard in 1998. (See additional  disclosure in Note
7 of the Notes to Consolidated Financial Statements, contained elsewhere in this
Form 10-K.)
<PAGE>
      In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging Activities" ("SFAS 133") which establishes  accounting and reporting
standards for derivative  instruments  and hedging  activities.  The Company has
considered   the   implications   of  SFAS  133  and  has  concluded   that  its
implementation  will not have a material  effect on the  Company's  consolidated
financial statements.

Year 2000

      In accordance with the U.S. Securities and Exchange  Commission's  ("SEC")
Staff Legal Bulletin No. 5 and the SEC's subsequent  interpretive  release,  the
Company has assessed both the cost of addressing and the cost or the consequence
of  incomplete  or  untimely  resolution  of the Year 2000 issue.  This  process
includes:   (a)  the  development  of  Year  2000  ("Y2K")   awareness,   (b)  a
comprehensive  review to  identify  systems  that could be  affected  by the Y2K
issue, (c) an assessment of potential risk factors  (including  noncompliance by
the Company's suppliers, subcontractors and customers, including the U.S. Navy),
(d) the allocation of required  resources,  (e) a determination of the extent of
remediation  work required,  (f) the development of an  implementation  plan and
timetable, and (g) the development of contingency plans.

      In  response  to the Y2K  issue,  Avondale  established  its own team as a
collaborative effort involving key Company personnel.  In addition,  the Company
commissioned  an outside  consultant to make inquiries and provide  observations
relating to the Company's plan for  identifying  and resolving Y2K issues within
its  information   technology  ("IT")  systems.  The  consultant  discussed  its
observations  with  members of senior  management.  A major  observation  of the
consultant  identified some segments of the Company's overall  accounting system
as non-compliant.  As a result,  management  considered several alternatives for
remediating  non-compliant  systems  including:  repairing/modifying  only those
systems,  replacing  only  those  systems  or  developing  a more  comprehensive
solution. After a thorough review of all options, the Company decided to replace
its entire accounting  systems software.  The acquisition and  implementation of
this  replacement  software  is  projected  to cost  approximately  $6.0 to $7.0
million.

      The Company has established a two-phased  approach for its solution of the
Y2K issue which  includes:  assessment of each system's  compliance with the Y2K
issue, and the testing and  modification/replacement  of non-compliant  systems.
The  Company's  remediation  plan  focuses  on both IT systems as well as non-IT
systems  which are integral to the Company's  operating  and support  functions.
This plan includes both replacement and upgrades of these systems or equipment.

      The Company is incurring  both internal  staff costs as well as consulting
and other  expenses  relating to these issues.  All costs related to remediating
the Y2K  issue  will  be  funded  with  cash on  hand.  Expenditures,  including
consulting  fees and other  expenses,  have totaled  approximately  $1.7 million
since the inception of the Company's Y2K effort.  Approximately $1.6 million has
been expended in 1998 and total  aggregate  expenditures  for both IT and non-IT
systems  remediation and testing are projected to be approximately  $7.0 to $9.0
million,  including the business systems software  discussed above much of which
is not required for remediation of the Company's Y2K issue.  The Company expects
<PAGE>
to  complete  its  remediation  of  non-compliance  systems during the first six
months of 1999.

      In addition,  the Company is in the process of  initiating  communications
with its  significant  suppliers,  large  customers  (including the U.S.  Navy),
subcontractors  and  others to  determine  the  extent to which the  Company  is
vulnerable to these third  parties'  failure to remediate  their own Y2K issues.
The Company  can give no  assurance  that the systems of these third  parties on
which the Company relies will be remediated on time or that failure to remediate
by them would not have a material adverse effect on the Company.

      If the Company is unable to timely  resolve Y2K issues  inherent in its IT
and non-IT  systems or any of the Company's  significant  suppliers,  customers,
subcontractors  and others are  unsuccessful in resolving Y2K issues inherent in
their own  systems and  existent  in  machinery,  equipment,  and other  systems
supplied to the Company,  the Company may experience some operating  disruption.
However,  although the Company cannot give assurance on the Y2K issue,  based on
current  information,  the Company does not expect such disruptions to be severe
and  therefore  does not expect  unsatisfactory  resolution of Y2K issues by the
Company or its significant  suppliers,  customers,  subcontractors and others to
have  a  material  adverse  impact  on  the  Company's   consolidated  financial
statements.

      The  Company  believes  that  it  will  successfully   implement  its  Y2K
remediation  plan on schedule and will be Y2K compliant  before the end of 1999.
However,  management  believes that there is a risk that significant  suppliers,
customers,  subcontractors,  and  others  on whom  the  Company's  finances  and
operations  largely  depend may  experience  their own Y2K  problems  that could
affect the Company's  operations or financial  position.  Such risks include but
are not limited to: the inability of the Company to retain  qualified  personnel
and outside  consultants to successfully  remediate Y2K issues and implement the
new business  system as demand for their services rises due to other  companies'
unanticipated  or more  severe Y2K  problems;  the  inability  of the  Company's
customers,  including the U. S. Navy, to accurately and timely pay invoices; the
inability  of the  Company to access  necessary  capital  from  lenders or other
sources when required; and the inability of the Company's significant suppliers,
customers,  subcontractors  and  others  to  provide  the  necessary  materials,
services, or systems required to run the Company's business.

      If  the  Company  does  experience  severe  Y2K  financial  and  operating
difficulties, notwithstanding its efforts to avoid or mitigate Y2K issues in its
own systems or adverse  effects of Y2K issues  experienced  by third  parties on
whom  the  Company  relies,  the  Company  is in the  process  of  developing  a
contingency  plan for  dealing  with  the  most  reasonably  likely  worst  case
scenario.  The  development  of  this  plan  is  the  current  focus  of  senior
management.

      The Company  will  continue to review its plan for  solution of Y2K issues
for effectiveness. As such, the Company can give no assurance that the estimated
costs  herein  for  solving  its own Y2K issues or the  estimated  impact of Y2K
issues on the Company's financial condition, operations, and cash flows will not
be revised as a result of the facts that become known to the Company.
<PAGE>
Liquidity and Capital Resources

      The Company's cash and cash equivalents  totaled $52.3 million at December
31, 1998 as  compared  to $81.8  million at December  31,  1997.  The  Company's
operations  generated  approximately  $37.2  million of cash  during  1998.  The
Company's  primary  use of cash during  1998 was the  purchase  of 1.25  million
shares of the Company's common stock for  approximately  $36.3 million through a
self-tender  offer executed in the second quarter of 1998. Other uses of cash in
the year  included  capital  expenditures  of  approximately  $27.7  million and
principal payments on long-term borrowings of approximately $3.0 million.

      As  discussed  above,  during the  second  quarter  of 1998,  the  Company
completed a tender offer  purchasing  1.25 million shares of its common stock at
$28 7/8 per  share.  Under the  terms of the  offer,  the  Company  invited  its
shareholders  to tender their  shares at prices  ranging from $26 1/2 to $29 per
share as  specified  by each  shareholder.  The  total  cost to the  Company  of
completing the tender offer was  approximately  $36.3 million,  including legal,
consulting and other professional fees. The total shares repurchased represented
approximately  8.6% of the  outstanding  shares at that date,  and following the
tender offer,  the Company had  approximately  13.2 million shares of its common
stock outstanding. The transaction was funded using existing cash balances.

      Capital  expenditures  in 1998  increased  $14.1  million to $27.7 million
compared to $13.6 million during 1997.  This increase is primarily  attributable
to certain  plant and  facilities  improvements  required to construct  the ARCO
vessels. In addition,  1998 capital spending includes approximately $2.0 million
of the approximately $7.0 million expected to be invested in connection with the
acquisition and implementation of new integrated business systems software.  The
remainder  of the  1998  capital  spending  represents  plant  improvements  and
equipment  additions  which are  designed  to improve  the  Company's  operating
efficiency.   The  Company  continues  to  evaluate  investment   opportunities,
particularly productivity and technology-focused capital expenditures,  in order
to enhance the Company's overall  efficiency and provide for future growth. As a
result, the Company expects capital spending in 1999 to approximate the level in
1998.

      The Company's $65 million  revolving  credit  agreement (the  "agreement")
provides  liquidity  for working  capital  purposes,  capital  expenditures  and
letters of credit. At December 31, 1998, there were approximately  $11.3 million
of letters of credit issued against the agreement  leaving  approximately  $53.7
million of liquidity  available to Avondale for operations  and other  purposes.
There have been no borrowings  under the agreement  since its inception in 1994.
Continuing  access to the agreement is conditioned upon the Company remaining in
compliance  with the  covenants  contained  therein.  At December 31, 1998,  the
Company was in compliance  with such  covenants.  The Company  believes that its
capital   resources  will  be  sufficient  to  finance   current  and  projected
operations, existing debt service requirements and planned capital expenditures.

      In order to comply  with the terms of the LPD  contract,  the  Company was
required to make  significant  capital  improvements,  including  enhancing  its
computer-aided  design  and  product  modeling  capabilities.  As a result,  the
Company teamed with the University of New Orleans (the  "University"  or "UNO"),
the  University of New Orleans  Research and  Technology  Foundation,  Inc. (the
"Foundation")  and the State of Louisiana in a cooperative  effort.  Pursuant to
terms of various agreements,  the Foundation is purchasing hardware and software
required to implement the extensive three-dimensional ship design and Integrated
Product Data Environment  teaming  technology  and  constructed a 200,000 square
<PAGE>
foot building on property donated to the University  by the Company  and located
adjacent  to the  Company's  main shipyard.  This facility was completed  during
the second  quarter of 1998.   The  initial  $40 million  investment in this new
technology and facility, which is known as the "UNO/Avondale Maritime Technology
Center of Excellence" (the "Center"),  is being financed by the Foundation using
third-party  debt  and  lease  financing,  both  of  which are guaranteed by the
Company. The Company has entered into a long-term lease for the Center requiring
a nominal  annual lease payment.   The Company provides access to the technology
and a portion of the Center to the  University for its  use in  research and the
development of educational  curricula related to naval architecture  and  marine
engineering. In addition to the amounts expected to be funded by the State,  the
Foundation, at the Company's request, is incurring  approximately $15.5  million
in  additional  costs to enhance the integration and  functionality  of the ship
design and IPDE technology.  The Company is reimbursing the Foundation for these
additional amounts as incurred and will capitalize these costs and amortize them
over their  estimated  useful lives in accordance with the Company's stated
policies. (See Note 1 of the Notes to Consolidated Financial Statements).

      The Foundation is the borrower on all  indebtedness  incurred to construct
and equip the Center. Under the terms of a Cooperative  Endeavor Agreement,  the
State of Louisiana  made a non-binding  commitment to  appropriate  $40 million,
plus interest, in installments over a period from 1997 through 2007 for donation
to the  Foundation  for  purposes  of  funding  the  Center.  Avondale  and  the
Foundation  anticipate that  appropriations  by the State will be sufficient for
the Foundation to service its debt. However,  if the State's  appropriations are
insufficient,  Avondale will ultimately be required to repay any remaining debt.
The Company's  guarantee is unsecured.  As of December 31, 1998,  the Foundation
had  incurred  $39.7  million of costs to  construct  and equip the  Center.  In
connection with its non-binding commitment, the State appropriated and paid $3.7
million  during  1997 and $6.3  million  in 1998,  representing  the  first  two
installments to the Foundation.

      The Company's  estimated income tax credit carry forward was $10.3 million
at December 31, 1998. This amount,  plus $9.0 million of alternative minimum tax
credits  will be used to reduce the income  tax  liabilities  for 1999 and later
years. The $9.2 million of cash paid in 1998 for income taxes reflects  payments
for alternative  minimum tax. The income tax credit carry forward will expire in
years 2000  through  2013.  The  alternative  minimum tax credits may be carried
forward indefinitely.

Item 7A.          Quantitative and Qualitative Disclosures About Market Risk.

                  Not applicable.

Item 8.           Financial Statements and Supplementary Data.

                  See next consecutive numbered page.
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders
  of Avondale Industries, Inc.:

We have  audited  the  accompanying  consolidated  balance  sheets  of  Avondale
Industries,  Inc. and  subsidiaries  as of December  31, 1998 and 1997,  and the
related   consolidated   statements   of   operations,   comprehensive   income,
shareholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 1998. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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 provide a reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position of Avondale  Industries,  Inc. and
subsidiaries at December 31, 1998 and 1997, and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1998 in conformity with generally accepted accounting principles.

As  discussed  in Note 1 of the  Notes  to  Consolidated  Financial  Statements,
effective  January 1, 1998,  the Company  changed its method of  accounting  for
certain insurance-related assessments.



/s/ DELOITTE & TOUCHE LLP
New Orleans, Louisiana
February 22, 1999
<PAGE>
                                    AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
                                            CONSOLIDATED BALANCE SHEETS
                                              (dollars in thousands)
<TABLE>
<CAPTION>
                                                                                           December 31,           
                                                                                      1998                1997    
                                                                                 -------------       -------------
<S>                                                                              <C>                 <C>
ASSETS

Current Assets:
Cash and cash equivalents....................................................    $      52,262       $      81,752
Receivables (Note 2).........................................................          125,917             101,746
Inventories (Note 3).........................................................           33,603              23,226
Deferred tax assets (Note 6).................................................           17,029              23,253
Prepaid expenses and other current assets ...................................            3,310               2,891
                                                                                 -------------       -------------
Total current assets.........................................................          232,121             232,868
                                                                                 -------------       -------------

Property, Plant and Equipment (Note 4):
Land.........................................................................            8,227               7,843
Buildings and improvements...................................................           68,880              55,917
Machinery and equipment......................................................          213,068             200,777
                                                                                 -------------       -------------
Total........................................................................          290,175             264,537
Less accumulated depreciation................................................         (141,249)           (134,481)
                                                                                 -------------       -------------
Property, plant and equipment - net..........................................          148,926             130,056
                                                                                 -------------       -------------
Goodwill - net...............................................................            4,961               5,357
Other assets.................................................................           11,194               7,334
                                                                                 -------------       -------------
TOTAL ASSETS.................................................................    $     397,202       $     375,615
                                                                                 =============       =============
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
Current maturities of long-term debt (Note 4)................................    $       3,137       $       3,047
Accounts payable.............................................................           79,876              59,548
Accrued employee compensation................................................           14,950              13,198
Other........................................................................           11,889              11,851
                                                                                 -------------       -------------
Total current liabilities....................................................          109,852              87,644
Long-term debt (Note 4)......................................................           48,682              51,819
Deferred income taxes (Note 6)...............................................            1,487              13,400
Other accrued employee compensation..........................................           26,766              13,775
                                                                                 -------------       -------------
Total liabilities............................................................          186,787             166,638
                                                                                 -------------       -------------

Commitments and Contingencies (Notes 5 and 10)

Shareholders' equity (Note 9):
Common stock, $1.00 par value; authorized - 30,000,000 shares; issued -
    15,967,082 shares in 1998 and 15,956,227 shares in 1997..................           15,967              15,956
Additional paid-in capital...................................................          376,512             374,173
Accumulated deficit..........................................................         (132,351)           (169,296)
Accumulated other comprehensive income/(loss)................................           (1,551)              --   
                                                                                 -------------       -------------
Total........................................................................          258,577             220,833
Treasury stock (2,713,016 shares in 1998 and 1,463,016 shares in 1997)
    at cost (Note 8).........................................................          (48,162)            (11,856)
                                                                                 -------------       -------------
Total shareholders' equity...................................................          210,415             208,977
                                                                                 -------------       -------------
TOTAL LIABILITIES AND
    SHAREHOLDERS' EQUITY.....................................................     $    397,202       $     375,615
                                                                                  ============       =============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
                                    AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                       (in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                                 Years ended December 31,        
                                                                           1998            1997            1996    
                                                                        ----------      ----------       ---------
<S>                                                                     <C>             <C>              <C>
Sales (Note 2).......................................................   $  748,936      $  613,993       $ 624,929
Cost of sales........................................................      664,575         538,515         543,102
                                                                        ----------      ----------       ---------
Gross profit ........................................................       84,361          75,478          81,827
Selling, general and administrative expenses.........................       37,461          31,885          45,037
                                                                        ----------      ----------       ---------
Income from operations...............................................       46,900          43,593          36,790
Interest expense.....................................................       (3,667)         (4,804)         (4,986)
Other - net..........................................................        4,173           3,294           2,691
                                                                        ----------      ----------       ---------
Income before income taxes...........................................       47,406          42,083          34,495
Income tax provision (Note 6)........................................        8,415          15,250           3,700
                                                                        ----------      ----------       ---------
Income before accounting change .....................................       38,991          26,833          30,795
Cumulative effect of accounting change (Note 1)......................       (2,046)         --              --    
                                                                        ----------      ----------       ---------
NET INCOME...........................................................   $   36,945      $   26,833       $  30,795
                                                                        ==========      ==========       =========

Income per share of common stock- BASIC (Note 9):
Income before accounting change......................................   $     2.83      $     1.85       $    2.13
Cumulative effect of accounting change...............................        (0.15)           --            --    
                                                                        ----------      ----------       ---------
Net income...........................................................   $     2.68      $     1.85       $    2.13
                                                                        ==========      ==========       =========
Weighted average number of shares outstanding........................       13,775          14,491          14,464
                                                                        ==========      ==========       =========

Income per share of common stock- DILUTED (Note 9):
Income before accounting change......................................   $     2.82      $     1.85       $    2.13
Cumulative effect of accounting change...............................        (0.15)            --           --    
                                                                        ----------     -----------       ---------
Net income...........................................................   $     2.67      $     1.85       $    2.13
                                                                        ==========      ==========       =========
Weighted average number of shares outstanding........................       13,845          14,524          14,479
                                                                        ==========      ==========       =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
                                    AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                                  (in thousands)
<TABLE>
<CAPTION>
                                                                                 Years ended December 31,         
                                                                           1998            1997            1996    
                                                                        ----------      ----------       ---------
<S>                                                                     <C>             <C>              <C>
Net income...........................................................   $   36,945      $   26,833       $  30,795
Other comprehensive income/(loss):
   Minimum pension liability adjustment, net of $605 tax benefit.....       (1,551)         --              --    
                                                                        ----------      ----------       ---------
COMPREHENSIVE INCOME.................................................   $   35,394      $   26,833       $  30,795
                                                                        ==========      ==========       =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
                                    AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                 Years ended December 31, 1996, 1997 and 1998
                                                                                   (in thousands)



                                                                                           Accumulated
                                                           Additional                         Other                        Total
                                                Common      Paid-In         Accumulated   Comprehensive    Treasury    Shareholders'
                                                 Stock      Capital           Deficit     Income/(Loss)     Stock          Equity
                                               --------    ----------      -----------    ----------       --------      ----------
     <S>                                       <C>         <C>             <C>            <C>              <C>           <C>
     BALANCE, JANUARY 1, 1996.............     $ 15,927    $  373,911      $  (226,924)   $    --          $(11,856)     $  151,058
     Net Income...........................                                      30,795                                       30,795
                                               --------    ----------      -----------    ----------       --------      ----------
     BALANCE, DECEMBER 31, 1996...........       15,927       373,911         (196,129)        --           (11,856)        181,853
     Net Income...........................                                      26,833                                       26,833
     Other................................           29           262                                                           291
                                               --------    ----------      -----------    ----------       --------      ----------
     BALANCE, DECEMBER 31, 1997...........       15,956       374,173         (169,296)        --           (11,856)        208,977
     Net Income...........................                                      36,945                                       36,945
     Purchase of Treasury Stock
         (Note 8).........................                                                                  (36,306)        (36,306)
     Minimum Pension
          Liability Adjustment............                                                   (1,551)                         (1,551)
     Other................................           11         2,339                                                         2,350
                                               --------    ----------      -----------    ---------        --------      ----------
     BALANCE, DECEMBER 31, 1998...........     $ 15,967    $  376,512      $  (132,351)   $  (1,551)       $(48,162)     $  210,415
                                               ========    ==========      ===========    =========        ========      ==========
</TABLE>
          See Notes to Consolidated Financial Statements.
<PAGE>
                                    AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                  (in thousands)
<TABLE>
<CAPTION>
                                                                                   Years ended December 31,       
                                                                             1998          1997             1996  
                                                                        ----------       ---------       ---------
<S>                                                                     <C>              <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...........................................................   $   36,945       $  26,833       $  30,795
Adjustments to reconcile net income to net
    cash provided by operating activities:
    Depreciation and amortization....................................        8,934          10,459          10,809
    Deferred income taxes............................................       (3,524)         12,198           2,600
    Loss on sale of assets...........................................          136             598           3,135
    Write-down of inventories........................................        2,200            --              --
    Cumulative effect of accounting change...........................        2,046            --              --
    Change in operating assets and liabilities, net of dispositions:
    Receivables......................................................      (24,171)         17,393         (25,955)
    Inventories......................................................      (12,577)         (1,441)         (6,496)
    Prepaid expenses and other assets................................       (3,131)         (3,053)           (150)
    Accounts payable.................................................       20,328         (14,041)          8,072
    Accrued compensation and other liabilities.......................        9,987           1,517           3,660
    Other - net......................................................         --                94            --  
                                                                        ----------       ---------       ---------
Net cash provided by operating activities............................       37,173          50,557          26,470
                                                                        ----------       ---------       ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................      (27,662)        (13,593)        (13,830)
Proceeds from sale of assets.........................................          118             510           2,998
Other - net..........................................................         --              --               383
                                                                        ----------       ---------       ---------
Net cash used for investing activities...............................      (27,544)        (13,083)        (10,449)
                                                                        ----------       ---------       ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term borrowings......................................       (3,047)         (4,957)         (5,832)
Payment for treasury stock (Note 8)..................................      (36,306)           --              --
Other - net..........................................................          234             291             231
                                                                        ----------       ---------       ---------
Net cash used for financing activities...............................      (39,119)         (4,666)         (5,601)
                                                                        ----------       ---------       ---------
NET (DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS..........................................................      (29,490)         32,808          10,420
CASH AND CASH EQUIVALENTS AT
    BEGINNING OF YEAR................................................       81,752          48,944          38,524
                                                                        ----------       ---------       ---------
CASH AND CASH EQUIVALENTS AT
    END OF YEAR......................................................   $   52,262       $  81,752       $  48,944
                                                                        ==========       =========       =========

SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for:
Interest (net of amounts capitalized)................................   $    4,610       $   5,093       $   5,207
                                                                        ==========       =========       =========

Income taxes paid....................................................   $    9,150       $   1,950       $   1,760
                                                                        ==========       =========       =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
                   AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Summary of Significant Accounting Policies

Principles of Consolidation

      The  consolidated  financial  statements  include the accounts of Avondale
Industries, Inc. and its wholly-owned subsidiaries ("Avondale" or the "Company")
which are primarily engaged in marine  construction and repair.  All significant
intercompany transactions have been eliminated.

Revenue Recognition

      Profits on long-term  contracts are generally recorded on the basis of the
Company's  estimates of the  percentage of  completion of individual  contracts,
commencing  when  progress  reaches  a  point  where  contract   performance  is
sufficient to estimate final results with reasonable accuracy.  Estimates of the
percentage of completion  are based on direct labor  charges.  Revisions in cost
and  profit  estimates  during  the  course  of the  work are  reflected  in the
accounting  period in which the facts  requiring  the  revisions  become  known.
Amounts in excess of agreed upon  contract  price for  customer  caused  delays,
disruptions,  unapproved  change orders or other causes of  additional  contract
costs are recognized in contract value if it is probable that the claim for such
amounts  will  result in  additional  revenue  and the amount can be  reasonably
estimated. Profits on long-term cost-plus- award fee contracts are recognized as
the aggregate of allowable  costs  reimbursed and award fees earned exceed total
costs  incurred.  Provisions  for  estimated  losses,  if  any,  on  uncompleted
contracts are made in the period in which such losses are determined.

Statements of Cash Flows

      For purposes of the  statements of cash flows,  the Company  considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.

Fair Value Disclosures

       The estimated fair value of all  significant  financial  instruments  has
been  developed  by the  Company  based  on  available  market  information  and
appropriate valuation methodologies.  However, considerable judgment is required
in developing  the estimates of fair value.  Therefore,  such  estimates are not
necessarily indicative of the amounts that could be realized in a current market
exchange.  After such analysis,  management believes that the carrying values of
the  Company's   significant  financial  instruments  including  cash  and  cash
equivalents,  short-term investments,  receivables, payables and certain accrued
liabilities  approximate fair values. The fair value of the Company's  long-term
debt at December 31, 1998 and 1997,  based upon  available  market  information,
approximated $56.2 million and $60.9 million, respectively.

Inventories

      Inventories  are  recorded  principally  at the lower of cost  (average or
first-in, first-out) or market.
<PAGE>
Property, Plant and Equipment

      Property, plant and equipment is stated at cost. Depreciation of property,
plant and equipment is computed in the financial statements on the straight-line
method based on estimates of useful lives as follows:
<TABLE>
<CAPTION>
                                  Type                                   Period
                  -------------------------------------------------    -----------
                  <S>                                                  <C>
                  Machinery and equipment...........................    3-20 years
                  Buildings and improvements........................   15-40 years
</TABLE>
      Accelerated  depreciation  methods  are  generally  used  for  income  tax
purposes.  Maintenance and repairs are charged  directly to expense as incurred.
Additions,  improvements and major renewals are capitalized.  Interest costs for
the construction of certain long-term assets are capitalized as part of the cost
of property,  plant and equipment and amortized over the related  assets' useful
lives.  Interest costs  capitalized in fiscal 1998,  1997 and 1996  approximated
$1.4 million, $519,000, and $759,000, respectively.

Goodwill

      Goodwill  represents  the excess of the purchase price over the underlying
fair value of the net assets of acquired  businesses and is being amortized on a
straight-line  basis over its estimated useful life of twenty years.  Management
evaluates the continuing  value and future  benefits of goodwill,  including the
appropriateness of related amortization periods, on a current basis.

      Accumulated  amortization  at December 31, 1998 and 1997 amounted to $75.9
million and $75.5 million, respectively.

Impairment of Long-Lived Assets

      Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be  recoverable.  The  recoverability  of long-lived  assets is
assessed by  determining  whether the carrying  values can be recovered  through
projected  cash flows and  operating  results over their  remaining  lives.  Any
impairment  of the asset is  recognized  when it is  probable  that such  future
undiscounted cash flows will be less than the carrying value of the asset.

Income Taxes

      The Company and its  subsidiaries  file a consolidated  Federal income tax
return.  Deferred income taxes are provided in the financial  statements,  where
necessary,  to account for the tax effects of  temporary  differences  resulting
from  reporting  revenues  and  expenses  for  income  tax  purposes  in periods
different  from those  used for  financial  reporting  purposes.  The  temporary
differences  result  principally from the use of different methods of accounting
for   depreciation,   long-term   contracts,   pension   benefits  and  workers'
compensation benefits.
<PAGE>
Stock-Based Compensation

      Statement of  Financial  Accounting  Standards  No. 123,  "Accounting  for
Stock-Based Compensation" ("SFAS 123") encourages but does not require companies
to record compensation cost for stock-based employee  compensation plans at fair
value.   The  Company  has  chosen  to  continue  to  account  for   stock-based
compensation   using  the  intrinsic  value  method   prescribed  in  Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related  Interpretations and has adopted the disclosure-only  provisions of SFAS
123. Accordingly, compensation cost for stock options is measured as the excess,
if any, of the quoted  market  price of the  Company's  stock at the date of the
grant over the amount an employee must pay to acquire the stock. See Note 9.

Use of Estimates

      The  preparation  of financial  statements  in conformity  with  generally
accepted  accounting  principles  requires  management  to  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.

New Accounting Standards

      During 1997, the Financial  Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting  Comprehensive  Income" ("SFAS
130") and Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments  of an  Enterprise  and Related  Information"  ("SFAS  131").  SFAS 130
provides guidance for the presentation and display of comprehensive income. SFAS
131  establishes  standards  for  disclosure  of operating  segments,  products,
services, geographic areas and major customers. The Company has adopted SFAS 130
and has included the required  Statements  of  Comprehensive  Income  within its
consolidated  financial  statements  with  the  same  prominence  as  its  other
consolidated  financial statements.  In addition, the Company has considered the
implications  of SFAS 131 and has  concluded  that no  additional  disclosure is
required at this time.

      In December 1997, the American  Institute of Certified Public  Accountants
promulgated  Statement of Position  97-3,  "Accounting  by  Insurance  and Other
Enterprises for Insurance-related Assessments" ("SOP 97-3"). SOP 97-3 prescribes
certain  accounting  treatment  for  entities  that are  subject to a variety of
assessments related to insurance  activities,  including assessments by workers'
compensation  second-injury funds. SOP 97-3 requires that companies estimate and
record the entity's future liabilities  related to these  assessments.  Although
SOP 97-3 is not effective  until fiscal years beginning after December 15, 1998,
it does  encourage  entities to early adopt its  requirements.  As Avondale  has
ceded certain workers'  compensation claims to a second injury fund administered
by the U. S.  Department  of Labor and is subject to an annual  assessment,  the
Company  has  elected to  adopt  SOP 97-3  early.  As a result,  the Company has
<PAGE>
recorded as a liability the estimated  present value of its future  assessments.
Thus, in accordance with SOP 97-3, the Company has recorded the after-tax impact
of the early  adoption of SOP 97-3 as a cumulative  effect of accounting  change
within the Company's 1998  Consolidated  Statement of Operations.  The effect of
this change in  accounting  principle was to decrease net income by $2.0 million
(net of related  tax  benefits  of $1.3  million) or $0.15 per basic and diluted
share.

      Assuming the change in accounting principle had been retroactively applied
to all periods  presented,  the reported net income of $36.9 million  ($2.68 per
basic share and $2.67 per diluted  share) and $30.8 million ($2.13 per basic and
diluted  share) for 1998 and 1996,  respectively,  would have been $39.0 million
($2.83 per basic share and $2.82 per diluted share) and $28.7 million ($1.99 per
basic and diluted share), respectively. The effect on net income and related per
share amounts for 1997 is not material.

      In  February  1998,  the  Financial   Accounting  Standards  Board  issued
Statement of Financial  Accounting  Standards No. 132,  "Employers'  Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises
the standards for disclosure of pension and other  postretirement  benefit plans
by standardizing the disclosure  requirements,  requiring additional information
on  changes in the  benefit  obligations  and fair  values of plan  assets,  and
eliminating  certain disclosure  requirements no longer considered to be useful.
The new disclosure requirements are designed to improve the understandability of
benefit  disclosures  for final analysis.  The Company,  in accordance with SFAS
132, has adopted this standard in 1998. See Note 7.

      In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging  Activities"  ("SFAS  133").  SFAS 133  establishes  accounting  and
reporting  standards for  derivative  instruments  and hedging  activities.  The
Company has considered the  implications  of SFAS 133 and has concluded that its
implementation  will not have a material  effect on the  Company's  consolidated
financial statements.

Reclassifications

      Certain  reclassifications of prior year amounts have been made to conform
to  the  current  year  presentation.  These  reclassifications  were  made  for
comparative  purposes  only and  have no  effect  on net  income  as  previously
reported.
<PAGE>
2.  Receivables

      Receivables  consisted of the  following at December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
                                                                                    1998                  1997    
                                                                                -----------           -----------
<S>                                                                             <C>                   <C>
Long-term contracts:
      U.S. Government:
          Amounts billed.....................................................   $     2,857           $       967
          Unbilled costs, including retentions, and
            estimated profits on contracts in progress.......................       101,931                80,041
                                                                                -----------           -----------
          Total..............................................................       104,788                81,008

      Commercial:
          Amounts billed.....................................................         1,934                 4,180
          Unbilled costs, including retentions, and
            estimated profits on contracts in progress.......................        13,427                 8,543
                                                                                -----------           -----------
      Total from long-term contracts.........................................       120,149                93,731
Trade and other current receivables..........................................         5,768                 8,015
                                                                                -----------           -----------
      Total..................................................................   $   125,917           $   101,746
                                                                                ===========           ===========
</TABLE>
      Unbilled costs,  including retentions,  and estimated profits on contracts
in progress  were not  billable to  customers  at the balance  sheet dates under
terms of the respective  contracts.  Of the unbilled costs and estimated profits
at December 31, 1998, approximately $38.8 million is expected to be collected in
1999 with the balance to be collected in subsequent years as contract deliveries
are made and warranty periods expire.  Sales to the United States  Government in
1998,  1997,  and 1996 account for  approximately  74%, 83% and 77% of total the
sales, respectively.

      Costs and estimated  profits (losses) on contracts in progress at December
31, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
                                                                                  1998                  1997    
                                                                             --------------        --------------
<S>                                                                          <C>                   <C>
Costs incurred on contracts in progress...................................   $    2,488,685        $    2,786,024
Estimated profits recognized on contracts in progress.....................          127,416               135,701
Estimated losses recognized on contracts in progress......................          (34,323)              (34,323)
                                                                             --------------        --------------
Total.....................................................................        2,581,778             2,887,402
Less billings to date.....................................................       (2,473,216)           (2,801,829)
                                                                             --------------        --------------
Net value of contracts in progress........................................   $      108,562        $       85,573
                                                                             ==============        ==============
</TABLE>
<PAGE>
Net value of contracts in progress was  comprised of the  following  amounts (in
thousands):
<TABLE>
<CAPTION>
                                                                                    1998                  1997   
                                                                                ------------          -----------
<S>                                                                             <C>                   <C>
Unbilled costs and estimated
      profits on contracts in progress
      (included in receivables)..............................................   $   115,358           $    88,584
Billings in excess of costs and estimated
      profits on contracts in progress (included
      in accounts payable)...................................................        (6,796)               (3,011)
                                                                                -----------          ------------
Total                                                                           $   108,562          $     85,573
                                                                                ===========          ============
</TABLE>
      The estimated losses on contracts in progress of $34.3 million included in
the net value of  contracts  in  progress at  December  31,  1998 and 1997,  are
related to certain  contracts which were delivered through 1998. During 1997 and
1996,  the  Company  recorded  increases  of $5.8  million  and  $28.5  million,
respectively,  in the  reserves  related to the  contracts  to retrofit the four
single- hulled  forebodies  with new double hulls and to construct the series of
river  hopper  barges.  The losses  resulted  primarily  from  increases  in the
estimated labor needed to complete these contracts.

      The Company  currently  has an issue with the U.S. Navy related to certain
materials  purchased  from a  subcontractor  for  use in the  Strategic  Sealift
program.   The   materials   were   purchased   based   on   government-provided
specifications  which have  proven to be  defective.  In  addition  to delay and
disruption costs, the Company has incurred approximately $12.5 million in direct
costs through December 31, 1998 related to this issue. The Company believes that
it is entitled to recovery  from the U.S. Navy of these costs and has recorded a
receivable  for the  amount of the  direct  costs  incurred  to date.  While the
Company hopes to resolve this issue through negotiation, the Company has engaged
legal counsel to assist in the development of a claim.

3.  Inventories

      Inventories  consisted of the  following at December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
                                                                                    1998                  1997   
                                                                                -----------          ------------
<S>                                                                             <C>                  <C>
Goods held for sale..........................................................   $    25,108          $     14,915
Materials and supplies.......................................................         8,495                 8,311
                                                                                -----------          ------------
Total     ...................................................................   $    33,603          $     23,226
                                                                                ===========          ============
</TABLE>
      Included in the results of operations  for 1998 is a $2.2 million  pre-tax
charge to reduce the  carrying  value of  certain  steel  inventories  to market
prices.
<PAGE>
4.  Financing Arrangements

Revolving Credit Agreement

      The Company has an unsecured  revolving credit agreement ("the agreement")
with various  financial  institutions.  The agreement  provides for an available
line of credit equal to the lesser of $65 million or a specified  borrowing base
with  a  term  expiring  in  April  2000.  At  December  31,  1998,  there  were
aproximately  $11.3  million of letters of credit  issued  against the agreement
leaving  approximately  $53.7  million of  liquidity  available  to Avondale for
operations and other  purposes.  There were no borrowings in 1998 and 1997 under
the revolving  credit  agreement.  A committment  fee based on the average daily
amount of the unused line of credit is payable on a quarterly basis.  Borrowings
under the  agreement  bear  interest at  fluctuating  rates.  The  agreement (1)
requires the Company to meet certain financial covenants (relating to net worth,
debt  coverage,  interest  coverage and backlog),  (2) imposes  limitations  and
restrictions  related to annual  capital  expenditures,  the  incurrence  of new
indebtedness,  the payment of dividends  and the  repurchase of common stock and
(3)  requires  compliance  with the  terms  and  conditions  of all  other  debt
agreements.

Long-Term Debt

      Long-term  debt  consisted of the  following at December 31, 1998 and 1997
(in thousands):
<TABLE>
<CAPTION>
                                                                                          1998              1997  
                                                                                        --------          --------
<S>                                                                                     <C>               <C>
Industrial revenue bonds........................................................        $ 34,390          $ 35,360
Mortgage bonds, interest at 8.16%, payable
  in semi-annual principal installments to 2010.................................          14,222            15,408
Mortgage bonds,interest at 7.86%, payable in semi-annual
  principal installments to 2000................................................           1,552             2,328
General obligation industrial bonds, interest at 7%,
  payable in annual installments to 2008........................................           1,655             1,770
                                                                                        --------          --------
Total...........................................................................          51,819            54,866
Less current maturities of long-term debt.......................................          (3,137)           (3,047)
                                                                                        --------          --------
Long-term debt..................................................................        $ 48,682          $ 51,819
                                                                                        ========          ========
</TABLE>
      The $34.4 million of industrial  revenue bonds represent Series 1994 bonds
which  consist of (1) $4.9  million  bearing  interest  at 8.25% and  payable in
annual principal  installments  ranging from $650,000 in 1999 to a final payment
of $985,000 in 2004 and (2) $29.5 million bearing  interest at 8.50% and payable
in  annual  principal  installments  ranging  from  $405,000  in 1999 to a final
payment of $3.8  million in 2014.  The Series  1994 bonds are secured by certain
property and equipment which had a net book value of approximately $26.4 million
at December 31, 1998. Among other things, the terms and conditions of the Series
1994 bonds (1) require the Company to meet certain financial covenants (relating
to net  worth,  debt  and debt  service  coverage  and  liquidity),  (2)  impose
limitations and  restrictions  related to the incurrence of new indebtedness and
the  payment  of  dividends,  and (3)  require  compliance  with the  terms  and
conditions of other specified debt agreements.
<PAGE>
      The $14.2 million of mortgage  bonds  represent  the remaining  balance of
$17.8  million of bonds issued in February  1995 as part of the financing of the
Company's  approximately $20 million plant modernization  effort. The bonds were
issued  utilizing a U.S.  Government  guarantee  under Title XI of the  Merchant
Marine Act, 1936, as amended  ("Title XI"),  bear interest at the annual rate of
8.16% and are payable in equal semi-annual  principal  payments of $593,000 with
the  final  payment  in  2010.  The  terms  of  the  financing  include  various
restrictive  covenants  including  provisions  relating  to the  maintenance  of
working capital, incurrence of additional indebtedness, and the maintenance of a
minimum net worth. Assets having a net book value of approximately $18.4 million
at December 31, 1998 have been pledged as collateral for these mortgage bonds.

      The $1.6  million of mortgage  bonds at December  31, 1998  represent  the
balance  of an  earlier  mortgage  bond  issue  which  also  utilized a Title XI
guarantee.  The terms of the  financing  provide for an annual  interest rate of
7.86% and contain various  restrictive  covenants similar to those for the $14.2
million of Title XI mortgage bonds discussed  above.  These bonds are payable in
equal  semi-annual  principal  payments of $388,000 and mature in the year 2000.
Property,  plant and equipment  having a net book value of  approximately  $12.0
million at December 31, 1998 has been pledged as collateral  for these  mortgage
bonds.

      Annual maturities of long-term debt for each of the next five years and in
total thereafter follow (in thousands):
<TABLE>
                                  <S>                                      <C>
                                  1999...............................      $  3,137
                                  2000...............................         3,237
                                  2001...............................         2,571
                                  2002...............................         2,686
                                  2003...............................         2,821
                                  Thereafter.........................        37,367
                                                                           --------
                                  Total..............................      $ 51,819
                                                                           ========
</TABLE>
5.  Leases

      The Company  leases  equipment  and real  property in the normal course of
business  under  various  operating   leases,   including   non-cancelable   and
month-to-month agreements.  Certain of the leases provide for renewal privileges
with  escalation  of the lease  payments  based on changes in selected  economic
indices.

      Rental expense for operating  leases was $10.5  million,  $6.1 million and
$9.0 million in 1998, 1997 and 1996, respectively.
<PAGE>
Minimum  rental  commitments  under leases  having an initial or remaining
noncancelable term in excess of twelve months follow (in thousands):
<TABLE>
                                  <S>                                        <C>
                                  1999...............................        $2,437
                                  2000...............................         1,830
                                  2001...............................           607
                                  2002...............................           --
                                  2003...............................           --   
                                                                             ------
                                  Total..............................        $4,874
                                                                             ======
</TABLE>
6.  Income Taxes

      Income taxes are  accounted  for under  Statement of Financial  Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") which requires the
use of the asset and liability  approach for financial  accounting and reporting
for income taxes.

      The Company has provided for Federal and State income taxes as follows (in
thousands):
<TABLE>
<CAPTION>
                                                                                     YEARS ENDED DECEMBER 31,
                                                                                  1998          1997        1996  
                                                                                --------       -------    --------
<S>                                                                             <C>            <C>        <C>
Current provision......................................................         $ 11,940       $ 3,052    $  1,100
Deferred provision.....................................................            1,475        12,198      11,600
Deferred benefit attributable to the realization of
   net operating loss carryforwards and tax credits....................           (5,000)         --        (9,000)
                                                                                --------       -------    --------
Provision for income taxes.............................................         $  8,415       $15,250    $  3,700
                                                                                ========       =======    ========
</TABLE>
      The  provision for income taxes varied from the Federal  statutory  income
tax rate due to the following (dollars in thousands):
<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,                       
                                                    1998                     1997                     1996        
                                              Amount        %          Amount           %       Amount        %  
                                             ---------    ---         ---------        --     ---------     ---
<S>                                          <C>          <C>         <C>              <C>    <C>           <C> 
Taxes at Federal statutory rate..........    $  16,592     35         $  14,729        35     $  12,073      35
Net operating loss carry forwards
  and tax credits utilized...............       (5,000)   (11)             --          --        (9,000)    (26)
Adjustments related to certain prior
 year tax deductions.....................       (4,600)    (9)             --          --            --      --
State income taxes ......................          948      2              --          --            --      --
Other....................................          475      1               521         1           627       2
                                             ---------    ---         ---------        --     ---------     ---

Total....................................    $   8,415     18         $  15,250        36     $   3,700      11
                                             =========    ===         =========        ==     =========     ===
</TABLE>
<PAGE>
      At December  31, 1998 the Company  has  available  for Federal  income tax
purposes tax credit  carry  forwards of $10.3  million.  These income tax credit
carry forwards expire in the years 2000 through 2013. Additionally,  the Company
has $9.0 million of alternative minimum tax credits which may be carried forward
indefinitely.

      Deferred  income  taxes  represent  the net tax  effects of (a)  temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and their  tax bases, and (b) operating  loss and tax  credit
carry forwards.  The tax effects of significant items comprising  the  Company's
net  deferred  tax  balances  at  December  31, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
                                                                                     1998                   1997   
                                                                                   --------               --------
      <S>                                                                          <C>                    <C>
      Deferred Tax Liabilities:
      Differences between book
        and tax basis of property, plant and equipment....................         $ 25,053               $ 25,566
      Other...............................................................              712                    818
                                                                                   --------               --------
          Total...........................................................           25,765                 26,384
                                                                                   --------               --------
      Deferred Tax Assets:
      Reserves not currently deductible...................................            8,555                  3,795
      Long-term contracts.................................................            6,684                 18,710
      Other temporary differences.........................................            7,368                  6,126
      Tax credit carry forwards...........................................           19,383                  8,289
                                                                                   --------               --------
                                                                                     41,990                 36,920
      Valuation Allowance.................................................             (683)                  (683)
                                                                                   --------               --------
          Total...........................................................           41,307                 36,237
                                                                                   --------               --------
      Net deferred tax assets.............................................         $ 15,542               $  9,853
                                                                                   ========               ========
</TABLE>
      The net deferred tax assets are included in the  following  balance  sheet
captions (in thousands):
<TABLE>
<CAPTION>
                                                                                     1998                   1997   
                                                                                   --------               --------
      <S>                                                                          <C>                    <C>
      Current deferred tax assets.........................................         $ 17,029               $ 23,253
      Non-current deferred income tax liabilities.........................           (1,487)               (13,400)
                                                                                   --------               --------
      Net deferred tax assets.............................................         $ 15,542               $  9,853
                                                                                   ========               ========
</TABLE>
<PAGE>
7.  Retirement Plans

ESOP

      The  Company  maintains  the  Avondale  Industries,  Inc.  Employee  Stock
Ownership  Plan  ("ESOP").  The ESOP covers all  employees  of the Company  upon
completion of one year of service,  except certain  employees who are covered by
collective bargaining  agreements,  unless by the terms of such agreements,  the
employees  are  to   participate   in  the  ESOP.   The  ESOP  is  a  qualified,
noncontributory  defined  contribution plan intended to qualify as a stock bonus
plan and an employee stock  ownership  plan. The stock bonus plan portion of the
plan is designed to invest in a  diversified  portfilio  and the employee  stock
ownership  plan  portion is designed to invest  primarily in common stock of the
Company.  The ESOP is  specifically  authorized to leverage its  acquisition  of
equity securities of the Company.  At December 31, 1998 and 1997, the ESOP owned
approximately  1,706,500  and 2,835,000  shares of the  Company's  common stock,
respectively.  In June  1998,  the  Company  purchased  1,054,750  shares of the
Company's common stock held by the ESOP for  approximately  $30.6 million of the
approximately  $36.3 million expended to fund the share repurchase.  See Note 8.
Company contributions to the ESOP for the years ended December 31 1998, 1997 and
1996 were not material.

Pension and Postretirement Plans

      The Company sponsors a qualified,  noncontributory defined benefit pension
plan (the  "Pension  Plan") which covers  substantially  all  employees who have
attained age 21 and  completed one year of service.  Benefits  payable under the
Pension  Plan  are  coordinated  with  the  benefits  payable  to  participating
employees in the ESOP. At retirement, a person's benefit is based on the greater
of (i) the market  value of the  participant's  ESOP account or (ii) the benefit
calculated under the pension plan formula. The pension plan formula benefits are
based  on a  defined  dollar  amount  multiplied  by  a  fraction  related  to a
participant's credited service.

      The Company also maintains certain nonqualified, noncontributory, unfunded
defined benefit pension plans and a  postretirement  welfare plan which provide,
among other benefits, specified retirement, life insurance and medical insurance
benefits to employees designated by the Board of Directors.
<PAGE>
      The following table sets forth the changes in benefit obligations, changes
in plan assets and  estimated  funded  status for  qualified  and  non-qualified
pension and other  postretirement  benefits as of December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
                                                                    Pension Benefits          Other Benefits        

                                                                 1998          1997        1998          1997    
                                                              ---------    ---------     --------      --------
<S>                                                           <C>          <C>           <C>           <C>
Change in benefit obligation:
Benefit obligation at beginning of year.................      $  56,385    $  50,868     $  3,359      $  3,019
Service cost............................................          2,704        3,037           54            39
Interest cost...........................................          4,147        4,230          288           233
Plan amendments.........................................          1,847        --            --             --
Actuarial loss..........................................          4,779        3,176          919            90
Benefits paid...........................................         (4,535)      (4,926)        (106)          (22)
                                                              ---------    ---------     --------      --------
Net benefit obligation at end of year ..................         65,327       56,385        4,514         3,359
                                                              ---------    ---------     --------      --------

Change in plan assets:
Fair value of plan assets at beginning of year..........         66,791       58,769         --            --
Actual return on plan assets............................         10,582       12,637         --            --
Employer contributions..................................            333          311          106            22
Benefits paid...........................................         (4,535)      (4,926)        (106)          (22)
                                                              ---------    ---------     --------      --------
Fair value of plan assets at end of year ...............         73,171       66,791         --            --  
                                                              ---------    ---------     --------      --------

Estimated funded status:
Funded status at end of year ...........................          7,844       10,406       (4,514)       (3,359)
Unrecognized net actuarial (gain) loss..................        (15,389)     (16,286)         968            68
Unrecognized prior service cost.........................          1,197         (896)        --            --
Unrecognized net transition obligation..................             45           61        2,641         2,830
                                                              ---------    ---------     --------      --------
Net amount recognized at end of year  ..................      $  (6,303)   $  (6,715)    $     (905)   $   (461)
                                                              =========    =========      =========    ========
</TABLE>
<PAGE>
Amounts recognized in the statements of financial position
consist of:
<TABLE>
   <S>                                                        <C>          <C>           <C>           <C>
   Accrued benefit cost ................................      $  (6,303)   $  (6,715)    $   (905)     $   (461)
   Minimum pension liability adjustment.................         (4,679)        (831)         --            --
   Intangible asset.....................................          2,523          831          --            --
   Accumulated other comprehensive loss.................          2,156          --           --            -- 
                                                              ---------    ---------     --------      --------
   Net amount recognized at end of year.................      $  (6,303)   $  (6,715)    $   (905)     $   (461)
                                                              =========-   ==========    ========      ========
</TABLE>
      The Company's  funding  policy for the Pension Plan is to contribute  each
year an amount  equal to the minimum  required  contribution  under the Employee
Retirement Income Security Act of 1974.  However,  the contribution for any year
will not be greater than the maximum tax deductible contribution. Plan assets of
the Pension  Plan  consist  primarily  of United  States  Government  and Agency
securities,  corporate stocks and corporate bonds and notes. The Company's other
pension  plans and its  postretirement  welfare plan are unfunded  plans and the
Company's  funding  policy is to  contribute  amounts  necessary  to pay current
benefits.  The weighted-average  discount rate used in determining the actuarial
present value of the projected benefit obligations was 6.75% for 1998, 7.25% for
1997,  and 7.75% for 1996.  The rate of increase in future  compensation  levels
used was 4.0% for 1998,  1997 and 1996 and  thereafter.  The expected  long-term
rate of return on the assets was 9.0% for 1998, 1997 and 1996.

      For measurement  purposes,  an 8.0% annual rate of increase in the cost of
covered  health care  benefits  was  assumed  for 1999.  The rate was assumed to
decrease gradually to 5.0% in 2004 and remain at that level thereafter.

      The components of net periodic  benefit  cost/(income)  are as follows (in
thousands):
<TABLE>
<CAPTION>
                                                                                     YEARS ENDED DECEMBER 31,  
                                                                                         Pension Benefits               

                                                                                 1998          1997          1996  
                                                                             ----------    ----------    ---------
<S>                                                                          <C>           <C>           <C>
Service cost................................................................ $    2,704    $    3,037    $   3,883
Interest cost  .............................................................      4,147         4,230        4,352
Expected return on assets...................................................     (5,833)       (5,112)      (4,531)
Amortization of:
   Transition obligation....................................................         15            15           15
   Prior service cost.......................................................       (245)         (246)        (246)
   Actuarial (gain) loss....................................................       (867)         (356)         244
                                                                             ----------    ----------    ---------
Total net periodic benefit (income) cost ................................... $      (79)   $    1,568    $   3,717
                                                                             ==========    ==========    =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                      YEARS ENDED DECEMBER 31, 
                                                                                           Other Benefits                   

                                                                                 1998          1997        1996    
                                                                             ----------    ----------    ---------
<S>                                                                          <C>           <C>           <C>
Service cost................................................................ $       54    $       39    $    --
Interest cost...............................................................        288           233         --
Expected return on assets...................................................        --            --          --
Amortization of:
   Transition obligation....................................................        189           189         --
   Prior service cost.......................................................        --            --          --
   Actuarial (gain) loss....................................................         19           --          --   
                                                                             ----------    ----------    ---------
Total net periodic benefit cost............................................. $      550    $      461    $    --   
                                                                             ==========    ==========    =========
</TABLE>
      The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated  benefit obligations
in excess of plan  assets were  $14,249,  $12,640  and $0,  respectively,  as of
December 31, 1998 and $10,408,  $9,160 and $0, respectively,  as of December 31,
1997.

      Assumed  health care cost trend rates impact the amounts  reported for the
Company's post-retirement welfare plan. A one-percentage-point change in assumed
health care cost trend rates would have the following  effects as of and for the
years ended December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
                                                                        1998                          1997    
                                                               ----------------------      -----------------------

                                                               1% Point      1% Point       1% Point       1% Point
                                                               Increase      Decrease       Increase       Decrease
                                                               --------      --------       --------       --------
<S>                                                            <C>           <C>            <C>            <C>
Effect on total service and interest cost components....       $     23      $    (20)      $     19       $    --
Effect on postretirement benefit obligation.............            298          (250)           230            --
</TABLE>

401(k) Savings Plan

      Beginning  in  1996,   the  Company   sponsored  a  401(k)  Savings  Plan.
Participation  in this defined  contribution  plan is available to substantially
all employees with one year of credited service to the Company.  The Company may
elect to make contributions to the Plan; however,  the timing and amount of such
contributions  is at the  discretion  of the Company's  Board of Directors.  The
Company paid approximately  $500,000 in matching  contributions for the 1998 and
1997 Plan Years. There was no similar contribution for the 1996 Plan Year.
<PAGE>
8.  Tender Offer

      In June 1998, the Company completed a tender offer purchasing 1.25 million
shares of its common  stock at $28 7/8 per share.  Under the terms of the offer,
the Company  invited its  shareholders  to tender their shares at prices ranging
from $26 1/2 to $29 per share as specified by each  shareholder.  The total cost
to the Company of completing the tender offer was  approximately  $36.3 million,
including  legal,  consulting  and other  professional  fees.  The total  shares
repurchased  represented  approximately  8.6% of the outstanding  shares at that
date, and following the tender offer, the Company had approximately 13.2 million
shares of its  common  stock  outstanding.  The  transaction  was  funded  using
existing cash balances.

9.  Shareholders' Equity

Preferred Stock

      The Company is authorized to issue  5,000,000  shares of preferred  stock,
$1.00 par value, none of which was outstanding at December 31, 1998 and 1997.

Earnings Per Share

      In accordance with Statement of Financial Accounting Standards Number 128,
"Earnings Per Share" ("SFAS 128"), the Company changed its method of calculating
earnings  per share  ("EPS")  during the fourth  quarter of 1997.  The number of
weighted average shares  outstanding for "basic" EPS was 13,775,333,  14,490,644
and  14,464,175  for  the  years  ended  December  31,  1998,   1997  and  1995,
respectively.  The number of weighted  average shares  outstanding for "diluted"
EPS was  13,844,564,  14,523,838 and 14,479,364 for the years ended December 31,
1998,  1997 and 1996,  respectively.  The difference in weighted  average shares
outstanding of 69,231,  33,194 and 15,189 for the years ended December 31, 1998,
1997 and 1996, respectively, relate to stock appreciation rights and options. In
accordance with the disclosure  requirements of SFAS 128, the  reconciliation of
the numerator and denominator  for calculating  earnings per share is as follows
(in thousands, except per share data):
<PAGE>
<TABLE>
<CAPTION>
                                                          FOR THE YEARS ENDED DECEMBER 31,                
                                            1998                              1997                            1996           
                           ---------------------------------  ---------------------------------  -----------------------------------
                             Income      Shares    Per Share    Income       Shares   Per Share    Income       Shares     Per Share
                           (Numerator)(Denominator)  Amount   (Numerator)(Denominator)  Amount   (Numerator) (Denominator)   Amount
                           ---------- ------------ ---------  ---------- ------------ ---------  ----------  ------------  ---------
<S>                         <C>          <C>         <C>        <C>         <C>         <C>        <C>          <C>          <C>
BASIC EPS
Income available to
    common shareholders     $36,945      13,775      $ 2.68     $26,833     14,491      $ 1.85     $30,795      14,464       $ 2.13
                                                     ======                             ======                               ======

EFFECT OF DILUTIVE
    SECURITIES
Stock appreciation
    rights/options                           70                                 33                                  15
                                         ------                             ------                              ------

DILUTED EPS
Income available to
   common shareholders
   plus assumed conversions $36,945      13,845      $ 2.67     $26,833     14,524      $ 1.85     $30,795      14,479       $ 2.13
                            =======      ======      ======     =======     ======      ======     =======      ======       ======
</TABLE>

As discussed in Note 8 of the Notes to Consolidated Financial Statements herein,
the Company  completed a tender  offer  purchasing  1.25  million  shares of its
common stock in June 1998. Had the repurchase taken place as of January 1, 1996,
the Company's  diluted earnings per share for the years ended December 31, 1998,
1997 and 1996 would have been $2.73, $1.88 and $2.24, respectively.
<PAGE>
Stock-Based Compensation Plans

      The Company has two  stock-based  compensation  plans which are  described
below.  The  Company  applies  Accounting   Principles  Board  Opinion  No.  25,
"Accounting   for  Stock   Issued  to   Employees"   ("APB   25")  and   related
Interpretations  in  accounting  for its  plans.  Accordingly,  no  compensation
expense is  recognized  for its  stock-based  compensation  plans other than for
performance-based  awards as the  exercise  price of all stock  options  granted
thereunder is equal to the fair value of the Company's  common stock at the date
of  grant.  Since no  options  were  granted  under  the  Company's  stock-based
compensation  plans during  1996,  there would have been no effect on net income
and  income  per  common  share.  Had 1998 and 1997  compensation  costs for the
Company's  stock-based  compensation  plans been determined  based upon the fair
value at the  grant  date for  awards  under  these  plans  consistent  with the
methodology presented under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's net income
and  earnings  per share  would  have  been  reduced  to the pro  forma  amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
                                                                             1998                  1997 
                                                                          ---------             ---------
<S>                                          <C>                          <C>                   <C>
Net income                                   As reported                  $  36,945             $  26,833
                                             Pro forma                    $  35,982             $  25,413

Earnings per share-basic                     As reported                  $    2.68             $    1.85
                                             Pro forma                    $    2.61             $    1.75

Earnings per share-diluted                   As reported                  $    2.67             $    1.85
                                             Pro forma                    $    2.60             $    1.75
</TABLE>
      The  weighted  average fair value of the options  granted  during 1998 and
1997 was  $15.3993  and  $15.4542,  respectively.  The fair value of each option
granted  in  1998  and  1997  is  estimated  on the  date  of  grant  using  the
Black-Scholes option pricing model with the following  assumptions:  no dividend
yield;  expected  volatility  of  56.6209%  and  85.0581%  for  1998  and  1997,
respectively;  risk-free  interest  rate of 4.753% and 5.772% for 1998 and 1997,
respectively; and an expected life of 5.86 years for both 1998 and 1997.
<PAGE>
      During 1997, the Board of Directors adopted and the shareholders  approved
the Avondale Industries,  Inc. 1997 Stock Incentive Plan (the "1997 Plan") which
provides  for the award of various  economic  incentives  to key  employees  and
directors.  Incentives  granted  under the 1997 Plan may be in the form of stock
options,  stock appreciation rights,  restricted stock and performance shares or
any  combination  thereof.  A total of  1,430,000  shares of common stock of the
Company are reserved for issuance under the 1997 Plan.  Incentives granted under
the 1997 Plan have a maximum term of ten years and are  exercisable,  subject to
various terms and conditions as set forth by the  Compensation  Committee of the
Board of Directors.  Transactions  of the 1997 Plan during 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
                                                                        1998                            
                     -------------------------------------------------------------------------------------------------         
                                      Options Outstanding                                  Options Exercisable   
                     ----------------------------------------------------------      ---------------------------------
                                           Weighted Average
                                               Remaining
                      Number               Contractual Life    Weighted Average         Number        Weighted Average
                     Outstanding                (Years)         Exercise Price       Exercisable       Exercise Price
                     -----------           ----------------    ----------------      -----------      ----------------
<S>                     <C>                       <C>                <C>                <C>               <C>
Beginning of year       274,904                   9.47               $ 20.723            90,219           $ 22.940
Granted/vested          221,036                   8.10                 26.868            46,957             19.639
Exercised               (10,855)                    --                 21.725           (10,855)            21.725
Forfeited/expired       (8,764)                     --                 22.934                --                 --
                        -------                                                         -------
End of year             476,321                   8.30               $ 23.511           126,321           $ 21.817
                        =======                                                         =======
Available for grant,
  end of year           962,443
                        =======
</TABLE>
      The range of exercise prices for options outstanding at December 31, 1998,
under the 1997 Plan was $19.625 to $26.875.  The 221,036  options  granted under
the  1997  Plan  in  1998  vest  25% on the  first,  second,  third  and  fourth
anniversary date of the grant.
<PAGE>
<TABLE>
<CAPTION>
                                                                       1997                            
                     -------------------------------------------------------------------------------------------------         
                                      Options Outstanding                                  Options Exercisable   
                     ----------------------------------------------------------      ---------------------------------
                                           Weighted Average
                                               Remaining
                      Number               Contractual Life    Weighted Average         Number        Weighted Average
                     Outstanding                (Years)         Exercise Price       Exercisable       Exercise Price
                     -----------           ----------------    ----------------      -----------      ----------------
<S>                   <C>                         <C>                <C>                <C>               <C>
Beginning of year           --                      --                    --                --                 --
Granted/vested          274,904                   9.47               $ 20.723           90,219            $ 22.940
Exercised                   --                      --                    --                --                 --
Forfeited/expired           --                      --                    --                --                 --
                      ---------                                                         ------
End of year             274,904                   9.47               $ 20.723           90,219            $ 22.940
                      =========                                                         ======
Available for grant,
  end of year         1,155,096
                      =========
</TABLE>
      The range of exercise prices for options outstanding at December 31, 1997,
under the 1997 Plan was $19.625 to $22.940. Of the 274,904 options granted under
the 1997 Plan in 1997, 184,685 options vest 25% on the first,  second, third and
fourth  anniversary date of the grant, while the remaining 90,219 options vested
on the grant date.
<PAGE>
      The Company's  Performance  Share Plan provided for the award of shares of
Common Stock to senior  executives of the Company,  as designated by a committee
of the Board of  Directors,  which were earned upon the  attainment of specified
performance  objectives.  These  performance  objectives  have been attained and
therefore no further awards will be made.

      A summary of the status of the  Performance  Share Plan as of December 31,
1998,  1997 and 1996 and changes  during the three years ended December 31, 1998
are presented below:
<TABLE>
<CAPTION>
                                    1998                         1997                              1996         
                           -----------------------     ------------------------          ------------------------
                                         Weighted                     Weighted                          Weighted
                                          Average                      Average                           Average
                                         Exercise                     Exercise                          Exercise
                             Shares        Price          Shares        Price             Shares          Price  
                             ------      --------        -------      --------           -------        --------
<S>                          <C>         <C>             <C>          <C>                <C>            <C>
Options outstanding
and exercisable,
beginning of year            4,896       $16.994         226,404      $17.718            240,971        $17.463

Forfeited/expired              --           --               --           --               1,360         19.000

Exercised                    3,298        16.970         221,508       17.537             13,207         12.940
                             -----                       -------                         -------
Options outstanding
and exercisable,
end of year                  1,598       $17.044           4,896      $16.994            226,404        $17.718
                             =====                       =======                         =======
</TABLE>
      The range of exercise prices for options  outstanding at December 31, 1998
under the  Performance  Share Plan  (which  contain a stock  appreciation  right
feature)  was $3.875 to $19.00 and the  weighted-average  remaining  contractual
life for such options was 0.82 years.

      Compensation  expense for the years ended December 31, 1998, 1997 and 1996
was not material.

      Upon  the consummation of  the Company's proposed merger with Newport News
Shipbuilding  Inc.,  pursuant  to  the  terms  of  the  1997  Plan,  all options
immediately become exercisable. See Note 11.
<PAGE>
10.  Commitments and Contingencies

Litigation

      In January 1986, the Louisiana Department of Environmental Quality ("DEQ")
advised the Company that it could be a  potentially  responsible  party  ("PRP")
with respect to an oil reclamation  site operated by an unaffiliated  company in
Walker,  Louisiana.  To date,  the  Company  and  certain of the other PRPs (the
"Funding Group") for the site have funded the site's remediation  expenses,  PRP
identification  expenses and related costs for the participating  parties. As of
December 31, 1998 such costs totaled  approximately  $19.5 million, of which the
Company has funded  approximately  $4.0 million.  Since 1988,  the Funding Group
filed  petitions  to add a number of companies as  third-party  defendants  with
regard to the remedial  action.  The Funding Group has agreed to settle with the
majority of these  companies.  All funds  collected are placed in escrow to fund
future  expenses.  At  December  31,  1998,  the  balance of the escrow was $9.9
million,  which  is to be used to fund any  ongoing  remediation  expenses.  The
Company  will not owe any  future  assessments  until the  balance  in escrow is
depleted.  There are additional settlements being negotiated which should add to
the balance in escrow.

      Additional  remedial work  scheduled  for the site includes  completion of
studies and if required by the results of these studies, subsequent remediation.
Following  completion of any such required  additional  remediation,  it will be
necessary to obtain Environmental  Protection Agency approval to close the site,
which consent may require subsequent post-closure activities such as groundwater
monitoring  and site  maintenance  for many  years.  The  Company is not able to
estimate the final costs for any such  additional  remedial work or post-closure
costs that may be required; however, the Company believes that its proportionate
share of expenditures for any additional work will not have a material impact on
the Company's financial statements.  In addition,  the Company and other members
of the Funding  Group have  entered into a final cost  sharing  agreement  under
which all parties have agreed that there would be no  re-allocation  of previous
remediation  costs, but that future  remediation costs would be established by a
formula.  Under this  agreement,  the  Company's  share of future costs will not
exceed 17.5% for any additional costs.

      Furthermore,  the Company has initiated litigation against its insurer for
a declaration of coverage of the liability, if any, that may arise in connection
with the remediation of the site referred to above. The court has ruled that the
insurer has the duty to defend the Company, but has not yet ruled on whether the
carrier has a duty to  indemnify  the  Company if any  liability  is  ultimately
assessed against it. After  consultation with counsel,  the Company is unable to
predict  the  eventual  outcome of this  litigation  or the degree to which such
potential liability would be indemnified by its insurance carrier.

      In 1996,  the Company  settled a class action  lawsuit  involving  alleged
personal  injury and property  damage arising from the Walker,  La.  reclamation
site.  Under the terms of the settlement,  the Company paid  approximately  $6.0
million into a settlement fund. The Company could also have been responsible for
payment to the plaintiffs of up to an additional  $6.0 million (plus interest at
8% per annum) if the plaintiffs were  unsuccessful in collecting  certain claims
under  Avondale's  insurance  policies that were assigned to the plaintiff class
under the  settlement  agreement.  During the first quarter of 1997, the parties
reached a  settlement  with the  Company's  insurers  which does not require any
further contribution by the Company.
<PAGE>
      In  addition to the above,  the  Company is also named as a  defendant  in
other lawsuits and proceedings arising in the ordinary course of business,  some
of which involve substantial claims.

      The Company has  established  accruals as  appropriate  for certain of the
matters discussed above.  While the ultimate outcome of lawsuits and proceedings
against the Company cannot be predicted  with  certainty,  management  believes,
based on current facts and circumstances and after review with counsel, that the
eventual  resolution of these matters is not expected to have a material adverse
effect on the Company's financial statements.

Guarantee

      Pursuant  to  agreements   related  to  the   University  of  New  Orleans
("UNO")/Avondale  Maritime  Technology Center of Excellence ("the Center"),  the
Company has agreed to  guarantee  indebtedness  with a  principal  amount not to
exceed $40 million incurred by the UNO Research and Technology Foundation,  Inc.
(the  "Foundation")  for  construction  of the facility and the  acquisition  of
computer-aided technology.  Under the terms of a Cooperative Endeavor Agreement,
the State of Louisiana made a non-binding commitment to appropriate $40 million,
plus interest, in installments over a period from 1997 through 2007 for donation
to the Foundation for purposes of servicing the debt incurred in connection with
construction  of  the  Center.  Avondale  and  the  Foundation  anticipate  that
appropriations by the State will be sufficient for the Foundation to service its
debt.  However,  if the State's  appropriations are insufficient,  Avondale will
ultimately be required to repay any remaining  debt. The Company's  guarantee is
unsecured. As of December 31, 1998, the Foundation had incurred $39.7 million of
costs to construct  and equip the Center.  In  connection  with its  non-binding
commitment,  the State  appropriated  and paid $3.7 million during 1997 and $6.3
million in 1998, representing the first two installments to the Foundation.

Letters of Credit and Bonds

      In the normal course of its business  activities,  the Company is required
to  provide  letters  of credit  and bonds to secure  the  payment  of  workers'
compensation  obligations,  other  insurance  obligations  and to provide a debt
service reserve fund related to $34.4 million of Series 1994 industrial  revenue
bonds.  Additionally,  under  certain  contracts  the Company may be required to
provide  letters  of credit to secure  certain  performance  obligations  of the
Company  thereunder.  Outstanding  letters of credit and bonds relating to these
business activities amounted to approximately $32.3 million at December 31, 1998
and 1997.
<PAGE>
11.   Subsequent Event

      On  January  19,  1999,  Avondale  announced  a  proposed  merger  with  a
subsidiary  of Newport  News  Shipbuilding  Inc.  which would result in Avondale
becoming a subsidiary of Newport News.  The  proposed merger is structured  as a
stock-for-stock  transaction  and  is  subject  to  regulatory  and  shareholder
approval.  Upon consummation of the proposed merger,  each  Avondale share would
be  exchanged  for a  maximum  of 1.25 and a  minimum  of 1.15 of  Newport  News
Shipbuilding  Inc.  shares  based on the average  closing  price of Newport News
shares during the fifteen day trading  period  ending on the fourth  trading day
prior to the shareholder  vote. If such average closing price is $28.40 or less,
Avondale  shareholders  would receive 1.25 Newport News shares for each Avondale
share. If such price is $30.87 or more, Avondale shareholders would receive 1.15
Newport News shares for each Avondale share. If such price is between $28.40 and
$30.87,  Avondale  shareholders would receive that number of Newport News shares
determined  by dividing  $35.50 by such price,  or between 1.25 and 1.15 Newport
News shares. Avondale and Newport News expect to finalize the transaction during
the second quarter of 1999.

      On  February 22,  1999,  Avondale  and  Newport News  announced that their
proposed  merger  had been  cleared by the Department of Justice under the Hart-
Scott-Rodino  Antitrust  Improvements  Act  of 1976.   The  antitrust  clearance
satisfies  an  important  condition  to  the  closing of the transaction,  which
remains subject to the approval of the shareholders of both companies and to the
consent of the Administrator of the Maritime Administration of the Department of
Transportation.

      In addition, on February 18, 1999,  the Company announced that it had been
advised by Newport News that Newport News had received an unsolicited offer from
General Dynamics Corporation ("General Dynamics") proposing  to acquire  Newport
News  for $38.50  per share  in  cash,  subject to due diligence and  regulatory
clearance.  Although the General Dynamics offer did not specifically ask Newport
News to terminate its agreement with Avondale, the offer  did state that Newport
News'  proposed  merger  with  Avondale  would  create  antitrust  problems in a
combination of General Dynamics and Newport News.

      Newport  News  has  advised  General  Dynamics  that it is not prepared to
evaluate  the General Dynamics proposal until it obtains reliable assurance that
a combination  of General Dynamics and Newport News  would not be opposed by the
Department of Defense and Department of Justice.  To that end, Newport News made
a request to  the  Department  of  Defense seeking a prompt  indication  of  the
Department's   position  on  the General  Dynamics   proposal.  Pending any such
determination,  Newport  News and the Company have each publicly expressed their
full commitment to the Newport News-Avondale merger.
<PAGE>

12.  Quarterly Results (Unaudited)

      Consolidated operating results for the four quarters of 1998 and 1997 were
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
                                                     1998                                              1997                      
                               -------------------------------------------------      --------------------------------------------
                                First          Second        Third       Fourth        First     Second        Third       Fourth
                               Quarter         Quarter      Quarter      Quarter      Quarter    Quarter      Quarter      Quarter
   <S>                         <C>             <C>          <C>          <C>          <C>        <C>          <C>         <C>
   Sales...................    $184,625       $178,463      $197,961    $187,887      $139,513   $145,792     $159,217    $169,471

   Gross Profit ...........      20,128         21,345        23,409      19,479        18,633     19,501       19,670      17,674

   Income from Operations..      11,815         11,936        12,419      10,730        10,299     10,866       10,950      11,478

   Income before
      Accounting Change....       7,377          7,654         7,856      16,104         6,291      6,380        6,920       7,242

   Cumulative Effect of
      Accounting Change....      (2,046)           --            --          --            --         --           --          --

   Net Income .............    $  5,331       $  7,654      $  7,856    $ 16,104      $  6,291   $  6,380     $  6,920    $  7,242
                               ========       ========      ========    ========      ========   ========     ========    ========


   Income per share:
   BASIC:
   Income before
      Accounting Change....    $   0.51       $   0.54      $   0.59    $   1.22      $   0.43   $   0.44     $   0.48    $   0.50
   Cumulative Effect of
      Accounting Change....       (0.14)           --            --          --            --         --           --          --  
                               --------       --------      --------    --------      --------   --------     --------    --------

   Net Income .............    $   0.37       $   0.54      $   0.59    $   1.22      $   0.43   $   0.44     $   0.48    $   0.50
                               ========       ========      ========    ========      ========   ========     ========    ========


   DILUTED:
   Income before
      Accounting Change....    $   0.51       $   0.54      $   0.59    $   1.21      $   0.43   $   0.44     $   0.48    $   0.50
   Cumulative Effect of
      Accounting Change....       (0.14)           --            --          --            --         --           --          --  
                               --------       --------      --------    --------      --------   --------     --------    --------

   Net Income .............    $   0.37       $   0.54      $   0.59    $   1.21      $   0.43   $   0.44     $   0.48    $   0.50
                               ========       ========      ========    ========      ========   ========     ========    ========
</TABLE>
Net income and related per share amounts previously  reported by the Company for
the first  quarter of 1998 differ from the first quarter data shown above solely
due to the change in accounting  principle  discussed in Note 1. Included in the
fourth quarter 1998 results are the following:
   -- $9.6  million  income  tax  benefit  to  recognize  income tax credits and
      adjustments associated with certain prior year tax deductions.
   -- $2.2 million  pre-tax charge to reduce the carrying value of certain steel
      inventories to market prices.
<PAGE>

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.

         Information  concerning the Company's directors and officers called for
by this  item will be  included  in the  Company's  definitive  Proxy  Statement
prepared in  connection  with the 1999  Annual  Meeting of  shareholders  and is
incorporated herein by reference.

Item 11.          Executive Compensation.

         Information  concerning the executive  compensation  called for by this
item will be included in the Company's  definitive  Proxy Statement  prepared in
connection  with the 1999 Annual  Meeting of  shareholders  and is  incorporated
herein by reference.

Item 12.          Security Ownership of Certain Beneficial Owners and Management

         Information  concerning security ownership of certain beneficial owners
and  management  called  for by this  item  will be  included  in the  Company's
definitive  Proxy Statement  prepared in connection with the 1999 Annual Meeting
of shareholders and is incorporated herein by reference.

Item 13.          Certain Relationships and Related Transactions.

         Information  concerning certain  relationships and related transactions
called  for by this item will be  included  in the  Company's  definitive  Proxy
Statement  prepared in connection  with the 1999 Annual Meeting of  shareholders
and is incorporated herein by reference.
<PAGE>
                                     PART IV

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

                (a)(1)     Financial Statements

                  Independent Auditors' Report.

                  Consolidated Balance Sheets as of December 31, 1998 and 1997.

                  Consolidated  Statements  of  Operations  for the years  ended
                  December 31, 1998, 1997 and 1996.

                  Consolidated  Statements of Comprehensive Income for the years
                  ended December 31, 1998, 1997 and 1996.

                  Consolidated  Statements of Shareholders' Equity for the years
                  ended December 31, 1996, 1997 and 1998.

                  Consolidated  Statements  of Cash  Flows for the  years  ended
                  December 31, 1998, 1997 and 1996.

                  Notes to Consolidated Financial Statements.

                (a)(2)     Financial Statement Schedules

                                     Not applicable

                (a)(3)     Exhibits

         2.1      Agreement  and  Plan  of  Merger dated as of January 19, 1999,
                  among Newport, Ares and Avondale.(1)

         2.2      Parent  Stock  Option  Agreement dated as of January 19, 1999,
                  between Newport and Avondale.(1)

         2.3      Company  Stock  Option Agreement dated as of January 19, 1999,
                  between Avondale and Newport.(1)

         3.1      Articles of Incorporation of the Company.(2)

         3.2      By-laws of the Company, as amended on November 3, 1997.(3)

         4.1      See  Exhibits  3.1  and  3.2  for  provisions of the Company's
                  Articles  of Incorporation  and By-laws defining the rights of
                  holders of Common Stock.

         4.2      Specimen of Common Stock Certificate.(4)
<PAGE>
         4.3      Instruments Relating to Title XI Vessel Financing

                  (a) Trust Indenture dated October 21, 1975, by and between the
                      Company  and  Manufacturers  Hanover  Trust  Company,   as
                      Indenture  Trustee,  relating  to  $19,012,000  of  United
                      States  Government  Guaranteed  Ship  Financing Bonds,  as
                      amended  by  an  Assumption  Agreement  and   Supplemental
                      Indenture  dated September 16, 1985(5), as further amended
                      by a  Master Assumption Agreement,  Supplemental Indenture
                      No. 2 and  Amendment to Title XI  Finance Agreements dated
                      March  13,  1991  (the  "Master Assumption Agreement"),(6)
                      which  has  been  further amended  by a Third Supplemental
                      Indenture dated February 9, 1995.(7)

                  (b) Title  XI  Reserve  Fund  and  Financial  Agreement  dated
                      October 21, 1975, by  and  between  the  Company  and  the
                      United States of America,  as amended by Amendments Nos. 1
                      and 2(5),  as  further  amended  by  the Master Assumption
                      Agreement  (filed as Exhibit 4.3(a) hereto).   The Reserve
                      Fund  and Financial Agreement has  been further amended by
                      Amendment No. 5  dated  February 9,  1995(7) and Amendment
                      No. 6 dated August 22, 1996.(8)

                  (c) Form  of  8.80%  Sinking Fund Bond,  Series A (included in
                      Exhibit 4.3(a)).

                  (d) Form  of  9.30%  Sinking Fund Bond,  Series B (included in
                      Exhibit 4.3(a)).

                  (e) Form of 7.86% Sinking Bond Fund, 2000 Series.(7)

         4.4      Instruments    relating    to   AEI's    and  the    Company's
                  obligations   arising  in   connection  with  the  issuance of
                  General Obligation Bonds by Harrison County, Mississippi.

                  (a) Loan  Agreement  dated  April  1,  1991  between  Harrison
                      County,   Mississippi   and  AEI, pursuant to which AEI is
                      obligated  to  repay  $3  million  in  order  to  fund the
                      County's bond payment obligations.(4)

                  (b) Guaranty  Agreement  dated  April  1,   1991  between  the
                      Company,   Harrison   County, Mississippi and the State of
                      Mississippi.(4)

         4.5      Instruments   relating   to   the  Company's  $36.25   million
                  Industrial Revenue Refunding Bond Series 1994 Financing.

                  (a) Refunding  Agreement  dated  April  1,  1994 between   the
                      Company and the  Board of Commissioners of the Port of New
                      Orleans,  Exhibit A and  First Preferred  Vessel  Mortgage
                      thereto.(9)

                  (b) Trust  Indenture dated April 1, 1994 between the  Board of
                      Commissioners  of  the  Port  of  New  Orleans  and  First
                      National  Bank  of Commerce.(9)

                  (c) Form of Industrial Revenue Refunding Bond Series 1994.(9)
<PAGE>
         4.6      Instruments Relating to February 1995 Title XI Vessel
                  Financing.

                  (a) Trust Indenture dated  February 9, 1995 by and between the
                      Company and Chemical  Bank, as Indenture Trustee, relating
                      to $17,780,000.00  of United States Government  Guaranteed
                      Ship Financing Bonds.(7)

                  (b) Title XI Reserve   Fund   and   Financial Agreement  dated
                      February  9, 1995,  by  and  between  the  Company and the
                      United States of America,(7) as amended by  Amendment  No.
                      1 dated August 22, 1996.(8)

                  (c) Form of 8.16% Sinking Bond Fund, 2010 Series.(7)

         10.1     Contracts With The United States Navy

                  (a) Agreement dated June 28, 1985, by and between the  Company
                      and  the  United   States   of   America   (Contract   No.
                      N00024-85-C-2131) for the  construction of T-AO 187  Class
                      Oiler Ships and various modifications thereto(5) including
                      modification P00005 thereto entered into on June 16, 1988,
                      and  the  related  Acknowledgment of Transfer and Transfer
                      Agreement relating to the Company's  agreement  to  assume
                      certain  of the rights and  obligations to build two  such
                      vessels  under  an  Agreement  dated  May  6, 1985, by and
                      between   Pennsylvania   Shipbuilding   Co. and the United
                      States of America.(10)

                  (b) Agreement  dated June 20, 1988, by and between the Company
                      and   the   United   States   of  America  (Contract   No.
                      N00024-88-C-2050) for the construction  of T-AO 187  Class
                      Oiler  Ships  and  various  modifications  thereto(10) and
                      modification P00036 thereto.(6)

                  (c) Agreement  dated  November  21,  1983,  by and between the
                      Company  and  the  United  States of America (Contract No.
                      N00024-84-C-2027) for the  construction  of  LSD-41  Class
                      Landing  Ship  Dock  vessels  and  various   modifications
                      thereto.(5)

                  (d) Agreement  dated June 17, 1988, by and between the Company
                      and the United States of America (Contract No.  N00024-88-
                      C-2048) for the construction of LSD-41 Class Landing  Ship
                      Dock vessels and modification  nos. P00001 and P00002(10),
                      modification  nos. P00008  and  P00013   thereto(4)    and
                      modification P00029 thereto.(6)

                  (e) Agreement  dated July 15, 1988, by and between the Company
                      and the United States of America (Contract No.  N00024-88-
                      C-2221) for the  conversion  of  AO-177  Class  Oilers  to
                      AO-177 Jumbo Class and various modifications thereto.(10)

                  (f) Agreement dated December 13, 1988,  by and between AGM and
                      the United States  of  America (Contract No.  N00024-89-C-
                      2110) for the construction of three LCACs.(10)
<PAGE>
                  (g) Agreement  dated  July  1,  1987,  by and between Lockheed
                      Shipbuilding Company and the United States  of     America
                      (Contract No. N00024-87-C-2089)  for the  construction  of
                      seven LCACs (assumed by AGM in 1988).(10)

                  (h) Agreement  dated  October  3,  1989,  by  and between  the
                      Company and the United  States of  America  (Contract  No.
                      N00024-89-C-2162) for the construction of one MHC Class 51
                      ship and various modifications thereto(11),   modification
                      no. P00020(6) and modification no. P00027 thereto.(12)

                  (i) Agreement  dated  August  2,  1990,  by  and   between the
                      Company and the United  States of  America  (Contract  No.
                      N00024-90-C-2304) for the construction of one MHC Class 51
                      ship,(4) and  modification  nos. P00002 (6), P00013(6) and
                      modification no. P00020  thereto.(12)

                  (j) Agreement  dated  November 30,  1990,  by and  between the
                      Company  and  the  United  States of America (Contract No.
                      N00024-90-C-2307) for the construction of one TAGS 45 ship
                      and various modifications thereto.(4)

                  (k) Agreement dated July 15, 1993, by  and between the Company
                      and the United States of America (Contract No.  N00024-93-
                      C-2300)  for the  construction of one WAGB 20 Coast  Guard
                      Polar  Icebreaker  ship,  amendment 0001 and  modification
                      nos. P0001 and P00013 thereto.(2)

                  (l) Agreement  dated  September 3, 1993,  by and  between  the
                      Company  and the  United States of  America  (Contract No.
                      N00024-93-C-2205) for the  construction  of one T- AKR 300
                      Class  Strategic  Sealift ship,   various  amendments  and
                      modifications   nos.   P00001,   P00003   and   P00004(6),
                      P00007(9),   P00019  (8)  and modifications   P00025   and
                      P00028(13) and modification P00033 thereto.

                  (m) Agreement  dated  October  12,  1993,  by  and between the
                      Company  and  the  United  States of America (Contract No.
                      N00024-94-C-2200) for the construction of one LSD 41 Class
                      Landing Ship Dock.(6)

                  (n) Agreement  dated  December  17,  1996  by and between  the
                      Company  and  the  United  States of America (Contract No.
                      N00024-97-C-2202) for the  design and  construction of one
                      LPD-17 ship(8) and modification P00021 thereto.

         10.2     Other Operating Contracts

                  (a) Agreement   dated   July 10,  1991 by and between Crawford
                      Technical Services, Inc. and the Dallas Area Rapid Transit
                      Authority,  and  the  supplement  thereto,   relating   to
                      providing   operational   and   maintenance   services for
                      paratransit    van   services   for   the   Dallas,  Texas
                      metropolitan area.(6)
<PAGE>
                  (b) Agreement dated January 28, 1991, by and between  Crawford
                      Technical Services, Inc. and the United States of  America
                      and various modifications thereto (Contract No. F03602-91-
                      C0007) relating to  providing  maintenance  services  with
                      respect to family housing units located in a Little  Rock,
                      Arkansas air force base.(6)

                  (c) Agreement  dated  January  12,  1994 by  and  between  the
                      Company and Belle of Orleans, L.L.C. for the  construction
                      of  a  350-foot-long  paddlewheel  gaming  vessel, various
                      exhibits and Amendment nos. 1, 2 and 3 thereto.(9)

                  (d) Agreement  dated  May  12, 1995 by and between the Company
                      and   American  Heavy  Lift  Shipping  Company   for   the
                      construction  of  one  ocean-going  product  tanker,   S/S
                      King.(14)

                  (e) Agreement  dated  May  12, 1995 by and between the Company
                      and   American  Heavy  Lift  Shipping  Company   for   the
                      construction   of  one  ocean-going  product  tanker,  S/S
                      Knight.(14)

                  (f) Agreement  dated  May  12, 1995 by and between the Company
                      and   American  Heavy  Lift  Shipping  Company   for   the
                      construction   of  one  ocean-going  product  tanker,  S/S
                      Solar.(14)

                  (g) Agreement  dated  May  12, 1995 by and between the Company
                      and   American  Heavy  Lift  Shipping  Company   for   the
                      construction   of  one  ocean-going  product  tanker,  S/S
                      Spray.(14)

         10.3     Employee Benefit Plans

                  (a) The Company's Amended and Restated Performance Share  Plan
                      dated April 24, 1989(15),  as amended by Amendment  No.  1
                      adopted December 5, 1994.(9)

                  (b) The  Company's  Amended and  Restated  Stock  Appreciation
                      Plan and  attachments  thereto dated  April 24,  1989(15),
                      as    amended   by   Amendment   No. 1 adopted December 5,
                      1994.(9)

                  (c) The   Company's  Amended   and   Restated  Employee  Stock
                      Ownership Plan(9) as further amended by: Amendment  No.  1
                      adopted April 5, 1995(7), Amendment No. 2 adopted June 16,
                      1995(14), Amendment No. 3 adopted February 5, 1996   (16),
                      Amendment No. 4  adopted December 31,  1996(8),  Amendment
                      No. 5  adopted  December  30, 1997  (13),  Amendment No. 6
                      adopted  May  5,  1998(3),  and  Amendment  No.  7 adopted
                      December  30,  1998  and the related  Amended and Restated
                      Trust Agreement(16) as further amended by Amendment No.  1
                      adopted May 5, 1998.(3)

                  (d) The Company's Pension Plan  as Amended  and Restated dated
                      December  30,  1997(13)  as  amended  by  Amendment  No. 1
                      thereto adopted December 30, 1998.
<PAGE>
                  (e) The  Company's  Amended and  Restated Supplemental Pension
                      Plan(5),  as  amended  by  Amendment  Nos. 1 and 2 thereto
                      adopted December 29, 1989(4), and Amendment  No. 3 adopted
                      May 5, 1998.(3)

                  (f) The  Company's  Excess  Retirement  Plan(4) as  amended by
                      Amendment No. 1 adopted February 2, 1998(3), and Amendment
                      No. 2 adopted May 5, 1998.(3)

                  (g) The  Amended  and  Restated  Avondale Services Corporation
                      Executive Group Insurance  Benefits Plan and Summary  Plan
                      Description  specifying   the  excess  insurance  benefits
                      provided to the Company's executive officers and certain
                      other key personnel,  and a summary description of health,
                      accidental death and dismemberment, disability and life
                      insurance benefits made available to employees dated
                      October 14,  1997 (13) as amended by Amendment No. 1 dated
                      March 23, 1998 (17), and Amendment No. 2 dated December 8,
                      1998.

                  (h) The Company's Directors' Deferred Compensation Plan.(4)

                  (i) Avondale Industries, Inc. Management Incentive Plan.(7)

                  (j) The  Company's  401(k)  Savings  Plan as  restated adopted
                      December 30, 1998.

                  (k) The Company's Executive Retirement Plan.(16)

                  (l) Avondale  Industries,  Inc.  1997  Stock  Incentive   Plan
                      adopted May 23, 1997.(18)

                  (m) Avondale Industries,  Inc.  Flexible Benefits Plan adopted
                      December 30, 1998.

         10.4     Employment Agreements

                  (a) Employment Agreement dated March 23, 1998,  by and between
                      the Company and Albert L. Bossier,  Jr.  the term of which
                      extends through December 31, 2000.(17)

                  (b) Employment Agreement dated March 23, 1998,  by and between
                      the  Company  and  Thomas  M.  Kitchen  the  term of which
                      extends through December 31, 2000.(17)

                  (c) Employment Agreement dated March 23, 1998,  by and between
                      the  Company  and  Kenneth  B.  Dupont  the  term of which
                      extends through December 31, 2000.(17)

                  (d) Amended   and  Restated   Change  Control Agreement  dated
                      January 19,  1996,  by and between the  Company and Albert
                      L.  Bossier,  Jr.(16) as amended by Amendment No. 1  dated
                      March 23, 1998.(17)

                  (e) Amended   and  Restated   Change  Control Agreement  dated
                      January 19, 1996, by and between the Company and Thomas M.
                      Kitchen(16) as amended by Amendment No. 1 dated March  23,
                      1998.(17)
<PAGE>
                  (f) Amended   and  Restated   Change  Control Agreement  dated
                      January 19, 1996,  by and between the Company and  Kenneth
                      B.  Dupont(16)  as  amended by Amendment No. 1 dated March
                      23, 1998.(17)

                  (g) The   Company's  Severance   Pay  Plan  and  Summary  Plan
                      Description adopted March 1, 1996.(16)

                  (h) Employment Agreement dated March 5, 1998, by  and  between
                      the Company and R. Dean Church the term of  which  extends
                      through December 31, 2000.(17)

                  (i) Employment Agreement dated March 23, 1998, by and  between
                      the  Company  and  Thomas  H.  Doussan   the term of which
                      extends through December 31, 2000.(17)

                  (j) Employment Agreement dated March 23, 1998, by and  between
                      the  Company  and  Ronald  J.  McAlear  the  term of which
                      extends through December 31, 2000.(17)

                  (k) Employment Agreement dated March 23, 1998, by and  between
                      the  Company  and Edmund C. Mortimer the term of which
                      extends through December 31, 2000.(17)

                  (l) Change of Control  Agreement dated March 5,  1998,  by and
                      between the Company and R. Dean Church.(17)

                  (m) Change of Control  Agreement dated March 23,  1998, by and
                      between the Company and Thomas H. Doussan.(17)

                  (n) Change of Control  Agreement dated March 23,  1998, by and
                      between the Company and Ronald J. McAlear.(17)

                  (o) Change of Control  Agreement dated March 23,  1998, by and
                      between the Company and Edmund C. Mortimer.(17)

         10.5     Avondale/Ogden Letter Agreement.(19)

         10.6     Acquisition and Disposition Agreements

                  (a) Asset Purchase Agreement dated January 27,  1987,  by  and
                      between the Company and Connell Industries, L.P.(5)

                  (b) Purchase  Agreement  dated June 22, 1988,  by and  between
                      AGM,    Lockheed   Shipbuilding   Company   and   Lockheed
                      Corporation.(10)

                  (c) Stock Purchase Agreement dated February 15,  1991,  by and
                      between  Avondale  Technical  Services, Inc. and Oliver R.
                      Crawford relating to the purchase  of  Crawford  Technical
                      Services, Inc.(4)

                  (d) Asset Purchase  Agreement dated November 20, 1992, by  and
                      between   the   Company   and  Bollinger  Machine  Shop  &
                      Shipyard,   Inc.,   a   Louisiana   corporation   (without
                      exhibits).(6)
<PAGE>
         10.7     Lease Agreements

                  (a) Lease  Agreement dated June 24, 1988, by and between   the
                      Company and the Board of Commissioners of the Port of  New
                      Orleans.(10)

                  (b) Lease  Agreement  dated June 4, 1979, by and   between the
                      Company  and  Marrero  Land  and  Improvement Association,
                      Ltd.(10)

                  (c) Adoption Agreement dated July 22, 1988, by and between the
                      Company  and   Missouri  Pacific  Railroad   Company,   as
                      supplemented on the date thereof.(10)

                  (d) Lease of Commercial  Property  dated July 1, 1970,  by and
                      between  the  Company  and  Metal  Building  Products Co.,
                      Inc.(4)

                  (e) Sub-lease agreement dated May 16, 1997, by and between the
                      Company  and  the University of New  Orleans Research  and
                      Technology Foundation, Inc. (Without exhibits).(18)

         10.8     Other Material Agreements

                  (a)  Registration Rights Agreement between the Company and the
                       ESOP  as  Annex  I of the Common Stock Purchase Agreement
                       dated  as of September  27,  1985,  by and between  Ogden
                       American  Corporation  and  the  trustees of the Avondale
                       Industries, Inc., Employee Stock Ownership Trust.(5)

                  (b)  Registration Rights Agreement between the Company and the
                       participants  in  the  Amended  and  Restated Performance
                       Share Plan (included in Exhibit 10.3(a)).

                  (c)  License  dated  October  13,  1989,  by  and  between the
                       Company and Intermarine S.p.A. relating to the license of
                       molded,   glass-reinforced  polyester  hull  construction
                       technology.(4)

                  (d)  Stockholder  Protection  Rights  Agreement  dated  as  of
                       September 26,  1994, by and  between Avondale Industries,
                       Inc.  and  Boatmen's  Trust Company,  as Rights Agent(20)
                       and Amendment No. 1 thereto dated January 19, 1999.(21)

                  (e)  Agreement by and  between the Company and Bath Iron Works
                       Corporation, Subcontract for LPD-17 Class Work dated June
                       23, 1996.(8)

                  (f)  Agreement by and  between the Company and Hughes Aircraft
                       Co.,   Subcontract  for  LPD-17 Class Work dated June 23,
                       1996.(8)

                  (g)  Cooperative Endeavor Agreement dated May 16, 1997, by and
                       among the Company,   the State  of Louisiana,   Board  of
                       Supervisors   of    Louisiana   State   University    and
                       Agricultural and Mechanical  College  acting on behalf of
                       the University of New Orleans, and the University of  New
                       Orleans Research and Technology Foundation, Inc.(18)
<PAGE>
         10.9     Revolving Credit Agreement dated as  of  May  10,  1994  among
                  Avondale  Industries,  Inc.,  various  financial  institutions
                  signatory thereto  ("the Banks")  and  Continental  Bank  N.A.
                  as  the  Agent  for  the  Banks,  and  Amendment  Nos. 1 and 2
                  thereto.(9)

                  (a)  Third  Amendment, Waiver and Consent to Revolving  Credit
                       Agreement, dated May 10, 1995.(12)

                  (b)  Fourth  Amendment  and  Consent   to   Revolving   Credit
                       Agreement, dated September 1, 1995(12).

                  (c)  Fifth  Amendment  to  Revolving  Credit  Agreement, dated
                       November 17, 1995.(12)

                  (d)  Sixth  Amendment  to  Revolving  Credit  Agreement, dated
                       October 22, 1996.(8)

         10.10    Amended   and   Restated  Revolving  Credit  Agreement   dated
                  January   29,  1997,   effective   April   30,   1997,   among
                  Avondale  Industries,  Inc.,  various  financial  institutions
                  signatory  thereto   ("the  Banks")   and   Bank  of   America
                  National   Trust and Savings  Association as the Agent for the
                  Banks, (without exhibits and schedules).(18)

                  (a) First  Amendment to Amended  and Restated Revolving Credit
                      Agreement, dated March 14, 1997.(13)

                  (b) Second Amendment to Amended and Restated Revolving  Credit
                      Agreement, dated April 30, 1997.(13)

                  (c) Third  Amendment to  Amended and Restated Revolving Credit
                      Agreement  and  Request  for Release of Collateral,  dated
                      October 24, 1997.(13)

                  (d) Fourth Amendment to Amended and Restated Revolving  Credit
                      Agreement, dated September 12, 1998.(22)

         21       List of subsidiaries of the Company

         23       Consent of Deloitte & Touche LLP

         27.1     Financial Data Schedule as of and for the Twelve Month  Period
                  Ended December 31, 1998

         27.2     Restated Financial Data Schedule as of and for the Three,  Six
                  and Nine Month Periods Ended March 31, 1998, June 30, 1998 and
                  September 30, 1998, Respectively

<PAGE>
----------
(1)      Incorporated by reference to Newport News Shipbuilding Inc.'s Form  8-K
         dated January 22, 1999 (Commission File No. 1-12385).

(2)      Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended June 30, 1993.

(3)      Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended June 30, 1998.

(4)      Incorporated by reference from the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1991, as amended by Form 10-K/A.

(5)      Incorporated by reference from the Company's  Registration Statement on
         Form S-1  (Registration  No. 33- 20145)  filed with the  Commission  on
         February 16, 1988.

(6)      Incorporated by reference from the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1993.

(7)      Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended March 31, 1995.

(8)      Incorporated by reference from the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1996.

(9)      Incorporated by reference from the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1994.

(10)     Incorporated by reference from the Company's  Registration Statement on
         Form S-1  (Registration  No. 33- 27342)  filed with the  Commission  on
         March 6, 1989.

(11)     Incorporated by reference from the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1990.

(12)     Incorporated by reference from the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1995.

(13)     Incorporated by reference from the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1997.

(14)     Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended June 30, 1995.

(15)     Incorporated by reference from the Company's  Registration Statement on
         Form  S-8 and Form  S-3  (Registration  No.  33-31984)  filed  with the
         Commission on November 8, 1989.

(16)     Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended March 31, 1996.
<PAGE>
(17)     Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended March 31, 1998.

(18)     Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended June 30, 1997.

(19)     Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended March 31, 1994.

(20)     Incorporated by reference from the Company's Current Report on Form 8-K
         filed with the Commission on September 30, 1994.


(21)     Incorporated by reference from the Company's Report on Form 8-A/A filed
         with the Commission on February 1, 1999.


(22)     Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended September 30, 1998.


         (b)      Reports on Form 8-K

         There were no reports on Form 8-K filed  during the three month  period
         ended December 31, 1998.

<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements of Section 13 of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on February , 1999.

                                            AVONDALE INDUSTRIES, INC.

                                            By:  /S/ALBERT L. BOSSIER, JR.
                                                 -------------------------
                                                    Albert L. Bossier, Jr.
                                                    Chairman of the Board,
                                                     President and Chief
                                                      Executive Officer

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

Signature                                Title                      Date

/s/Albert L. Bossier, Jr.    Chairman of the Board, President  February 23, 1999
--------------------------      and Chief Executive Officer
   Albert L. Bossier, Jr.      

/s/Thomas M. Kitchen         Vice President, Chief Financial   February 23, 1999
--------------------------  Officer, Corporate Secretary and
   Thomas M. Kitchen                  a Director
                                        

/s/Kenneth B. Dupont         Vice President and a Director     February 23, 1999
--------------------------
   Kenneth B. Dupont

/s/Anthony J. Correro, III              Director               February 23, 1999
--------------------------
   Anthony J. Correro, III

/s/Francis R. Donovan                   Director               February 23, 1999
--------------------------
   Francis R. Donovan

/s/Hugh A. Thompson                     Director               February 23, 1999
---------------------------
   Hugh A. Thompson

/s/Eugene K. Simon             Vice President of Finance       February 23, 1999
---------------------------
   Eugene K. Simon
<PAGE>
                                  EXHIBIT INDEX

Number                             Description                                 

10.1              Contracts With The United States Navy

                  (l)      Agreement dated September 3, 1993, by and between the
                           Company  and the United  States of America  (Contract
                           No.  N00024-93-C-2205)  for the  construction  of one
                           T-AKR  300  Class  Strategic  Sealift  ship,  various
                           amendments and modifications nos. P00001,  P00003 and
                           P00004(4),  P00007 (7), P00019 (6) and  modifications
                           P00025 and P00028 thereto.

                  (n)      Agreement  dated December 17, 1996 by and between the
                           Company  and the United  States of America  (Contract
                           No. N00024-97-C-2202) for the design and construction
                           of  one  LPD-17  ship(8)  and   modification   P00021
                           thereto.

10.3              Employee Benefit Plans

                  c)       The  Company's  Amended  and  Restated Employee Stock
                           Ownership  Plan(9)  as  further amended by: Amendment
                           No. 1  adopted  April 5,  1995(7),  Amendment  No.  2
                           adopted June 16, 1995(14),  Amendment  No. 3  adopted
                           February   5,  1996 (16),  Amendment  No.  4  adopted
                           December  31,  1996  (8),  Amendment  No.  5  adopted
                           December 30, 1997 (13),   Amendment No. 6 adopted May
                           5, 1998(3),  and Amendment No. 7 adopted December 30,
                           1998  and  the  related  Amended  and  Restated Trust
                           Agreement(16) as further amended by Amendment  No.  1
                           adopted May 5, 1998.(3)

                  (d)      The  Company's  Pension  Plan as Amended and Restated
                           dated  December 30,  1997(13) as amended by Amendment
                           No. 1 thereto adopted December 30, 1998.

                  (g)      The   Amended   and   Restated    Avondale   Services
                           Corporation  Executive Group Insurance  Benefits Plan
                           and Summary Plan  Description  specifying  the excess
                           insurance   benefits   provided   to  the   Company's
                           executive  officers and certain other key  personnel,
                           and a summary description of health, accidental death
                           and  dismemberment,  disability  and  life  insurance
                           benefits  made  available to employees  dated October
                           14,  1997 (13) as  amended by  Amendment  No. 1 dated
                           March  23,  1998  (17),  and  Amendment  No.  2 dated
                           December 8, 1998.

                  (j)      The Company's 401(k) Savings Plan as restated adopted
                           December 30, 1998.

                  (m)      Avondale Industries, Inc. Flexible Benefits Plan
                           adopted December 30, 1998.

21                List of subsidiaries of the Company

23                Consent of Deloitte & Touche LLP
<PAGE>
27.1              Financial Data Schedule as of and for the Twelve Month  Period
                  Ended December 31, 1998

27.2              Restated Financial Data Schedule as of and for the Three,  Six
                  and Nine Month Periods Ended March 31, 1998, June 30, 1998 and
                  September 30, 1998, Respectively
----------
(1)      Incorporated by reference to Newport News Shipbuilding  Inc.'s Form 8-K
         dated January 22, 1999 (Commission File No. 1-12385).


(2)      Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended June 30, 1993.


(3)      Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended June 30, 1998.

(4)      Incorporated by reference from the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1991, as amended by Form 10-K/A.

(5)      Incorporated by reference from the Company's  Registration Statement on
         Form S-1  (Registration  No.  33-20145)  filed with the  Commission  on
         February 16, 1988.

(6)      Incorporated by reference from the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1993.

(7)      Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended March 31, 1995.

(8)      Incorporated by reference from the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1996.

(9)      Incorporated by reference from the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1994.

(10)     Incorporated by reference from the Company's  Registration Statement on
         Form S-1 (Registration No. 33-27342) filed with the Commission on March
         6, 1989.

(11)     Incorporated by reference from the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1990.

(12)     Incorporated by reference from the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1995.

(13)     Incorporated by reference from the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1997.

(14)     Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended June 30, 1995.

(15)     Incorporated by reference from the Company's  Registration Statement on
         Form  S-8 and Form  S-3  (Registration  No.  33-31984)  filed  with the
         Commission on November 8, 1989.
<PAGE>
(16)     Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended March 31, 1996.

(17)     Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended March 31, 1998.

(18)     Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended June 30, 1997.

(19)     Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended March 31, 1994.

(20)     Incorporated by reference from the Company's Current Report on Form 8-K
         filed with the Commission on September 30, 1994.

(21)     Incorporated by reference from the Company's Report on Form 8-A/A filed
         with the Commission on February 1, 1999.

(22)     Incorporated by reference from the Company's  Quarterly  Report on Form
         10-Q for the fiscal quarter ended September 30, 1998.