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

                                    FORM 10-K
              Annual Report Pursuant to Section 13 or 15 (d) of the
                         Securities Exchange Act of 1934

For the fiscal year ended December 31, 1998       Commission file number 0-13875

                               Lancer Corporation
             (Exact name of registrant as specified in its charter)


           Texas                                                 74-1591073
(State or other jurisdiction of                                (IRS Employer
incorporation or organization)                               Identification No.)

6655 Lancer Blvd., San Antonio, Texas                               78219
(Address of principal executive offices)                          (Zip Code)

        Registrant's telephone number, including area code (210) 310-7000

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

          Securities registered pursuant to Section 12 (g) of the Act:
                     Common Stock, par value $.01 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 (section 229.405 of this chapter) 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. [ ]

The aggregate market value of the registrant's  common stock, par value $.01 per
share,  as of March 22,  1999,  held by  non-affiliates  of the  registrant  was
approximately  $54,445,050 based on the closing sale price. For purposes of this
computation,  all executive officers,  directors and 5% beneficial owners of the
registrant are deemed to be affiliates.  Such determination should not be deemed
to be an admission that such officers, directors or 5% beneficial owners are, in
fact, affiliates of the Company.

The number of shares of the  registrant's  common stock  outstanding as of March
22, 1999 was 9,121,482.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  registrant's  definitive  proxy  statement to be filed with the
Securities and Exchange  Commission (the  "Commission")  not later than 120 days
after the end of the fiscal  year  covered by this report and  prepared  for the
1999 annual meeting of shareholders  are incorporated by reference into Part III
of this report.

                                       1
<PAGE>

This  document  contains  certain  "forward-looking"  statements as such term is
defined in the Private Securities  Litigation Reform Act of 1995 and information
relating to the Company  and its  subsidiaries  that are based on the beliefs of
the  Company's  management.  When used in this report,  the words  "anticipate,"
"believe,"  "estimate,"  "expect," "forecast," "plan," and "intend" and words or
phrases of similar import,  as they relate to the Company or its subsidiaries or
Company management,  are intended to identify forward-looking  statements.  Such
statements reflect the current risks,  uncertainties and assumptions which exist
or must be made as a result of certain factors  including,  without  limitation,
competitive   factors,   general  economic   conditions,   customer   relations,
relationships  with  vendors,   the  interest  rate  environment,   governmental
regulation  and  supervision,   seasonality,   distribution  networks,   product
introductions and acceptance, one-time events and other factors described herein
and in other  filings  made by the  Company  with the  Securities  and  Exchange
Commission.  Based  upon  changing  conditions,  should any one or more of these
risks or uncertainties  materialize,  or should any underlying assumptions prove
incorrect,  actual results may vary materially  from those  described  herein as
anticipated,  believed, estimated,  expected, forecast, planned or intended. The
Company does not intend to update these forward-looking statements.

                                     PART I

ITEM 1.   BUSINESS

General

Lancer designs,  engineers,  manufactures and markets fountain soft drink,  beer
and citrus beverage dispensing systems,  and other equipment for use in the food
service and beverage  industry.  Lancer also markets frozen beverage  dispensers
manufactured  by a joint  venture  that is 50%  owned by the  Company.  Lancer's
products are sold by Company personnel and through independent  distributors and
agents  principally  to major  soft drink  companies  (primarily  The  Coca-Cola
Company),  bottlers,  equipment  distributors,  beer  breweries and food service
chains  for use in  various  food and  beverage  operations.  The  Company  is a
vertically  integrated  manufacturer  whose  tooling,  production,  assembly and
testing  capabilities  enable  it to  fabricate  a  substantial  portion  of the
components used in Company products. In addition, the Company is an innovator of
new products in the beverage dispensing industry and has a large technical staff
supported  by  state-of-the-art  engineering  facilities  to  develop  these new
products and to enhance existing product lines in response to changing  industry
requirements and specific customer demands.

The Company  was  incorporated  in Texas on December  18,  1967,  and  initially
manufactured  parts for beverage  dispensing  equipment.  The Company  designed,
engineered,  manufactured and marketed its first mechanically  cooled soft drink
dispensing  system in 1971.  Since that  time,  the  Company  has  expanded  its
engineering and production facilities and has developed new products,  including
various  configurations  of the Company's  mechanically  and ice cooled beverage
dispensing  systems,  syrup  pumps,  carbonators  and other  related  equipment,
accessories and parts.


The Beverage Dispensing Industry

The manufacture of fountain soft drink and other beverage  dispensing systems is
a rapidly changing industry.  Technological changes and improvements continue to
be reflected in the  development,  manufacture and  introduction of new products
and processes.  Manufacturers of such beverage dispensing systems generally sell
most of their  products  to one or more  major soft  drink  companies,  licensed
bottlers, large international breweries, equipment distributors and food service
chains.  In order to facilitate  sales of their beverage  products to end-users,
soft drink companies and some breweries,  and their  respective  affiliates,  in
turn sell or lease the dispensing  systems to restaurants,  convenience  stores,
concessionaires  and other food and  beverage  operators.  Soft drink  companies
generally  recommend that their affiliates  purchase beverage dispensing systems
from approved manufacturers.  Informal,  long-term relationships between certain
manufacturers and soft drink companies have become the norm in the industry.

                                       2
<PAGE>

Products

The Company's  products can be divided into four major categories:  (i) fountain
soft drink,  citrus, and frozen beverage  dispensers;  (ii) post-mix  dispensing
valves; (iii) beer dispensing systems; and (iv) other products and services.


Soft Drink, Citrus, and Frozen Beverage Dispensers

The Company  manufactures and sells a broad range of mechanically cooled and ice
cooled soft drink and citrus  dispensing  systems.  These  systems are  non-coin
operated. The type of equipment and configuration of each model varies according
to intended use and specific customer needs. The Company's  mechanically  cooled
dispensing  systems chill  beverages as they run through  stainless steel tubing
inside  a  self-contained  refrigeration  unit.  In  the  Company's  ice  cooled
dispensing  systems,  the beverage is cooled as it runs through  stainless steel
tubing  encased in an  aluminum  cold plate  which  serves as the heat  transfer
element when covered with ice.  Several of the ice cooled  systems also dispense
ice. The Company manufactures both post-mix and pre-mix dispensing equipment for
each of the mechanically cooled and ice cooled fountain systems.

Lancer  manufactures  several models of  mechanically  cooled citrus  dispensing
systems  for counter top use.  The Minute Maid  Company,  a division of The Coca
Cola  Company,  is the primary  customer  for the  Company's  citrus  dispensing
products.

Lancer  FBD  Partnership,  Ltd.,  a joint  venture  in which  Lancer  owns a 50%
interest,  manufactures frozen beverage dispensers.  The joint venture sells its
production to Lancer,  and Lancer markets and distributes the equipment to third
parties.

The prices of the  Company's  dispensing  systems vary  depending on  dispensing
capacity, number of drink selections,  speed of beverage flow and other customer
requirements.  Sales of soft drink,  citrus, and frozen beverage  dispensers for
the years ended December 31, 1998,  1997 and 1996,  accounted for  approximately
50%, 51% and 56% of total sales, respectively.

Post-Mix Dispensing Valves

The Company  manufactures and sells post-mix  dispensing  valves which mix syrup
and  carbonated  water  at a  preset  ratio.  The  valves  are  designed  to  be
interchangeable with existing post-mix valves used with Coca-Cola products.  The
Company  manufactures   accessories  for  the  valves,   including   push-button
activation,   water-only  dispensing  mechanisms,  portion  controls  and  other
automatically  activated valve controls.  The Company's  primary valve, the LEV,
has been designated by The Coca-Cola  Company as the standard valve for the U.S.
market.  Lancer  uses the LEV in many of its own  dispensing  systems,  and also
sells the valve to competing  equipment makers. For the years ended December 31,
1998,  1997 and 1996,  sales of valves and  related  accessories  accounted  for
approximately 13%, 14%, and 16% of total net sales, respectively.

Beer Dispensing Systems

The Company  manufactures  and markets  beer  dispensing  equipment  and related
accessories.  Products  include  chillers,  taps,  fonts,  dispensers  and kegs.
Lancer's operations in Australia, Brazil and New Zealand account for most of the
Company's sales of beer related equipment.  Sales of beer equipment  represented
6%, 8% and 1% of total net sales in the years ended December 31, 1998,  1997 and
1996, respectively.

Other Related Products and Services

The Company  remanufactures  various  dispensing  systems and sells  replacement
parts  in   connection   with  the   remanufacturing   process.   Revenues  from
remanufacturing  activities were 4% of sales in each of the years ended December
31, 1998, 1997 and 1996

The Company  manufactures  and/or markets a variety of other products  including
syrup pumps,  carbonators,  stainless steel and brass  fittings,  carbon dioxide
regulator  components,  ice bagger  machines,  water  filtering  systems,  and a
variety  of  other  products,  parts  and  accessories  for  use  with  beverage
dispensing  systems.  Lancer also provides  logistics services to certain of its
customers. Together, these parts and services constitute 26%, 23% and 23% of the
Company's  total net sales for the years ended December 31, 1998, 1997 and 1996,
respectively.
 
                                      3
<PAGE>

Product Research and Development

In order to maintain its competitive position, the Company continuously seeks to
improve  and  enhance  its line of  existing  beverage  dispensing  systems  and
equipment,  and to  develop  new  products  to meet the  demands of the food and
beverage  industry.  Some  projects are  originated by Company  personnel  while
others are initiated by customers,  primarily The Coca-Cola Company. The Company
has, from time to time,  entered into  agreements  with  customers to design and
develop new  products.  For the years ended  December 31,  1998,  1997 and 1996,
Company-sponsored research and development expenses were $2,207,000,  $1,467,000
and $913,000, respectively.


Production, Inventory and Raw Materials

The Company's major products  typically contain a number of metal and/or plastic
parts that are  manufactured  by the  Company.  The  production  of these  parts
usually  requires metal dies,  fixtures,  thermal plastic  injection  molds, and
other tooling, some of which are produced in the Company's tool and die and mold
departments. Other manufacturing processes include welding, polishing, painting,
tube bending, metal turning,  stamping, and assembling of printed circuit boards
and wire harnesses.  The Company assembles the various parts and components into
finished products, or sells them as spare parts.

Substantially  all raw  materials  and parts  not  manufactured  internally  are
readily available from other commercial sources. The Company has not experienced
any significant  shortages in the supply of its raw materials and parts over the
past several years.  Shortages can occur from time to time,  however,  and could
delay or limit the  manufacture  of the  Company's  products.  Such a disruption
could adversely affect the Company's operations.  The Company does not stockpile
large amounts of raw materials and parts,  but attempts to control its inventory
through  extrapolation  of historical  production  requirements and by using its
specific  knowledge  of the market.  In addition,  the Company  would be able to
manufacture  some  purchased  parts if  shortages  of these parts were to occur.
There can be no  assurances,  however,  that  these  measures  will be  entirely
successful or that disruptive shortages will not occur in the future.


Backlog

The  Company's  manufacturing  operations  are driven by actual  and  forecasted
customer  demand.  The Company's  backlog of unfilled  orders was  approximately
$13.0  million,  $8.2 million and $10.1  million at December 31, 1998,  1997 and
1996, respectively. It is anticipated that 1998 backlog orders will be filled in
1999.


Marketing and Customers

The  Company's  products are marketed on a wholesale  basis in the United States
through   a   network   of   independent   distributors   and   salaried   sales
representatives.  The principal  purchasers  of Company  products are major soft
drink companies,  bottlers,  breweries, beverage equipment dealers, restaurants,
convenience stores, and other end users.

Substantially all of the Company's sales are derived from, or influenced by, The
Coca-Cola  Company.  Lancer is a preferred  supplier to The  Coca-Cola  Company.
Direct sales to The Coca-Cola Company, the Company's largest customer, accounted
for  approximately  23%,  24% and 33% of the  Company's  total net sales for the
years  ended  December  31,  1998,  1997  and  1996,  respectively.  None of the
Company's   customers,   including  The  Coca-Cola  Company,  are  contractually
obligated to purchase minimum quantities of Lancer products.  Consequently,  The
Coca-Cola Company has the ability to adversely  affect,  directly or indirectly,
the volume and price of the products sold by the Company. Lancer does not expect
any  significant  volume or price  reductions in its business with The Coca-Cola
Company. If they were to occur,  however,  such reductions would have a material
adverse  impact  on  the  Company's   financial  position  and  its  results  of
operations.

                                       4
<PAGE>

The Company and The  Coca-Cola  Company have  entered into a master  development
agreement  which  governs  development  of various  products.  Products that are
developed  pursuant to this agreement may be sold only to The Coca-Cola  Company
or its designated  agents.  The agreement  generally provides that The Coca-Cola
Company will also retain the rights to any tooling it pays for and any resulting
patents.  The Company is obligated under the  development  agreement to make its
manufacturing capabilities available for the benefit of The Coca-Cola Company as
they relate to, and are required for,  selected  projects.  The Company supplies
engineering  and  research  and  development  personnel,  designs,  develops and
creates prototypes,  and obtains either an exclusive or a non-exclusive  license
to  manufacture  and market  the  resulting  products.  Generally,  the  Company
warrants all such products for one year. The Coca-Cola Company may terminate the
development agreement at any time, subject to certain conditions.

The Company and The  Coca-Cola  Company  have  entered  into  certain  logistics
support  agreements  under which the Company  warehouses and distributes new and
used products owned by The Coca-Cola Company.  The two parties also have entered
into  agreements  which  provide  for the  remanufacturing  of  used  dispensing
equipment owned by The Coca-Cola Company.


International Sales

For the years ended  December 31, 1998,  1997 and 1996,  the Company's  sales to
customers outside the United States were approximately 48%, 48% and 43% of total
net sales, respectively. The Company has sales employees,  distributors,  and/or
licensees in Latin America,  Europe,  Africa and Asia. The Company  manufactures
products in Australia,  Brazil, and Mexico, and operates  warehouses in Belgium,
New Zealand, and Russia.

The  Company's  foreign  sales and  operations  could be  adversely  affected by
foreign currency fluctuations, exchange controls, tax policies, deterioration of
foreign  economies,  the expropriation of Company property,  and other political
actions and economic events.  Although the Company attempts to limit such risks,
there can be no assurance that these efforts will be successful.


Financial Information About Segments and Geographic Areas

Financial  information  about segments and geographic areas is set forth in Note
12 to the Consolidated Financial Statements included elsewhere in this filing.


Competition

The business of  manufacturing  and marketing  beverage  dispensing  systems and
related equipment is highly competitive and is characterized by rapidly changing
technology.   Competition   is  primarily   based  upon   product   suitability,
reliability,  technological  development and expertise,  price, product warranty
and delivery time. In addition,  the Company frequently  competes with companies
having  substantially  greater financial resources than the Company. The Company
has been able to compete  successfully in the past, and believes it will be able
to do so in the future.


Employees

As of December 31, 1998,  the Company had 1,506  full-time  employees of whom 75
were engaged in engineering and technical support, 1,225 in manufacturing, 80 in
marketing and sales and 126 in general management and administrative  positions.
The majority of the employees  work at the Company's  facilities in San Antonio,
Texas. 576 employees work at the Company's  facility in Piedras Negras,  Mexico,
70 are employed by the Company's Brazilian subsidiary,  and a total of 72 people
are employed by the Company's subsidiaries in Australia and New Zealand. Certain
sales  representatives are located in various parts of the United States,  Latin
America,  Europe and Asia. None of the U.S. employees are represented by a union
or are subject to collective bargaining agreements.  Substantially all full-time
United States  employees are eligible to participate  in the Company's  employee
profit sharing plan and various other benefit programs.

                                       5
<PAGE>

Intellectual Property

The Company  presently owns 37 United States patents and numerous  corresponding
foreign patents.  It has 17 pending U.S. patent  applications and  corresponding
foreign  patent  applications.  The  Company's  products  covered  by patents or
pending patent  applications  include food, beverage and ice beverage dispensing
equipment and  components.  The patents have a remaining  life of 4 to 18 years.
Management  does  not  believe  the  expiration  of  such  patents  will  have a
significant adverse impact on continuing operations.

The  Company  seeks to  improve  its  products  and to obtain  patents  on these
improvements.  As a result,  the  Company  believes  its patent  portfolio  will
expand, thereby lessening its reliance on any one particular patent. The Company
also believes its competitive  position is enhanced by its existing  patents and
that any future patents will continue to enhance this position.  There can be no
assurance,  however, that the Company's existing or future patents will continue
to provide a  competitive  advantage,  nor can there be any  assurance  that the
Company's competitors will not produce non-infringing competing products.

In  addition  to  Company-owned  patents,  Lancer  has  assigned  patents to the
Company's  customers,  primarily  The Coca-Cola  Company.  These patents are the
result of special development  projects between Lancer and its customers.  These
projects are typically  paid for by the customer,  with Lancer either  retaining
licenses to manufacture the products  covered by these patents for the customer,
or granting  such licenses to the customer.  The Company  occasionally  acquires
patent  protection for products that are complimentary to products whose patents
are controlled by third parties.

The name "Lancer" is the federally  registered  trademark of the Company.  It is
also registered in many foreign  countries.  In certain  instances,  the Company
grants a non-exclusive  license to its distributors,  primarily foreign,  to use
the trademark subject to control by the Company.


Environmental Matters

The Company's operations are subject to increasingly  stringent federal,  state,
local,  and  foreign  laws and  regulations  relating to the  protection  of the
environment.  In the United States,  these  environmental  laws and regulations,
which are  implemented  by the  Environmental  Protection  Agency and comparable
state  agencies,  govern the  management  of hazardous  waste,  the discharge of
pollutants  into the air and into surface and ground water,  and the manufacture
and disposal of certain substances.

There  are no  material  environmental  claims  pending  or,  to  the  Company's
knowledge,  threatened  against the Company.  The Company also believes that its
operations are in material compliance with current U.S., state, and foreign laws
and regulations. The Company estimates that any expenses incurred in maintaining
compliance with current laws and regulations  will not have a material effect on
the  Company's  earnings  or capital  expenditures.  The  Company can provide no
assurance, however, that the current regulatory requirements will not change, or
that currently unforeseen  environmental  incidents will not occur, or that past
non-compliance  with  environmental laws will not be discovered on the Company's
properties.

                                       6

<PAGE>

ITEM 2.   PROPERTIES

The Company's primary manufacturing and administrative facilities are located in
several buildings in San Antonio,  Texas, totaling  approximately 713,000 square
feet, including three buildings owned by Lancer covering  approximately  410,000
square feet of space, the largest of which is located on a 40-acre tract of land
in the  southeast  sector of San  Antonio.  In the first  quarter  of 1998,  the
Company  completed  construction of  approximately  32,000 square feet of office
space at its  primary  San  Antonio  facility.  The  Company  owns and  operates
facilities  located in Piedras Negras,  Mexico consisting of 192,000 square feet
of completed  space.  The Company also leases a 65,000  square foot plant in Sao
Paulo,  Brazil,  a 39,000 square foot plant in Auckland,  New Zealand,  a 38,000
square foot plant in Beverley,  South Australia, a suburb of Adelaide, and small
facilities  in  Sydney,  Australia;   Brussels,  Belgium;  Moscow,  Russia;  and
Monterrey,  Mexico.  The Company leases 492,000 square feet of space  throughout
the world.

Total net rent expense for real estate was $1,356,000, $1,359,000 and $1,093,000
in 1998, 1997 and 1996, respectively.  Included in total rent expense in 1998 is
$89,000 for certain properties that are leased from a partnership  controlled by
certain shareholders.  See Note 5 of Notes to Consolidated  Financial Statements
and "Certain Relationships and Related Transactions" for more information.


ITEM 3.   LEGAL PROCEEDINGS

There are no claims or legal  actions  pending  against the  Company  other than
claims arising in the ordinary  course of business.  The Company  believes these
claims, taking into account reserves and applicable  insurance,  will not have a
material adverse effect on the Company.


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to the security holders for a vote by proxy or otherwise
during the fourth quarter of the year ended December 31, 1998.


                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                 STOCKHOLDER MATTERS

The Company's  common stock is currently  traded on the American  Stock Exchange
("ASE") under the symbol "LAN." The following table sets forth the range of high
and low market  price as reported by the ASE for the periods  indicated.  Prices
are adjusted for a three-for-two stock dividend effective July 8, 1997.

Market Price For Common Stock
<TABLE>
<CAPTION>
                                      1998                              1997
Quarter                       High           Low                High           Low
------------------------   --------------------------        --------------------------
<S>                            <C>             <C>               <C>            <C>   
First                          $13.81          $9.44             $15.00         $11.92
Second                          17.25          13.50              17.33          12.58
Third                           18.25           9.75              17.63          14.75
Fourth                          14.00           8.88              16.13          10.75
</TABLE>


On March 22, 1999, the closing price of the Company's  common stock, as reported
by the ASE, was $9.56 per share. On that date,  there were 174 holders of record
of the  Company's  common  stock,  not  including  shares  held by  brokers  and
nominees.  The Company has not  declared a cash  dividend on the common stock to
date. It is a general policy of the Company to retain future earnings to support
future growth.

                                       7
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                       Years Ended December 31,
                                           ----------------------------------------------------------------------------------
                                                1998              1997              1996            1995            1994
                                           ----------------  ---------------   ---------------  -------------   -------------
Operating Data:
<S>                                              <C>              <C>               <C>             <C>             <C>     
     Net sales                                   $ 138,869        $ 119,367         $ 103,295       $ 76,432        $ 71,526
     Gross profit                                   34,006           31,429            25,088         16,439          14,312
     Selling, general and
        administrative expenses                     19,911           20,439            14,512          9,934           9,359
     Operating income                               14,095           10,990            10,576          6,505           4,953
     Interest expense                                3,972            2,815             1,588            981             755
     Interest and other income, net                    202            (948)             (160)        (1,179)           (354)
     Earnings before income taxes
        and extraordinary item                       9,921            9,123             9,148          6,703           4,552
     Income tax expense                              4,078            3,037             3,415          2,612           1,602
     Net earnings                                    5,843            6,086             5,733          4,091           2,950
     Net earnings per share
       Basic                                      $   0.64         $   0.69          $   0.66        $  0.47         $  0.36
       Diluted                                    $   0.63         $   0.65          $   0.63        $  0.46         $  0.35
     Weighted average shares outstanding
       Basic                                         9,060            8,863             8,722          8,701           8,178
       Diluted                                       9,306            9,338             9,052          8,985           8,460
</TABLE>
<TABLE>
<CAPTION>




                                                                          As of December 31,
                                           ----------------------------------------------------------------------------------
                                                1998              1997              1996            1995            1994
                                           ----------------  ---------------   ---------------  -------------   -------------
Balance Sheet Data:
<S>                                              <C>              <C>               <C>             <C>             <C>     
     Total assets                                $ 112,840        $ 110,669         $  82,009       $ 57,944        $ 46,896
     Short-term debt                                27,094           23,444            13,553          8,448           7,409
     Long-term debt, less
        current installments                        17,568           21,565            15,459          5,398           3,397
     Shareholders' equity                           48,258           42,961            37,036         31,065          26,919
</TABLE>


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS

This  document  contains  certain  "forward-looking"  statements as such term is
defined in the Private Securities  Litigation Reform Act of 1995 and information
relating to the Company  and its  subsidiaries  that are based on the beliefs of
the  Company's  management.  When used in this report,  the words  "anticipate,"
"believe,"  "estimate,"  "expect," "forecast," "plan," and "intend" and words or
phrases of similar import,  as they relate to the Company or its subsidiaries or
Company management,  are intended to identify forward-looking  statements.  Such
statements reflect the current risks,  uncertainties and assumptions which exist
or must be made as a result of certain factors  including,  without  limitation,
competitive   factors,   general  economic   conditions,   customer   relations,
relationships  with  vendors,   the  interest  rate  environment,   governmental
regulation  and  supervision,   seasonality,   distribution  networks,   product
introductions and acceptance, one-time events and other factors described herein
and in other  filings  made by the  Company  with the  Securities  and  Exchange
Commission.  Based  upon  changing  conditions,  should any one or more of these
risks or uncertainties  materialize,  or should any underlying assumptions prove
incorrect,  actual results may vary materially  from those  described  herein as
anticipated,  believed, estimated,  expected, forecast, planned or intended. The
Company does not intend to update these forward-looking statements.

The  following  discussion  should  be read in  connection  with  the  Company's
Consolidated Financial Statements, related notes and other financial information
included elsewhere in this filing.

                                       8
<PAGE>

Results of Operations


Comparison of the Years Ended December 31, 1998 and December 31, 1997

Net sales for the year ended December 31, 1998  increased by $19.5  million,  or
16%, to $138.9 million from $119.4 million in 1997.  Sales in Latin America rose
$10.7 million, or 98%, due largely to the Company's efforts to align itself with
key bottlers in the region. Additionally,  the Company added sales and technical
staff in Monterrey,  Mexico and in other parts of Latin America during the year.
Sales in the United  States rose $10.4  million,  or 17%, as sales of ice cooled
fountain equipment increased from 1997 levels. Sales in Brazil and Asia declined
in 1998, suffering from poor economic conditions.

Sales to customers  outside the United  States  represented  48% of net sales in
both 1998 and 1997.

Gross margin for the year ended  December 31, 1998 was 24%, down from 26% in the
prior year.  Gross margin fell in 1998 primarily  because of poor margins at the
Company's Brazilian subsidiary.

Selling,  general and  administrative  expenses for the year ended  December 31,
1998 were $19.9 million (14% of sales), compared to $20.4 million (17% of sales)
in 1997. Operating expenses were unusually high in 1997 because of non-recurring
costs associated with the Company's  acquisitions in Brazil and New Zealand, the
establishment  of a  subsidiary  in  Belgium,  and  the  implementation  of  the
Company's primary computer system.

Interest expense for the year ended December 31, 1998 was $4.0 million,  up from
$2.8 million in 1997. The increase  resulted from higher  average  borrowings to
finance asset growth. The Company's income tax rate was 41% in 1998, compared to
33% in 1997. The effective rate was unusually high in 1998 because the Company's
losses in Brazil were not  deductible  against  income earned outside of Brazil.
The effective rate in 1997 was unusually low,  primarily  because of tax credits
for research and development expenditures incurred prior to 1997.

Net  earnings  for the year ended  December  31,  1998 were $5.8  million,  a 4%
decrease  from $6.1  million  earned in 1997.  Net  earnings  per diluted  share
declined to $0.63 in 1998 from $0.65 in 1997.


Comparison of the Years Ended December 31, 1997 and December 31, 1996

Net sales for the year ended December 31, 1997  increased by $16.1  million,  or
16%, to $119.4  million from $103.3  million in 1996.  This  increase was driven
primarily by the inclusion of sales from the Company's newly acquired operations
in Brazil and New Zealand,  and by strong sales across most product lines. Latin
American  sales rose $2.1 million or 24%, due in part to strong  demand in South
American markets.

Sales to customers  outside the United States  represented  48% of net sales for
the year ended December 31, 1997, compared to 43% for the prior year.

Gross margin for the year ended  December  31, 1997 was 26%,  compared to 24% in
1996. The improved margin reflects product mix changes and management's  ongoing
efforts to control costs through manufacturing process enhancements.

Selling,  general and  administrative  expenses for the year ended  December 31,
1997 were $20.4 million, (17% of sales), up from $14.5 million (14% of sales) in
1996.  The  increase was  primarily  driven by the recent  acquisitions,  and by
non-recurring expenses relating to the Company's expansion in Western Europe and
the  implementation  of a fully integrated  manufacturing  MRP II system.  Small
increases  in  company-sponsored   research  and  development  expenses  and  in
administrative personnel to support the Company's growth also contributed to the
overall increase in expenses.

Interest expense for the year ended December 31, 1997 was $2.8 million,  up from
$1.6 million in 1996. This increase  resulted from higher average  borrowings to
fund asset growth. The Company's income tax rate was 33% in 1997 compared to 37%
in 1996. In 1997, the Company applied for, and received tax credits for research
and development  expenditures  incurred in prior years. Tax planning reduced the
impact of foreign and state taxes,  further  lowering the  effective tax rate in
1997.

                                       9
<PAGE>

Net  earnings  for the year ended  December  31,  1997 were $6.1  million,  a 6%
increase  over the $5.7 million  earned in 1996.  Net earnings per diluted share
improved 3% to $0.65 in 1997 from $0.63 in 1996.


Liquidity and Capital Resources

The Company's  principal sources of liquidity are cash flows from operations and
amounts available under the Company's  existing lines of credit. The Company has
met, and currently  expects that it will continue to meet,  substantially all of
its working  capital and capital  expenditure  requirements  as well as its debt
service  requirements with funds provided by operations and borrowings under its
credit facilities.

Lancer generated $4.4 million of cash from operating activities in 1998, up from
$3.1 million in 1997.  Cash from  operations  improved in 1998 because of slower
inventory growth and a decline in accounts receivable.

Capital spending was $5.2 million in 1998.  Lancer  completed  construction of a
32,000 square foot office addition to its primary facility in San Antonio during
the first quarter of 1998.  Most of the  remaining  capital  investment  was for
production  equipment and tooling.  Lancer expects  capital  spending in 1999 to
decline slightly from 1998 levels.

The Company  funded a portion of its  capital  spending  with bank debt.  During
1998, the Company  increased its revolving  bank facility to $35.0 million.  The
bank facilities  require that the Company maintain certain  financial ratios and
other covenants.  The Company is in compliance with, or has obtained waivers of,
the financial ratios and covenants contained in the credit agreement.

Because of its anticipated  growth,  the Company may need additional debt and/or
equity  financing.  The Company  believes it will be successful in obtaining the
financing it needs.


Inflation

Management  believes  inflation has not had a significant impact on its business
or operations.


Seasonality

The  Company's  net  sales  in the  fourth  quarter  of its  fiscal  years  have
frequently  been lower than in other  quarters  because  of  seasonality  in the
capital spending budgets of many of the Company's customers.


Accounting Matters

The Company established a DISC in 1979 in order to defer federal income taxes on
its foreign  sales.  In late 1984,  the  Internal  Revenue Code (the "Code") was
amended to limit the  benefits  of a DISC,  primarily  by  imposing  an interest
charge on the accumulated  deferred  federal income taxes of a DISC. At the same
time, the Code was amended to permit the creation of a Foreign Sales Corporation
("FSC").  Under the Code, as amended,  a portion of a FSC's income is subject to
federal income taxes,  while a portion is permanently exempt from federal income
taxes. As a result, at some point, the interest charge the Company incurs on the
deferred  federal  income  taxes of its DISC will  equal or exceed  the taxes it
would have incurred had it operated a FSC.  Current tax regulations  prevent the
Company from maintaining the DISC and a FSC  concurrently.  The Company does not
plan  to  convert  from  the  DISC  to a FSC in  1999.  At the  time  of  such a
conversion, the Company would be required to provide for federal income taxes on
the $2.4 million of undistributed earnings of the DISC, for which federal income
taxes have not previously  been provided.  The Company would be able to pay such
federal income taxes over a ten-year  period.  If the DISC had been converted on
December  31,  1998,  it would have  resulted  in a reduction  of  approximately
$801,000 in the Company's net earnings.

On January 1, 1998, the Company adopted SFAS No. 130,  "Reporting  Comprehensive
Income." This statement establishes standards for reporting comprehensive income
and its components in a full set of financial statements. The Statement requires
only additional  disclosures in the consolidated  financial statements;  it does
not affect the Company's financial position or results of operations. Prior year
financial  statements have been  reclassified to conform to the  requirements of
SFAS No. 130.

                                       10
<PAGE>

Effective  December 31,  1998,  the Company  adopted SFAS No. 131,  "Disclosures
about  Segments  of  an  Enterprise  and  Related  Information."  SFAS  No.  131
established  standards  for  the way in  which  publicly-held  companies  report
financial  and  descriptive   information  about  their  operating  segments  in
financial   statements  for  both  interim  and  annual  periods,  and  requires
additional  disclosures with respect to products and services,  geographic areas
of  operation  and major  customers.  (See Note 12 in the Notes to  Consolidated
Financial Statements.)

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments  and  Hedging   Activities."  The  Statement  provides  guidance  on
accounting  and  financial  reporting  for  derivative  instruments  and hedging
activities.  The Statement requires the recognition of all derivatives as either
assets or  liabilities  in the  consolidated  balance  sheet,  and the  periodic
measurement of those  instruments at fair value.  SFAS No. 133 requires adoption
no later than January 1, 2000. The Company is currently  analyzing and assessing
the  impact  that  the  adoption  of SFAS  No.  133 is  expected  to have on its
consolidated results of operations, cash flows and financial position.

In April 1998,  the AICPA issued SOP 98-5,  "Reporting  on the Costs of Start-Up
Activities,"  which  requires  that  costs  of  start-up  activities,  including
organizational  costs,  be expensed as incurred.  This SOP will be effective for
the Company's  1999  consolidated  financial  statements.  In the opinion of the
Company's  management,  it is not anticipated that the adoption of SOP 98-5 will
have a material effect on the consolidated financial statements of the Company.


Year 2000

The Year 2000 ("Y2K") issue arose  because some computer  programs use two-digit
date fields to designate a year.  Some of these  programs  with  two-digit  date
fields will not  recognize  the year 2000, or may confuse it with the year 1900.
This date recognition problem could cause erroneous calculations, or could cause
entire systems to malfunction.

The Company has adopted a  two-phase  approach to the Year 2000  threat.  In the
Assessment  Phase,  the  Company  generates  a  comprehensive  inventory  of the
Company's date-oriented systems, and determines which are not Y2K compliant. The
Renovation/Replacement  Phase  involves  correcting  or replacing  non-compliant
systems.  The Company has completed 92% of the  Assessment  Phase,  and plans to
have finished  substantially  all of the Assessment Phase by March 31, 1999. The
Renovation/Replacement  Phase is being  executed  as  non-compliant  systems are
identified.  The  Company  expects  that it will  have  corrected  high-priority
non-compliant  systems  by June  30,  1999,  and  medium-priority  non-compliant
systems by September 30, 1999.

In the second quarter of 1998,  the Company  initiated  correspondence  with its
suppliers to determine  their Y2K  readiness.  The Company  plans to monitor the
readiness of its key suppliers throughout 1999. The Company intends to determine
the Y2K readiness of its key customers  during 1999.  The Coca-Cola  Company was
the Company's largest customer in 1998, accounting for 23% of sales.

The Company's primary information  technology ("IT") system is a BaaN ERP system
that was installed in 1996, and upgraded in 1998. The Company  believes the BaaN
system, and other major IT systems, are Y2K compliant. Among non-IT systems, the
Company  has  replaced  a  non-compliant  payroll  system,  and  expects to have
upgraded or replaced its non-compliant  timekeeping  system by June 30, 1999. As
of December 31, 1998,  the Company has committed  more than half of the $200,000
it expects to spend on all of the Company's Y2K issues.

The Company believes there is low risk of any internal critical system not being
Y2K-compliant  by the end of 1999.  The  Company  continues  to assess  its risk
exposure  attributable to external  factors and suppliers.  Although the Company
has no reason to conclude that any specific supplier represents a risk, the most
likely  worst-case  Y2K  scenario  would  entail  production  disruption  due to
inability  of  suppliers  to deliver  critical  parts.  The Company is unable to
quantify such a scenario,  but it could potentially result in a material adverse
impact on the results of  operations,  liquidity  or  financial  position of the
Company.  The Company does not now have a formal  contingency  plan to deal with
non-performance by suppliers.  The Company intends,  however, to monitor the Y2K
readiness of key suppliers  throughout  1999, and to develop a contingency  plan
for any  supplier  whose  lack of  preparedness  may  jeopardize  the  Company's
operations.

                                       11
<PAGE>

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

On December 31, 1998, all of the Company's  $44,663,000 of debt  outstanding was
variable rate debt.  The Company uses interest rate swap  agreements  (the "Swap
Agreements")  to hedge a portion of the interest rate risk  associated  with the
Company's  variable rate debt. The Company has entered into Swap Agreements with
a combined  notional  amount of $18.0 million.  Under the Swap  Agreements,  the
Company pays fixed interest rates ranging from 5.98% to 6.345%,  while receiving
a floating  rate  payment  equal to the three month LIBOR rate  determined  on a
quarterly basis with settlement  occurring on specific dates. Based on exposures
on December 31, 1998, if interest rates were to change by one percentage  point,
the Company's annual pretax income would be impacted by approximately $267,000.

The Company does not trade in interest  rate swaps with the objective of earning
financial  gain on interest  rate  fluctuations.  The Company had no  additional
derivative financial instruments at December 31, 1998.

In 1998,  $456,000  of the  Company's  operating  profit  was  earned by foreign
subsidiaries with a functional  currency other than the United States dollar. If
the  average  annual  exchange  rate  of  the  functional  currencies  of  those
subsidiaries  were to fluctuate  by 10% against the United  States  dollar,  the
operating profit of those subsidiaries could be impacted by as much as $394,000,
when  translated to United States  dollars.  This analysis does not consider the
effect of changes in costs, demand, asset values, or other unpredictable factors
that could result from currency fluctuations.


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See "Index to Consolidated  Financial  Statements and Schedule"  included herein
for information required for Item 8.


ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
             AND FINANCIAL DISCLOSURE

Not applicable.

                                       12
<PAGE>



                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  set forth under the caption  "Election  of  Directors"  in the
Company's proxy  statement for its May 27, 1999 Annual Meeting of  Shareholders,
which is to be filed with the Commission, describes the directors of the Company
as required in response to this item and is  incorporated  herein by  reference.
The information set forth under the caption "Section 16(a) Beneficial  Ownership
Reporting Compliance" in the Company's proxy statement which is to be filed with
the Commission is incorporated herein by reference.

The following  table sets forth  certain  information  concerning  the executive
officers and directors of the Company:
<TABLE>
<CAPTION>

        Name                      Age              Position with the Company

<S>                               <C>                <C>                     
  Alfred A. Schroeder             61                 Chairman of the Board
  George F. Schroeder             58                 President, Chief Executive Officer and Director
  Michael W. Andaloro             52                 Chief Operating Officer
  David E. Green                  42                 Chief Financial Officer
  Christi A. Rohmer               34                 Controller
  Walter J. Biegler               56                 Director
  Jean M. Braley                  68                 Director
  Charles K. Clymer               62                 Director
  Michael E. Smith                57                 Director
</TABLE>

Mr.  Alfred A.  Schroeder  is a  co-founder  of the  Company  and has  served as
Chairman of the Board of Directors of the Company  since its  inception in 1967.
His primary  responsibilities include conceptual engineering design, new product
development  and corporate  planning.  He is the brother of George F. Schroeder,
and is also a partner  in Lancer  Properties.  See  "Certain  Relationships  and
Related Transactions."

Mr.  George F.  Schroeder is a co-founder of the Company and has served as Chief
Executive  Officer,  President  and a director  of the Company  since 1967.  His
primary   responsibilities  include  strategic  planning,   marketing,   overall
production management and corporate administration.  He is the brother of Alfred
A.  Schroeder,  and  is  also a  partner  in  Lancer  Properties.  See  "Certain
Relationships and Related Transactions."

Mr. Michael W. Andaloro  joined Lancer in 1998 as Chief Operating  Officer.  Mr.
Andaloro  previously  held various  senior  positions,  including Vice President
Operations and Group Vice President of Technical Services,  during 15 years with
Pioneer Flour Mills in San Antonio,  Texas. Mr. Andaloro is a business  resource
planning  specialist,  having  led  Pioneer  in a  successful  Class  A  MRP  II
implementation.

Mr.  David E. Green joined  Lancer in 1998 as Chief  Financial  Officer.  Before
coming to Lancer,  Mr. Green spent 14 years with Coca-Cola  Bottling  Company of
the Southwest,  a wholly-owned  subsidiary of Texas  Bottling  Group.  Mr. Green
served  in  senior  positions  including  Vice  President  Operations  and Chief
Financial  Officer.  Before joining Coca-Cola Bottling Company of the Southwest,
Mr. Green worked four years in public accounting with Deloitte Haskins & Sells.

Ms.  Rohmer  joined  Lancer in 1995 and serves as Corporate  Controller.  Before
joining  Lancer,  Ms. Rohmer worked for five years as Assistant  Controller  for
Pioneer Flour Mills,  and three years in public  accounting  with Ernst & Young,
LLP.

Mr.  Walter J. Biegler has served as a director of the Company  since 1985.  Mr.
Biegler is a private  investor.  From 1991 until  1998,  he was Chief  Financial
Officer of Periodical  Management Group, Inc., a San Antonio,  Texas distributor
of periodicals,  books and specialty items in the United States,  Mexico and the
Virgin Islands. Prior to November 1991, he served as the Chief Financial Officer
and Senior Vice  President-Finance of La Quinta Motor Inns, Inc. of San Antonio,
Texas, a national hotel chain.

Ms.  Jean M. Braley has served as a director  of the  Company  since  1976.  She
served as  Secretary  of the Company  from 1982 to 1985.  Ms.  Braley has been a
private  investor  since 1985. She is also a partner in Lancer  Properties.  See
"Certain Relationships and Related Transactions."

                                       13
<PAGE>

Mr.  Charles K. Clymer has served as a director of the Company  since 1996.  Mr.
Clymer retired from The Coca-Cola Company in 1993 after 31 years of service.  He
held  managerial  positions with Coca-Cola  International  including  Manager of
Chile,  Director and Senior Vice President of Coca-Cola (Japan) Company Limited,
and Vice President of On Premise Market Development and Customer Service for the
Latin America Group.

Mr.  Michael E. Smith has served as a director  of the Company  since 1985.  Mr.
Smith is  presently a principal  shareholder  and  Executive  Vice  President of
Gosling & Sachse, an insurance  brokerage firm. He has been employed by the same
firm since 1968. Mr. Smith has been the Company's insurance broker since 1981.

All directors of the Company are elected  annually.  The executive  officers are
elected  annually by, and serve at the  discretion  of, the  Company's  Board of
Directors.  The Board of Directors of the Company  currently  maintains an Audit
Committee, a Compensation Committee and a Stock Option Committee. The members of
the Audit Committee are Walter J. Biegler, Jean M. Braley, Charles K. Clymer and
Michael E.  Smith.  The Audit  Committee  met once in 1998.  The  members of the
Compensation  Committee are Walter J. Biegler,  Charles K. Clymer and Michael E.
Smith. No member of the  Compensation  Committee is an executive  officer of the
Company.  The Compensation  Committee met once in 1998. The members of the Stock
Option Committee are Walter A. Biegler,  Charles K. Clymer and Michael E. Smith.
The Stock Option Committee met four times in 1998.


ITEM 11.  EXECUTIVE COMPENSATION

The  information  set  forth  under  the  caption   "Compensation   and  Certain
Transactions"  in the  Company's  proxy  statement  for its May 27,  1999 Annual
Meeting of  Shareholders,  which is to be filed with the Commission,  sets forth
information  regarding  executive   compensation  and  certain  transactions  as
required in response to this item and is incorporated herein by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT

The  information  set forth  under the  captions  "Principal  Shareholders"  and
"Election of Directors" in the  Company's  proxy  statement for its May 27, 1999
Annual  Meeting  of  Shareholders,  which  is to be filed  with the  Commission,
describes the security  ownership of certain beneficial owners and management as
required in response to this item and is incorporated herein by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption "Certain  Relationships  and Related
Transactions"  in the  Company's  proxy  statement  for its May 27,  1999 Annual
Meeting of  Shareholders,  which is to be filed with the Commission,  sets forth
information regarding certain relationships and related transactions as required
in response to this item and is incorporated herein by reference.

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. The  following  documents are filed as part of this Annual Report on Form
10-K:

     (1) Financial statements:

          The financial  statements filed as a part of this report are listed in
          the  "Index  to  Consolidated   Financial   Statements  and  Schedule"
          referenced in Item 8.

     (2) Financial statement schedule:

          The  financial  statement  schedule  filed as a part of this report is
          listed  in  the  "Index  to  Consolidated   Financial  Statements  and
          Schedule" referenced in Item 8.

                                       14
<PAGE>
 
    (3) Exhibits:

         3.1*     Registrants  Articles  of Incorporation and amendments thereto
         3.2*     Bylaws of the Registrant 
         4.1*     Specimen  Common  Stock   Certificate,  $0.01  par  value,  of
                  Registrant
        10.1*     Lancer Corporation Profit Sharing Plan
        10.2*     1992 Non-Statutory Stock Option Plan
        10.3*     1987 Incentive Stock Option Plan
        10.4*     Master  Development  Agreement,  dated  January 12,  1984,  
                  between Lancer Corporation and The Coca-Cola Company
        10.5*     Net  Lease  Agreement,  dated  July 1,  1974,  between  Lancer
                  Corporation and Lancer Properties dated as of June 3, 1977
        10.6*     Loan  Agreement,  dated   as  of  July   24,  1991,  between 
                  Lancer Corporation and First Interstate Bank 
        10.7*     Security Agreement, dated as  of July 24, 1991, between Lancer
                  Corporation and First Interstate Bank of Texas
        10.8*     Fourth Amendment to Loan Agreement and  Loan  Documents, dated
                  as of July 29, 1994,  between  Lancer  Corporation and  First 
                  Interstate Bank
        10.9*     Modification of Deeds of Trust,  dated as of May 15, 1993, for
                  the  benefit of First  Interstate  Bank,  as  modified  by the
                  Second  Modification  of Deeds of Trust,  dated as of April 8,
                  1994, and the Third  Modification of Deeds of Trust,  dated as
                  of July 29, 1994
        10.10*    Form of Guaranty  Agreement,  dated July 29, 1994, executed by
                  each of the  subsidiaries  of Lancer  Corporation  in favor of
                  First Interstate Bank of Texas
        10.13*    Development and Manufacturing Agreement, dated April 13, 1993,
                  between Lancer Corporation and Packaged Ice, Inc.
        10.14*    Manufacturer's  Representation  Agreement,  dated  June  1993,
                  between Lancer Corporation and Middleby  Marshall Inc., doing 
                  business as Victory - A Middleby Company         
        10.15*    Form  of  Notice  of  Grant  of Stock  Option  under the 1987
                  Incentive  Stock  Option  Plan  
        10.16*    Form  of  Nonstatutory Stock Option Agreement under  the 1992
                  Non-Statutory Stock Option Plan
        10.19**   Revolving Promissory Note, dated as of July 29, 1994,  between
                  Lancer Corporation and First Interstate Bank of Texas, N.A.
        10.21+    Fifth  Amendment to Loan Agreement and Loan  Documents, dated 
                  November  8,  1994,  between  Lancer  Corporation  and  First 
                  Interstate Bank
        10.22+    Sixth   Amendment   to  Loan  Agreement  and  Loan  Documents,
                  dated  July  6, 1995,  between  Lancer  Corporation  and First
                  Interstate Bank
        10.23***  Seventh  Amendment  to  Loan  Agreement  and  Loan  Documents,
                  dated  August 1, 1995,  between  Lancer Corporation  and First
                  Interstate Bank
        10.24+    Eighth  Amendment to Loan Agreement and Loan Documents,  dated
                  December  29,  1995,  between  Lancer Corporation  and  First 
                  Interstate Bank
        10.27++   Credit  Agreement,   dated  July  15, 1996,   between   Lancer
                  Corporation  and  The  Frost  National  Bank and The Boatmen's
                  National Bank of St. Louis
        10.28++   Term  A Note, dated July 15,1996,  between Lancer  Corporation
                  and The Frost National Bank and The Boatmen's National Bank of
                  St. Louis
        10.29++   Term B Note, dated  July 15,1996,  between Lancer  Corporation
                  and The Frost National Bank and The Boatmen's National Bank of
                  St. Louis
        10.30++   Revolving   Note,  dated   July  15,  1996,   between  Lancer 
                  Corporation  and  The  Frost  National  Bank and The Boatmen's
                  National Bank of St. Louis
        10.31++   Acquisition   Note,   dated  July  15, 1996,  between   Lancer
                  Corporation  and  The  Frost  National Bank and The Boatmen's 
                  National Bank of St. Louis
        10.32++   Stock Pledge, dated July 15, 1996, between Lancer Corporation 
                  and  The  Frost  National  Bank 
        10.33++   Parent and Affiliate Guaranties, dated  July 15, 1996, between
                  Lancer Corporation or its subsidiaries  and The Frost National
                  Bank
        10.34#    Lancer Corporation Stock Incentive Plan, Effective Date March 
                  1, 1996 
        10.35+++  Master  Lease  Agreement   dated   September  4, 1996  between
                  Lancer Partnership, Ltd. and CCA Financial, Inc.
        10.36##   First Amendment to Credit Agreement dated May 12, 1997 between
                  Lancer  Partnership,  Ltd.  and The  Frost  National  Bank and
                  NationsBank, N.A.
        10.37##   Second  Amendment to Credit  Agreement dated December 31, 1997
                  between Lancer  Partnership,  Ltd. and The Frost National Bank
                  and NationsBank, N.A.

                                       15
<PAGE>

        10.38###  Third  Amendment  to  Credit  Agreement  dated  July 15,  1998
                  between  Lancer  Corporation  and The Frost  National Bank and
                  NationsBank, N.A.
        21.1      List of Significant Subsidiaries of the Registrant
        23.1      Consent of KPMG LLP

*       These exhibits are  incorporated by reference to the same Exhibit to the
        Registrant's  Registration Statement No. 33-82434 filed on Form S-1 with
        the Securities and Exchange  Commission (the  "Commission") on August 5,
        1994, as amended by Amendment No. 1 to Form S-1  Registration  Statement
        with the Commission on August 23, 1994.

**      These exhibits are  incorporated by reference to the same Exhibit to the
        Registrant's Form 10-K for the year ended December 31, 1994.

***     These  exhibits  are  incorporated  by  reference  to the Exhibit to the
        Registrant's Form 10-Q for the quarter ended June 30, 1995.

+       These  exhibits  are  incorporated  by  reference  to the Exhibit to the
        Registrant's Form 10-K for the year ended December 31, 1995.

++      These  exhibits  are  incorporated  by  reference  to the Exhibit to the
        Registrant's Form 10-Q for the quarter ended June 30, 1995.

+++     This  exhibit  is  incorporated  by  reference  to  the  Exhibit  to the
        Registrant's Form 10-K for the year ended December 31, 1996.

#       This  exhibit  is incorporated  by  reference  to  the  Exhibit  to the 
        Registrant's Proxy dated April 22, 1996.

##      These  exhibits  are  incorporated  by  reference  to the Exhibit to the
        Registrant's Form 10-K for the year ended December 31, 1997.

###     This  exhibit  is  incorporated  by  reference  to  the  Exhibit  to the
        Registrant's Form 10-Q for the quarter ended June 30, 1998.

(b) Reports on Form 8-K:   None


                                       16

<PAGE>


SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) 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.

LANCER CORPORATION

by:  /s/ George F. Schroeder
George F. Schroeder                                               March 26, 1999
President

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

Signature                    Title                      Date
-------------------------   -------------------------  --------------------

/s/ ALFRED A. SCHROEDER      Chairman of the Board      March 26, 1999
-------------------------   -------------------------  -------------------- 
Alfred A. Schroeder                                       

/s/ GEORGE F. SCHROEDER      President and Director     March 26, 1999
-------------------------   -------------------------  --------------------  
George F. Schroeder        (principal executive officer)

/s/ WALTER J. BIEGLER        Director                   March 26, 1999
-------------------------   -------------------------  -------------------- 
Walter J. Biegler                                          

/s/ JEAN M. BRALEY           Director                   March 26, 1999
-------------------------   -------------------------  -------------------- 
Jean M. Braley                                          

/s/ CHARLES K. CLYMER        Director                   March 26, 1999
-------------------------   -------------------------  --------------------
Charles K. Clymer                                                             

/s/ MICHAEL E. SMITH         Director                   March 26, 1999
-------------------------   -------------------------  -------------------- 
Michael E. Smith                                                               

                                       17
<PAGE>



                       LANCER CORPORATION AND SUBSIDIARIES
             INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

Independent Auditors' Report                                                F-2

Consolidated Balance Sheets as of December 31, 1998 and 1997                F-3

Consolidated Statements of Income for each of the years in the three-year 
period ended December 31, 1998                                              F-5

Consolidated Statements of Shareholders' Equity and Comprehensive Income
    for each of the years in the three-year period ended December 31, 1998  F-6

Consolidated Statements of Cash Flows for each of the years in the
    three-year period ended December 31, 1998                               F-7

Notes to Consolidated Financial Statements                                  F-8

Schedule for the years ended December 31, 1998, 1997 and 1996

    II-Reserve account                                                     F-20

All other  schedules  for which  provision is made in the  applicable  rules and
regulations of the Securities and Exchange  Commission  have been omitted as the
schedules are not required under the related  instructions,  are not applicable,
or the information  required thereby is set forth in the consolidated  financial
statements or notes thereto.

                                      F-1
<PAGE>


                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Shareholders
Lancer Corporation:

We have audited the consolidated  financial statements of Lancer Corporation and
subsidiaries as listed in the accompanying  index. In connection with our audits
of the consolidated financial statements,  we also have audited the consolidated
financial  statement  schedule  as  listed  in  the  accompanying  index.  These
consolidated  financial statements and consolidated financial statement schedule
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these consolidated  financial  statements and consolidated
financial statement schedule 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, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Lancer Corporation
and  subsidiaries  as of  December  31,  1998 and 1997 and the  results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 1998,  in  conformity  with  generally  accepted  accounting
principles.  Also in our opinion, the related  consolidated  financial statement
schedule,  when  considered  in  relation  to the basic  consolidated  financial
statements taken as a whole,  presents  fairly,  in all material  respects,  the
information set forth therein.


                                    KPMG LLP



San Antonio, Texas
March 23, 1999

                                      F-2

<PAGE>


                                            LANCER CORPORATION AND SUBSIDIARIES

                                               CONSOLIDATED BALANCE SHEETS
                                               December 31, 1998 and 1997

                                                          ASSETS
<TABLE>
<CAPTION>

                                                                          1998                           1997
                                                                   --------------------           --------------------

Current assets:
<S>                                                              <C>                             <C>                 
     Cash                                                        $           1,118,848           $          1,850,779
     Receivables:
        Trade accounts and notes                                            20,866,928                     21,892,601
        Other                                                                  565,254                      1,109,425
                                                                   --------------------           --------------------
                                                                            21,432,182                     23,002,026
        Less allowance for doubtful accounts                                  (326,000)                      (363,000)
                                                                   --------------------           --------------------
            Net receivables                                                 21,106,182                     22,639,026
                                                                   --------------------           --------------------
     Inventories                                                            46,128,697                     44,414,567
     Prepaid expenses                                                          559,472                        178,869
     Income taxes receivable                                                   211,760                              -
     Deferred tax asset                                                        117,241                        220,849
                                                                   --------------------           --------------------
            Total current assets                                            69,242,200                     69,304,090
                                                                   --------------------           --------------------

Property, plant and equipment, at cost:
     Land                                                                    1,259,938                      1,259,938
     Buildings                                                              21,769,690                     18,152,535
     Machinery and equipment                                                19,699,040                     17,732,999
     Tools and dies                                                          7,017,936                      5,520,759
     Leaseholds, office equipment and vehicles                               8,148,299                      6,714,519
     Construction in progress                                                1,200,506                      4,701,452
                                                                   --------------------           --------------------
                                                                            59,095,409                     54,082,202
     Less accumulated depreciation and amortization                        (24,596,773)                   (22,186,770)
                                                                   --------------------           --------------------
        Net property, plant and equipment                                   34,498,636                     31,895,432
                                                                   --------------------           --------------------

Long-term receivables ($370,569 and $358,890 due
     from affiliates, respectively)                                            619,800                        724,959
Long-term investments                                                        3,317,131                      3,274,390
Intangibles and other assets, at cost, less
     accumulated amortization                                                5,162,200                      5,470,117
                                                                   --------------------           --------------------

                                                                 $         112,839,967           $        110,668,988
                                                                   ====================           ====================
</TABLE>



          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>

     
                                         LANCER CORPORATION AND SUBSIDIARIES

                                        CONSOLIDATED BALANCE SHEETS (Continued)
                                              December 31, 1998 and 1997

                                        LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                            1998                           1997
                                                                     --------------------           --------------------
Current liabilities:
<S>                                                                <C>                            <C>                  
  Accounts payable                                                 $           8,854,438          $          12,133,894
  Current installments of long-term debt                                       4,794,400                      4,444,400
  Line of credit with bank                                                    22,300,000                     19,000,000
  Deferred licensing and maintenance fees                                        466,327                        538,554
  Accrued expenses and other liabilities                                       5,528,425                      6,538,003
  Income taxes payable                                                                 -                        185,472
                                                                     --------------------           --------------------
    Total current liabilities                                                 41,943,590                     42,840,323

Deferred  tax liability                                                        2,938,628                      1,736,405
Long-term debt, excluding current installments                                17,568,150                     21,565,350
Deferred licensing and maintenance fees                                        2,131,624                      1,565,597
                                                                     --------------------           --------------------
    Total liabilities                                                         64,581,992                     67,707,675
                                                                     --------------------           --------------------

Commitments and contingencies                                                          -                              -

Shareholders' equity:

  Preferred stock, without par value:
   5,000,000 shares authorized; none issued                                            -                              -

  Common stock, $.01 par value:
   50,000,000 shares authorized; 9,121,482 and 8,902,236
   issued and outstanding in 1998 and 1997, respectively                          91,215                         89,022

  Additional paid-in capital                                                  11,912,993                     11,607,504

  Accumulated other comprehensive loss -
    Cumulative translation adjustment                                         (2,581,558)                    (1,727,719)

  Retained earnings                                                           38,835,325                     32,992,506
                                                                     --------------------           --------------------

    Total shareholders' equity                                                 48,257,975                    42,961,313
                                                                     --------------------           --------------------

                                                                   $          112,839,967          $        110,668,988
                                                                     ====================           ====================
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>


                       LANCER CORPORATION AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
                  Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>

                                                               1998                    1997                    1996
                                                        --------------------    --------------------    --------------------

<S>                                                   <C>                      <C>                     <C>                 
Net sales                                             $         138,868,916    $        119,366,587    $        103,294,696

Cost of sales                                                   104,862,935              87,937,146              78,207,012
                                                        --------------------    --------------------    --------------------

    Gross profit                                                 34,005,981              31,429,441              25,087,684

Selling, general and administrative expenses                     19,910,772              20,439,019              14,512,086
                                                        --------------------    --------------------    --------------------

    Operating income                                             14,095,209              10,990,422              10,575,598
                                                        --------------------    --------------------    --------------------

Other (income) expense:
  Interest expense                                                3,971,746               2,814,744               1,587,510
  Interest and other income, net                                    202,345                (947,657)               (159,775)
                                                        --------------------    --------------------    --------------------
                                                                  4,174,091               1,867,087               1,427,735
                                                        --------------------    --------------------    --------------------

    Earnings before income taxes                                  9,921,118               9,123,335               9,147,863
                                                        --------------------    --------------------    --------------------

Income tax expense:
  Current                                                         2,772,468               2,809,302               3,373,117
  Deferred                                                        1,305,831                 227,534                  42,246
                                                        --------------------    --------------------    --------------------
                                                                  4,078,299               3,036,836               3,415,363
                                                        --------------------    --------------------    --------------------

    Net earnings                                      $           5,842,819    $          6,086,499    $          5,732,500
                                                        ====================    ====================    ====================

Common Shares and Equivalents Outstanding:
  Basic                                                           9,059,539               8,863,263               8,722,396
  Diluted                                                         9,305,796               9,337,524               9,052,345

Earnings Per Share:
  Basic                                                         $      0.64             $      0.69             $      0.66
  Diluted                                                       $      0.63             $      0.65             $      0.63
</TABLE>



          See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>


                       LANCER CORPORATION AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                  Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>

                                                                                Accumulated
                                                              Additional        and Other                             Total
                                                Common         Paid-in         Comprehensive      Retained        Shareholders'
                                                 Stock         Capital        Income (Loss)       Earnings           Equity
                                              ------------ ----------------- ----------------  ----------------  ----------------


<S>                                                <C>            <C>             <C>               <C>               <C>       
Balance December 31, 1995                          38,722         9,852,713                -        21,173,507        31,064,942

    Comprehensive income:

      Net earnings                                      -                 -                -         5,732,500         5,732,500

      Cumulative translation adjustment                                              183,803                             183,803
                                                                                                                 ----------------
        Total comprehensive income:                     -                 -                -                 -         5,916,303
                                                                                                                 ----------------
      Exercise of 12,646 stock options                108            54,910                -                 -            55,018

      Three-for-two stock dividend                 19,379           (19,379)               -                 -                 -
                                              ------------ ----------------- ----------------  ----------------  ----------------

Balance December 31, 1996                          58,209         9,888,244          183,803        26,906,007        37,036,263

   Comprehensive income:

     Net earnings                                       -                 -                          6,086,499         6,086,499

     Cumulative translation adjustment                  -                 -       (1,911,522)                -        (1,911,522)
                                                                                                                 ----------------
         Total comprehensive income:                                                                                   4,174,977
                                                                                                                 ----------------
      Exercise of 34,387 stock options                344           193,856                -                 -           194,200

      Stock issued for acquisition
        of subsidiary                                 819         1,555,054                -                 -         1,555,873

      Three-for-two stock dividend                 29,650           (29,650)               -                 -                 -
                                              ------------ ----------------- ----------------  ----------------  ----------------
Balance December 31, 1997                          89,022        11,607,504       (1,727,719)       32,992,506        42,961,313

  Comprehensive income:

    Net earnings                                        -                 -                -         5,842,819         5,842,819

    Cumulative translation adjustment                   -                 -         (853,839)                -          (853,839)
                                                                                                                 ----------------
      Total comprehensive income:                                                                                      4,988,980
                                                                                                                 ----------------
      Acquisition and retirement of 40,608
         shares of common stock                      (406)         (591,536)               -                 -          (591,942)

      Exercise of 259,906 stock options             2,599           897,025                -                 -           899,624
                                              ------------ ----------------- ----------------  ----------------  ----------------
Balance December 31, 1998                        $ 91,215      $ 11,912,993     $ (2,581,558)     $ 38,835,325       $48,257,975
                                              ============ ================= ================  ================  ================
</TABLE>


          See accompanying notes to consolidated financial statements.
                                      F-6

<PAGE>


                       LANCER CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>

                                                                              1998                1997                1996
                                                                        -----------------   -----------------   -----------------

Cash flow from operating activities:
<S>                                                                         <C>                 <C>                 <C>         
    Net earnings                                                            $  5,842,819        $  6,086,499        $  5,732,500

    Adjustments  to  reconcile  net  earnings to net
    cash (used in)  provided by operating activities:
      Depreciation and amortization                                            2,887,736           3,149,126           2,445,288
      Deferred licensing and maintenance fees                                    493,800             286,316           1,190,504
      Deferred income taxes                                                    1,321,185             511,089             (22,267)
      (Gain) loss on sale and disposal of assets                                  16,351            (203,113)            (15,485)
      (Earnings) loss on investments in affiliates                              (153,510)             12,104                   -
      Change  in  assets  and  liabilities,  net of  effects  from 
      purchase  of subsidiary:
          Receivables                                                          1,401,293          (1,663,822)         (5,464,226)
          Prepaid expenses                                                      (380,603)             82,490             (97,161)
          Income taxes receivable                                               (211,760)                   -                   -
          Inventories                                                         (2,173,560)        (12,764,438)         (8,207,165)
          Other assets                                                          (438,737)            423,411            (390,495)
          Accounts payable                                                    (3,098,185)          4,657,659           1,589,097
          Accrued expenses                                                      (930,776)          1,477,500             473,429
          Income taxes payable                                                  (193,160)            237,346            (883,890)
          Other long-term liabilities                                                  -             820,000             120,000
                                                                        -----------------   -----------------   -----------------
             Net cash (used in) provided by operating activities               4,382,893           3,112,167          (3,529,871)
                                                                        -----------------   -----------------   -----------------

Cash flow from investing activities:
      Proceeds from sale of assets                                                 7,500             256,686              43,625
      Capital expenditures                                                    (5,216,414)         (9,922,830)         (9,056,710)
      Acquisition of subsidiary company                                                -          (3,768,375)                   -
      Proceeds (purchase) of long-term investments                               110,769            (250,000)         (2,600,000)
                                                                        -----------------   -----------------   -----------------
             Net cash used in investing activities                            (5,098,145)        (13,684,519)        (11,613,085)
                                                                        -----------------   -----------------   -----------------

Cash flow from financing activities:
      Net borrowings under line of credit agreements                           3,300,000           7,300,000           4,700,000
      Proceeds from issuance of long-term debt                                         -           7,050,000          17,950,000
      Retirement of long-term debt                                            (3,647,200)         (2,338,124)         (7,483,792)
      Net proceeds from exercise of stock options                                307,682             194,200              55,018
                                                                        -----------------   -----------------   -----------------
             Net cash (used in) provided by financing activities                 (39,518)         12,206,076          15,221,226
                                                                        -----------------   -----------------   -----------------
Effect of exchange rate changes on cash                                           22,839            (799,370)            183,803
Net increase (decrease) in cash                                                 (731,931)            834,354             262,073
Cash at beginning of year                                                      1,850,779           1,016,425             754,352
                                                                        -----------------   -----------------   -----------------
Cash at end of year                                                         $  1,118,848        $  1,850,779        $  1,016,425
                                                                        =================   =================   =================
</TABLE>

         Lancer issued debt of $3,986,000 and stock of $1,555,873 to the
                sellers of the subsidiaries acquired in 1997. The
             non-cash portion of these transactions is excluded from
                              the above statement.


          See accompanying notes to consolidated financial statements.

                                      F-7
<PAGE>



                       LANCER CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Summary of Significant Accounting Policies

Principles of Consolidation

The Company designs, engineers, manufactures and markets fountain soft drink and
other  beverage  dispensing  systems and related  equipment  for use in the food
service and beverage industry. The consolidated financial statements include the
accounts  of  Lancer   Corporation   (the   "Company")   and  its   wholly-owned
subsidiaries,   with  intercompany  balances  and  transactions   eliminated  in
consolidation.

Inventories

Inventories  are stated at the lower of cost or market on a first-in,  first-out
basis (average cost as to raw materials and supplies) or market (net  realizable
value).

Certain items in inventory have become  obsolete due to  technological  advances
and  discontinuation  of  products.  The  Company  has taken  these  items  into
consideration in valuing its inventory.

Property, Plant and Equipment

Property,  plant and equipment are stated at cost. Depreciation is calculated on
a straight-line  basis over estimated  useful lives ranging from 5 to 39 years .
Long-lived  assets are evaluated  annually for possible  impairment  adjustments
which may be required. No such adjustments have been required.

Maintenance,  repair  and  purchases  of small  tools and dies are  expensed  as
incurred.

Intangibles and Other Assets

Intangibles  and other  assets  consist  principally  of patents  and  goodwill.
Patents are amortized over the estimated  useful lives of the respective  assets
using  the  straight-line   method.   Goodwill  is  being  amortized  using  the
straight-line  method  over  twenty to thirty  years.  The  Company  continually
evaluates the carrying value of goodwill as well as the  amortization  period to
determine  whether  adjustments  are  required.  No such  adjustments  have been
required.

Long-term Investments

In October 1996, the Company invested $2.6 million to obtain a 50% interest in a
joint venture, Lancer FBD Partnership,  Ltd., which manufactures frozen beverage
dispensing systems. The investment is accounted for under the equity method. The
remaining 50% is owned by the developer of the technology  utilized by the joint
venture. The joint venture now owns the rights to that technology.

Also included in long-term  investments  is an investment in the common stock of
Packaged Ice, Inc., a company which sells ice bagger  machines  manufactured  by
the Company. Lancer owns less than 10% of the common stock of Packaged Ice, Inc.
The  investment  is carried at cost at December  31,  1998,  which  approximates
market value.

Net Earnings per Share

The Company adopted the Statement of Financial  Accounting  Standards (SFAS) No.
128, "Earnings per Share", in 1997, and accordingly, basic earnings per share is
calculated  using the weighted  average number of common shares  outstanding and
diluted earnings per share is calculated  assuming the issuance of common shares
for all  dilutive  potential  common  shares  outstanding  during the  reporting
period. The dilutive effect of stock options approximated  246,257,  474,261 and
329,949  shares  in 1998,  1997 and  1996,  respectively.  Options  to  purchase
approximately 56,500, 19,500 and 0 shares in 1998, 1997, and 1996, respectively,
were  outstanding but were not included in the computation  because the exercise
price is greater than the average market price of the common shares.

During 1997 and 1996, the Company declared  three-for-two  stock splits effected
in  the  form  of  dividends.  All  references  in  the  consolidated  financial
statements to number of shares, per share amounts,  stock option data and market
prices of the  Company's  common stock have been  restated to give effect to the
stock splits.

                                      F-8
<PAGE>

                      LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Revenue Recognition

Revenue is recognized in accordance with the following methods:
    (a) At time of  shipment  for all  products  except  for  those  sold  under
        agreements  described  in  (b); 
    (b) As  produced,   for  certain  products manufactured and warehoused under
        production and warehousing agreements with two customers,  principally  
        The  Coca-Cola Company, which  is the Company's largest single customer.

The Company has entered  into an  agreement  with its major  customer to receive
partial reimbursement for research and development.  The reimbursement is offset
against cost on a percentage of completion  basis. In addition,  the Company has
agreed  to  provide  exclusive  rights  for use of  certain  tools to its  major
customer.  These tools are included in fixed assets and are depreciated over the
life of the asset. The  corresponding  license and maintenance fees are recorded
as  deferred  income  and  recognized  over  the  life  of the  agreement  which
approximates the life of the corresponding asset.

Income Taxes

Amounts in the financial statements related to income taxes are calculated using
the  principles of SFAS No. 109,  "Accounting  for Income Taxes." Under SFAS No.
109,  deferred  taxes  reflect the impact of temporary  differences  between the
amounts of assets and liabilities  recognized for financial  reporting  purposes
and the amounts  recognized for tax purposes.  These deferred taxes are measured
by applying currently enacted tax rates.

Provision  for  U.S.  income  taxes on the  undistributed  earnings  of  foreign
subsidiaries is made only on those amounts in excess of the funds  considered to
be permanently reinvested.

Research and Development

Company-sponsored  research and  development  costs are expensed as incurred and
totaled  approximately  $2,207,000,  $1,467,000 and $913,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.

Foreign Currency Translation

Assets and liabilities of non-U.S. subsidiaries that operate in a local currency
environment are translated to U.S.  dollars at year-end  exchange rates.  Income
and expense items are translated at average rates of exchange  prevailing during
the year.  Translation  adjustments are  accumulated in a separate  component of
shareholders'  equity.  Inventories,  plant and equipment and other non-monetary
assets and liabilities of non-U.S. subsidiaries that operate in U.S. dollars are
translated at approximate  exchange rates  prevailing  when acquired.  All other
assets and  liabilities are translated at year-end  exchange rates.  Inventories
charged to cost of sales and depreciation are translated at historical  exchange
rates.  All other income and expense  items are  translated  at average rates of
exchange  prevailing  during the year. For those  companies that operate in U.S.
dollars, gains and losses that result from translation are included in earnings.


Stock Compensation Plans

The Company utilizes the intrinsic value method required under provisions of APB
Opinion No. 25 and related interpretations in measuring stock-based compensation
for employees. In addition, the required pro forma disclosures of net income and
net income per share as if the fair value method of  accounting  for stock based
compensation  had been  applied  under SFAS  No.123 are made in the notes to the
consolidated financial statements. (See note 4)

Comprehensive Income

On January 1, 1998, the Company adopted SFAS No. 130,  "Reporting  Comprehensive
Income." SFAS No. 130  establishes  standards for reporting and  presentation of
comprehensive  income and its components in a full set of financial  statements.
Comprehensive income consists of net income and currency translation  adjustment
and is presented in the  consolidated  statements  of  shareholders'  equity and
comprehensive  income.  The Statement  requires  additional  disclosures  in the
consolidated financial statements but it does not affect the Company's financial
position or results of  operations.  Prior year financial  statements  have been
reclassified to conform to the requirements of SFAS No. 130.

                                      F-9
<PAGE>

                      LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Segment Disclosures

During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise  and Related  Information."  SFAS No. 131  establishes  standards for
reporting  information  about operating  segments and related  disclosures about
products and services, geographic areas and major customers. (See Note 12)

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.


Reclassifications

Certain amounts in the  consolidated  financial  statements for prior years have
been reclassified to conform with the current year's presentation.


2. Income Taxes


An analysis of income tax expense follows:
<TABLE>
<CAPTION>

    1998                      Current                Deferred                 Total
--------------            ----------------        ---------------        ----------------

<S>                           <C>                    <C>                     <C>        
Federal                       $ 1,843,946            $ 1,094,950             $ 2,938,896
State                              52,262                      -                  52,262
Foreign                           876,260                210,881               1,087,141
                          ----------------        ---------------        ----------------
Total                         $ 2,772,468            $ 1,305,831             $ 4,078,299
                          ================        ===============        ================

    1997
--------------

Federal                       $ 2,366,565             $  208,454             $ 2,575,019
State                              62,370                      -                  62,370
Foreign                           380,367                 19,080                 399,447
                          ----------------        ---------------        ----------------
Total                         $ 2,809,302             $  227,534             $ 3,036,836
                          ================        ===============        ================

    1996
--------------
Federal                       $ 3,105,988             $   29,827             $ 3,135,815
State                             138,251                    609                 138,860
Foreign                           128,878                 11,810                 140,688
                          ----------------        ---------------        ----------------
Total                         $ 3,373,117             $   42,246             $ 3,415,363
                          ================        ===============        ================
</TABLE>

                                      F-10


<PAGE>

                      LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Temporary  differences  between the financial statement carrying amounts and tax
bases of assets and  liabilities  that give rise to significant  portions of the
net deferred tax liability relate to the following:
<TABLE>
<CAPTION>

                                                                           1998                   1997
                                                                     ----------------       ----------------
Deferred tax assets:
<S>                                                                      <C>                    <C>       
    Inventories                                                            $      -              $  438,493
    Compensation and benefits                                                357,352                620,670
    Foreign net operating loss carryforward                                  765,857                171,810
    Foreign creditable minimum taxes                                         295,000                      -
    All other                                                                 61,724                173,893
                                                                     ----------------       ----------------
Total gross deferred tax assets                                            1,479,933              1,541,546
Less valuation allowance                                                    (743,350)              (136,680)
                                                                     ----------------       ----------------
    Net deferred tax assets                                                  736,583              1,404,866
                                                                     ----------------       ----------------

Deferred tax liabilities:
  Accounts receivable                                                        288,294                580,753
  Inventories                                                                184,742                      -
  Property, plant and equipment                                            2,053,094              1,527,792
  DISC income                                                              1,031,840                811,877
                                                                     ----------------       ----------------
Total deferred tax liability                                               3,557,970              2,920,422
                                                                     ----------------       ----------------
Net deferred tax liability                                               $ 2,821,387            $ 1,515,556
                                                                     ================       ================
</TABLE>


The net change in the total valuation  allowance for the year ended December 31,
1998 was an increase of approximately  $607,000.  In assessing the realizability
of deferred tax assets,  management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized.  Based
on the  expectation of future  taxable income and that the deductible  temporary
differences  will offset  existing  taxable  temporary  differences,  management
believes it is more likely than not the Company will realize the  benefits,  net
of valuation allowance, of these deductible differences at December 31, 1998.

The actual tax expense  differs  from the  "expected"  tax expense  (computed by
applying U.S. Federal  corporate rate of 34% to earnings before income taxes) as
follows:
<TABLE>
<CAPTION>
                                                         1998                1997               1996
                                                    ----------------    ---------------    ----------------

<S>                                                     <C>                <C>                 <C>        
Computed "expected" tax expense                         $ 3,373,180        $ 3,101,934         $ 3,110,274

Increase (decrease) in taxes resulting from:
     Effect of nondeductible foreign tax losses             451,970             89,847              40,794
     Effect of nondeductible expenses                       106,246            125,884             163,343
     Tax credits                                                  -           (355,690)                  -
     State, net of Federal benefit                           34,493             54,137              92,565
     Effect of foreign tax rates                             50,144                  -                   -
     Other, net                                              62,266             20,724               8,387
                                                     ================    ===============    ================
                                                        $ 4,078,299        $ 3,036,836         $ 3,415,363
                                                     ================    ===============    ================
</TABLE>



In  accordance  with SFAS No. 109, no federal and state  income  taxes have been
provided for the accumulated  undistributed  earnings of the DISC as of December
31, 1992. On December 31, 1992, the  accumulated  undistributed  earnings of the
DISC totaled  $2,357,000.  Should the DISC terminate in the future, SFAS No. 109
would require federal and state income taxes be provided. Such a provision would
result in a federal  and state  income tax charge to the  financial  statements,
thereby increasing the Company's effective tax rate.

Actual  net income  taxes paid were  approximately  $3,165,000,  $1,920,000  and
$3,720,000 for 1998, 1997 and 1996, respectively.

                                      F-11

<PAGE>

                      LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


3. Long-term Debt and Line of Credit with Banks
<TABLE>
<CAPTION>

                                                                             1998                  1997

                                                                      ------------------   -------------------
<S>                                                                   <C>                   <C>
$25,000,000 notes payable to banks, due in quarterly
     installments plus interest based upon                                                            
     prime and LIBOR (weighted average rate
     of 7.11% at December 31, 1998) through                                                           
     July 15, 2001; secured by the pledge of
     a portion of the stock of foreign subsidiaries                   $    19,173,750       $    22,023,750

Note payable to seller of Brazil  subsidiary,  due
     in annual  installments  plus interest  based 
     on  LIBOR  (weighted  average  interest  rate
     of  5.78% at December 31, 1998) through
     December 31, 2001                                                      3,188,800             3,986,000
                                                                      ------------------   -------------------
                                                                           22,362,550            26,009,750


Less current installments of long-term debt                                 4,794,400             4,444,400
                                                                      ==================   ===================
                                                                         $ 17,568,150          $ 21,565,350
                                                                      ==================   ===================
</TABLE>



The Company also has a $35.0 million  revolving  credit facility (the "Revolving
Facility") from two banks.  Borrowings under the Revolving Facility are based on
certain percentages of accounts receivable and inventories.  Amounts outstanding
under the  revolving  facility were $22.3 million at December 31, 1998 and $19.0
million at December 31, 1997. There was $4,232,000 available under the Revolving
Facility  on December  31,  1998.  Interest  accrues at a rate based upon either
LIBOR or upon the Banks' prime rate. The weighted average interest rate was 7.1%
as of December 31, 1998. The Revolving Facility expires July 15, 2001.

Annual  maturities  on long-term  debt  outstanding  at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>

<S>                    <C>                              <C>         
                       1999                             $  4,794,400
                       2000                                3,997,200
                       2001                               13,570,950
                                                    =================
                                                        $ 22,362,550
                                                    =================
</TABLE>



To manage its  exposure  to  fluctuations  in  interest  rates,  the Company has
entered  into  interest  rate swap  agreements  (the  "Swap  Agreements")  for a
combined  notional  principal  amount  of  $18.0  million.  Interest  rate  swap
agreements  involve the exchange of interest  obligations  on fixed and floating
rate  debt  without  the  exchange  of the  underlying  principal  amounts.  The
difference paid or received on the swap agreement is recognized as an adjustment
to interest expense.  The Company's Swap Agreements provide that the Company pay
fixed  interest rates ranging from 5.98% to 6.345%,  while  receiving a floating
rate payment equal to the three month LIBOR rate determined on a quarterly basis
with settlement  occurring on specific dates.  While the Company has credit risk
associated  with  this  financial  instrument,  no  loss is  anticipated  due to
nonperformance  by  the  counterparties  to  these  agreements  because  of  the
financial strength of the financial institutions involved.

The Credit Facilities and the Revolving Credit Facility require that the Company
maintain  certain  financial  ratios  and other  covenants.  The  Company  is in
compliance  or has  obtained  waivers  for all of  these  financial  ratios  and
covenants.

Actual interest paid was approximately $3,973,000,  $2,922,000 and $1,432,000 in
1998, 1997 and 1996, respectively.

                                      F-12
<PAGE>
                      LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Employee Benefit Plans

Common Stock Options

The Company has stock  option  plans under  which  incentive  and  non-qualified
options may be granted. Options are granted at the market price per share at the
grant date. Options generally become exercisable in 20% increments  beginning on
the grant date and expire five years from the grant date.

A summary of transactions for all options follows:
<TABLE>
<CAPTION>

                                                           Stock Options          Option Price
                                                         ----------------   -------------------------

<S>                                                             <C>          <C>             <C> 
Outstanding at December 31, 1995                                 539,789     $     1.29 -       6.28
     Granted                                                     292,845           7.22 -      10.00
     Exercised                                                   (18,969)          2.37 -       7.22
                                                         ----------------   -------------------------
Outstanding at December 31, 1996                                 813,665     $     1.29 -      10.00
     Granted                                                      50,500          11.63 -      16.54
     Canceled                                                    (31,140)          7.22 -       8.58
     Exercised                                                   (34,387)          1.29 -       7.22
                                                         ----------------   -------------------------
Outstanding at December 31, 1997                                 798,638     $     1.29 -      16.54
     Granted                                                      44,000           9.63 -      13.63
     Canceled                                                    (27,869)          4.93 -       7.39
     Exercised                                                  (259,906)          2.37 -       7.39
                                                         ----------------   -------------------------
Outstanding at December 31, 1998                                 554,863     $     1.29 -    $ 16.54   
                                                         ================   =========================
</TABLE>



A summary of exercisable options follows:
<TABLE>
<CAPTION>

                                                          Stock Options         Option Price
                                                        ----------------   -----------------------

<S>                                                             <C>           <C>        <C>    
1996                                                            515,543       $ 1.29 -   $ 10.00
                                                        ================   =======================
1997                                                            584,000       $ 1.29 -   $ 16.54
                                                        ================   =======================
1998                                                            401,912       $ 1.29 -   $ 16.54
                                                        ================   =======================

</TABLE>


The  Company  has  adopted  the  disclosure-only  provisions  of  SFAS  No.  123
"Accounting for Stock-Based Compensation." Accordingly, no compensation has been
recognized  for the stock option plans.  If the Company had elected to recognize
compensation  cost based on the fair value of the options  granted at grant date
as  prescribed  by SFAS No. 123,  net  earnings and net earnings per share would
have been reduced to the pro forma amounts indicated in the table below:


<TABLE>
<CAPTION>

                                                       1998                  1997                  1996
                                                  ----------------      ----------------      ----------------

<S>                                                   <C>                   <C>                   <C>        
Net income-as reported                                $ 5,842,819           $ 6,086,499           $ 5,732,500
Net income-pro forma                                    5,579,315             5,886,407             5,592,553
Net earnings per basic share-as reported                     0.64                  0.69                  0.66
Net earnings per basic share-pro forma                       0.62                  0.66                  0.64
Net earnings per diluted share-as reported                   0.63                  0.65                  0.63
Net earnings per diluted share-pro forma                     0.60                  0.63                  0.62
Weighted-average fair value of
  options, granted during the year                           4.28                  3.70                  2.44
</TABLE>

                                      F-13
<PAGE>

                      LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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:
<TABLE>
<CAPTION>
                                                    1998                  1997                  1996
                                               ----------------      ----------------      ----------------

<S>                                                      <C>                   <C>                   <C>
Expected life (years)                                        4                     4                     4
Interest rate                                             5.4%                  5.5%                  5.8%
Volatility                                               40.4%                 35.6%                 33.9%
Dividend yield                                            None                  None                  None
</TABLE>


Self-Insured Hospitalization Plan

The  Company   maintains  a   self-insurance   program  for  major  medical  and
hospitalization  coverage for employees and their  dependents which is partially
funded by payroll  deductions.  The Company has provided for both reported,  and
incurred  but not  reported,  medical  costs  in the  accompanying  consolidated
balance  sheets.  The Company has a maximum  liability of $75,000 per employee /
dependent per year.  Amounts in excess of the stated maximum are covered under a
separate policy provided by an insurance company.

Workers' Compensation Coverage

The Company is self-insured  for all workers'  compensation  claims submitted by
employees for on-the-job  injuries.  The Company has provided for both reported,
and incurred but not reported,  costs of workers'  compensation  coverage in the
accompanying consolidated balance sheets. In 1998, due to continuing declines in
the annual  cost of claims,  the Company  reduced its reserve for the  estimated
cost of incurred claims.

In an effort to provide for catastrophic  events,  the Company carries an excess
indemnity  policy for workers'  compensation  claims.  All claims paid under the
policy are subject to a  deductible  to be paid by the  Company.  Based upon the
Company's past experience,  management  believes that the Company has adequately
provided for potential losses. However, multiple occurrences of serious injuries
to employees  could have a material  adverse  effect on the Company's  financial
position or its results of operations.

Employee Profit Sharing Plan

The Company has  established an employee  profit sharing and 401(k) plan,  which
covers  substantially  all  United  States  employees  who meet the  eligibility
requirements.  Participants  may elect to  contribute  up to 15% of their annual
wages,  subject to certain IRS limitations.  The Company matches employee 401(k)
contributions  to the  plan  at a rate of  $0.10  per  each  $1.00  of  employee
contribution up to 3 % of annual compensation.  In addition, the Company, at the
discretion of the Board of Directors,  may make profit sharing  contributions to
the plan. The accompanying consolidated statements of income for the years ended
December 31, 1998,  1997 and 1996 include Company  contributions  to the plan of
approximately $559,000, $576,000 and $520,000, respectively.

The Company is also  required to make  contributions  to a defined  contribution
plan for the employees of Lancer Pacific Pty. Ltd. Contributions during 1998 and
1997 totaled approximately $47,000 and $32,000, respectively.

5. Leases

The Company rents a building, in which a portion of its manufacturing facilities
are located,  under an operating lease from a partnership  controlled by certain
shareholders.  The month-to-month agreement provides for monthly rental payments
of $7,400,  and the  payment of real estate  taxes,  insurance  and  maintenance
expenses.

The Company rents an integrated  computer system and other  technology  oriented
equipment under an operating lease which expires in September 2000.

                                      F-14
<PAGE>

                      LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


At  December  31,  1998,  future  minimum  lease  payments  required  under  all
noncancelable operating leases are as follows:

<TABLE>
<CAPTION>

<S>                      <C>                                <C>      
                         1999                                 1,997,144
                         2000                                 1,086,720
                         2001                                    90,720
                                                        ================
             Total minimum lease payments                   $ 3,174,584
                                                        ================
</TABLE>



Total rental expense was approximately $2,603,000 , $1,930,000 and $1,223,000 in
1998, 1997and 1996, respectively.

The Company is party to agreements to provide warehousing space and services for
The Coca-Cola  Company.  Rental  income  related to the  warehousing  agreements
totaled  approximately  $749,000,  $385,000 and $297,000 in 1998, 1997 and 1996,
respectively.

6. Long-term Receivables

Long-term  receivables are interest bearing and include  approximately  $371,000
and $359,000 due from  officers for the years ended  December 31, 1998 and 1997,
respectively.

7. Fair Value of Financial Instruments

The  Company is  required  to  disclose  estimated  fair value of its  financial
instruments,  including  derivative  financial  instruments,  for  which  it  is
practicable to estimate fair value.  The following  methods and assumptions were
used to estimate the fair market value of each class of financial instrument for
which it is practicable to estimate that value.

Cash, Trade Receivables, and Trade Payables

The carrying amounts of the Company's cash, trade receivables and trade payables
approximate market value.

Notes Receivable

The carrying amount of the Company's notes receivable  approximates  fair market
value based on the actual interest rates paid on the interest  bearing notes and
imputed rate used to determine the recorded  value of the  non-interest  bearing
notes.

Long-term Investments

Long-term  investments  are stated at  approximate  market  value based upon the
current nature of the investments.

Debt and Swap Agreements

The carrying  amount of the  Company's  long-term  debt,  short-term  debt,  and
interest rate swap agreements approximate market value as the rates are variable
or are fixed at current market rates.

                                      F-15
<PAGE>

                      LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


8. Acquisition of Subsidiary

Through  its  wholly-owned  subsidiary,   Lancer  do  Brasil,Ltda.  the  Company
completed the purchase of all of the outstanding common shares of Comercial Vila
Formosa, Ltda.  ("Formosa"),  a Brazilian-based  manufacturer and distributor of
soft drink fountain and beer dispensing  equipment in the first quarter of 1997.
The purchase  price of $6 million was financed  with a $4 million note issued to
the  seller  and $2 million  in cash  funded  with bank debt.  The excess of the
purchase price over the fair value of the assets acquired of $3 million has been
recorded as goodwill  and is being  amortized on a  straight-line  basis over 20
years. The acquisition was accounted for under the purchase method of accounting
with the results of operations included in the consolidated financial statements
from the date of acquisition.

In April 1997, the Company  acquired  certain assets and  liabilities of Applied
Beverage Systems (1990), Ltd. ("ABS").  Located in New Zealand, ABS manufactures
and distributes  fountain soft drink and beer dispensing  systems.  The purchase
price of $3.3  million was  financed by  borrowings  of $1.5  million  under the
Company's  credit  facilities  and 122,832 shares of Lancer  Corporation  common
stock  based on a price of  approximately  $12.67  per share,  adjusted  for the
three-for-two  stock  split  effected  July 8, 1997.  The  acquisition  has been
accounted for by the purchase method and accordingly,  the results of operations
of ABS have been included in the  Company's  consolidated  financial  statements
from the date of  acquisition.  The excess of the  purchase  price over the fair
value of the net  identifiable  assets acquired of $476,000 has been recorded as
goodwill and is being amortized over 30 years.

Assuming the  acquisitions  of Formosa and ABS had occurred at the  beginning of
1997 and 1996,  pro-forma  operating  results of the Company would be as follows
(in thousands except for per share data):
<TABLE>
<CAPTION>
                                                        Years Ended December 31,
                                              -----------------------------------------
                                                        1997                 1996
                                                  ----------------     ----------------
<S>                                                    <C>                  <C>       
Net sales                                              $  121,378           $  123,530
Net earnings                                                6,054                6,532
Net earnings per basic share                                 0.68                 0.75
Net earnings per diluted share                               0.65                 0.72
</TABLE>

The above  pro-forma  amounts are based upon certain  assumptions  and estimates
which the Company  believes are reasonable,  and do not reflect any benefit from
economies  which might be  achieved  from  combined  operations.  The  pro-forma
results do not  necessarily  represent  results which would have occurred if the
acquisitions  had taken place on the basis assumed above nor are they indicative
of the results of future combined operations.

Details of the businesses  acquired in the purchase  transactions are as follows
(in thousands):
<TABLE>
<CAPTION>
                                                                 1997
                                                           ----------------
<S>                                                              <C>      
Fair value of assets acquired, including goodwill                $   9,737
Liabilities assumed                                                   (427)
                                                           ================
Net assets acquired                                              $   9,310
                                                           ================
</TABLE>

Supplemental Balance Sheet and Income Statement Information

Inventory components are as follows (dollars in thousands):
<TABLE>
<CAPTION>
                                          1998            1997
                                      -------------   -------------
<S>                                       <C>             <C>     
Raw materials and supplies                $ 13,107        $ 12,617
Work in process                             11,371          10,948
Finished goods                              21,651          20,850
                                      -------------   -------------
                                          $ 46,129        $ 44,415
                                      =============   =============
</TABLE>

                                      F-16

<PAGE>
0
                      LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
                                                        As of December 31,
                                              ------------------------------------
                                                    1998                1997
                                              ----------------    ----------------

<S>                                                 <C>                 <C>      
Payroll and related expenses                        $   2,193           $   2,676
Commissions                                               165                 540
Health and workers' compensation                          336               1,298
Property taxes                                            657                 525
Interest                                                  433                 694
Other                                                   1,744                 805
                                              ================    ================
                                                    $   5,528           $   6,538
                                              ================    ================
</TABLE>



10. Contingencies

The Company is a party to various  lawsuits and claims  generally  incidental to
its business.  The ultimate disposition of these matters is not expected to have
a significant  adverse effect on the Company's  financial position or results of
operations.

11. Quarterly Financial Information (Unaudited)

The Company  uses the gross  profit  method to estimate  cost of goods sold on a
quarterly  basis, and therefore must make year-end  adjustments  based on ending
inventory levels.  Consequently,  the fourth quarter margin calculation  adjusts
for  estimates  made in the prior  three  quarters.  The fourth  quarter of 1998
included a $1.3 million operating loss and inventory adjustment in the Company's
Brazilian  operations.  The  quarter  also  included a favorable  adjustment  of
$820,000 from the reduction of workers' compensation and medical reserves due to
favorable claims experience.  The following table reflects the quarterly results
for 1998 and 1997 (in thousands except for per share data):
<TABLE>
<CAPTION>
                                                                         Three Months Ended
                                              -------------------------------------------------------------------------
1998                                               March               June             September           December
----                                                 31                 30                  30                 31
                                              --------------     ---------------     --------------     ---------------

<S>                                               <C>                 <C>                <C>                 <C>      
Net sales                                         $  36,305           $  37,241          $  36,582           $  28,741
Gross profit                                          9,455               9,725              9,434               5,392
Net earnings (loss)                                   2,126               2,149              1,840               (272)

Earnings (loss) per share:
  Basic                                            $   0.24            $   0.24           $   0.20          $   (0.03)
  Diluted                                          $   0.23            $   0.23           $   0.20          $   (0.03)
</TABLE>
<TABLE>
<CAPTION>


                                                                         Three Months Ended
                                              -------------------------------------------------------------------------
1997                                               March               June             September           December
----                                                 31                 30                  30                 31
                                              --------------     ---------------     --------------     ---------------

<S>                                               <C>                 <C>                <C>                 <C>      
Net sales                                         $  30,398           $  32,295          $  29,735           $  26,939
Gross profit                                          7,665               8,069              7,612               8,083
Net earnings                                          1,790               1,801              1,025               1,470

Earnings per share:
  Basic                                            $   0.20            $   0.20           $   0.12            $   0.17
  Diluted                                          $   0.19            $   0.19           $   0.11            $   0.16
</TABLE>
  

                                      F-17



<PAGE>

                      LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


12.      Segment and Geographic Information

The Company and its subsidiaries are engaged in the manufacture and distribution
of beverage dispensing equipment and related parts and components. The Company's
reportable  segments are based on the  geographic  area of the final customer as
indicated by the following (dollars in thousands):
<TABLE>
<CAPTION>

                                           Domestic     America    Pacific    Brazil      Other   Corporate      Total
                                          ------------ ---------- ---------- ---------- --------------------- -------------

Year ended December 31, 1998
<S>                                          <C>          <C>        <C>         <C>       <C>        <C>       <C>       
   Total revenues                            $ 72,818     21,624     15,459      6,142     22,826          -    $  138,869
   Depreciation and amortization                2,317         21        245        284         21          -         2,888
   Operating income                            16,290      3,282      2,199     (1,743)     4,426     (10,359)      14,095
   Identifiable assets December 31, 1998       88,274      4,496      9,233      6,319      4,518          -       112,840
   Capital expenditures                         4,697          5         78        392         44          -         5,216

Year ended December 31, 1997
   Total revenues                              62,397     10,900     13,121      8,542     24,407          -       119,367
   Depreciation and amortization                2,702         19        229        193          6          -         3,149
   Operating income                            14,756        662      1,097        311      3,166      (9,002)      10,990
   Identifiable assets December 31, 1997       87,807      4,007      9,402      7,733      1,720          -       110,669
   Capital expenditures                         8,499        110        153      1,095         66          -         9,923

Year ended December 31, 1996
   Total revenues                              59,531      8,819      9,682          -     25,263          -       103,295
   Depreciation and amortization                2,380         12         53          -          -          -         2,445
   Operating income                            12,008      1,242        377          -      4,551      (7,602)      10,576
   Identifiable assets December 31, 1996       72,062      2,410      7,041          -        496          -        82,009
   Capital expenditures                         8,841          -        216          -          -          -         9,057
</TABLE>





All  intercompany  revenues are  eliminated in computing  revenues and operating
income. The corporate component of operating income represents corporate general
and  administrative  expenses.  Identifiable  assets are those assets identified
with the operations in each geographic area.

Substantially  all  revenues  result  from the sales of  products  and  services
associated with beverage dispensing. The products can be divided into four major
categories:  (i)  fountain  soft  drink and  citrus  dispensers;  (ii)  post-mix
dispensing valves;  (iii) beer dispensing  systems;  and (iv) other products and
services as follows (dollars in thousands):
<TABLE>
<CAPTION>


                                                1998                1997                1996
                                        ----------------    ----------------    ----------------
<S>                                            <C>                 <C>                 <C>
Soft drink, citrus and frozen
     beverage dispensers                       $   69,446          $   60,778          $   57,266
Post mix dispensing valves                         18,702              16,694              16,802
Beer dispensing systems                             8,768               9,920               1,297
Other                                              41,953              31,975              27,930
                                          ----------------    ----------------    ----------------
Total revenue                                  $  138,869          $  119,367          $  103,295
                                          ================    ================    ================
</TABLE>


                                      F-18

<PAGE>

                      LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The  following  provides  information  regarding  net sales to major  customers,
domestically and internationally (in thousands):
<TABLE>
<CAPTION>

                                    1998      Percent of Net      1997       Percent of       1996        Percent of 
                                                   Sales                      Net Sales                    Net Sales
                                ------------- -------------   ------------- ------------  -------------- ------------
United States:
<S>                                 <C>             <C>          <C>              <C>         <C>              <C>
    The Coca-Cola Company           $ 31,816         23%         $  28,961         24%        $  32,325         32%
    Other                             41,002         29             33,436         28            27,206         25
                                ------------- -------------   ------------- ------------  -------------- ------------
                                      72,818         52             62,397         52            59,531         57
                                ------------- -------------   ------------- ------------  -------------- ------------
                          
Export:
    The Coca-Cola Company                 34          -                 42          -               159          -      
    Panamerican Beverages, Inc.       14,861         11              7,212          6             2,666          3
    Other                             51,156         37             49,716         42            40,939         40
                                ------------- -------------   ------------- ------------  -------------- ------------
                                      66,051         48             56,970         48            43,764         43
                                ------------- -------------   ------------- ------------  -------------- ------------    
                                    $138,869        100%         $119,367         100%        $ 103,295        100%
                                ============= =============   ============= ============  ============== ============
</TABLE>

In addition to sales made directly to The Coca-Cola  Company,  substantially all
sales to other entities are significantly  influenced by The Coca-Cola  Company.
Any disruption or change in the  relationship  with The Coca-Cola  Company could
have a material adverse effect on the results of operations of the Company.

                                      F-19
<PAGE>

                      LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


                                                        SCHEDULE II

                                                      RESERVE ACCOUNT
<TABLE>
<CAPTION>


Description                                  Balance at         Additions       Deductions from   Balance at End
                                         Beginning of Year     Charged to           Account           of Year
                                                                 Expense
-------------------------------------    -------------------------------------------------------------------------
     Allowance for doubtful accounts:

<S>                <C>                        <C>                <C>                <C>                <C>       
                   December 31, 1998          $  363,000         $  61,000          $   98,000         $  326,000
                   December 31, 1997          $  185,000         $ 178,000          $        -         $  363,000
                   December 31, 1996          $   85,000         $ 106,645          $    6,645         $  185,000
</TABLE>



--------------------------------------------------------------------------------
                                      F-20