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, 1996      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.)

    235 W. Turbo, San Antonio, Texas                                 78216
(Address of principal executive offices)                          (Zip Code)

        Registrant's telephone number, including area code (210) 344-3071

          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 20,  1997,  held by  non-affiliates  of the  registrant  was
approximately  $57,347,272 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
20, 1997, was 5,836,898.

                       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
1997 annual meeting of shareholders  are incorporated by reference into Part III
of this report.
<PAGE>

                                     PART I

ITEM 1.   BUSINESS

General

Lancer  designs,  engineers,   manufactures  and  markets  fountain  soft  drink
dispensing systems,  citrus beverage dispensing systems, and other equipment for
use in the food  service and  beverage  industry.  During the fourth  quarter of
1996, Lancer began marketing frozen beverage dispensers  manufactured by a joint
venture that is 50% owned by the Company.  Lancers 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  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.

Strategy

The Companys  strategy is to increase sales through (i) its continued  emphasis
on developing and manufacturing technologically superior, reliable, high quality
products,  (ii) the development of new and enhanced  products in anticipation of
market  demand and (iii)  emphasis on  establishing  a  strategic  international
manufacturing  and distribution  network to enhance customer service  throughout
the world.

In keeping with this strategy,  Lancer acquired its Australian subsidiary in the
fourth  quarter of 1995. In the fourth  quarter of 1996, the Company added a new
product line by forming a joint venture to develop and  manufacture a new frozen
beverage  dispenser.  In the first  quarter of 1997,  the Company  completed the
purchase of the assets of a Brazilian manufacturer and marketer of fountain soft
drink and beer  dispensing  equipment.  The Brazilian  subsidiary is expected to
strengthen the Companys  position in Latin America.  Also, in the first quarter
of 1997, Lancer signed a letter of intent to acquire another strategically based
manufacturer and marketer of beverage dispensing  equipment.  The transaction is
expected to close in the second quarter of 1997. Finally,  the Company continues
to internally  develop new products and  technologies  designed to meet customer
needs.

The Beverage Dispensing Industry

The  manufacture of soft drink and citrus  dispensing  systems and other related
equipment is a rapidly changing industry. Technological changes and improvements
continue to be manifested 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,  equipment  distributors and food service chains. In order to
facilitate sales of their beverage  products to end-users,  soft drink companies
and  their  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.   Most
manufacturers  of  beverage  dispensing  systems  therefore  seek to have  their
products  approved by as many soft drink  companies  as possible  and  informal,
long-term  relationships  between certain manufacturers and soft drink companies
have become the norm in the industry.

Products

The  Company's  products  can be divided into three major  categories:  (i) soft
drink and citrus dispensing systems;  (ii) post-mix dispensing valves; and (iii)
other related products, including carbonators, refurbished products, syrup pumps
and  related  accessories,   ice  dispensers,   ice  baggers,  beer  dispensers,
carbonator  fittings and other  miscellaneous  parts and  equipment  for various
dispensing systems.



                                       1
<PAGE>


Beverage Dispensing Systems

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, to some extent,  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 systems.

The Company also manufactures and markets  self-contained,  mechanically  cooled
citrus dispensing systems for countertop use. The units use electronic  controls
to dispense preset mix ratios for different flavored juice  concentrates.  Under
an agreement with The Coca-Cola  Company,  the citrus dispenser may be sold only
to The  Minute  Maid  Company,  a  division  of The  Coca-Cola  Company,  or its
designated agents.

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 complete dispensing systems for the years ended December
31, 1996, 1995 and 1994,  accounted for approximately  53%, 55% and 49% of total
net sales, respectively.

Post-Mix Dispensing Valves

The Company  manufactures and sells post-mix  dispensing  valves which mix syrup
and 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  Companys  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, 1996, 1995 and 1994, sales of
LEV post-mix valves  accounted for  approximately  16%, 20% and 23% of total net
sales, respectively.

Other Related Products and Services

The Company manufactures a carbonator which produces carbonated water for use in
beverage systems. For the years ended December 31, 1996, 1995 and 1994, sales of
carbonators  accounted  for  approximately  2%,  1% and 4% of total  net  sales,
respectively.  The Company  manufactures  ice bagger machines under an exclusive
agreement  with Packaged Ice, Inc., an affiliate.  Sales of ice bagger  machines
for  the  years  ended  December  31,  1996,   1995  and  1994,   accounted  for
approximately 2%, 1%, and 3% of total net sales, respectively.

The Company also refurbishes,  for a fee, various  dispensing  systems and sells
replacement  parts in connection with such  refurbishments.  For the years ended
December  31,  1996,  1995 and 1994,  revenues  generated  from  these  services
accounted for approximately 4%, 5%, and 4% of total net sales, respectively.

Other products manufactured by the Company include syrup pumps,  stainless steel
and brass fittings, carbon dioxide regulator components, disconnect sockets used
on five-gallon  syrup tanks,  quality control testing  equipment,  recirculating
beer equipment and accessories,  water filtering systems, and a variety of other
products, parts and accessories for use with beverage dispensing systems.

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 develops 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,   1996,   1995  and  1994,
Company-sponsored research and development expenses were $913,000, $737,000, and
$695,000, respectively.


                                       2
<PAGE>

Production, Inventory and Raw Materials

The Company  manufactures many of the plastic components and other parts used in
its products.  The Company maintains  complete tool and die and mold departments
which produce and maintain the necessary  tools and molds to  manufacture  these
components.  The  manufacture  of major  products  generally  involves a tooling
process using metal dies,  fixtures and thermal plastic  injection molds.  Other
manufacturing  processes  include welding,  polishing,  painting,  tube bending,
metal  turning,  stamping,  and  assembling of printed  circuit  boards and wire
harnesses.

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 its specific
knowledge of the market.  In addition,  the Company is able to manufacture  some
purchased parts that may occasionally be unavailable in desired  quantities when
needed.  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 $
10.1  million,  $10.2  million and $7.1 million at December  31, 1996,  1995 and
1994, respectively. It is anticipated that 1996 backlog orders will be filled in
1997.

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, 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  33%,  50% and 46% of the  Company's  total net sales for the
years  ended  December  31,  1996,  1995  and  1994,  respectively.  None of the
Companys   customers,   including  The  Coca-Cola  Company,  are  contractually
obligated to purchase  minimum  volumes 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  Companys   financial  position  and  its  results  of
operations.

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 only be sold 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
available  its  manufacturing  capabilities  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.

Additionally,  the Company and The  Coca-Cola  Company have entered into certain
warehousing  agreements under which the Company warehouses new and used products
owned by The  Coca-Cola  Company,  as well as  agreements  which provide for the
refurbishment  of used  dispensing  equipment  owned by The  Coca-Cola  Company.
During 1996, the Company expanded the scope of its warehousing  arrangement with
The Coca-Cola Company.


                                       3
<PAGE>

International Sales

For the years ended December 31, 1996,  1995 and 1994,  the Company's  total net
sales derived from sales to customers in foreign  countries  were  approximately
43%, 35% and 29% , respectively. The Company has sales employees,  distributors,
and/or licensees in Latin America,  Europe,  and Asia. The Company  manufactures
product in Mexico and Australia, and operates a warehouse in Russia.(See note 9)

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.

During the first  quarter of 1997,  the  Company  completed  the  purchase  of a
Brazilian  manufacturer  and  marketer of  beverage  dispensing  equipment.  The
acquired business produced 1996 net sales of approximately $14 million.

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, 1996,  the Company had 1,376  full-time  employees of whom 77
were engaged in engineering and technical support, 1,143 in manufacturing, 62 in
marketing and sales and 94 in general management and  administrative  positions.
While the majority of the  employees  work at the  Company's  facilities  in San
Antonio,  Texas,  454 employees  work at the Company's  maquiladora  and related
companies  located in Piedras Negras,  Mexico,  and 73 employees are employed by
the Companys Australian  subsidiary.  Certain sales representatives are located
in various parts of the U.S., Mexico,  Europe and the Far East. 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.

Intellectual Property

The Company  presently owns 36 United States patents and numerous  corresponding
foreign patents.  It has 13 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 6 to 19 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.  However,  there
can be no assurance 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  numerous 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.


                                       4
<PAGE>


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. However, the Company can provide
no assurances 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.

ITEM 2.   PROPERTIES

The Company's primary manufacturing and administrative facilities are located in
several buildings in San Antonio, Texas, totaling 516,038 square feet, including
three buildings owned by Lancer  covering  approximately  144,000 square feet of
space,  the  largest  of  which is  located  on a  40-acre  tract of land in the
southeast  sector of San  Antonio.  A 218,000  square  foot  expansion  is under
construction at the Companys primary San Antonio facility. In 1997, the Company
expects to begin  construction  on  approximately  30,000  square feet of office
space at its  primary  San  Antonio  facility.  The  addition  is expected to be
completed in late 1997 or early 1998.  The Company owns and operates  facilities
located in Piedras  Negras,  Mexico  that  consist  of  127,495  square  feet of
completed space plus 56,000 square feet of space under construction. The Company
also leases a 4,000 square foot sales office in Monterrey,  Mexico, and a 38,284
square foot plant in Beverley, South Australia, a suburb of Adelaide. Facilities
under lease  account for 431,322  square feet of space.  The Company also owns a
building in Chicago,  Illinois,  with approximately 47,000 square feet of space,
of which a major  portion  is  currently  leased to outside  tenants.  The lease
expires March 31, 1997, and the building is under contract to be sold.

Total net rent expense was $1,223,000,  $712,000, and $776,000 in 1996, 1995 and
1994,  respectively.  Included  in total rent  expense  in 1996 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, 1996.


                                       5
<PAGE>

                                     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 three-for-two  stock dividends  effective July 9, 1996 and July 11,
1995
<TABLE>
<CAPTION>

Market Price For Common Stock

                              1996                             1995
Quarter                       High           Low               High            Low
-----------------------    --------------------------       ---------------------------
<S>                            <C>             <C>                <C>            <C>
First                          $12.00          $9.08              $8.22          $6.83
Second                          15.83          10.83               9.05           7.22
Third                           14.92          12.00              10.59           9.33
Fourth                          20.88          13.00              10.67           8.67
</TABLE>

On March 20, 1997, the closing price of the Company's  common stock, as reported
by the ASE, was $19.63 per share. On that date, there were 167 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.

ITEM 6.   SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>

                                                                     Years Ended December 31,
                                           ------------------------------------------------------------------------------
                                                1996             1995           1994            1993           1992
                                           ---------------   -------------  -------------   -------------  --------------
Operating Data:
<S>                                             <C>               <C>            <C>             <C>             <C>
     Net sales                                  $ 102,308         $75,912        $70,900         $56,661         $44,729
     Gross profit                                  24,554          16,075         14,193          10,482           7,891
     Selling, general and
        administrative expenses                   (14,434)         (9,880)        (9,239)         (7,157)         (6,409)
     Operating income                              10,120           6,195          4,954           3,325           1,482
     Interest expense                              (1,588)           (981)          (755)           (795)           (884)
     Interest and other income, net                   616           1,489            354           1,060             911
     Earnings before income taxes
        and extraordinary item                      9,148           6,703          4,553           3,590           1,509
     Income tax expense                             3,415           2,612          1,602           1,416             451
     Net earnings                                   5,733           4,091          2,951           2,174           1,465
     Net earnings per share*                 $       0.94       $    0.68      $    0.52       $    0.40       $    0.28
     Weighted average shares outstanding*           6,076           5,989          5,674           5,388           5,298
<CAPTION>

      * Per share amounts have been restated to reflect a three-for-two
        stock dividend effective July 11, 1995 and July 9, 1996
</TABLE>
<TABLE>
<CAPTION>
                                                                        As of December 31,
                                           ------------------------------------------------------------------------------
                                                1996             1995           1994            1993           1992
                                           ---------------   -------------  -------------   -------------  --------------
Balance Sheet Data:
<S>                                            <C>                <C>            <C>             <C>             <C>
     Total assets                              $   82,009         $57,944        $46,896         $38,902         $37,762
     Short-term debt                               13,553           8,448          7,409           7,159           6,522
     Long-term debt, less
        current installments                       15,459           5,398          3,397           2,575           3,589
     Shareholders' equity                          37,036          31,065         26,919          20,325          17,923
</TABLE>


                                       6
<PAGE>

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

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.

Results of Operations


Comparison of the Years Ended December 31, 1996 and December 31, 1995

Net sales for the year ended December 31, 1996  increased by $26.4  million,  or
34.8%,  to $102.3  million from $75.9 million in 1995.  This increase was driven
primarily by the inclusion of the  Companys  Australian  subsidiary  for a full
year,  and by strong  sales across most product  lines.  Excluding  sales of the
Australian  subsidiary,  sales of mechanically cooled dispensers rose 42%, sales
of ice cooled dispensers rose 69%, and spare parts sales increased 56%. Sales of
citrus  dispensers  declined 35% from 1995 levels,  as the Company  introduced a
major new product line. International sales represented 43% of the net sales for
the year ended December 31, 1996, compared to 35% for the prior year.

Gross profit for the year ended December 31, 1996 increased by $8.5 million,  or
52.8%, to $24.6 million from $16.1 million for the prior year, due to the higher
sales and an  improvement  in  manufacturing  gross margin to 24.0% in 1996 from
21.2% in 1995. This  improvement  reflects  product mix changes and managements
ongoing efforts to control costs through manufacturing process enhancements.

Selling,  general and  administrative  expenses for the year ended  December 31,
1996 were $14.4 million, (14.1% of sales), up from $9.9 million (13.0% of sales)
in 1995.  The  increase was  primarily  driven by  increased  worldwide  selling
expenses, by an increase in company-sponsored  research and development expense,
and by a general increase in personnel to support the Companys growth.

Interest expense for the year ended December 31, 1996 was $1.6 million,  up from
$0.9 million in 1995. This increase  resulted from higher average  borrowings to
fund asset growth. The Companys income tax rate was 37% in 1996 compared to 39%
in 1995.  The lower rate was  primarily  the result of tax planning  relating to
foreign and state taxes.

Net earnings for the year ended  December  31, 1996 were $5.7  million,  a 39.0%
increase over the $4.1 million  earned in 1995.  Net earnings per share improved
38.2% to $0.94 in 1996 from $0.68 in 1995.


Comparison of the Years Ended December 31, 1995 and December 31, 1994

Net sales for the year ended  December 31, 1995  increased by $5.0  million,  or
7.1%, to $75.9 million from $70.9 million for the prior year.  This increase was
caused  primarily by a 39% increase in  shipments  of citrus  dispensers,  a 22%
increase  in ice cooled  dispensers,  and a 28%  increase  in spare part  sales.
International sales accounted for 35.0% of net sales for the year ended December
31, 1995, as compared to 29.0% for the prior year.

Gross profit for the year ended December 31, 1995 increased by $1.9 million,  or
13.3%,  to $16.1  million  from  $14.2  million  for the prior  year,  due to an
improvement in  manufacturing  gross margin to 21.2% in 1995 from 20.0% in 1994.
This  improvement  reflects  product  mix changes  and lower  manufacturing  and
support costs. In 1995, the Company continued to benefit from further reductions
in labor  costs as a result  of moving  additional  assembly  and  manufacturing
operations to its maquiladora plant in Piedras Negras, Mexico.

Selling,  general and  administrative  expenses for the year ended  December 31,
1995 increased by approximately $0.7 million, or 6.9%, to $9.9 million from $9.2
million for the prior year. This increase reflected additional engineering costs
for new product development and technical support, increased selling expenses to
sustain a higher  level of sales,  and higher  variable  costs  related to those
sales.

Interest expense for the year ended December 31, 1995,  increased  approximately
$226,000,  or 30.0%, to $981,000 from $755,000 for the prior year. This increase
resulted  from   increased   average   borrowings,   due  primarily  to  funding
requirements for construction of the Companys expanded facilities in Mexico.

                                       7
<PAGE>

Interest  and other income for the year ended  December  31, 1995,  increased by
approximately  $1.1  million,  or 321.2%,  to $1.5 million from $354,000 for the
prior year.  The increase was due primarily to increased  sales  commissions  of
$716,000  related to sales of  beverage  coolers,  and an increase of $50,000 in
warehousing cost reimbursements from The Coca-Cola Company.

The  Companys  income tax rate was 39% in 1995,  compared  to 35% in 1994.  The
increase was driven by higher state taxes and nondeductible foreign losses.

Net earnings for the year ended  December 31, 1995,  increased by  approximately
$1.1  million,  or 38.7%,  to $4.1  million  ($0.68 per share) from $3.0 million
($0.52  per  share) for the prior  year.  This  increase  was due  primarily  to
increased net sales, an improvement in operating income and an increase in other
income.

Liquidity and Capital Resources

Cash used in operations  was $3.3 million in 1996,  compared to cash provided by
operations  of $7.1  million  in 1995.  Record  earnings  in 1996 were more than
offset by increases in inventory and accounts receivable.  Lancers strong sales
growth  caused part of the increase in current  assets.  The addition of several
new product  lines also  contributed  to the inventory  increase.  Management is
focused on managing current assets aggressively in 1997.

Capital expenditures were $9.1 million in 1996, up from $7.9 million in 1995. In
1996,   Lancer  began   construction  on  a  218,000  square  foot  addition  of
manufacturing  and  warehouse  space to the primary San  Antonio  facility.  The
Company also completed most of a 56,000 square foot expansion of its facility in
Piedras Negras,  Mexico. The Company expects to complete the two projects in the
second  quarter of 1997. It is  anticipated  that capital  spending in 1997 will
increase  somewhat over 1996 levels. In addition to completing the two expansion
projects mentioned above, the Company plans to build office space at its primary
San  Antonio  plant in 1997.  The new office  space will  consolidate  three San
Antonio office locations. The Company expects to borrow approximately $4 million
on its credit facilities in 1997 to fund construction spending.

Working  capital  requirements  and  capital  spending  were  funded  with  bank
borrowings.  In July, 1996, the Company entered into an agreement with two banks
for $42.5 million of five year credit facilities. The facilities include a $17.5
million  revolving  loan,  and loans  totaling  $25.0  million  to fund  capital
spending  and  acquisitions.  The credit  facilities  require  that the  Company
maintain  certain  financial  ratios  and other  covenants.  The  Company  is in
compliance with respect to these financial  ratios and covenants.  To manage its
exposure to interest rate  fluctuations,  the Company  entered into two interest
rate swap transactions in 1996 covering a combined notional  principal amount of
$8.0 million.

In October,  1996,  the Company  formed a joint  venture to  manufacture  frozen
beverage dispensing systems. Lancer paid $2.6 million in cash for a 50% interest
in  Lancer  FBD  Partnership,  Ltd.  The  funds  were  borrowed  under  the bank
facilities.

During 1996,  the Company  entered  into a $4.3  million  lease to finance a new
integrated computer system and other technology oriented equipment. The lease is
for a period of 48  months,  unless it is  terminated  by the  Company  after 24
months.  Approximately  $2.5  million  was funded  under the lease in 1996.  The
Company  believes  the computer  system will  contribute  to improved  operating
efficiencies in the future.

In December, 1996, the Company agreed to purchase a manufacturer and marketer of
fountain soft drink and beer dispensing  equipment  based in Sao Paulo,  Brazil.
The  transaction  was completed in the first  quarter of 1997.  The $6.1 million
purchase  price  was  financed  with  borrowings   under  the  Companys  credit
facilities,  and with long term  financing  provided by the seller.  The Company
purchased had 1996 net sales of approximately $14 million.

In the first quarter of 1997,  the Company  signed a letter of intent to acquire
the assets of an entity which manufactures and distributes  beverage  dispensing
equipment.  The anticipated  purchase price is approximately  $3.5 million.  The
Company expects to finalize the transaction during the second quarter of 1997.

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.


                                       8
<PAGE>

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  historically
have been subject to seasonal changes primarily as a result of the reduced funds
available in the capital expenditure budgets of Lancer'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. Since the Company cannot maintain the
DISC and FSC at the same time under  current  tax  regulations,  the Company has
determined  it will be  advantagous  to  convert  the DISC to a FSC and plans to
convert in 1997. At the time of such a conversion,  the Company will be required
to  provide  for  federal  income  taxes on the $2.4  million  of  undistributed
earnings of the DISC,  for which federal  income taxes had not  previously  been
provided.  If the DISC had been  converted on December  31, 1996,  it would have
resulted in a reduction of approximately $801,000 in the Company's net earnings.
The  Company  will be able to pay such  federal  income  taxes  over a  ten-year
period;  thus the Company  does not  anticipate  that  payments of such  federal
income taxes will significantly affect the Company's cash from operations.

In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 Earnings per Share. The Statement,
which is effective  for  financial  statements  issued after  December 15, 1997,
simplifies  the standards  for  computing  earnings per share and makes the U.S.
standard for computing earnings per share more compatible with the EPS standards
of other  countries.  The  Company  plans to adopt this  Statement  in the first
quarter of 1997.



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.


                                       9
<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 22, 1997 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 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             60               Chairman of the Board
  George F. Schroeder             57               President, Chief Executive Officer and Director
  John P. Herbots                 49               Vice President Finance and Director
  Walter J. Biegler               55               Director
  Jean M. Braley                  67               Director
  Charles K. Clymer               61               Director
  Michael E. Smith                56               Director
  Charles W. Thomas               43               Vice President of Marketing
  Robert W. Abbott                58               Vice President-Asia
  Jose A. Canales, Jr.            51               Vice President-Latin America
  Robert E. Gehl                  35               Vice President-Europe
  James R. Sprinkle               49               Vice President-Domestic Sales
  Samuel Durham                   48               Vice President of Engineering
  Michael U. Raymondi             50               Vice President of Operations
</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.  John P.  Herbots  joined the  Company  as Vice  President  of  Finance  and
Administration  in February  1995. On August 7, 1995,  Mr. Herbots was appointed
Chief Financial Officer and Treasurer.  Prior to joining Lancer, Mr. Herbots was
Executive Vice President of MK Rail Corporation and from 1990 until 1992, served
as Vice President and Chief Financial Officer for Morrison Knudsen Corporation's
Rail  Systems  Group.  Prior to that he was  Vice  President  and CFO of  Avline
Leasing  Corporation  for one year,  of Lancer  Corporation  for one year and of
Fairchild  Aircraft  Corporation for four years.  Mr. Herbots was elected to the
Board of Directors in May 1995.

Mr. Walter J. Biegler has served as a director of the Company since 1985. He has
held the position of Chief  Financial  Officer of Periodical  Management  Group,
Inc., a San Antonio,  Texas concern  which  distributes  periodicals,  books and
specialty  items in the United  States,  Mexico and the  Virgin  Islands,  since
November 1991. 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 is currently
and has been  involved  for the last ten years in  personal  investments  as her
principal occupation.  She is also a partner in Lancer Properties.  See Certain
Relationships and Related Transactions.

Mr.  Charles K. Clymer has served as a director of the Company  since  December,
1996.  Mr. Clymer  retired from The Coca-Cola  Company in 1993 after 31 years of
service. Managerial positions held with Coca-Cola International included 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.

                                       10
<PAGE>

Mr.  Michael E. Smith has served as a director  of the Company  since 1985.  Mr.
Smith is presently a principal  shareholder and Vice President of Bailey-Gosling
Associates,  Inc., 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.

Mr.  Charles W. Thomas  joined the Company as Vice  President  of  Marketing  on
February 12, 1996. Prior to joining Lancer, Mr. Thomas was employed for 15 years
by what is now The Minute Maid  Company,  a Division of The  Coca-Cola  Company.
While at The Minute  Maid  Company,  Mr.  Thomas held  positions  as Director of
Marketing, Director of Field Sales and Director of Technical Development.

Mr.  Robert W. Abbott has been  employed by the Company  since 1974.  Mr. Abbott
became Vice  President-Asia in 1997. From 1976 until January,  1997, he has held
various senior sales  positions.  Prior to his employment by Lancer,  Mr. Abbott
was employed by The Coca-Cola Company.

Mr. Jose A. Canales, Jr., joined the Company as Vice President-Latin  America in
August 1995. Prior to joining Lancer,  Mr. Canales was the  International  Sales
Manager  for  Pioneer  Flour Mills in San  Antonio.  From 1982 to 1993,  he held
various management positions within the Latin American steel industry with Trade
Arbed of Luxembourg,  Fundidora in Mexico and Huntco Steel in the United States.
From  1972 to 1982,  he  represented  W. W.  Grainger  within  Mexico  and Latin
America.

Mr. Robert E. Gehl joined the Company in February 1997 as Vice President-Europe.
Before coming to Lancer,  Mr. Gehl was Managing Director of Europe for Multiplex
GMbH for five years, and was Director of Sales and Marketing of Jetspray London,
Ltd. for two years.

Mr. James R.  Sprinkle  joined the Company in April 1984 as Director of National
Accounts.  Mr. Sprinkle assumed the responsibilities of Vice  President-Domestic
Sales in May 1993. Prior to his employment by Lancer,  Mr. Sprinkle was employed
by The Coca-Cola Company.

Mr.  Samuel  Durham joined the Company in June 1979 and he has held the position
of Vice President of Engineering since May 1993. He is primarily responsible for
coordinating  new product  design through its  introduction  into the market and
works  directly  with  the  engineering  department  of  the  Company's  primary
customer.  Before  joining the Company,  Mr. Durham was employed by Polyvend,  a
manufacturer of vending equipment.

Mr.  Michael U. Raymondi  joined the Company as Vice  President of Operations in
August 1994.  Prior to joining  Lancer,  Mr.  Raymondi was employed by Minnesota
Rubber,  a rubber and plastics  products  company,  as General Manager for three
years.  Prior to that,  Mr.  Raymondi was  employed by National  O-Ring as Plant
Manager for five years.

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,  Charles K. Clymer,  and Michael E.
Smith.  The Audit  Committee met once in 1996.  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  1996.  The  members  of the  Stock  Option
Committee are Walter A. Biegler,  Charles K. Clymer,  and Michael E. Smith.  The
Stock Option Committee met five times in 1996.


ITEM 11.  EXECUTIVE COMPENSATION

The   information  set  forth  under  the  caption   Compensation   and  Certain
Transactions  in the  Company's  proxy  statement  for its May 22,  1997  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.


                                       11
<PAGE>

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 22,  1997 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 22,  1997 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.

     (3) Exhibits:
<TABLE>
       <S>        <C>
          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
        10.11*    Master  Security  Agreement,  dated as of July  28,  1992,  between  Lancer  Corporation  and CIT
                  Group/Equipment Financing, Inc.
        10.12*    Agreement for Purchase and Sale of Assets and Business (Vaculator division), dated August 5,
                  1993, between Lancer Corporation and Newco Enterprises, Inc.
        10.13*    Development and Manufacturing  Agreement,  dated April 13, 1993,  between Lancer  Corporation and
                  Packaged Ice, Inc.

                                       12
<PAGE>

        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
        10.17**   Schedule  No.  5,  dated  February  18,  1994,  to  Master  Security   Agreement  between  Lancer
                  Corporation and CIT Group/Equipment
        10.18**   Schedule No. 6, dated May 24, 1994, to Master Security  Agreement between Lancer  Corporation and
                  CIT Group/Equipment Financing, Inc.
        10.19**   Revolving  Promissory  Note,  dated as of July 29, 1994,  between  Lancer  Corporation  and First
                  Interstate Bank of Texas, N.A.
        10.20**   Schedule No. 7, dated November 1, 1994, to Master Security  Agreement between Lancer  Corporation
                  and CIT Group/Equipment Financing, Inc.
        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 Boatmens National Bank of St. Louis
        10.28++   Term A Note, dated July 15,1996,  between Lancer  Corporation and The Frost National Bank and The
                  Boatmens National Bank of St. Louis
        10.29++   Term B Note, dated July 15,1996,  between Lancer  Corporation and The Frost National Bank and The
                  Boatmens National Bank of St. Louis
        10.30++   Revolving Note,  dated July 15,1996,  between Lancer  Corporation and The Frost National Bank and
                  The Boatmens National Bank of St. Louis
        10.31++   Acquisition  Note,  dated July 15,1996,  between Lancer  Corporation  and The Frost National Bank
                  and The Boatmens 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, 1997
        10.35+++  Master Lease Agreement dated September 4, 1996 between Lancer Partnership, Ltd. and CCA
                  Financial, Inc.
        21.1      List of Significant Subsidiaries of the Registrant
        23.1      Consent of KPMG Peat Marwick LLP
</TABLE>

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

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

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

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

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

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


(b) Reports on Form 8-K:
    The  Company  filed a  report  on Form 8-K in  January,  1997,  relating  to
    the acquisition  of its  Brazilian  subsidiary.  No  reports  on Form 8-K
    were filed during 1996.


                                       13
<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 28, 1997
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 28, 1997
Alfred A. Schroeder

/s/ GEORGE F. SCHROEDER    President and Director                March 28, 1997
George F. Schroeder        (principal executive officer)

/s/ JOHN P. HERBOTS        Vice President Finance & Director     March 28, 1997
John P. Herbots            (principal financial and accounting officer)

/s/ WALTER J. BIEGLER      Director                              March 28, 1997
Walter J. Biegler

/s/ JEAN M. BRALEY         Director                              March 28, 1997
Jean M. Braley

/s/ CHARLES K. CLYMER      Director                              March 28, 1997
Charles K. Clymer

/s/ MICHAEL E. SMITH       Director                              March 28, 1997
Michael E. Smith

                                       14
<PAGE>
                       LANCER CORPORATION AND SUBSIDIARIES

             INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

Independent Auditors' Report                                                F-2

Consolidated Balance Sheets as of December 31, 1996 and 1995                F-3

Consolidated Statements of Income for each of the years in the
    three-year period ended December 31, 1996                               F-5

Consolidated Statements of Shareholders' Equity for each of the
    years in the three-year period ended December 31, 1996                  F-6

Consolidated Statements of Cash Flows for each of the years in the
    three-year period ended December 31, 1996                               F-7

Notes to Consolidated Financial Statements                                  F-8

Schedule for the years ended December 31, 1996, 1995 and 1994

    II-Reserve account                                                     F-18

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,  1996 and 1995 and the  results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 1996,  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 Peat Marwick LLP



San Antonio, Texas
February 27, 1997


                                      F-2
<PAGE>

                       LANCER CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>

                                             CONSOLIDATED BALANCE SHEETS
                                              December 31, 1996 and 1995

                                                        ASSETS
                                                                          1996                           1995
                                                                   --------------------           -------------------

Current assets:
<S>                                                              <C>                               <C>
     Cash                                                        $           1,016,425             $         754,352
     Receivables:
        Trade accounts and notes                                            19,686,318                    14,431,531
        Refundable income taxes                                                396,495                             -
        Other                                                                  690,034                       272,214
                                                                   --------------------           -------------------
                                                                            20,772,847                    14,703,745
        Less allowance for doubtful accounts                                  (185,000)                      (85,000)
                                                                   --------------------           -------------------
            Net receivables                                                 20,587,847                    14,618,745
                                                                   --------------------           -------------------
     Inventories:
        Raw materials and supplies                                           1,269,404                     3,490,396
        Work in process                                                     18,425,735                    11,982,620
        Finished goods                                                       8,543,784                     4,558,742
                                                                   --------------------           -------------------
            Total inventories                                               28,238,923                    20,031,758

     Prepaid expenses ( $4,624 and $56,698 due
        from affiliates, respectively)                                         243,937                       146,776
     Deferred tax asset                                                         64,513                             -
                                                                   --------------------           -------------------
            Total current assets
                                                                            50,151,645                    35,551,631
                                                                   --------------------           -------------------

     Property, plant and equipment, at cost:
        Land                                                                 1,307,663                       977,888
        Buildings                                                            9,681,466                     7,950,514
        Machinery and equipment                                             14,925,713                    13,255,089
        Tools and dies                                                       8,448,506                     7,927,246
        Leaseholds, office equipment and vehicles                            5,945,069                     4,969,712
        Construction in progress                                             5,162,508                     1,361,906
                                                                   --------------------           -------------------

                                                                            45,470,925                    36,442,355
        Less accumulated depreciation and amortization
                                                                          (19,676,377)                  (17,242,089)
                                                                   --------------------           -------------------
            Net property, plant and equipment                              25,794,548                    19,200,266
                                                                   --------------------           -------------------
     Long-term receivables ($ 306,232 and $251,764 due
        from affiliates, respectively)                                        404,007                       512,388
     Long-term investments                                                  2,975,000                       375,000
     Intangibles and other assets, at cost, less
        accumulated amortization                                            2,684,073                     2,304,578
                                                                   --------------------           -------------------

                                                                 $          82,009,273           $        57,943,863
                                                                   ====================           ===================

<CAPTION>
                             See accompanying notes to consolidated financial statements.
</TABLE>

                                      F-3
<PAGE>

                       LANCER CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>

                                       CONSOLIDATED BALANCE SHEETS (Continued)
                                              December 31, 1996 and 1995

                                         LIABILITIES AND SHAREHOLDERS EQUITY

                                                                            1996                           1995
                                                                     -------------------            -------------------
Current liabilities:
<S>                                                                <C>                             <C>
  Accounts payable                                                 $          7,234,160            $         5,645,063
  Current installments of long-term debt                                      1,852,500                      1,448,093
  Line of credit with bank                                                   11,700,000                      7,000,000
  Deferred licensing and maintenance fees                                     1,339,868                        815,901
  Accrued expenses and other liabilities                                      3,356,315                      2,882,886
  Income taxes payable                                                                -                        487,395
                                                                     -------------------            -------------------
    Total current liabilities                                                25,482,843                     18,279,338

Deferred  tax liability                                                       1,038,655                        996,409
Other long-term liabilities                                                     820,000                        700,000
Long-term debt, excluding current installments                               15,459,375                      5,397,574
Deferred licensing and maintenance fees                                       2,172,137                      1,505,600
                                                                     -------------------            -------------------

    Total liabilities                                                        44,973,010                     26,878,921
                                                                     -------------------            -------------------

Shareholders' equity:

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

  Common stock, $.01 par value:
   10,000,000 shares authorized; 5,820,976 and 3,872,221
   issued and outstanding in 1996 and 1995, respectively                         58,209                         38,722

  Additional paid-in capital                                                  9,888,244                      9,852,713

  Cumulative foreign currency translation adjustment                            183,803                              -

  Retained earnings                                                          26,906,007                     21,173,507

Commitments and contingencies                                                         -                              -
                                                                     -------------------            -------------------

    Total shareholders' equity                                               37,036,263                     31,064,942
                                                                     -------------------            -------------------

                                                                   $         82,009,273             $       57,943,863
                                                                     ===================            ===================
<CAPTION>

                             See accompanying notes to consolidated financial statements.
</TABLE>

                                      F-4
<PAGE>

                                        LANCER CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>

                                          CONSOLIDATED STATEMENTS OF INCOME
                                     Years ended December 31, 1996, 1995 and 1994
                                                                 1996                   1995                  1994
                                                        -------------------     ------------------    ------------------

<S>                                                   <C>                       <C>                   <C>
Net sales                                             $        102,308,422      $      75,912,289     $      70,899,829
Cost of sales                                                   77,754,400             59,836,951            56,706,572
                                                        -------------------     ------------------    ------------------
    Gross profit                                                24,554,022             16,075,338            14,193,257
Selling, general and administrative expenses                    14,434,066              9,880,172             9,238,922
                                                        -------------------     ------------------    ------------------
    Operating income                                            10,119,956              6,195,166             4,954,335
                                                        -------------------     ------------------    ------------------
Other income (expense):
  Interest expense                                              (1,587,510)              (981,153)             (755,485)
  Interest and other income, net                                   615,417              1,489,309               353,600
                                                        -------------------     ------------------    ------------------
                                                                  (972,093)               508,156              (401,885)
                                                        -------------------     ------------------    ------------------
   Earnings before income taxes                                  9,147,863              6,703,322             4,552,450
                                                        -------------------     ------------------    ------------------
Income taxes expense (benefit):
  Current                                                        3,373,117              2,446,959             1,637,930
  Deferred                                                          42,246                165,246               (36,034)
                                                        -------------------     ------------------    ------------------
                                                                 3,415,363              2,612,205             1,601,896
                                                        -------------------     ------------------    ------------------
    Net earnings                                      $          5,732,500     $        4,091,117    $        2,950,554
                                                        ===================     ==================    ==================
Weighted average shares outstanding                              6,076,341              5,988,540             5,674,199
                                                        ===================     ==================    ==================
Net earnings per share                                $               0.94     $             0.68    $             0.52
                                                        ===================     ==================    ==================
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

<TABLE>
<CAPTION>

                                         LANCER CORPORATION AND SUBSIDIARIES

                                   CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
                                     Years ended December 31, 1996, 1995 and 1994

                                                   Additional         Cumulative                                 Total
                                    Common           Paid-in          Translation           Retained         Shareholder's
                                    Stock            Capital          Adjustment            Earnings             Equity
                                 -------------   ----------------  ------------------   -----------------   -----------------

<S>                                 <C>             <C>              <C>                   <C>                 <C>
Balance December 31, 1993           $  23,622       $  6,169,507     $             -       $  14,131,836       $  20,324,965
     Net earnings                           -                  -                   -           2,950,554           2,950,554

     Issuance of 300,000 shares
     of common stock, net of
     offering expenses                  2,000          3,531,083                   -                   -           3,533,083

     Exercise of 27,996 stock
     options, including tax
     benefit of $43,003                   124            110,017                   -                   -             110,141
                                 -------------   ----------------  ------------------   -----------------   -----------------

Balance December 31, 1994              25,746          9,810,607                   -          17,082,390          26,918,743

     Net earnings                           -                  -                   -           4,091,117           4,091,117

     Exercise of 15,498 stock
     options                               89             54,993                   -                   -              55,082

     Three-for-two stock dividend      12,887            (12,887)                  -                   -                   -
                                 -------------   ----------------  ------------------   -----------------   -----------------

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

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

     Cumulative foreign currency
     translation adjustment                 -                  -             183,803                   -             183,803

     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
                                 =============   ================  ==================   =================   =================


</TABLE>
          See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>

<TABLE>
<CAPTION>
                                          LANCER CORPORATION AND SUBSIDIARIES

                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                     Years ended December 31, 1996, 1995 and 1994

                                                                          1996                1995                1994
                                                                    -----------------   -----------------   -----------------

Cash flow from operating activities:
<S>                                                                   <C>                 <C>                 <C>
     Net earnings                                                     $    5,732,500      $    4,091,117      $    2,950,554

     Adjustments to reconcile net earnings to net
       cash (used) provided by operating activities:
        Depreciation and amortization                                      2,445,288           2,152,169           1,843,177
        (Gain) loss on sale and disposal of assets                           (15,485)             13,985              28,679
        Effect of foreign currency translation                               183,803                   -                   -
        Change in assets and liabilities, net of effects
            from purchase of subsidiary:
               Receivables                                                (5,464,226)         (3,872,837)            218,488
               Prepaid expenses                                              (97,161)            (23,969)             (4,522)
               Inventories                                                (8,207,165)          2,283,927          (5,783,544)
               Other assets                                                 (390,495)            425,019            (143,666)
               Accounts payable                                            1,589,097          (1,094,867)           (356,526)
               Accrued expenses                                              473,429             601,787             (32,771)
               Deferred licensing and maintenance fees                     1,190,504           1,710,576             610,925
               Income taxes payable                                         (883,890)            760,293            (359,449)
               Deferred tax liability                                        (22,267)           (100,552)            (36,034)
               Other long-term liabilities                                   120,000             180,000             160,000
                                                                    -----------------   -----------------   -----------------
     Net cash (used) provided by operating activities                     (3,346,068)          7,126,648            (904,689)
                                                                    -----------------   -----------------   -----------------

Cash flow from investing activities:
        Proceeds from sale of assets                                          43,625              20,166              31,595
        Acquisition of property, plant and equipment                      (9,056,710)         (7,861,164)         (2,942,641)
        Acquisition of subsidiary company                                          -          (3,503,600)                  -
        Purchase of long-term investments                                 (2,600,000)           (225,000)           (150,000)
                                                                    -----------------   -----------------   -----------------
Net cash used in investing activities                                    (11,613,085)        (11,569,598)
                                                                          (3,061,046)
                                                                    -----------------   -----------------   -----------------

Cash flow from financing activities:
        Net borrowings under line of credit agreements                     4,700,000           1,000,000             700,000
        Proceeds from issuance of long-term debt                          17,950,000           6,929,000           5,035,072
        Retirement of long-term debt                                      (7,483,792)         (4,889,170)         (4,663,338)
        Proceeds from issuance of common stock                                     -                   -           3,533,083
        Proceeds from exercise of stock options                               55,018              55,082             110,141
                                                                    -----------------   -----------------   -----------------
Net cash provided by financing activities                                 15,221,226           3,094,912           4,714,958
                                                                    -----------------   -----------------   -----------------
Net increase (decrease) in cash                                              262,073          (1,348,038)            749,223
Cash at beginning of year                                                    754,352           2,102,390           1,353,167
                                                                    -----------------   -----------------   -----------------
Cash at end of year                                                   $    1,016,425    $        754,352    $      2,102,390
                                                                    =================   =================   =================
<CAPTION>

                             See accompanying notes to consolidated financial statements.
</TABLE>

                                      F-7
<PAGE>


                       LANCER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. Summary of Significant Accounting Policies

General and Principles of Consolidation

The consolidated financial statements include the accounts of Lancer Corporation
(the Company), its wholly-owned  subsidiaries,  Lancer International Sales, Inc.
(DISC), Lancer Ltd., Glenn Pleass Holdings Pty. Ltd., Industrias Lancermex, S.A.
de C.V., Nueva Distribuidora  Lancermex,  S.A. de C.V. and Servicios  Lancermex,
S.A. de C.V.  All  intercompany  balances and  transactions  are  eliminated  in
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  DISC  is  a  qualified   Interest-Charge   Domestic   International   Sales
Corporation, which markets the Company's products internationally. The DISC is a
wholly-owned subsidiary created to operate under Federal income tax regulations.

Lancer Ltd. is a wholly-owned  subsidiary  incorporated to market and distribute
the  Company's  products  to  the  European  Union  and  certain  other  foreign
countries.

Glenn Pleass  Holdings Pty.  Ltd,.  acquired in December 1995, is a wholly-owned
subsidiary which manufactures and distributes the Companys products in Australia
and surrounding Pacific Rim countries.

Industrias Lancermex,  S.A. de C.V. is a wholly-owned subsidiary incorporated to
assemble the Company's products and components in Mexico.  Industrias Lancermex,
S.A.  de C.V.  is a  maquiladora  plant  operating  under both U.S.  and Mexican
customs laws.

Nueva  Distribuidora  Lancermex,  S.A.  de  C.V.  is a  wholly-owned  subsidiary
incorporated  to market and  distribute the Company's  products in Mexico.  This
company has no  employees  but  receives  services  and support  from  Servicios
Lancermex, S.A. de C.V.

Servicios Lancermex,  S.A. de C.V. is a wholly-owned  subsidiary incorporated to
provide all of the services required by Nueva Distribuidora  Lancermex,  S.A. de
C.V.

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 the 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 3 to 30 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.



                                      F-8
<PAGE>



                       LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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 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.  Results of
operations  of the  joint  venture  were  not  significant  during  1996 and the
carrying  value of the investment at December 31, 1996  approximates  the market
value.

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.

Net Earnings per Share

Net earnings per share are based on the  weighted  average  number of common and
common equivalent (dilutive stock options) shares outstanding each period. Fully
diluted earnings per share would not be different than net earnings per share.

During 1996 and 1995, 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  Companys  common stock have been  restated to give effect to the
stock splits.

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

The Company uses the asset and liability  method of accounting for income taxes.
Under the asset and liability  method,  deferred tax assets and  liabilities are
recognized for the future tax consequences  attributable to differences  between
the financial  statement carrying amounts of existing assets and liabilities and
their  respective  tax bases.  Deferred  amounts are measured  using enacted tax
rates  expected  to apply  to  taxable  earnings  in the  year  those  temporary
differences are expected to be recovered or settled.

No Federal income taxes have been provided on the undistributed  earnings of the
DISC  ($2,357,000  at  December  31,  1992)  since  the tax laws  allow  for the
indefinite  deferral of a portion of the  earnings of such  entities.  Effective
January 1, 1993, in  accordance  with SFAS No. 109, the Company began to provide
Federal income taxes on the  undistributed  earnings of the DISC,  which had the
effect of increasing the Company's effective tax rate.



                                      F-9
<PAGE>

                       LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Research and Development

Company-sponsored  research and  development  costs are expensed as incurred and
totaled  approximately  $913,000,  $737,000  and  $695,000  for the years  ended
December 31, 1996, 1995 and 1994, respectively.

Foreign Currency Translation

The Company has foreign subsidiaries located in Australia, Mexico and the United
Kingdom.  Foreign  subsidiary  income and  expenses are  translated  into United
States dollars at the average rates of exchange  prevailing during the year. The
assets and liabilities are translated into United States dollars at the rates of
exchange on either the balance sheet date, or on the transaction date based upon
the functional  currency unit. The Australian dollar is the functional  currency
of the Australian subsidiary, and therefore, related translation adjustments are
accumulated as a separate  component of shareholders  equity. The U.S. dollar is
the  functional  currency of the  subsidiaries  in Mexico and the United Kingdom
with the related foreign currency translation gains and losses being recorded in
the  statements of income as they occur.  For the years ended December 31, 1996,
1995 and 1994 the  Company  recognized  foreign  translation  losses of  $29,000
$87,000 and $306,000, respectively. The Company included such losses in interest
and other income, net in the accompanying consolidated statements of income.


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  123 are  made in the  notes to the
consolidated  financial  statements.  (See note 4) The disclosure  provisions of
SFAS 123 are effective for options granted in fiscal years beginning in 1995.

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 years presentation.

2. Income Taxes

The actual tax expense differs from the expected tax expense (benefit) (computed
by applying U.S. Federal  corporate rate of 34% to earnings before income taxes)
as follows:

<TABLE>
<CAPTION>
                                                              1996               1995                1994
                                                         ----------------   ----------------    ---------------

<S>                                                          <C>                <C>                <C>
Computed expected tax expense                                $ 3,110,274        $ 2,279,130        $ 1,547,833

Increase (decrease) in taxes resulting from:
     Effect of nondeductible foreign losses                       40,794             93,364             54,705
     Effect of nondeductible expenses                            163,343             52,772             31,433
     Other, net                                                    8,387              5,032            (86,496)
     State, net of Federal benefit                                92,565            181,907             54,421
                                                         ================   ================    ===============
                                                             $ 3,415,363        $ 2,612,205        $ 1,601,896
                                                         ================   ================    ===============
</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>

                                                                                    1996                  1995
                                                                               ----------------      ----------------

<S>                                                                            <C>                   <C>
Plant and equipment, principally due to differences in depreciation            $ 1,164,420           $ 1,150,146
Income of the DISC                                                                 693,258               549,330
Employee benefit accruals                                                         (553,722)             (513,942)
Other, net (primarily accruals)                                                   (329,814)             (189,125)
                                                                               ================      ================
Net deferred tax liability                                                     $    974,142          $    996,409
                                                                               ================      ================
</TABLE>

Foreign tax expense has not been significant.  The Company intends to repatriate
the  undistributed  earnings  of  its  foreign  subsidiaries  only  when  it  is
advantageous  for the  Company  to do so. The  Company  does not  anticipate  an
additional  tax  liability at the time of  repatriation  of these  undistributed
earnings  as the  tax  rates  in  the  foreign  jurisdictions  the  Company  has
operations in are equal to or higher than the U.S. tax rate.

Actual net income taxes paid were  $3,720,000,  $1,920,000  and  $2,115,000  for
1996, 1995 and 1994, respectively.

3. Long-term Debt and Line of Credit with Bank
<TABLE>
<CAPTION>
                                                                                      1996                 1995
                                                                              -------------------   ------------------
<S>                                                                              <C>                   <C>
Note payable to bank, due in quarterly
     installments plus interest based upon
     prime and LIBOR (weighted average rate
     of 6.78% at December 31, 1996) through
     July 15, 2001; secured by the pledge of
     a portion of the stock of a foreign subsidiary                               $  17,311,875          $     -

Note payable to bank, due in equal monthly principal
     installments plus interest at 7.75% through
     December 31, 1999; secured by equipment; repaid in 1996                              -                 5,000,000

Note payable to bank, due in equal monthly principal
     installments plus interest at prime less .25%
     (8.25% at  December 31, 1995) through
     January 15, 1999; unsecured; repaid in 1996                                          -                 1,845,667
                                                                               -------------------   ------------------
                                                                                     17,311,875             6,845,667

Less current installments of long-term debt                                           1,852,500             1,448,093
                                                                               -------------------   ------------------
                                                                                 $   15,459,375       $     5,397,574
                                                                               ===================   ==================
</TABLE>


On July 15,  1996,  the  Company  entered  into an  agreement  with two banks to
replace its existing  long-term  borrowings  with $25.0 million of new long-term
credit  facilities (the Credit  Facilities)  All outstanding  long-term debt was
repaid with borrowings on the Credit Facility.  Principal payments on the Credit
Facility are due  quarterly  along with  interest  which accrues at a rate based
upon either the London  Interbank  Offered  Rate (LIBOR) or upon the Banks prime
rate. The notes mature on July 15, 2001.

In July,  1996,  the Company  also  obtained a $17.5  million  revolving  credit
facility  (the  Revolving  Facility)  from two  banks.  The  Revolving  Facility
replaced a $12.0 million facility.  Borrowings under the Revolving  Facility are
based on certain  percentages of accounts  receivable and inventories.  Interest
accrues at a rate based upon either LIBOR or upon the Banks prime rate.  Amounts
outstanding  under  revolving  loans were $11.7 million on December 31, 1996 and
$7.0 million on December 31, 1995. The Revolving Facility expires July 15, 2001.


                                      F-11
<PAGE>

                       LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Annual  maturities  on long-term  debt  outstanding  at December 31, 1996 are as
follows:
<TABLE>

<S>                    <C>                            <C>
                       1997                           $    1,852,500
                       1998                                2,302,500
                       1999                                2,652,500
                       2000                                2,652,500
                       2001                                7,851,875
                                                   ==================
                                                       $  17,311,875
                                                   ==================
</TABLE>


To manage its  exposure  to  fluctuations  in  interest  rates,  the Company has
entered into two  interest  rate swap  agreements  (the Swap  Agreements)  for a
combined  notional  principal  amount  of  $8.0  million.  The  Swap  Agreements
terminate in August,  1999 and November,  2001.  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  Companys  Swap  Agreements  provide  that the  Company pay fixed
interest  rates of 6.255% and 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 credit
worthiness of the financial institution.

The Credit Facility and the Revolving  Credit Facility  require that the Company
maintain  certain  financial  ratios  and other  covenants.  The  Company  is in
compliance with respect to these financial ratios and covenants.

Actual  interest paid was  $1,432,000,  $964,000 and $763,000 in 1996,  1995 and
1994, respectively.


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, 1993                                 379,053     $    1.94   -  $  3.91
     Granted                                                      18,000                       7.45
     Exercised                                                   (27,996)         1.94   -     3.55
                                                         ----------------   -------------------------
Outstanding at December 31, 1994                                 369,057          1.94   -     7.45
     Granted                                                      13,550          7.39   -     9.42
     Canceled                                                     (7,250)         3.55   -     7.45
     Exercised                                                   (15,498)                      3.55
                                                         ----------------   -------------------------
Outstanding at December 31, 1995                                 359,859          1.94   -     9.42
     Granted                                                     195,230         10.83   -    15.00
     Exercised                                                   (12,646)         3.56   -    10.83
                                                         ----------------   -------------------------
Outstanding at December 31, 1996                                 542,443      $    1.94  -  $ 15.00
                                                         ================   =========================
</TABLE>

                                      F-12
<PAGE>

                       LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>

A summary of exercisable options follows:
                                                         Stock Options          Option Price
                                                        ----------------   -----------------------

<S>                                                             <C>          <C>        <C>
1994                                                            246,842      $  1.94 -  $ 7.45
                                                        ================   =======================
1995                                                            270,708      $  1.94 -  $ 9.42
                                                        ================   =======================
1996                                                            343,695      $  1.94 -  $15.00
                                                        ================   =======================
</TABLE>


The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting   Standards  No.  123  (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>
                                                       1996                       1995
                                                 ---------------            ---------------

<S>                                               <C>                        <C>
 Net income-as reported                           $5,732,500                 $4,091,117
 Net income-pro forma                              5,592,553                  4,085,589
 Net earnings per share-as reported                     0.94                       0.68
 Net earnings per share-pro forma                       0.92                       0.68
 Weighted-average fair value of options,
   granted during the year                              2.81                       3.75

</TABLE>

The fair value of each option  granted in 1996 and 1995 is estimated on the date
of grant  using  the  Black-Scholes  option-pricing  model  with  the  following
assumptions:  expected  volatility  of 33.9% based upon  historical  stock price
fluctuations; risk-free interest rate of 5.8%; expected lives of 4 years; and no
expected dividend yield.


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 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.  The total
amount expensed under the self-insurance  major medical program, net of employee
contributions,  was  $896,000,  $478,000  and  $695,000 in 1996,  1995 and 1994,
respectively.

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. For the years ended December 31, 1996,
1995 and 1994 the total amount expensed for workers'  compensation  coverage was
$291,000, $479,000 and $525,000, respectively.

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.  The Company has
recorded an accrual for  workers  compensation  claims,  a portion of which has
been classified as an other long-term  liability based on the expected long-term
nature of its  payout.  Based upon the  Companys  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 Companys financial position or its results of operations.



                                      F-13
<PAGE>

                       LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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, 1996,  1995 and 1994 include Company  contributions  to the plan of
$520,000, $359,000 and $270,000, respectively.

The Company is also  required to make  contributions  to a defined  contribution
plan for the employees of Glenn Pleass Holdings Pty. Ltd.  Contributions  during
1996 totaled $65,000.

5. Leases

The  Company  leases  a  building,  in  which  a  portion  of its  manufacturing
facilities are located,  under an operating lease from a partnership  controlled
by  certain  shareholders.  The lease  agreement  provides  for  monthly  rental
payments of $6,600 through 1998, and the payment of real estate taxes, insurance
and maintenance expenses.  In addition,  the Company leases property adjacent to
the building from the partnership on a month to month basis. In conjunction with
a 1992 debt  refinancing,  the Company  advanced  $220,000 to this  partnership.
Repayment of this  advance  will be made  through a reduction of lease  payments
otherwise due between the Company and the  partnership  and includes an interest
charge at a rate of 9.25% per annum on the  outstanding  balance of the advance.
Included in other assets and prepaid expenses in the  accompanying  consolidated
balance  sheets is $5,000 in 1996 and  $61,000  in 1995  remaining  due from the
partnership for this advance.

During 1996 the Company entered into a $4.3 million lease, of which $2.5 million
has been funded at  December  31,  1996,  to finance a new  integrated  computer
system and other technology oriented equipment.  The lease is for a period of 48
months,  unless it is terminated by the Company after 24 months.

At  December  31,  1996,  future  minimum  lease  payments  required  under  all
noncancelable operating leases are as follows:

<TABLE>
             <S>                                            <C>
             1997                                           $ 1,815,829
             1998                                             1,675,475
             1999                                               957,159
             2000                                               597,239
                                                        ----------------
             Total minimum lease payments                   $ 5,045,702
                                                        ================
</TABLE>

Total rental  expense was  $1,223,000,  $712,000 and $776,000 in 1996,  1995 and
1994, 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 $297,000, $310,000 and $259,000 in 1996, 1995 and 1994, respectively.


6. Long-term Receivables

Long-term receivables are interest bearing and include $306,000 and $252,000 due
from officers for the years ended December 31, 1996 and 1995, respectively.


                                      F-14
<PAGE>

                       LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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  Companys  trade  receivables  and trade  payables
approximate market value.

Notes Receivable

The carrying amount of the Companys notes receivable  approximates  fair market
value estimated 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  approximated  market value based upon the
current nature of the investments.

Debt and Swap Agreements

The  carrying  amount of the  Companys  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.


8. Acquisition of Subsidiary

In  December  1995,  the  Company  acquired  100% of the  stock of Glenn  Pleass
Holdings  Pty.  Ltd.  (GPH)  for  $3.5  million.  GPH  is  an  Australian  based
manufacturer and distributor of beverage dispensing systems. The acquisition was
recorded in accordance  with the purchase method of accounting and, as such, the
Company  recognized  the excess cost of the assets  acquired  over the estimated
fair value of such assets, or $2.0 million, as goodwill which is being amortized
over  thirty  years.  Results  of  operations  are  included  in  the  Companys
consolidated statement of income from the date of acquisition.

Details of the business acquired in the purchase  transaction are as follows (in
thousands):
<TABLE>
<CAPTION>

                                                                1995
                                                         ----------------
<S>                                                       <C>
Fair value of assets acquired, including goodwill         $         5,248
Liabilities assumed                                                (1,744)
                                                         ================
Net cash paid for the acquisition                         $         3,504
                                                         =================
</TABLE>

Assuming the sale was  consummated  as of the beginning of years ended  December
31, 1995 and 1994 fiscal years, pro forma operating results of the Company would
be as follows (in thousands except for per share data):

<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                             -----------------------------------
                                                   1995                 1994
                                             ---------------     ---------------
<S>                                           <C>                  <C>

Net Sales                                     $       83,898       $       77,913
Net earnings                                           3,927                3,312
Net earnings per share                                  0.65                 0.59
Number of shares used in calculation                   5,988                5,675
</TABLE>


                                      F-15
<PAGE>


                       LANCER CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)


9. Supplemental Balance Sheet and Income Statement Information

Accrued expenses consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                      As of December 31,
                                             -------------------------------------
                                                   1996                 1995
                                             ----------------     ----------------

<S>                                             <C>                  <C>
Payroll and related expenses                    $      1,608         $      1,238
Commissions                                              344                  465
Workers' compensation accrual - current                  300                  300
Property taxes                                            47                  255
Health insurance                                         107                  122
Interest                                                 237                  122
Other                                                    713                  380
                                             ================     ================
                                                 $     3,356           $    2,883
                                             ================     ================
</TABLE>


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

<TABLE>
<CAPTION>
                                      1996         Percent of      1995         Percent of       1994       Percent
                                                    Net Sales                    Net Sales                  of Net Sales
                                  -------------   --------------------------   ---------------------------  -----------
United States:
<S>                                  <C>                 <C>      <C>                 <C>       <C>                <C>
     The Coca-Cola Company           $  32,325           32%      $  37,425           49%       $  31,747          45%
     Other                              26,190           25%         11,835           16%          18,266          26%
                                  -------------   -----------   ------------   -----------   -------------  -----------
                                        58,515           57%         49,260           65%          50,013          71%
                                  -------------   -----------   ------------   -----------   -------------  -----------

Export:
     The Coca-Cola Company                 159            1%            527            1%              198          1%
     Other                              43,634           42%         26,125           34%           20,689         28%
                                  -------------   -----------   ------------   -----------   -------------  -----------
                                        43,793           43%         26,652           35%          20,887          29%
                                  -------------   -----------   ------------   -----------   -------------  -----------
                                      $102,308          100%      $  75,912          100%       $  70,900         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.

The  Company's   foreign   operations   consist  of  that  of  its  wholly-owned
subsidiaries Industrias Lancermex,  S.A. de C.V., Nueva Distribuidora Lancermex,
S.A. de C.V.,  Servicios  Lancermex,  S.A. de C.V.,  Glenn Pleass  Holdings Pty,
Ltd.,  and Lancer Ltd. A summary of  operating  results and asset of the foreign
operations is as follows:

<TABLE>
<CAPTION>
                                                     1996                     1995                     1994
                                              -----------------      --------------------         -----------------
<S>                                              <C>                       <C>                     <C>
Total revenue                                    $  11,454,678             $   2,517,495           $    3,694,853

Operating income (loss)                                218,112                  (120,568)                 115,146

Assignable assets, as of December 31                14,888,994                10,184,422                3,264,579
</TABLE>

Management  believes  that  gross  profit  on  export  sales  is not  materially
different from that on domestic sales.

                                      F-16
<PAGE>

                       LANCER CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)


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. Subsequent Events

During the first  quarter of 1997,  the  Company  completed  the  purchase  of a
manufacturer  and marketer of fountain soft drink and beer dispensing  equipment
based in Sao Paulo, Brazil. The purchase price of $6.1 million was financed with
borrowings under the Companys Credit Facilities,  and with long-term  financing
provided by the seller. The operating results and assets of acquired company are
less than 10% of  consolidated  operating  results and assets of the Company and
are not considered material for disclosure purposes.

Subsequent  to December  31, 1996 the Company  also signed a letter of intent to
acquire the assets of an entity  which  manufactures  and  distributes  beverage
dispensing  equipment.  The  anticipated  purchase price is  approximately  $3.5
million and will be financed with  borrowings  under the Credit  Facilities  and
issuance of common stock. The Company expects to finalize the transaction during
the second quarter of 1997.

12. Quarterly Financial Information (Unaudited)

The  Company  uses the  gross  profit  method  to  determine  cost of sales  and
estimates the inventory components for interim periods after considering various
factors  including  historical  percentages and price  increases.  The following
table reflects the quarterly  results for 1996 and 1995 (in thousands except for
per share data):

<TABLE>
<CAPTION>

                                                           Three Months Ended
                                  -------------------------------------------------------------
1996                                  March             June         September       December
                                       31                30             30              31
                                   ------------    ------------    ------------    ------------

<S>                                  <C>             <C>             <C>             <C>
Net Sales                            $  23,452       $  25,334       $  27,605       $  25,917
Gross Profit                             5,610           6,024           6,414           6,506
Net earnings                             1,340           1,526           1,509           1,358
Net earnings per share                    0.22            0.25            0.25            0.22


<CAPTION>
</TABLE>

<TABLE>
<CAPTION>

                                                           Three Months Ended
                                  -------------------------------------------------------------
1995                                  March             June         September       December
                                       31                30             30              31
                                   ------------    ------------    ------------    ------------

<S>                                 <C>             <C>             <C>             <C>
Net Sales                           $  20,341       $  21,313       $  17,376       $  16,882
Gross Profit                            3,868           4,263           3,675           4,269
Net earnings                              969           1,314             814             994
Net earnings per share                   0.16            0.22            0.13            0.17

</TABLE>


                                      F-17
<PAGE>

                       LANCER CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>

                                   SCHEDULE II

                                 RESERVE ACCOUNT


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

<S>                                           <C>              <C>                 <C>             <C>
                  December 31, 1996           $   85,000       $  106,645          $    6,645      $    185,000
                  December 31, 1995               85,000            2,083               2,083             85,000
                  December 31, 1994               85,000          106,121             106,121             85,000
<CAPTION>
----------------------------------------------------------------------------------------------------------------
</TABLE>



                                      F-18
<PAGE>