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, 1997       Commission file number 0-13875

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


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

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

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

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

          Securities registered pursuant to Section 12 (g) of the Act:
                     Common Stock, par value $.01 per share
                                (Title of class)

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K (section 229.405 of this chapter) is not contained herein, and
will not be  contained,  to the best of  registrant's  knowledge,  in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

The aggregate market value of the registrant's  common stock, par value $.01 per
share,  as of March 23,  1998,  held by  non-affiliates  of the  registrant  was
approximately  $71,676,787 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
23, 1998, was 8,914,490.

                      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
1998 annual meeting of shareholders  are incorporated by reference into Part III
of this report.

<PAGE>

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

                                     PART I

ITEM 1.   BUSINESS

General

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

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

Strategy

The Company's  strategy is to increase sales through (i) its continued  emphasis
on providing  technologically  superior,  reliable, high quality products to its
customers,  (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 1997,  Lancer  completed  expansions  of its  manufacturing  capacity  in San
Antonio,  Texas  and  in  Piedras  Negras,  Mexico.  The  Company  believes  the
expansions  will allow  production  to grow with customer  demand.  In the first
quarter of 1997,  Lancer  completed  the  purchase of the assets of a Sao Paulo,
Brazil,  based  manufacturer  and  marketer  of  fountain  soft  drink  and beer
dispensing  equipment.  The Brazilian operation has improved Lancer's ability to
serve its customers in the region.  In the second  quarter of 1997,  the Company
acquired a  manufacturer  of beer and fountain soft drink  dispensing  equipment
based in Auckland, New Zealand.  Lancer also opened a sales office and warehouse
facility in Brussels,  Belgium to improve  delivery of its products to European,
Middle Eastern and North African customers.
                                      1
<PAGE>

The Beverage Dispensing Industry

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


Products

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



Soft Drink and Citrus Dispensers

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

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

The prices of the  Company's  dispensing  systems vary  depending on  dispensing
capacity, number of drink selections,  speed of beverage flow and other customer
requirements.  Sales of soft drink and  citrus  dispensers  for the years  ended
December 31, 1997, 1996 and 1995,  accounted for approximately  47%, 54% and 55%
of total 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  Company's  primary  valve,  the LEV, has been  designated by The
Coca-Cola Company as the standard valve for the U.S. market. Lancer uses the LEV
in many of its own  dispensing  systems,  and also sells the valve to  competing
equipment makers. For the years ended December 31, 1997, 1996 and 1995, sales of
valves and related  accessories  accounted for approximately 14%, 16% and 20% of
total net sales, respectively.

Beer Dispensing Systems

The Company  manufactures  and markets  beer  dispensing  equipment  and related
accessories.  Products  include  chillers,  taps,  fonts,  dispensers  and kegs.
Lancer's operations in Australia, Brazil and New Zealand account for most of the
Company's sales of beer related equipment.  Sales of beer equipment  represented
8%, 1% and 0% of total net sales in the years ended December 31, 1997,  1996 and
1995, respectively.
                                       2
<PAGE>

Other Related Products and Services

The Company  remanufactures  various  dispensing  systems and sells  replacement
parts in  connection  with the  remanufacturing  process.  For the  years  ended
December 31, 1997, 1996 and 1995,  revenues from these activities  accounted for
approximately 4%, 4% and 5% of sales, respectively.

Lancer  FBD  Partnership,  Ltd.,  a joint  venture  in which  Lancer  owns a 50%
interest,  manufactures  frozen  beverage  dispensers.  Sales of the  dispensers
represented  4%,  2% and 0% of  Lancer's  total  net  sales in the  years  ended
December 31, 1997, 1996 and 1995, respectively.

The Company  manufactures  and/or markets a variety of other products  including
syrup pumps,  carbonators,  stainless steel and brass  fittings,  carbon dioxide
regulator  components,  ice bagger  machines,  water  filtering  systems,  and a
variety  of  other  products,  parts  and  accessories  for  use  with  beverage
dispensing  systems.  Lancer also provides  logistics services to certain of its
customers. Together, these parts and services constitute 23%, 23% and 20% of the
Company's  total net sales for the years ended December 31, 1997, 1996 and 1995,
respectively.

Product Research and Development

In order to maintain its competitive position, the Company continuously seeks to
improve  and  enhance  its line of  existing  beverage  dispensing  systems  and
equipment,  and to  develop  new  products  to meet the  demands of the food and
beverage  industry.  Some  projects are  originated by Company  personnel  while
others are initiated by customers,  primarily The Coca-Cola Company. The Company
has, from time to time,  entered into  agreements  with  customers to design and
develop new  products.  For the years ended  December 31,  1997,  1996 and 1995,
Company-sponsored  research and development  expenses were $1,467,000,  $913,000
and $737,000, respectively.

Production, Inventory and Raw Materials

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

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

Backlog

The  Company's  manufacturing  operations  are driven by actual  and  forecasted
customer demand. The Company's backlog of unfilled orders was approximately $8.2
million,  $10.1  million,  $10.2  million at December 31,  1997,  1996 and 1995,
respectively. It is anticipated that 1997 backlog orders will be filled in 1998.

Marketing and Customers

The  Company's  products are marketed on a wholesale  basis in the United States
through   a   network   of   independent   distributors   and   salaried   sales
representatives.  The principal  purchasers  of Company  products are major soft
drink companies,  bottlers,  breweries, beverage equipment dealers, restaurants,
convenience stores, and other end users.
                                       3
<PAGE>

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  24%,  33% and 50% of the  Company's  total net sales for the
years  ended  December  31,  1997,  1996  and  1995,  respectively.  None of the
Company's   customers,   including  The  Coca-Cola  Company,  are  contractually
obligated to purchase minimum quantities of Lancer products.  Consequently,  The
Coca-Cola Company has the ability to adversely  affect,  directly or indirectly,
the volume and price of the products sold by the Company. Lancer does not expect
any  significant  volume or price  reductions in its business with The Coca-Cola
Company. If they were to occur,  however,  such reductions would have a material
adverse  impact  on  the  Company's   financial  position  and  its  results  of
operations.

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

The Company and The  Coca-Cola  Company  have  entered  into  certain  logistics
support  agreements  under which the Company  warehouses and distributes new and
used products owned by The Coca-Cola Company.  The two parties also have entered
into  agreements  which  provide  for the  remanufacturing  of  used  dispensing
equipment owned by The Coca-Cola Company.  During 1997, the Company expanded the
scope of all such arrangements with The Coca-Cola Company.


International Sales

For the years ended  December  31, 1997,  1996 and 1995,  the sales to customers
outside  the United  States  were  approximately  48%,  43% and 35% of total net
sales,  respectively.  The Company  has sales  employees,  distributors,  and/or
licensees in Latin America,  Europe,  Africa and Asia. The Company  manufactures
products in Australia,  Brazil,  Mexico and New Zealand, and operates warehouses
in Belgium and Russia.

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

In the first quarter of 1997,  Lancer  completed the purchase of the assets of a
Sao Paulo, Brazil, based manufacturer of fountain soft drink and beer dispensing
equipment. In the second quarter of 1997, the Company acquired a manufacturer of
beer and  fountain  soft  drink  dispensing  equipment  based in  Auckland,  New
Zealand.  Also, in 1997, Lancer opened a sales office and warehouse  facility in
Brussels, Belgium.


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.

                                       4
<PAGE>

Employees

As of December 31, 1997,  the Company had 1,569  full-time  employees of whom 79
were engaged in engineering and technical support, 1,305 in manufacturing, 79 in
marketing and sales and 106 in general management and administrative  positions.
The majority of the employees  work at the Company's  facilities in San Antonio,
Texas. 545 employees work at the Company's  facility in Piedras Negras,  Mexico,
94 are employed by the Company's  Brazilian  subsidiary,  57 are employed by the
Company's  Australian  subsidiary,  and 31 work in New  Zealand.  Certain  sales
representatives  are  located  in  various  parts of the  United  States,  Latin
America,  Europe and Asia. None of the U.S. employees are represented by a union
or are subject to collective bargaining agreements.  Substantially all full-time
United States  employees are eligible to participate  in the Company's  employee
profit sharing plan and various other benefit programs.

Intellectual Property

The Company  presently owns 34 United States patents and numerous  corresponding
foreign patents.  It has 10 pending U.S. patent  applications and  corresponding
foreign  patent  applications.  The  Company's  products  covered  by patents or
pending patent  applications  include food, beverage and ice beverage dispensing
equipment and  components.  The patents have a remaining  life of 4 to 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.  There can be no
assurance,  however, that the Company's existing or future patents will continue
to provide a  competitive  advantage,  nor can there be any  assurance  that the
Company's competitors will not produce non-infringing competing products.

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

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

Environmental Matters

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

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

                                       5
<PAGE>

ITEM 2.   PROPERTIES

The Company's primary manufacturing and administrative facilities are located in
several buildings in San Antonio,  Texas, totaling  approximately 723,000 square
feet, including three buildings owned by Lancer covering  approximately  410,000
square feet of space, the largest of which is located on a 40-acre tract of land
in the southeast sector of San Antonio. A 220,000 square foot plant expansion at
the Company's  primary San Antonio  facility was completed in 1997. In the first
quarter of 1998, the Company  completed  construction  of  approximately  32,000
square feet of office  space at its primary  San Antonio  facility.  The Company
owns and operates  facilities  located in Piedras Negras,  Mexico  consisting of
192,000 square feet of completed  space,  including  56,000 square feet of space
that was  completed in 1997.  The Company also leases a 59,000 square foot plant
in Sao Paulo,  Brazil,  a 34,000 square foot plant in Auckland,  New Zealand,  a
38,284 square foot plant in Beverley, South Australia, a suburb of Adelaide, and
small facilities in Brussels,  Belgium;  Moscow, Russia; and Monterrey,  Mexico.
The Company  leases  516,000  square  feet of space  throughout  the world.  The
Company sold a building in Chicago, Illinois during the fourth quarter of 1997.

Total net rent expense for real estate was $1,359,000,  $1,093,000, and $712,000
in 1997, 1996 and 1995, respectively.  Included in total rent expense in 1997 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, 1997.


                                     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 8, 1997 and July
9, 1996.

<TABLE>
<CAPTION>
Market Price For Common Stock
                              1997                             1996
Quarter                       High           Low               High            Low
-----------------------    --------------------------       ---------------------------
<S>                            <C>            <C>                 <C>            <C>
First                          $15.00         $11.92              $8.00          $6.06
Second                          17.33          12.58              10.56           7.22
Third                           17.63          14.75               9.94           8.00
Fourth                          16.13          10.75              13.92           8.67
</TABLE>


On March 23, 1998, the closing price of the Company's  common stock, as reported
by the ASE, was $13.00 per share. On that date, there were 162 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.

                                       6
<PAGE>


<TABLE>
<CAPTION>

ITEM 6.   SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
                                                                      Years Ended December 31,
                                           --------------------------------------------------------------------------------
                                                1997              1996            1995            1994           1993
                                           ---------------   ---------------  -------------   -------------  --------------
Operating Data:
<S>                                            <C>               <C>             <C>            <C>              <C>
     Net sales                                 $  119,502        $  103,295      $  76,432      $   71,526       $  57,254
     Gross profit                                  31,337            24,929         16,439          14,312          10,500
     Selling, general and
        administrative expenses                   (20,439)          (14,512)        (9,934)         (9,359)         (7,175)
     Operating income                              10,898            10,417          6,505           4,953           3,325
     Interest expense                              (2,815)           (1,588)          (981)           (755)           (795)
     Interest and other income, net                 1,040               318          1,179             354           1,060
     Earnings before income taxes
        and extraordinary item                      9,123             9,147          6,703           4,552           3,590
     Income tax expense                             3,037             3,415          2,612           1,602           1,416
     Net earnings                                   6,086             5,732          4,091           2,950           2,174
     Net earnings per share*
       Basic                                       $ 0.69            $ 0.66         $ 0.47          $ 0.36          $ 0.27
       Diluted                                     $ 0.65            $ 0.63         $ 0.46          $ 0.35          $ 0.26
     Weighted average shares outstanding*
       Basic                                        8,863             8,722          8,701           8,178           7,972
       Diluted                                      9,338             9,052          8,985           8,460           8,214

<CAPTION>
      * Per share  amounts  have been  restated to reflect  three-for-two  stock
        dividends effective July 8, 1997, July 9, 1996 and July 11, 1995
</TABLE>

<TABLE>
<CAPTION>
                                                                         As of December 31,
                                           --------------------------------------------------------------------------------
                                                1997              1996            1995            1994           1993
                                           ---------------   ---------------  -------------   -------------  --------------
Balance Sheet Data:
<S>                                            <C>                <C>            <C>             <C>              <C>
     Total assets                              $  110,669         $  82,009      $  57,944       $  46,896        $ 38,902
     Short-term debt                               23,444            13,553          8,448           7,409           7,159
     Long-term debt, less
        current installments                       21,565            15,459          5,398           3,397           2,575
     Shareholders' equity                          42,961            37,036         31,065          26,919          20,325
</TABLE>


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

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

The  following  discussion  should  be read in  connection  with  the  Company's
Consolidated Financial Statements, related notes and other financial information
included elsewhere in this filing.
                                       7
<PAGE>

Results of Operations


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

Net sales for the year ended December 31, 1997  increased by $16.2  million,  or
16%, to $119.5  million from $103.3  million in 1996.  This  increase was driven
primarily by the inclusion of sales from the Company's newly acquired operations
in Brazil and New Zealand,  and by strong sales across most product lines. Sales
of mechanically  cooled  dispensers rose 7%, sales of ice cooled dispensers rose
13%,  and spare parts  sales  increased  35%.  The newly  acquired  subsidiaries
enhanced  the  Company's  market  position in beer  equipment  as sales of those
product  lines  grew  665%.  The  Company's  joint  venture  in frozen  beverage
dispensing  systems  established  in 1996 also  contributed to growth during the
year as sales of frozen beverage  dispensers grew 193% during 1997. Sales of new
citrus dispensers  declined 36% from 1996 levels. The Company's primary customer
has  significantly  reduced  purchases of new  equipment,  but has increased the
remanufacture of existing equipment. Lancer's remanufacturing revenues increased
24% in 1997.

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

Gross profit for the year ended December 31, 1997 increased by $6.4 million,  or
26%, to $31.3 million from $24.9  million for the prior year,  due to the higher
sales and an improvement in  manufacturing  gross margin to 26% in 1997 from 24%
in 1996. This improvement  reflects product mix changes and management's ongoing
efforts to control costs through manufacturing process enhancements.

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

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

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

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

Net sales for the year ended December 31, 1996  increased by $26.9  million,  or
35%, to $103.3  million  from $76.4  million in 1995.  This  increase was driven
primarily by the inclusion of the  Company's  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 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%, to $24.9 million from $16.4  million for the prior year,  due to the higher
sales and an improvement in  manufacturing  gross margin to 24% in 1996 from 22%
in 1995. This improvement  reflects product mix changes and management's ongoing
efforts to control costs through manufacturing process enhancements.

Selling,  general and  administrative  expenses for the year ended  December 31,
1996 were $14.5 million,  (14% of sales), up from $9.9 million (13% 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 Company's growth.
                                       8
<PAGE>

Interest expense for the year ended December 31, 1996 was $1.6 million,  up from
$1.0 million in 1995. This increase  resulted from higher average  borrowings to
fund asset growth. The Company's 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 40%
increase  over the $4.1 million  earned in 1995.  Net earnings per diluted share
improved 39% to $0.63 in 1996 from $0.46 in 1995.

Liquidity and Capital Resources

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

Lancer  generated  $3.1  million  of cash  from  operating  activities  in 1997,
compared to $3.5 million of cash used by operating  activities  in 1996.  Record
earnings in 1997 were partially  offset by an increase in inventory and accounts
receivable.  The  increase in current  assets was caused by sales  growth and by
slower inventory turns.

Capital  spending  was $9.9  million  in 1997.  During  the  year,  the  Company
completed a 220,000 square foot plant  expansion at its primary  facility in San
Antonio, and a 56,000 square foot plant expansion in Piedras Negras, Mexico. The
Company  also  completed  most of a 32,000  square foot  office  addition to its
primary  facility in San Antonio.  The space was  completed  and occupied in the
first quarter of 1998, consolidating three San Antonio office locations.  Lancer
expects capital spending levels in 1998 to be less than half of those in 1997.

In the first  quarter of 1997,  Lancer  completed  the  purchase of a Sao Paulo,
Brazil,  based  manufacturer  and  marketer  of  fountain  soft  drink  and beer
dispensing  equipment.  The $6.0 million  purchase  price was financed with $2.0
million of cash and a $4.0 million note issued to the seller.  Lancer funded the
cash portion of the purchase price with bank debt.

In the second quarter of 1997, the Company bought the assets of an Auckland, New
Zealand based  manufacturer  of beer and fountain soft drink  equipment for $3.3
million.  Consideration consisted of 122,832 shares of Lancer Corporation common
stock (adjusted for the three-for-two  stock split effected July 8, 1997) valued
at approximately  $1.6 million,  plus $1.7 million in cash.  Lancer financed the
cash portion of the acquisition with bank debt.

Lancer  funded a portion of its  capital  spending  and the cash  portion of its
acquisitions  with  bank  debt.  In July,  1996,  the  Company  entered  into an
agreement with two banks for $42.5 million of five year credit  facilities.  The
facilities  included 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.  In May,
1997, the Company  increased its revolving  facility from $17.5 million to $25.0
million.  In December,  1997, the Company increased its revolving  facility from
$25.0  million to $30.0  million.  The  increase to $30.0  million is  effective
through July 15, 1998, when the facility will decrease to $25.0 million. Certain
financial  covenants  were  amended  through  July 15,  1998.  The Company is in
compliance  with  respect to  financial  ratios and  covenants  contained in the
credit agreement.

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

Inflation

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

Seasonality

The Company's net sales in the fourth  quarter of its fiscal years  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.
                                       9
<PAGE>

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. The Company, prevented by current tax
regulations  from  maintaining  both the DISC  and a FSC at the same  time,  has
determined it may be  advantageous  to convert the DISC to a FSC. The conversion
to a FSC could take place in 1998. 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 have not
previously  been provided.  If the DISC had been converted on December 31, 1997,
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 (the "FASB") issued
Statement of Financial  Accounting  Standards  ("SFAS")  No. 128  "Earnings  per
Share." The Statement  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 adopted SFAS No. 128 in
1997. All  prior-period  earnings per share data  presented in the  accompanying
consolidated   financial   statements  has  been  restated  to  conform  to  the
requirements of SFAS No. 128.

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income."
This statement establishes standards for reporting  comprehensive income and its
components in a full set of general-purpose  financial statements.  SFAS No. 130
requires  that all items that are  required to be  recognized  under  accounting
standards  as  components  of  comprehensive  income be  reported in a financial
statement displayed with the same prominence as other financial statements. SFAS
No. 130 is effective for fiscal years  beginning  after  December 15, 1997.  The
Company believes that the disclosure of comprehensive  income in accordance with
the  provisions  of SFAS No.  130 will  not  materially  impact  the  manner  of
presentation of its financial statements as currently and previously reported.


Year 2000

In 1997, Lancer  implemented a BaaN ERP manufacturing  system which is year 2000
compliant.  The Company is also working with its vendors and processing banks to
ensure that their systems are year 2000  compliant.  The Company does not expect
to incur any additional material expenses relating to year 2000 compliance.


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.

                                       10
<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 28, 1998 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             61                 Chairman of the Board
  George F. Schroeder             58                 President, Chief Executive Officer and Director
  John P. Herbots                 50                 Vice President Finance, CFO and Director
  Walter J. Biegler               56                 Director
  Jean M. Braley                  68                 Director
  Charles K. Clymer               62                 Director
  Michael E. Smith                57                 Director
  Charles W. Thomas               44                 Vice President of Marketing
  Robert W. Abbott                59                 Vice President-Asia
  Richard M. Abraham              47                 Vice President-Pacific
  Jose A. Canales, Jr.            52                 Vice President-Latin America
  Robert E. Gehl                  36                 Vice President-Europe
  James R. Sprinkle               50                 Vice President-North America
  Samuel Durham                   49                 Vice President of Engineering
  Michael U. Raymondi             51                 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 has been a
private  investor  since 1985. 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.
                                       11
<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.   Richard  M.   Abraham   has  been   employed   by  the   Company  as  Vice
President-Pacific  since April 1, 1997. He was  previously a principal  owner of
Applied Beverage Systems (1990),  Ltd. ("ABS") in Auckland,  New Zealand,  since
1986.  The  Company  acquired  substantially  all of the assets of ABS in April,
1997.

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, Jean M. Braley, Charles K. Clymer and
Michael E.  Smith.  The Audit  Committee  met once in 1997.  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 1997. The members of the Stock
Option Committee are Walter A. Biegler,  Charles K. Clymer and Michael E. Smith.
The Stock Option Committee met seven times in 1997.

                                       12
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

The  information  set  forth  under  the  caption   "Compensation   and  Certain
Transactions"  in the  Company's  proxy  statement  for its May 28,  1998 Annual
Meeting of  Shareholders,  which is to be filed with the Commission,  sets forth
information  regarding  executive   compensation  and  certain  transactions  as
required in response to this item and is incorporated herein by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT

The  information  set forth  under the  captions  "Principal  Shareholders"  and
"Election of Directors" in the  Company's  proxy  statement for its May 28, 1998
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 28,  1998 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:

          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
                                       13
<PAGE>
        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.
        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 Boatmen's
                  National Bank of St. Louis
        10.28++   Term A Note, dated July 15,1996,  between Lancer Corporation
                  and The Frost National Bank and The Boatmen's National Bank of
                  St. Louis
        10.29++   Term B Note, dated July 15,1996,  between Lancer  Corporation
                  and The Frost National Bank and The Boatmen's National Bank of
                  St. Louis
        10.30++   Revolving Note, dated July 15,1996, between Lancer Corporation
                  and The Frost National Bank and The Boatmen's National Bank of
                  St. Louis
        10.31++   Acquisition  Note, dated July 15,1996, between Lancer
                  Corporation and The Frost National Bank and The Boatmen's
                  National Bank of St. Louis
        10.32++   Stock Pledge, dated July 15,1996, between Lancer Corporation
                  and The Frost National Bank 10.33++ Parent and Affiliate
                  Guaranties, dated July 15,1996, between Lancer Corporation or
                  its subsidiaries and The Frost National Bank
        10.34#    Lancer Corporation Stock Incentive Plan, Effective Date
                  March 1, 1996
        10.35+++  Master  Lease  Agreement  dated  September 4, 1996 between
                  Lancer Partnership, Ltd. and CCA Financial, Inc.
        10.36     First Amendment to Credit Agreement dated May 12, 1997 between
                  Lancer Partnership, Ltd. and The Frost National Bank and
                  NationsBank, N.A.
        10.37     Second Amendment to Credit Agreement dated December 31, 1997
                  between Lancer Partnership, Ltd. and The Frost National Bank
                  and NationsBank, N.A.
        21.1      List of Significant Subsidiaries of the Registrant
        23.1      Consent of KPMG Peat Marwick LLP

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

**      These exhibits are  incorporated by reference to the same Exhibit to the
        Registrant's Form 10-K for the year ended December 31, 1994.
                                       14
<PAGE>

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

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

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

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

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



(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.
















                                       15
<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 27, 1998
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.
<TABLE>
<CAPTION>

Signature                                 Title                                                         Date

<S>                                      <C>                                                            <C>
/s/ ALFRED A. SCHROEDER                   Chairman of the Board                                         March 27, 1998
Alfred A. Schroeder                                                                                     Date

/s/ GEORGE F. SCHROEDER                   President and Director                                        March 27, 1998
George F. Schroeder                       (principal executive officer)                                 Date

/s/ JOHN P. HERBOTS                       Vice President Finance & Director                             March 27, 1998
John P. Herbots                           (principal financial and accounting officer)                  Date

/s/ WALTER J. BIEGLER                     Director                                                      March 27, 1998
Walter J. Biegler                                                                                       Date

/s/ JEAN M. BRALEY                        Director                                                      March 27, 1998
Jean M. Braley                                                                                          Date

/s/ CHARLES K. CLYMER                     Director                                                      March 27, 1998
Charles K. Clymer                                                                                       Date

/s/ MICHAEL E. SMITH                      Director                                                      March 27, 1998

Michael E. Smith                                                                                        Date
</TABLE>







                                       16
<PAGE>
                       LANCER CORPORATION AND SUBSIDIARIES
             INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

Independent Auditors Report                                                  F-2

Consolidated Balance Sheets as of December 31, 1997 and 1996                 F-3

Consolidated Statements of Income for each of the years in the three-year
    period ended December 31, 1997                                           F-5

Consolidated Statements of Shareholders Equity for each of the years in the
    three-year period ended December 31, 1997                                F-6

Consolidated Statements of Cash Flows for each of the years in the
    three-year period ended December 31, 1997                                F-7

Notes to Consolidated Financial Statements                                   F-8

Schedule for the years ended December 31, 1997, 1996 and 1995
    II-Reserve account                                                      F-20

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











                                      F-1
<PAGE>

                           INDEPENDENT AUDITORS REPORT


The Board of Directors and Shareholders
Lancer Corporation:

We have audited the consolidated  financial statements of Lancer Corporation and
subsidiaries as listed in the accompanying  index. In connection with our audits
of the consolidated financial statements,  we also have audited the consolidated
financial  statement  schedule  as  listed  in  the  accompanying  index.  These
consolidated  financial statements and consolidated financial statement schedule
are the  responsibility  of the Companys  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,  1997 and 1996 and the  results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 1997,  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
March 11, 1998





                                      F-2
<PAGE>

<TABLE>
<CAPTION>

                                         LANCER CORPORATION AND SUBSIDIARIES

                                             CONSOLIDATED BALANCE SHEETS
                                              December 31, 1997 and 1996

                                                        ASSETS

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

Current assets:
<S>                                                              <C>                            <C>
     Cash                                                        $           1,850,779          $          1,016,425
     Receivables:
        Trade accounts and notes                                            22,674,269                    19,686,318
        Refundable income taxes                                                  1,483                       396,495
        Other                                                                  298,274                       690,034
                                                                   --------------------           -------------------
                                                                            22,974,026                    20,772,847
        Less allowance for doubtful accounts                                  (335,000)                     (185,000)
                                                                   --------------------           -------------------
            Net receivables                                                 22,639,026                    20,587,847
                                                                   --------------------           -------------------
     Inventories:
        Raw materials and supplies                                           1,996,536                     1,269,404
        Work in process                                                     28,980,250                    18,425,735
        Finished goods                                                      13,437,781                     8,543,784
                                                                   --------------------           -------------------
            Total inventories                                               44,414,567                    28,238,923
     Prepaid expenses ( $0 and $4,624 due
        from affiliates, respectively)                                         178,869                       243,937
     Deferred tax asset                                                        220,849                        64,513
                                                                   --------------------           -------------------
            Total current assets                                            69,304,090                    50,151,645
                                                                   --------------------           -------------------

     Property, plant and equipment, at cost:
        Land                                                                 1,259,938                     1,307,663
        Buildings                                                           18,152,535                     9,681,466
        Machinery and equipment                                             17,839,310                    14,925,713
        Tools and dies                                                       8,454,022                     8,448,506
        Leaseholds, office equipment and vehicles                            6,776,193                     5,945,069
        Construction in progress                                             1,600,204                     5,162,508
                                                                   --------------------           -------------------
                                                                            54,082,202                   45,470,925
        Less accumulated depreciation and amortization                    (22,186,770)                  (19,676,377)
                                                                   --------------------           -------------------
            Net property, plant and equipment                               31,895,432                   25,794,548
                                                                   --------------------           -------------------

     Long-term receivables ($ 358,890 and $306,232  due
        from affiliates, respectively)                                         724,959                       404,007
     Long-term investments                                                   3,273,621                     2,975,000
     Intangibles and other assets, at cost, less
        accumulated amortization                                             5,470,886                     2,684,073
                                                                   --------------------           -------------------
                                                                 $         110,668,988          $         82,009,273
                                                                   ====================           ===================
<CAPTION>

                             See accompanying notes to consolidated financial statements.


</TABLE>


                                      F-3
<PAGE>

<TABLE>
<CAPTION>


                                          LANCER CORPORATION AND SUBSIDIARIES

                                       CONSOLIDATED BALANCE SHEETS (Continued)
                                              December 31, 1997 and 1996

                                         LIABILITIES AND SHAREHOLDERS EQUITY

                                                                            1997                           1996
                                                                     -------------------            -------------------
Current liabilities:
<S>                                                                <C>                            <C>
  Accounts payable                                                 $         12,133,894           $          7,234,160
  Current installments of long-term debt                                      4,444,400                      1,852,500
  Line of credit with bank                                                   19,000,000                     11,700,000
  Deferred licensing and maintenance fees                                       538,554                      1,339,868
  Accrued expenses and other liabilities                                      5,718,003                      3,356,315
  Income taxes payable                                                          185,472                              -
                                                                     -------------------            -------------------
    Total current liabilities                                                42,020,323                     25,482,843

Deferred  tax liability                                                       1,736,405                      1,038,655
Other long-term liabilities                                                     820,000                        820,000
Long-term debt, excluding current installments                               21,565,350                     15,459,375
Deferred licensing and maintenance fees                                       1,565,597                      2,172,137
                                                                     -------------------            -------------------

    Total liabilities                                                        67,707,675                     44,973,010
                                                                     -------------------            -------------------

Commitments and contingencies                                                 -                              -

Shareholders equity:

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

  Common stock, $.01 par value:
   50,000,000 shares authorized; 8,902,236 and 5,820,976
   issued and outstanding in 1997 and 1996, respectively                        89,022                         58,209

  Additional paid-in capital                                                11,607,504                      9,888,244

  Cumulative foreign currency translation adjustment                        (1,727,719)                       183,803

  Retained earnings                                                         32,992,506                     26,906,007
                                                                     -------------------            -------------------
    Total shareholders equity                                               42,961,313                     37,036,263
                                                                     -------------------            -------------------
                                                                   $        110,668,988           $        82,009,273
                                                                     ===================            ===================

<CAPTION>

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



                                      F-4
<PAGE>
<TABLE>
<CAPTION>
                                         LANCER CORPORATION AND SUBSIDIARIES

                                          CONSOLIDATED STATEMENTS OF INCOME
                                     Years ended December 31, 1997, 1996 and 1995

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

<S>                                                   <C>                     <C>                     <C>
Net sales                                             $        119,502,337    $        103,294,696    $        76,431,875

Cost of sales                                                   88,165,595              78,365,637             59,992,544
                                                        -------------------     -------------------     ------------------

    Gross profit                                                31,336,742              24,929,059             16,439,331

Selling, general and administrative expenses                    20,439,019              14,512,086              9,934,211
                                                        -------------------     -------------------     ------------------

    Operating income                                            10,897,723              10,416,973              6,505,120
                                                        -------------------     -------------------     ------------------

Other income (expense):
  Interest expense                                              (2,814,744)             (1,587,510)              (981,153)
  Interest and other income, net                                 1,040,356                 318,400              1,179,355
                                                        -------------------     -------------------     ------------------
                                                                (1,774,388)             (1,269,110)                198,202
                                                        -------------------     -------------------     ------------------

    Earnings before income taxes                                 9,123,335               9,147,863              6,703,322
                                                        -------------------     -------------------     ------------------

Income tax expense:
  Current                                                        2,809,302               3,373,117              2,446,959
  Deferred                                                         227,534                  42,246                165,246
                                                        -------------------     -------------------     ------------------
                                                                 3,036,836               3,415,363              2,612,205
                                                        -------------------     -------------------     ------------------

    Net earnings                                      $          6,086,499    $          5,732,500    $         4,091,117
                                                        ===================     ===================     ==================

Common Shares and Equivalents Outstanding:
  Basic                                                          8,863,263               8,722,396              8,701,025
  Diluted                                                        9,337,524               9,052,345              8,984,782

Earnings Per Share:
  Basic                                                              $0.69                   $0.66                  $0.47
  Diluted                                                            $0.65                   $0.63                  $0.46


<CAPTION>

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

                                      F-5
<PAGE>
<TABLE>
<CAPTION>
                                         LANCER CORPORATION AND SUBSIDIARIES

                                    CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
                                     Years ended December 31, 1997, 1996 and 1995

                                                    Additional          Cumulative                                Total
                                    Common           Paid-in           Translation           Retained          Shareholders
                                    Stock            Capital            Adjustment           Earnings             Equity
                                 -------------   -----------------   -----------------   -----------------   -----------------

<S>                                 <C>             <C>                  <C>                 <C>                <C>
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

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

     Cumulative foreign currency
     translation adjustment                 -                   -          (1,911,522)                  -          (1,911,522)

     Exercise of 34,387 stock
     options                              344             193,856                   -                   -             194,200

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

     Three-for-two stock
     dividend                          29,650            (29,650)                   -                   -                   -
                                 -------------   -----------------   -----------------   -----------------   -----------------

Balance December 31, 1997           $  89,022        $ 11,607,504      $  (1,727,719)        $ 32,992,506       $  42,961,313
                                 =============   =================   =================   =================   =================
<CAPTION>



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

                                      F-6
<PAGE>
<TABLE>
<CAPTION>

                                          LANCER CORPORATION AND SUBSIDIARIES

                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                     Years ended December 31, 1997, 1996 and 1995

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

Cash flow from operating activities:
<S>                                                                    <C>                 <C>                 <C>
     Net earnings                                                      $   6,086,499       $   5,732,500       $   4,091,117

     Adjustments to reconcile net earnings to net
       cash (used) provided by operating activities:
        Depreciation and amortization                                      3,149,126           2,445,288           2,152,169
        (Gain) loss on sale and disposal of assets                          (203,113)            (15,485)              13,985
        Loss on investments in affiliates                                     12,104                   -                   -
        Change in assets and liabilities, net of effects
            from purchase of subsidiary:
               Receivables                                                (2,067,507)         (5,464,226)         (3,872,837)
               Refundable income taxes                                       403,685                   -                   -
               Prepaid expenses                                               82,490             (97,161)            (23,969)
               Inventories                                               (12,764,438)         (8,207,165)           2,283,927
               Other assets                                                  423,411            (390,495)             425,019
               Accounts payable                                            4,657,659           1,589,097          (1,094,867)
               Accrued expenses                                            2,297,500             473,429             601,787
               Deferred licensing and maintenance fees                       286,316           1,190,504           1,710,576
               Income taxes payable                                          237,346            (883,890)            760,293
               Deferred tax liability                                        511,089             (22,267)           (100,552)
               Other long-term liabilities                                         -             120,000             180,000
                                                                    -----------------   -----------------   -----------------
     Net cash (used) provided by operating activities                      3,112,167         (3,529,871)           7,126,648
                                                                    -----------------   -----------------   -----------------

Cash flow from investing activities:
        Proceeds from sale of assets                                         256,686              43,625              20,166
        Capital expenditures                                              (9,922,830)         (9,056,710)         (7,861,164)
        Acquisition of subsidiary company                                 (3,768,375)                  -          (3,503,600)
        Purchase of long-term investments                                   (250,000)         (2,600,000)           (225,000)
                                                                    -----------------   -----------------   -----------------
Net cash used in investing activities                                    (13,684,519)        (11,613,085)        (11,569,598)
                                                                    -----------------   -----------------   -----------------

Cash flow from financing activities:
        Net borrowings under line of credit agreements                     7,300,000           4,700,000           1,000,000
        Proceeds from issuance of long-term debt                           7,050,000          17,950,000           6,929,000
        Retirement of long-term debt                                      (2,338,124)         (7,483,792)         (4,889,170)
        Proceeds from issuance of common stock                                    -                   -                   -
        Proceeds from exercise of stock options                              194,200              55,018              55,082
                                                                    -----------------   -----------------   -----------------
Net cash provided by financing activities                                 12,206,076          15,221,226           3,094,912
                                                                    -----------------   -----------------   -----------------
Effect of exchange rate changes on cash                                     (799,370)            183,803                   -
Net increase (decrease) in cash                                              834,354             262,073          (1,348,038)
Cash at beginning of year                                                  1,016,425             754,352           2,102,390
                                                                    -----------------   -----------------   -----------------
Cash at end of year                                                    $   1,850,779       $   1,016,425      $      754,352
                                                                    =================   =================   =================
<CAPTION>

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


                             See accompanying notes to consolidated financial statements.
</TABLE>
                                      F-7
<PAGE>

                                            LANCER CORPORATION AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. Summary of Significant Accounting Policies

Principles of Consolidation

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

Lancer Partnership, Ltd. is the primary operating entity in the United States.

Lancer International Sales, Inc. (DISC) is a qualified  Interest-Charge Domestic
International   Sales   Corporation,   which   markets  the  Companys   products
internationally.  The DISC is a wholly-owned subsidiary created to operate under
Federal income tax regulations.

Lancer Europe,  S.A. is a  wholly-owned  subsidiary  incorporated  to market and
distribute the Companys products to the European Union and certain other foreign
countries.

Lancer  Pacific  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 Companys 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.

Lancer de Mexico,  S.A. de C.V. is a  wholly-owned  subsidiary  incorporated  to
market and  distribute  the  Companys  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 Lancer de Mexico, S.A. de C.V.

Lancer  do  Brasil,  Ltda.,  acquired  in  the  first  quarter  of  1997,  is  a
wholly-owned  subsidiary which manufactures and distributes  fountain soft drink
and beer dispensing systems in Brazil and surrounding Latin American countries.

Lancer  Pacific Ltd.,  acquired in the second quarter of 1997, is a wholly-owned
subsidiary  which  manufactures  and  distributes  fountain  soft drink and beer
dispensing systems in New Zealand, Australia and Brazil.

OOO Lancer Sales Company is a wholly-owned subsidiary which distributes fountain
soft  drink  dispensing  systems  in Russia  and  surrounding  Eastern  European
countries.

Inventories

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

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

Property, Plant and Equipment

Property,  plant and equipment are stated at cost. Depreciation is calculated on
a  straight-line  basis over estimated  useful lives ranging from 3 to 39 years.
Long-lived  assets are evaluated  annually for possible  impairment  adjustments
which may be required. No such adjustments have been required.

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

                                      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  twenty to thirty  years.  The  Company  continually
evaluates the carrying value of goodwill as well as the  amortization  period to
determine  whether  adjustments  are  required.  No such  adjustments  have been
required.

Long-term Investments

In October 1996, the Company invested $2.6 million to obtain a 50% interest in a
joint venture, Lancer FBD Partnership,  Ltd., which manufactures frozen beverage
dispensing systems. The investment is accounted for under the equity method. The
remaining 50% is owned by the developer of the technology  utilized by the joint
venture. The joint venture now owns the rights to that technology.  The carrying
value of the investment at December 31, 1997 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. Lancer owns less than 10% of the common stock of Packaged Ice, Inc.
The  carrying  value of the  investment  at December 31, 1997  approximates  the
market value.

Net Earnings per Share

The Company adopted the Statement of Financial  Accounting  Standards (SFAS) No.
128,  Earnings per Share, in 1997, and accordingly,  basic earnings per share is
calculated  using the weighted  average number of common shares  outstanding and
diluted earnings per share is calculated  assuming the issuance of common shares
for all  dilutive  potential  common  shares  outstanding  during the  reporting
period. The dilutive effect of stock options approximated 474,261,  329,949, and
283,757  shares  in 1997,  1996 and  1995,  respectively.  Options  to  purchase
approximately 19,500, 0, and 7,904 shares in 1997, 1996, and 1995, respectively,
were  outstanding but were not included in the computation  because the exercise
price is  greater  than the  average  market  price of the  common  shares.  All
prior-period  earnings per share data  presented in the  consolidated  financial
statements have been restated to conform to the requirements of SFAS No. 128.

During 1997,  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 Companys 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.





                                      F-9
<PAGE>

                       LANCER CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Income Taxes

Amounts in the financial statements related to income taxes are calculated using
the  principles  of Financial  Accounting  Standards  Board  Statement  No. 109,
Accounting for Income Taxes (FAS 109). Under FAS 109, prepaid and deferred taxes
reflect the impact of  temporary  differences  between the amounts of assets and
liabilities   recognized  for  financial  reporting  purposes  and  the  amounts
recognized  for tax  purposes  as  well as tax  credit  carryforwards  and  loss
carryforwards.  These deferred taxes are measured by applying  currently enacted
tax rates.

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


Research and Development

Company-sponsored  research and  development  costs are expensed as incurred and
totaled  approximately  $1,467,000,  $913,000  and  $737,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.


Foreign Currency Translation

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


Stock Compensation Plans

The Company utilizes the intrinsic value method required under provisions of APB
Opinion No. 25 and related interpretations in measuring stock-based compensation
for employees. In addition, the required pro forma disclosures of net income and
net income per share as if the fair value method of  accounting  for stock based
compensation  had been  applied  under  SFAS  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.



                                      F-10
<PAGE>



                       LANCER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Income Taxes
<TABLE>
<CAPTION>

An analysis of income tax expense follows:

    1997                      Current               Deferred                 Total
-------------             ----------------       ----------------        ---------------

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

<TABLE>
<CAPTION>

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

<TABLE>
<CAPTION>

    1995
-------------
<S>                         <C>                     <C>                   <C>
Federal                     $   2,171,342           $    126,191          $   2,297,533
State                             275,617                  2,575                278,192
Foreign                                 -                 36,480                 36,480
                          ----------------       ----------------        ---------------
Total                       $   2,446,959           $    165,246          $   2,612,205
                          ================       ================        ===============
</TABLE>


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>

                                                     1997                   1996
                                                ----------------       ----------------
Deferred tax assets:
<S>                                                  <C>                 <C>
  Accounts receivable                                $        -          $     282,582
  Inventory                                             438,493                      -
  Compensation and benefits                             620,670                547,224
  NOL carryforward, expiring through 2012               171,810                203,546
  All other                                             173,893                      -
                                                ----------------       ----------------

Total deferred tax assets                             1,404,866              1,033,352

Deferred tax liabilities:
  Accounts receivable                                   580,753                      -
  Inventory                                                   -                190,678
  Property, plant and equipment                       1,527,792                953,431
  DISC income                                           811,877                662,547
  All other                                                   -                200,838
                                                ----------------       ----------------

Total deferred tax liability                          2,920,422              2,007,494
                                                ----------------       ----------------

Net deferred tax liability                        $   1,515,556          $     974,142
                                                ================       ================
</TABLE>


                                      F-11
<PAGE>

                              LANCER CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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

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

<S>                                                           <C>                <C>                <C>
Computed "expected" tax expense                               $3,101,934         $3,110,274         $2,279,130

Increase (decrease) in taxes resulting from:
     Effect of nondeductible foreign tax losses                   89,847             40,794             93,364
     Effect of nondeductible expenses                            125,884            163,343             52,772
     Tax credits                                               (355,690)                  -                  -
     State, net of Federal benefit                                54,137             92,565            181,907
     Other, net                                                   20,724              8,387              5,032
                                                         ================   ================    ===============
                                                              $3,036,836         $3,415,363         $2,612,205
                                                         ================   ================    ===============
</TABLE>

In accordance with FAS 109, no federal and state income taxes have been provided
for the accumulated  undistributed earnings of the DISC as of December 31, 1992.
On December 31, 1992, the accumulated undistributed earnings of the DISC totaled
$2,357,000.  Should the DISC  terminate  in the  future,  FAS 109 would  require
federal and state income taxes be provided.  Such a provision  would result in a
federal  and state  income  tax  charge  to the  financial  statements,  thereby
increasing  the  Companys   effective  tax  rate.  The  Company  is  considering
converting the DISC to a Foreign Sales Corporation in 1998.

Actual  net income  taxes paid were  approximately  $1,920,000,  $3,720,000  and
$1,920,000 for 1997, 1996 and 1995, respectively.

3. Long-term Debt and Line of Credit with Banks

<TABLE>
<CAPTION>
                                                                                      1997                 1996

                                                                               -------------------   ------------------
<S>                                                                               <C>                  <C>
Notes payable to banks, due in quarterly
     installments plus interest based upon
     prime and LIBOR (weighted average rate
     of 7.73% at December 31, 1997) through
     July 15, 2001; secured by the pledge of
     a portion of the stock of foreign subsidiaries                               $ 22,023,750          $ 17,311,875

Note payable to seller of Brazil subsidiary, due
     in annual installments plus interest based
     on LIBOR (weighted average interest rate of
     6.44% at December 31, 1997) through
     December 31, 2001                                                               3,986,000                    -
                                                                               -------------------   ------------------
                                                                                    26,009,750           17,311,875

Less current installments of long-term debt                                          4,444,400            1,852,500
                                                                               ===================   ==================
                                                                                 $  21,565,350        $  15,459,375
                                                                               ===================   ==================
</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  Facilities.  Principal  payments on the
Credit  Facilities 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.


                                      F-12
<PAGE>

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


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.  In May,
1997, the Company  increased its revolving  facility from $17.5 million to $25.0
million.  In December,  1997, the Company increased its revolving  facility from
$25.0  million to $30.0  million.  The  increase to $30.0  million is  effective
through July 15, 1998, when the facility will decrease to $25.0 million. Certain
financial  covenants  were amended  through July 15, 1998.  Amounts  outstanding
under  revolving loans were $19.0 million on December 31, 1997 and $11.7 million
on December 31, 1996. The Revolving Facility expires July 15, 2001.

Annual  maturities  on long-term  debt  outstanding  at December 31, 1997 are as
follows:

<TABLE>
                       <S>                             <C>
                       1998                            $   4,444,400
                       1999                                3,997,200
                       2000                                3,997,200
                       2001                               13,570,950
                                                   ==================
                                                        $ 26,009,750
                                                   ==================
</TABLE>


To manage its  exposure  to  fluctuations  in  interest  rates,  the Company has
entered into interest rate swap agreements (the Swap  Agreements) for a combined
notional principal amount of $18.0 million. The Swap Agreements have termination
dates ranging from August, 1999 to January,  2003. 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  ranging from 5.98% to 6.345%,  while  receiving a floating rate
payment equal to the three month LIBOR rate determined on a quarterly basis with
settlement  occurring  on  specific  dates.  While the  Company  has credit risk
associated  with  this  financial  instrument,  no  loss is  anticipated  due to
nonperformance  by  the  counterparties  to  these  agreements  because  of  the
financial strength of the financial institutions involved.

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

Actual interest paid was  approximately  $2,922,000,  $1,432,000 and $964,000 in
1997, 1996 and 1995, 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.









                                      F-13
<PAGE>


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

<TABLE>
<CAPTION>

A summary of transactions for all options follows:
                                                          Stock Options           Option Price
                                                         ----------------   -------------------------

<S>                                                              <C>           <C>             <C>
Outstanding at December 31, 1994                                 553,586       $   1.29   -    4.97
     Granted                                                      20,324           4.93   -    6.28
     Canceled                                                   (10,874)           2.37   -    4.97
     Exercised                                                  (23,247)                       2.37
                                                         ----------------   -------------------------
Outstanding at December 31, 1995                                 539,789       $   1.29   -     6.28
     Granted                                                     292,845           7.22   -    10.00
     Exercised                                                  (18,969)           2.37   -     7.22
                                                         ----------------   -------------------------
Outstanding at December 31, 1996                                 813,665       $   1.29   -    10.00
     Granted                                                      50,500          11.63   -    16.54
     Canceled                                                    (31,140)          7.22   -     8.58
     Exercised                                                   (34,387)          1.29   -     7.22
                                                         ================   =========================
Outstanding at December 31, 1997                                 798,638       $   1.29   -  $ 16.54
                                                         ================   =========================
</TABLE>



<TABLE>
<CAPTION>

A summary of exercisable options follows:

                                                         Stock Options          Option Price
                                                        ----------------   -----------------------
<S>                                                             <C>           <C>         <C>
1995                                                            406,062       $ 1.29  -   $ 6.28
                                                        ================   =======================
1996                                                            515,543       $ 1.29  -   $10.00
                                                        ================   =======================
1997                                                            584,000       $ 1.29  -   $16.54
                                                        ================   =======================
</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>
                                                               1997                  1996
                                                          ----------------      ----------------

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



                                      F-14
<PAGE>

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


The fair value of each option  granted in 1997 and 1996 is estimated on the date
of grant  using  the  Black-Scholes  option-pricing  model  with  the  following
assumptions:

<TABLE>
<CAPTION>
                                                               1997                  1996
                                                          ----------------      ----------------

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



Self-Insured Hospitalization Plan

The  Company   maintains  a   self-insurance   program  for  major  medical  and
hospitalization  coverage for employees and their  dependents which is partially
funded by payroll deductions. The Company has 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 approximately $1,052,000, $896,000 and $478,000 in 1997, 1996
and 1995, 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, 1997,
1996 and 1995 the total amount  expensed for workers  compensation  coverage was
$217,000, $291,000 and $479,000, 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.

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, 1997,  1996 and 1995 include Company  contributions  to the plan of
approximately $576,000, $520,000 and $359,000, respectively.

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

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.


                                      F-15

<PAGE>

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


During 1996 the Company entered into a $4.3 million lease, of which $3.3 million
and $2.5  million  were  funded at  December  31, 1997 and  December  31,  1996,
respectively,  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.  The lease has been  recorded as an
operating lease.

At  December  31,  1997,  future  minimum  lease  payments  required  under  all
noncancelable operating leases are as follows:

<TABLE>

            <S>                                              <C>
                         1998                                $1,874,319
                         1999                                 1,487,728
                         2000                                   816,148
                                                        ================
             Total minimum lease payments                    $4,178,195
                                                        ================
</TABLE>



Total rental expense was  approximately  $1,930,000,  $1,223,000 and $712,000 in
1997, 1996 and 1995, respectively.

The Company is party to agreements to provide warehousing space and services for
The Coca-Cola  Company.  Rental  income  related to the  warehousing  agreements
totaled  approximately  $385,000,  $297,000 and $310,000 in 1997, 1996 and 1995,
respectively.

6. Long-term Receivables

Long-term receivables are interest bearing and include $359,000 and $306,000 due
from officers for the years ended December 31, 1997 and 1996, respectively.

7. Fair Value of Financial Instruments

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

Cash, Trade Receivables, and Trade Payables

The  carrying  amounts of the  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  approximate  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.


                                      F-16
<PAGE>


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


8. Acquisition of Subsidiary

Through  its  wholly-owned  subsidiary,   Lancer  do  Brasil,Ltda.  the  Company
completed the purchase of all of the outstanding common shares of Comercial Vila
Formosa, Ltda. (Formosa), a Brazilian-based manufacturer and distributor of soft
drink fountain and beer  dispensing  equipment in the first quarter of 1997. The
purchase  price of $6 million was financed  with a $4 million note issued to the
seller and $2 million in cash funded with bank debt.  The excess of the purchase
price over the fair value of the assets acquired of $3 million has been recorded
as goodwill and is being amortized on a straight-line  basis over 30 years.  The
acquisition  was accounted for under the purchase  method of accounting with the
results of operations included in the consolidated financial statements from the
date of acquisition.

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

Assuming the  acquisitions  of Formosa and ABS had occurred at the  beginning of
1997 and 1996,  pro-forma  operating  results of the Company would be as follows
(in thousands except for per share data):

<TABLE>
<CAPTION>

                                                   Years Ended December 31,
                                             -------------------------------------
                                                   1997                 1996
                                             ----------------     ----------------

<S>                                              <C>                  <C>
Net Sales                                        $   121,378          $   123,530
Net earnings                                           6,054                6,532
Net earnings per basic share                            0.68                 0.75
Net earnings per diluted share                          0.65                 0.72
</TABLE>


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

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 businesses  acquired in the purchase  transactions are as follows
(in thousands):
<TABLE>
<CAPTION>

                                                               1997              1995
                                                         ----------------  ----------------
<S>                                                        <C>               <C>
Fair value of assets acquired, including goodwill          $       9,737     $       5,248
Liabilities assumed                                                 (427)           (1,744)
                                                         ================  ================
Net assets acquired                                        $       9,310     $       3,504
                                                         ================  ================
</TABLE>

                                      F-17
<PAGE>

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


Supplemental Balance Sheet and Income Statement Information

<TABLE>
<CAPTION>

Accrued expenses consist of the following (in thousands):
                                                      As of December 31,
                                             -------------------------------------
                                                   1997                 1996
                                             ----------------     ----------------

<S>                                            <C>                  <C>
Payroll and related expenses                   $       2,676        $       1,608
Commissions                                              540                  344
Workers compensation accrual - current                   300                  300
Property taxes                                           525                   47
Health insurance                                         178                  107
Interest                                                 694                  237
Other                                                    805                  713
                                             ================     ================
                                               $       5,718        $       3,356
                                             ================     ================
</TABLE>


<TABLE>
<CAPTION>

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

                                      1997         Percent of       1996         Percent of       1995        Percent
                                                    Net Sales                     Net Sales                   of Net
                                                                                                                Sales
                                  --------------  ----------------------------  ---------------------------   -----------
United States:
<S>                                  <C>                 <C>       <C>                 <C>       <C>                 <C>
     The Coca-Cola Company           $   28,961          24%       $   32,325          32%       $  37,425           49%
     Other                               33,569          28%           27,177          25%          12,355           16%
                                  --------------  -----------   --------------  -----------   -------------   -----------
                                         62,530          52%           59,502          57%          49,780           65%
                                  --------------  -----------   --------------  -----------   -------------   -----------

Export:
     The Coca-Cola Company                   42           0%              159           1%             527            1%
     Other                               56,930          48%           43,634          42%          26,125           34%
                                  --------------  -----------   --------------  -----------   -------------   -----------
                                         56,972          48%           43,793          43%          26,652           35%
                                  --------------  -----------   --------------  -----------   -------------   -----------
                                      $ 119,502         100%        $ 103,295         100%       $  76,432          100%
                                  ==============  ===========   ==============  ===========   =============   ===========
</TABLE>




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







                                      F-18
<PAGE>

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

The Companys foreign operations consist of that of its wholly-owned subsidiaries
Industrias  Lancermex,  S.A. de C.V., Lancer de Mexico, S.A. de C.V.,  Servicios
Lancermex,  S.A. de C.V., Lancer Pacific Pty, Ltd., Lancer Pacific,  Ltd. Lancer
do Brasil,  Ltda., Lancer Europe,  S.A., and OOO Lancer Sales Company. A summary
of operating results and assets of the foreign operations follows:
<TABLE>
<CAPTION>

                                                     1997                     1996                     1995
                                              -------------------       ------------------       -----------------
<S>                                              <C>                       <C>                      <C>
Total revenue                                    $ 25,673,556              $ 11,454,678             $ 2,517,495

Operating income (loss)                             1,144,875                   218,112                (120,568)

Assignable assets, as of December 31               26,531,773                14,888,994              10,184,422
</TABLE>

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

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 Companys  financial  position or results of
operations.

11. Quarterly Financial Information (Unaudited)

The Company  uses the gross  profit  method to estimate  cost of goods sold on a
quarterly  basis, and therefore must make year-end  adjustments  based on ending
inventory levels.  Consequently,  the fourth quarter margin calculation  adjusts
for  estimates  made in the prior three  quarters.  In 1997,  the Companys  cost
estimates   proved   conservative,   resulting  in  a  larger  that  anticipated
improvement in gross margin for the fourth quarter. The following table reflects
the  quarterly  results  for 1997 and 1996 (in  thousands  except  for per share
data):

<TABLE>
<CAPTION>
                                                                     Three Months Ended
                                             --------------------------------------------------------------------
1997                                             March             June            September         December
                                                   31                30                30                31
                                             --------------    --------------    --------------    --------------

<S>                                              <C>               <C>               <C>               <C>
Net Sales                                        $  30,398         $  32,295         $  29,844         $  26,965
Gross Profit                                         7,665             7,941             7,630             8,101
Net earnings                                         1,790             1,801             1,025             1,470

Earnings Per Share:
  Basic                                        $      0.20       $      0.20       $      0.12       $      0.17
  Diluted                                      $      0.19       $      0.19       $      0.11       $      0.16

</TABLE>
<TABLE>
<CAPTION>

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

<S>                                              <C>               <C>               <C>               <C>
Net Sales                                        $  23,678         $  25,602         $  27,896         $  26,119
Gross Profit                                         5,703             6,120             6,486             6,620
Net earnings                                         1,340             1,526             1,509             1,358

Earnings Per Share:
  Basic                                        $      0.15       $      0.18       $      0.17       $      0.16
  Diluted                                      $      0.15       $      0.17       $      0.16       $      0.15
</TABLE>

                                      F-19
<PAGE>

                       LANCER CORPORATION AND SUBSIDIARIES

                                   SCHEDULE II
<TABLE>
<CAPTION>

                                                   RESERVE ACCOUNT


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

                  <S>                       <C>                <C>                   <C>            <C>
                  December 31, 1997         $    185,000       $  150,000            $       -      $    335,000
                  December 31, 1996         $     85,000       $  106,645            $   6,645      $    185,000
                  December 31, 1995         $     85,000       $    2,083            $   2,083      $     85,000
<CAPTION>


----------------------------------------------------------------------------------------------------------------------
</TABLE>
















                                      F-20