UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D. C. 20549





FORM
10-Q





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF
              THE
      SECURITIES EXCHANGE ACT OF 1934





For the
quarterly period ended May 29, 2010





OR





o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF
              THE
      SECURITIES EXCHANGE ACT OF 1934





For the
transition period from _______ to ________





Commission
File Number 1-11024





CLARCOR Inc.(Exact
      name of registrant as specified in its
charter)





DELAWARE
                    
                    36-0922490(State
      or other jurisdiction of
                      incorporation
      or organization)
                    
                    (I.R.S.
      Employer
                      Identification
      No.)





840 Crescent Centre Drive, Suite 600, Franklin,
Tennessee 37067


(Address
of principal executive offices)





Registrant’s
      telephone number, including area code
              615-771-3100





No Change


(Former
name, former address and former fiscal year, if changed since last
report.)





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  xNo  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes  ̈ No  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act:





Large
      accelerated filer
            x
            Accelerated
      filer
             ̈
            Non-accelerated
      filer
             ̈
            Smaller
      reporting company
             ̈





Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2)   Yes  ̈  No x





As of May
29, 2010, 50,637,671 common shares with a par value of $1 per share were
outstanding.








TABLE OF CONTENTS
                            
                            PAGEPart
      I – Financial InformationItem
      1.
                            Financial
      Statements
                            
                            3Item
      2.
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            
                            24Item
      3.
                            Quantitative
      and Qualitative Disclosures About Market Risk
                            
                            36Item
      4.
                            Controls
      and Procedures
                            
                            36Part
      II – Other InformationItem
      1.
                            Legal
      Proceedings
                            
                            37Item
      1A.
                            Risk
      Factors
                            
                            37Item
      2.
                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                            
                            37Item
      3.
                            Defaults
      Upon Senior Securities
                            
                            *Item
      4.
                            [Removed
      and Reserved]
                            
                            *Item
      5.
                            Other
      Information
                            
                            *Item
      6.
                            Exhibits
                            
                            37*
      Item omitted because no answer is called for or item is not
      applicable


Page
2


Part I-   Item1. Financial
Statements
 CLARCOR
Inc.
 CONSOLIDATED
CONDENSED BALANCE SHEETS
 (Dollars
in thousands)


May 29,
                
                
                November 28,2010
                
                
                2009(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                75,661
                
                
                $
                59,277Restricted
      cash
                
                
                790
                
                
                
                762Short-term
      investments
                
                
                -
                
                
                
                32,171Accounts
      receivable, less allowance for losses of $12,360 for 2010 and $15,150 for
      2009
                
                
                175,240
                
                
                
                164,545Inventories:Raw
      materials
                
                
                62,064
                
                
                
                57,579Work
      in process
                
                
                27,430
                
                
                
                23,405Finished
      products
                
                
                84,357
                
                
                
                76,432Total
      inventories
                
                
                173,851
                
                
                
                157,416Deferred
      income taxes
                
                
                29,452
                
                
                
                27,567Prepaid
      expenses and other current assets
                
                
                6,745
                
                
                
                6,790Total
      current assets
                
                
                461,739
                
                
                
                448,528Plant
      assets at cost,
                
                
                452,315
                
                
                
                447,241less
      accumulated depreciation
                
                
                (268,018
                )
                
                
                (259,150
                )184,297
                
                
                
                188,091Goodwill
                
                
                226,364
                
                
                
                228,182Acquired
      intangibles, less accumulated amortization
                
                
                93,440
                
                
                
                95,990Deferred
      income taxes
                
                
                436
                
                
                
                630Other
      noncurrent assets
                
                
                11,547
                
                
                
                12,469Total
      assets
                
                $
                977,823
                
                
                $
                973,890LIABILITIESCurrent
      liabilities:Current
      portion of long-term debt
                
                $
                105
                
                
                $
                99Accounts
      payable
                
                
                60,385
                
                
                
                54,627Accrued
      insurance liabilities
                
                
                12,898
                
                
                
                10,572Accrued
      salaries, wages and commissions
                
                
                16,055
                
                
                
                8,599Customer
      deposits
                
                
                12,204
                
                
                
                8,705Compensated
      absences
                
                
                7,876
                
                
                
                7,903Other
      accrued liabilities
                
                
                35,060
                
                
                
                36,018Income
      taxes
                
                
                2,654
                
                
                
                5,419Total
      current liabilities
                
                
                147,237
                
                
                
                131,942Long-term
      debt, less current portion
                
                
                17,302
                
                
                
                52,096Postretirement
      healthcare benefits
                
                
                693
                
                
                
                689Long-term
      pension liabilities
                
                
                62,919
                
                
                
                61,746Deferred
      income taxes
                
                
                30,651
                
                
                
                32,136Other
      long-term liabilities
                
                
                4,514
                
                
                
                5,394Total
      liabilities
                
                
                263,316
                
                
                
                284,003ContingenciesRedeemable
      noncontrolling interest
                
                
                1,363
                
                
                
                1,412SHAREHOLDERS'
      EQUITYCapital
      stock
                
                
                50,638
                
                
                
                50,393Capital
      in excess of par value
                
                
                44,900
                
                
                
                36,814Accumulated
      other comprehensive loss
                
                
                (45,527
                )
                
                
                (32,879
                )Retained
      earnings
                
                
                661,187
                
                
                
                632,291Total
      CLARCOR Inc. equity
                
                
                711,198
                
                
                
                686,619Noncontrolling
      interests
                
                
                1,946
                
                
                
                1,856Total
      shareholders' equity
                
                
                713,144
                
                
                
                688,475Total
      liabilities and shareholders' equity
                
                $
                977,823
                
                
                $
                973,890




See Notes
to Consolidated Condensed Financial Statements


Page
3




CLARCOR
Inc.
 CONSOLIDATED
CONDENSED STATEMENTS OF EARNINGS
 (Dollars
in thousands, except per share data)
 (Unaudited)


Quarter
      Ended
                        
                        
                        Six
      Months
      EndedMay 29,
                        
                        
                        May 30,
                        
                        
                        May 29,
                        
                        
                        May 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Net
      sales
                        
                        $
                        257,869
                        
                        
                        $
                        229,395
                        
                        
                        $
                        473,000
                        
                        
                        $
                        443,085Cost
      of sales
                        
                        
                        173,026
                        
                        
                        
                        159,797
                        
                        
                        
                        318,352
                        
                        
                        
                        312,504Gross
      profit
                        
                        
                        84,843
                        
                        
                        
                        69,598
                        
                        
                        
                        154,648
                        
                        
                        
                        130,581Selling
      and administrative expenses
                        
                        
                        48,631
                        
                        
                        
                        44,368
                        
                        
                        
                        95,540
                        
                        
                        
                        91,664Operating
      profit
                        
                        
                        36,212
                        
                        
                        
                        25,230
                        
                        
                        
                        59,108
                        
                        
                        
                        38,917Other
      income (expense):Interest
      expense
                        
                        
                        (114
                        )
                        
                        
                        (604
                        )
                        
                        
                        (237
                        )
                        
                        
                        (1,532
                        )Interest
      income
                        
                        
                        95
                        
                        
                        
                        88
                        
                        
                        
                        116
                        
                        
                        
                        230Other,
      net
                        
                        
                        (205
                        )
                        
                        
                        464
                        
                        
                        
                        (597
                        )
                        
                        
                        444(224
                        )
                        
                        
                        (52
                        )
                        
                        
                        (718
                        )
                        
                        
                        (858
                        )Earnings
      before income taxes
                        
                        
                        35,988
                        
                        
                        
                        25,178
                        
                        
                        
                        58,390
                        
                        
                        
                        38,059Provision
      for income taxes
                        
                        
                        12,053
                        
                        
                        
                        8,121
                        
                        
                        
                        19,648
                        
                        
                        
                        12,217Net
      earnings
                        
                        
                        23,935
                        
                        
                        
                        17,057
                        
                        
                        
                        38,742
                        
                        
                        
                        25,842Net
      (earnings) losses attributable to noncontrolling interests
                        
                        
                        (50
                        )
                        
                        
                        (266
                        )
                        
                        
                        9
                        
                        
                        
                        (260
                        )Net
      earnings attributable to CLARCOR Inc.
                        
                        $
                        23,885
                        
                        
                        $
                        16,791
                        
                        
                        $
                        38,751
                        
                        
                        $
                        25,582Net
      earnings per share attributable to CLARCOR Inc:Basic
                        
                        $
                        0.47
                        
                        
                        $
                        0.33
                        
                        
                        $
                        0.76
                        
                        
                        $
                        0.50Diluted
                        
                        $
                        0.47
                        
                        
                        $
                        0.33
                        
                        
                        $
                        0.76
                        
                        
                        $
                        0.50Average
      number of shares outstanding:Basic
                        
                        
                        50,716,443
                        
                        
                        
                        51,116,978
                        
                        
                        
                        50,661,061
                        
                        
                        
                        51,086,280Diluted
                        
                        
                        51,042,817
                        
                        
                        
                        51,409,284
                        
                        
                        
                        50,902,545
                        
                        
                        
                        51,467,212Dividends
      paid per share
                        
                        $
                        0.0975
                        
                        
                        $
                        0.0900
                        
                        
                        $
                        0.1950
                        
                        
                        $
                        0.1800







Page
4




CLARCOR
Inc.


CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS


(Dollars
in thousands)


(Unaudited)


Six Months EndedMay 29,
                
                
                May 30,2010
                
                
                2009Cash
      flows from operating activities:Net
      earnings
                
                $
                38,742
                
                
                $
                25,842Depreciation
                
                
                13,805
                
                
                
                13,851Amortization
                
                
                2,423
                
                
                
                2,436Stock-based
      compensation expense
                
                
                3,362
                
                
                
                3,142Excess
      tax benefit from stock-based compensation
                
                
                (1,722
                )
                
                
                (432
                )Changes
      in short-term investments
                
                
                32,171
                
                
                
                (16,065
                )Changes
      in assets and liabilities, excluding short-term
investments
                
                
                (18,736
                )
                
                
                7,742Other,
      net
                
                
                (102
                )
                
                
                (55
                )Net
      cash provided by operating activities
                
                
                69,943
                
                
                
                36,461Cash
      flows from investing activities:Additions
      to plant assets
                
                
                (11,257
                )
                
                
                (10,784
                )Business
      acquisitions, net of cash acquired
                
                
                -
                
                
                
                (9,804
                )Proceeds
      from insurance claim
                
                
                557
                
                
                
                -Investment
      in affiliate
                
                
                -
                
                
                
                (1,000
                )Other,
      net
                
                
                153
                
                
                
                394Net
      cash used in investing activities
                
                
                (10,547
                )
                
                
                (21,194
                )Cash
      flows from financing activities:Net
      payments under line of credit
                
                
                (35,000
                )
                
                
                (10,000
                )Borrowings
      under long-term debt
                
                
                354
                
                
                
                8,410Payments
      on long-term debt
                
                
                (73
                )
                
                
                (559
                )Sale
      of capital stock under stock option and employee purchase
      plans
                
                
                3,963
                
                
                
                2,106Acquisition
      of noncontrolling interest
                
                
                -
                
                
                
                (2,388
                )Excess
      tax benefits from stock-based compensation
                
                
                1,722
                
                
                
                432Cash
      dividends paid
                
                
                (9,870
                )
                
                
                (9,196
                )Net
      cash used in financing activities
                
                
                (38,904
                )
                
                
                (11,195
                )Net
      effect of exchange rate changes on cash
                
                
                (4,108
                )
                
                
                2,016Net
      change in cash and cash equivalents
                
                
                16,384
                
                
                
                6,088Cash
      and cash equivalents, beginning of period
                
                
                59,277
                
                
                
                40,715Cash
      and cash equivalents, end of period
                
                $
                75,661
                
                
                $
                46,803Cash
      paid during the period for:Interest
                
                $
                1,076
                
                
                $
                1,140Income
      taxes
                
                $
                24,426
                
                
                $
                14,200







Page
5


CLARCOR
Inc.
 NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 (Dollars
in thousands, except per share data)
 (Unaudited)


1.
            CONSOLIDATED CONDENSED
      FINANCIAL STATEMENTS





Basis of
Presentation





The
Consolidated Condensed Balance Sheet as of May 29, 2010, the Consolidated
Condensed Statements of Earnings and the Consolidated Condensed Statements of
Cash Flows for the periods ended May 29, 2010 and May 30, 2009, have been
prepared by CLARCOR Inc. (“CLARCOR” or “the Company”) without
audit.  The Consolidated Condensed Financial Statements have been
prepared on the same basis as those in the Company’s Annual Report on Form 10-K
for the fiscal year ended November 28, 2009 (“2009 Form 10-K”).  The
November 28, 2009 Consolidated Condensed Balance Sheet data was derived from the
Company’s year-end audited Consolidated Financial Statements as presented in the
2009 Form 10-K but does not include all disclosures required by accounting
principles generally accepted in the United States of America.  In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows have been made.  The results of operations for
the period ended May 29, 2010, are not necessarily indicative of the operating
results for the full year.  The information included in this Form 10-Q
should be read in conjunction with the audited Consolidated Financial Statements
and accompanying notes included in the Company’s 2009 Form 10-K.








New Accounting
Guidance


“ ”
  In
January 2010, the FASB issued guidance related to fair value measurements (see
Note 6) requiring new disclosures regarding transfers in and out of Level 1
and 2 and requiring the gross presentation of activity within Level
3.  The guidance also clarifies existing disclosures of inputs and
valuation techniques for Level 2 and 3 fair value
measurements.  Additionally, the guidance includes conforming
amendments to employers’ disclosures about postretirement benefit plan
assets.  The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosure of activity within Level 3
fair value measurements, which is effective for fiscal years beginning after
December 15, 2010, and for interim periods within those years.  The
impact of adopting this guidance during the quarterly period ended May 29, 2010
resulted in additional disclosures in the Notes to the Consolidated Condensed
Financial Statements.


Page
6




CLARCOR
Inc.


NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(Dollars
in thousands, except per share data)


(Unaudited)


In
December 2008, the FASB expanded the required disclosures for pension and other
postretirement plans by requiring disclosures about how investment allocation
decisions are made by management, major categories of plan assets and
significant concentration of risk.  Additionally, an employer is
required to disclose information about the valuation of plan
assets.  This accounting guidance is effective for the Company’s
fiscal year 2010 year-end and will affect the disclosures in the annual
Consolidated Financial Statements.
 
 In June
2008, the FASB issued guidance that requires that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) be considered participating securities and be included
in the computation of earnings per share pursuant to the two-class
method.  The Company’s unvested restricted stock unit awards discussed
in Note 3 qualify as participating securities under this
guidance.  The impact of adopting this guidance on November 29, 2009
was not material to the Consolidated Condensed Financial
Statements.
 
 In
December 2007, the FASB issued guidance affecting the accounting for businesses
acquired, the presentation of noncontrolling interests, previously called
minority interests, and requiring that assets acquired or liabilities assumed in
a business combination and arising from a contingency be recognized at fair
value at the acquisition date if the acquisition date fair value can be
determined during the measurement period.  The Company adopted this
guidance on November 29, 2009.  The guidance dealing with
noncontrolling interests was retrospectively applied to all prior period
information for presentation and disclosure requirements and resulted in the
reclassification of certain prior year amounts.  For all periods
presented, noncontrolling interests are classified in the Consolidated Condensed
Balance Sheets as either a separate component of shareholders’ equity or as
redeemable noncontrolling interests.  Net earnings attributable to
CLARCOR and the noncontrolling interests are reflected in the Consolidated
Condensed Statements of Earnings.  Payments for the acquisition of
noncontrolling interests in entities of which the Company did not previously
have control are included in investing activities in the Consolidated Condensed
Statements of Cash Flows.  Payments for acquisitions of noncontrolling
interest in entities of which the Company did have previous control are treated
as equity transactions and are included in financing activities in the
Consolidated Condensed Statements of Cash Flows.  Prior to the
adoption of this guidance, payments related to controlled entities were included
in investing activities.




2.
            INVESTMENTS AND
      REDEEMABLE NONCONTROLLING
INTERESTS





Investments





Effective
May 1, 2008, the Company acquired a 30% share in BioProcessH2O LLC
(“BPH”), a Rhode Island based manufacturer of industrial waste water and water
reuse filtration systems, for $4,000.  Under the terms of the
agreement with BPH, the Company has the right, but not the obligation, to
acquire additional ownership shares and eventually complete ownership of the
company over several years at a price based on, among other factors, BPH’s
operating income.  The investment, with a carrying amount of $3,421
included in other noncurrent assets, is being accounted for under the equity
method of accounting.  The carrying amount is adjusted each period to
recognize the Company’s share of the earnings or losses of BPH based on the
percentage of ownership, as well as the receipt of any
dividends.  During the six months ended May 29, 2010, the Company
received dividends of $382 from BPH.  The equity investment is
periodically reviewed for indicators of impairment.  The amount of
undistributed BPH earnings included within the retained earnings of the Company
was not material at May 29, 2010 or November 28, 2009.


Page
7




CLARCOR
Inc.


NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(Dollars
in thousands, except per share data)


(Unaudited)


Redeemable Noncontrolling
Interests





In March
2007, the Company acquired an 80% ownership share in Sinfa SA (“SINFA”), a
manufacturer of automotive and heavy-duty engine filters based in Casablanca,
Morocco.  As part of the purchase agreement, the Company and the
noncontrolling owners each have an option to require the purchase of the
remaining 20% ownership shares by the Company after December 31, 2012 which
would result in SINFA becoming a wholly owned subsidiary.  The
remaining 20% of SINFA owned by the noncontrolling owners has been reported as
redeemable noncontrolling interests and classified as mezzanine equity in the
Consolidated Condensed Balance Sheets.  The redeemable noncontrolling
interests will be accreted to the redemption price, through equity, at the point
at which the redemption becomes probable.





3.
            INCENTIVE PLANS AND
      STOCK-BASED COMPENSATION





On March
23, 2009, the shareholders of CLARCOR approved the 2009 Incentive Plan, which
replaced the 2004 Incentive Plan.  The 2009 Incentive Plan allows the
Company to grant stock options, restricted stock unit awards, restricted stock,
performance awards and other awards to officers, directors and key employees of
up to 3,800,000 shares during a ten-year period that ends in December
2019.  Upon share option exercise or restricted stock unit award
conversion, the Company issues new shares unless treasury shares are
available.  The key provisions of the Company’s stock-based incentive
plans are described in Note N of the Company’s consolidated financial statements
included in the 2009 Form 10-K.





Stock
Options





Nonqualified
stock options are granted at exercise prices equal to the market price of
CLARCOR common stock at the date of grant, which is the date the Board of
Directors approves the grant and the participants receive it.  The
Company’s Board of Directors determines the vesting requirements for stock
options at the time of grant and may accelerate vesting.  In general,
options granted to key employees vest 25% per year beginning at the end of the
first year; therefore, they become fully exercisable at the end of four
years.  Vesting may be accelerated in the event of retirement,
disability or death of a participant or change in control of the
Company.  Options granted to non-employee directors vest
immediately.  All options expire ten years from the date of grant
unless otherwise terminated.




Page
8


CLARCOR
Inc.
 NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 (Dollars
in thousands, except per share data)
 (Unaudited)




The
following table summarizes compensation expense related to stock options during
the quarter and six months ended May 29, 2010 and May 30, 2009.





QuarterEnded
                
                
                Six Months EndedMay 29,
                
                
                May 30,
                
                
                May 29,
                
                
                May 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Pre-tax
      compensation expense
                
                $
                752
                
                
                $
                620
                
                
                $
                2,530
                
                
                $
                2,277Tax
      benefits
                
                
                (249
                )
                
                
                (197
                )
                
                
                (851
                )
                
                
                (724
                )Excess
      tax benefits associated with tax deductions over the amount of
      compensation expense recognized in the consolidated condensed financial
      statements
                
                
                1,631
                
                
                
                50
                
                
                
                1,783
                
                
                
                567





The
following table summarizes activity with respect to stock options granted by the
Company and includes options granted under the 1994 Incentive Plan, the 2004
Incentive Plan and the 2009 Incentive Plan.





SharesGranted
                            underIncentive
                            Plans
                          
                          
                          Weighted
                            Average
                            ExercisePriceOutstanding
      at beginning of year
                          
                          
                          3,229,187
                          
                          
                          $
                          27.43Granted
                          
                          
                          475,960
                          
                          
                          $
                          32.62Exercised
                          
                          
                          (302,780
                          )
                          
                          $
                          21.28Surrendered
                          
                          
                          (12,249
                          )
                          
                          $
                          33.89Outstanding
      at May 29, 2010
                          
                          
                          3,390,118
                          
                          
                          $
                          28.69Options
      exercisable at May 29, 2010
                          
                          
                          2,402,608
                          
                          
                          $
                          26.79





At May
29, 2010, there was $4,005 of unrecognized compensation cost related to option
awards which the Company expects to recognize over a weighted-average period of
3.2 years.


Page
9




CLARCOR
Inc.


NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(Dollars
in thousands, except per share data)


(Unaudited)


The
following table summarizes information about the Company’s outstanding and
exercisable options at May 29, 2010.





OptionsOutstanding
                  
                  
                  OptionsExercisableRangeof
                    ExercisePrices
                  
                  Number
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Intrinsic
                    Value
                  
                  
                  Weighted
                    Average
                    Remaining
                    LifeinYears
                  
                  
                  Number
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Intrinsic
                    Value
                  
                  
                  Weighted
                    Average
                    Remaining
                    LifeinYears$9.25
      - $13.75
                  
                  
                  165,084
                  
                  
                  $
                  12.50
                  
                  
                  $
                  3,922
                  
                  
                  
                  1.20
                  
                  
                  
                  165,084
                  
                  
                  $
                  12.50
                  
                  
                  $
                  3,922
                  
                  
                  
                  1.20$16.01
      - $22.80
                  
                  
                  601,743
                  
                  
                  $
                  20.04
                  
                  
                  
                  9,760
                  
                  
                  
                  2.94
                  
                  
                  
                  601,743
                  
                  
                  $
                  20.04
                  
                  
                  
                  9,760
                  
                  
                  
                  2.94$25.31
      - $35.66
                  
                  
                  2,272,804
                  
                  
                  $
                  30.95
                  
                  
                  
                  12,072
                  
                  
                  
                  6.62
                  
                  
                  
                  1,457,588
                  
                  
                  $
                  30.00
                  
                  
                  
                  9,125
                  
                  
                  
                  5.40$36.48
      - $38.23
                  
                  
                  350,487
                  
                  
                  $
                  36.51
                  
                  
                  
                  -
                  
                  
                  
                  7.49
                  
                  
                  
                  178,193
                  
                  
                  $
                  36.53
                  
                  
                  
                  -
                  
                  
                  
                  7.493,390,118
                  
                  
                  $
                  28.69
                  
                  
                  $
                  25,754
                  
                  
                  
                  5.79
                  
                  
                  
                  2,402,608
                  
                  
                  $
                  26.79
                  
                  
                  $
                  22,807
                  
                  
                  
                  4.65





The
following table summarizes information about stock option exercises during the
quarter and six months ended May 29, 2010 and May 30, 2009.





QuarterEnded
                
                
                Six Months EndedMay 29,
                
                
                May 30,
                
                
                May 29,
                
                
                May 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Fair
      value of options exercised
                
                $
                1,671
                
                
                $
                23
                
                
                $
                1,742
                
                
                $
                448Total
      intrinsic value of options exercised
                
                
                4,474
                
                
                
                158
                
                
                
                4,893
                
                
                
                1,527Cash
      received upon exercise of options
                
                
                3,184
                
                
                
                28
                
                
                
                3,424
                
                
                
                1,526Tax
      benefit realized from exercise of options
                
                
                1,624
                
                
                
                49
                
                
                
                1,776
                
                
                
                551Addition
      to capital in excess of par value due to exercise of stock
      options
                
                
                4,035
                
                
                
                27
                
                
                
                4,407
                
                
                
                1,903





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions by grant year.





Six Months EndedMay 29,
                  
                  
                  May 30,2010
                  
                  
                  2009Weighted
      average fair value per option at the date of grant for options
      granted
                  
                  $
                  8.72
                  
                  
                  $
                  7.62Risk-free
      interest rate
                  
                  
                  2.76
                  %
                  
                  
                  1.91
                  %Expected
      dividend yield
                  
                  
                  1.25
                  %
                  
                  
                  0.96
                  %Expected
      volatility factor
                  
                  
                  26.28
                  %
                  
                  
                  24.16
                  %Expected
      option term in years
                  
                  
                  5.7
                  
                  
                  
                  6.1





The
expected life selected for options granted during each year presented represents
the period of time that the options are expected to be outstanding based on
historical data of option holder exercise and termination
behavior.  Expected volatilities are based upon historical volatility
of the Company’s monthly stock closing prices over a period equal to the
expected life of each option grant.  The risk-free interest rate is
selected based on yields from U.S. Treasury zero-coupon issues with a remaining
term approximately equal to the expected term of the options being
valued.


Page
10




CLARCOR
Inc.


NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(Dollars
in thousands, except per share data)


(Unaudited)


Restricted Stock Unit
Awards





The
Company’s restricted stock unit awards are considered nonvested share
awards.  The restricted stock unit awards require no payment from the
employee.  Compensation cost is recorded based on the market price of
the stock on the grant date and is recorded equally over the vesting period of
four years.  During the vesting period, officers and key employees
receive compensation equal to the amount of dividends declared on common shares
they would have been entitled to receive had the shares been
issued.  Upon vesting, employees may elect to defer receipt of their
shares.  There were 101,629 and 99,265 vested and deferred shares at
May 29, 2010 and November 28, 2009, respectively.





The
following table summarizes compensation expense related to restricted stock unit
awards during the quarter and six months ended May 29, 2010 and May 30,
2009.





QuarterEnded
                
                
                Six Months EndedMay 29,
                
                
                May 30,
                
                
                May 29,
                
                
                May 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Pre-tax
      compensation expense
                
                $
                99
                
                
                $
                107
                
                
                $
                832
                
                
                $
                865Tax
      benefits
                
                
                (32
                )
                
                
                (34
                )
                
                
                (280
                )
                
                
                (275
                )Excess
      tax expense associated with tax deductions under the amount of
      compensation expense recognized in the consolidated condensed financial
      statements
                
                
                (36
                )
                
                
                (40
                )
                
                
                (61
                )
                
                
                (135
                )





The
following table summarizes the restricted stock unit awards.





SharesGranted
                            underIncentive
                            Plans
                          
                          
                          Weighted
                            AverageGrant
                            DateFairValueNonvested
      at beginning of year
                          
                          
                          67,476
                          
                          
                          $
                          34.01Granted
                          
                          
                          34,128
                          
                          
                          $
                          32.30Vested
                          
                          
                          (21,727
                          )
                          
                          $
                          34.15Nonvested
      at May 29, 2010
                          
                          
                          79,877
                          
                          
                          $
                          33.24





The total
fair value of shares vested during the six months ended May 29, 2010 and May 30,
2009 was $742 and $614, respectively.





The
Company has recognized $1,727 of compensation cost prior to May 29, 2010 related
to nonvested restricted stock unit awards.  As of May 29, 2010, there
was $811 of total unrecognized compensation cost related to nonvested restricted
stock unit awards that the Company expects to recognize during fiscal years 2010
through 2013.


Page
11


CLARCOR
Inc.
 NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 (Dollars
in thousands, except per share data)
 (Unaudited)




4.
            COMPREHENSIVE
      EARNINGS





Total
comprehensive earnings and its components are as follows:





OtherComprehensiveEarnings,NetofTax:NetEarnings
                      (Loss)
                    
                    
                    ForeignCurrencyand
                      OtherAdjustments
                    
                    
                    PensionLiability
                      Adjustments
                    
                    
                    Comprehensive
                      EarningsQuarter EndedMay
      29, 2010:CLARCOR
      Inc.
                    
                    $
                    23,885
                    
                    
                    $
                    (6,558
                    )
                    
                    $
                    656
                    
                    
                    $
                    17,983Non-redeemable
      noncontrolling interests
                    
                    
                    48
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    48Redeemable
      noncontrolling interests
                    
                    
                    2
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2$
                    23,935
                    
                    
                    $
                    (6,558
                    )
                    
                    $
                    656
                    
                    
                    $
                    18,033May
      30, 2009:CLARCOR
      Inc.
                    
                    $
                    16,791
                    
                    
                    $
                    11,446
                    
                    
                    $
                    216
                    
                    
                    $
                    28,453Non-redeemable
      noncontrolling interests
                    
                    
                    202
                    
                    
                    
                    (68
                    )
                    
                    
                    -
                    
                    
                    
                    134Redeemable
      noncontrolling interests
                    
                    
                    64
                    
                    
                    
                    (5
                    )
                    
                    
                    -
                    
                    
                    
                    59$
                    17,057
                    
                    
                    $
                    11,373
                    
                    
                    $
                    216
                    
                    
                    $
                    28,646Six Months EndedMay
      29, 2010:CLARCOR
      Inc.
                    
                    $
                    38,751
                    
                    
                    $
                    (13,927
                    )
                    
                    $
                    1,279
                    
                    
                    $
                    26,103Non-redeemable
      noncontrolling interests
                    
                    
                    93
                    
                    
                    
                    (3
                    )
                    
                    
                    -
                    
                    
                    
                    90Redeemable
      noncontrolling interests
                    
                    
                    (102
                    )
                    
                    
                    53
                    
                    
                    
                    -
                    
                    
                    
                    (49
                    )$
                    38,742
                    
                    
                    $
                    (13,877
                    )
                    
                    $
                    1,279
                    
                    
                    $
                    26,144May
      30, 2009:CLARCOR
      Inc.
                    
                    $
                    25,582
                    
                    
                    $
                    8,132
                    
                    
                    $
                    433
                    
                    
                    $
                    34,147Non-redeemable
      noncontrolling interests
                    
                    
                    297
                    
                    
                    
                    (67
                    )
                    
                    
                    -
                    
                    
                    
                    230Redeemable
      noncontrolling interests
                    
                    
                    (37
                    )
                    
                    
                    3
                    
                    
                    
                    -
                    
                    
                    
                    (34
                    )$
                    25,842
                    
                    
                    $
                    8,068
                    
                    
                    $
                    433
                    
                    
                    $
                    34,343





The
components of the ending balances of accumulated other comprehensive loss are as
follows:





May 29,
                  
                  
                  November 28,2010
                  
                  
                  2009Pension
      liability, net of tax of $22,830 and $22,796
                  
                  $
                  (37,933
                  )
                  
                  $
                  (39,212
                  )Translation
      adjustments, net of tax of $155 and $155
                  
                  
                  (7,594
                  )
                  
                  
                  6,333Accumulated
      other comprehensive loss
                  
                  $
                  (45,527
                  )
                  
                  $
                  (32,879
                  )


Page
12


CLARCOR
Inc.
 NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 (Dollars
in thousands, except per share data)
 (Unaudited)


5.
            GOODWILL AND ACQUIRED
      INTANGIBLES ASSETS





The
following table reconciles the activity for goodwill by segment for the six
months ended May 29, 2010.  All goodwill is stated on a gross basis,
as the Company has not recorded any impairment charges against
goodwill.





Engine/Mobile
                  Filtration
                
                
                Industrial/
                  Environmental
                  Filtration
                
                
                Packaging
                
                
                TotalBalance
      at November 28, 2009
                
                $
                22,551
                
                
                $
                205,631
                
                
                $
                -
                
                
                $
                228,182Currency
      translation adjustments
                
                
                (1,822
                )
                
                
                4
                
                
                
                -
                
                
                
                (1,818
                )Balance
      at May 29, 2010
                
                $
                20,729
                
                
                $
                205,635
                
                
                $
                -
                
                
                $
                226,364





The
following table summarizes acquired intangibles by segment. Other acquired
intangibles includes parts manufacturer regulatory approvals, developed
technology, patents and non-compete agreements.





Engine/Mobile
                  Filtration
                
                
                Industrial/
                  Environmental
                  Filtration
                
                
                Packaging
                
                
                TotalBalance
      at May 29, 2010Trademarks,
      gross - indefinite lived
                
                $
                603
                
                
                $
                41,022
                
                
                $
                -
                
                
                $
                41,625Trademarks,
      gross - finite lived
                
                
                289
                
                
                
                488
                
                
                
                -
                
                
                
                777Accumulated
      amortization
                
                
                (52
                )
                
                
                (282
                )
                
                
                -
                
                
                
                (334
                )Trademarks,
      net
                
                
                840
                
                
                
                41,228
                
                
                
                -
                
                
                
                42,068Customer
      relationships, gross
                
                
                4,110
                
                
                
                34,158
                
                
                
                -
                
                
                
                38,268Accumulated
      amortization
                
                
                (1,291
                )
                
                
                (9,393
                )
                
                
                -
                
                
                
                (10,684
                )Customer
      relationships, net
                
                
                2,819
                
                
                
                24,765
                
                
                
                -
                
                
                
                27,584Other
      acquired intangibles, gross
                
                
                243
                
                
                
                35,909
                
                
                
                -
                
                
                
                36,152Accumulated
      amortization
                
                
                (243
                )
                
                
                (12,121
                )
                
                
                -
                
                
                
                (12,364
                )Other
      acquired intangibles, net
                
                
                -
                
                
                
                23,788
                
                
                
                -
                
                
                
                23,788$
                3,659
                
                
                $
                89,781
                
                
                $
                -
                
                
                $
                93,440


Page
13




CLARCOR
Inc.


NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(Dollars
in thousands, except per share data)


(Unaudited)





The following table summarizes
estimated amortization expense for the next five fiscal years.





Fiscal
      year 2010
                  
                  $
                  4,739Fiscal
      year 2011
                  
                  
                  4,526Fiscal
      year 2012
                  
                  
                  4,526Fiscal
      year 2013
                  
                  
                  4,501Fiscal
      year 2014
                  
                  
                  4,315





6.
            FAIR VALUE
      MEASUREMENTS





Fair Value
Measurements





The
Company measures certain assets and liabilities at fair value as discussed
throughout the notes to its quarterly and annual financial statements. Fair
value is the exchange price that would be received for an asset or paid to
transfer a liability, an exit price, in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants.  Fair value measurements are categorized in a hierarchy
based upon the observability of inputs used in valuation
techniques.  Observable inputs are the highest level and reflect
market data obtained from independent sources, while unobservable inputs are the
lowest level and reflect internally developed market assumptions.  The
Company classifies fair value measurements by the following
hierarchy:





·
            Level
      1 – Quoted active market prices for identical
  assets





·
            Level
      2 – Significant other observable inputs, such as quoted prices for similar
      (but not identical) instruments in active markets, quoted prices for
      identical or similar instruments in markets which are not active and model
      determined valuations in which all significant inputs or significant
      value-drivers are observable in active
markets





·
            Level
      3 – Significant unobservable inputs, such as model determined valuations
      in which one or more significant inputs or significant value-drivers are
      unobservable





The
Company’s short-term investments consisted of tax-exempt municipal money market
funds which were actively traded.  The restricted trust, which is used
to fund certain payments for the Company’s U.S. combined nonqualified pension
plans, consists of actively traded equity and bond funds.  The fair
value of the interest rate agreement (see Note 8) was determined
using the present value of expected future cash flows using forward rates as of
November 28, 2009 and discount rates commensurate with the risks associated with
those cash flows.  There were no changes in fair value determination
methods or significant assumptions used in those methods during the six months
ended May 29, 2010.


Page
14


CLARCOR
Inc.


NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(Dollars
in thousands, except per share data)


(Unaudited)





Assets or
liabilities that have recurring measurements are shown below:





Fair Value Measurements at Reporting
      DateTotal
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Balance
      at May 29, 2010Restricted
      trust: (part of noncurrent
      assets)Mutual
      fund investments - equities
                  
                  $
                  857
                  
                  
                  $
                  857
                  
                  
                  $
                  -
                  
                  
                  $
                  -Mutual
      fund investments - bonds
                  
                  
                  252
                  
                  
                  
                  252
                  
                  
                  
                  -
                  
                  
                  
                  -Cash
      and equivalents
                  
                  
                  272
                  
                  
                  
                  272
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      restricted trust
                  
                  $
                  1,381
                  
                  
                  $
                  1,381
                  
                  
                  $
                  -
                  
                  
                  $
                  -Balance
      at November 28, 2009Short-term
      investments
                  
                  $
                  32,171
                  
                  
                  $
                  32,171
                  
                  
                  $
                  -
                  
                  
                  $
                  -Restricted
      trust (part of noncurrent
      assets)
                  
                  $
                  1,419
                  
                  
                  $
                  1,419
                  
                  
                  $
                  -
                  
                  
                  $
                  -Interest
      rate agreement (part of
      current liabilities)
                  
                  $
                  (961
                  )
                  
                  $
                  -
                  
                  
                  $
                  (961
                  )
                  
                  $
                  -





There
were no transfers between Level 1 and Level 2 during the six months ended May
29, 2010.  The interest rate agreement (Level 2) expired January 1,
2010.  The Company liquidated the short-term investments (Level 1)
during May 2010.




Fair Values of Financial
Instruments





The fair
values of the Company’s financial instruments, which are cash and cash
equivalents, restricted cash, accounts receivable, short-term investments (only
at November 28, 2009), the restricted trust and the interest rate agreement
(only at November 28, 2009), approximated the carrying values of those financial
instruments at both May 29, 2010 and November 28, 2009.  An expected
present value technique is used to estimate the fair value of long-term
debt.  A fair value estimate of $16,699 and $49,513 for long-term debt
at May 29, 2010 and November 28, 2009, respectively, is based on the current
interest rates available to the Company for debt with similar remaining
maturities.  The carrying value for the long-term debt at May 29, 2010
and November 28, 2009 is $17,407 and $52,195, respectively.





7.
            GUARANTEES AND
      WARRANTIES





The
Company has provided letters of credit totaling $23,425 and $23,395 as of May
29, 2010 and November 28, 2009, respectively, to various government agencies,
primarily related to industrial revenue bonds, and to insurance companies and
other commercial entities in support of its obligations. The Company believes
that no payments will be required resulting from these obligations.





In the
ordinary course of business, the Company also provides routine indemnifications
and other guarantees whose terms range in duration and are often not explicitly
defined. The Company does not believe these will have a material impact on the
results of operations or financial condition of the Company.





Warranties
are recorded as a liability on the balance sheet and as charges to current
expense for estimated normal warranty costs and, if applicable, for specific
performance issues known to exist on products already sold. The expenses
estimated to be incurred are provided at the time of sale and adjusted as
needed, based primarily upon experience.


Page
15


CLARCOR
Inc.


NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(Dollars
in thousands, except per share data)


(Unaudited)





Changes
in the Company’s warranty accrual, which is included in other accrued
liabilities, during the six months ended May 29, 2010 and May 30, 2009, are as
follows:





2010
                  
                  
                  2009Balance
      at beginning of period
                  
                  $
                  3,989
                  
                  
                  $
                  2,494Accruals
      for warranties issued during the period
                  
                  
                  242
                  
                  
                  
                  502Accruals
      related to pre-existing warranties
                  
                  
                  41
                  
                  
                  
                  345Settlements
      made during the period
                  
                  
                  (502
                  )
                  
                  
                  (366
                  )Other
      adjustments, including currency translation
                  
                  
                  (384
                  )
                  
                  
                  48Balance
      at end of period
                  
                  $
                  3,386
                  
                  
                  $
                  3,023





8.
            LONG-TERM DEBT AND
      INTEREST RATE AGREEMENT





On
December 18, 2007, the Company entered into a five-year multicurrency revolving
credit agreement (“Credit Facility”) with a group of financial institutions
under which it may borrow up to $250,000 under a selection of currencies and
rate formulas.  The Credit Facility interest rate is based upon, at
the Company’s election, either a defined Base Rate or the London Interbank
Offered Rate (“LIBOR”) plus or minus applicable margins.  Commitment
fees, letter of credit fees and other fees are also payable as provided in the
credit agreement.  At May 29, 2010, there were no borrowings
outstanding on the Credit Facility.  The Credit Facility includes a
$75,000 letter of credit subline, against which $16,012 and $8,491 in letters of
credit had been issued at May 29, 2010 and November 28, 2009.





The
Company’s significant accounting policies for derivative instruments are
described in Note A of the 2009 Form 10-K.  On January 2, 2008, the
Company entered into a fixed rate interest swap agreement to manage its interest
rate exposure on certain amounts outstanding under the Credit
Facility.  The interest rate agreement expired January 1,
2010.  The interest rate agreement provided for the Company to receive
interest at floating rates based on LIBOR and pay a 3.93% fixed interest rate
plus an applicable margin on a notional amount of $100,000.  Payments
pursuant to the interest rate agreement were settled on a net basis quarterly.
Hedge accounting was not applied to the fixed rate interest swap agreement and
therefore, unrealized gains or losses were recorded in interest expense in the
Consolidated Condensed Statements of Earnings.  Periodic settlement
payments or receipts were recorded as a component of cash flows from operating
activities in the Consolidated Condensed Statements of Cash
Flows.


Page
16


CLARCOR
Inc.


NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(Dollars
in thousands, except per share data)


(Unaudited)





At
November 28, 2009, the Company had the following derivative in a liability
position.





Derivatives In Liability PositionDerivatives Not Designated as
                              Hedging Instruments
                            
                            Consolidated Balance
                              Sheet Location
                            
                            Fair
                              ValueNovember
      28, 2009Fixed
      rate interest swap agreement
                            
                            Current
      liabilities
                            
                            $
                            961Total
                            
                            
                            
                            $
                            961





The
following table reflects the gain (loss) and net settlement payments on the
interest rate agreement for the quarter and six months ended May 29, 2010 and
May 30, 2009, respectively.





Derivatives Not Designated
                          as Hedging Instruments
                        
                        Location
                        
                        AmountQuarter EndedMay 29,
                        
                        
                        May 30,2010
                        
                        
                        2009Fixed
      rate interest swap agreement unrealized losses
                        
                        Interest
      expense
                        
                        $
                        -
                        
                        
                        $
                        (360
                        )Fixed
      rate interest swap agreement net settlement payments
                        
                        Cash
      flows from operating activities
                        
                        
                        -
                        
                        
                        
                        617





Six Months EndedMay 29,
                      
                      
                      May 30,2010
                      
                      
                      2009Fixed
      rate interest swap agreement unrealized losses
                      
                      Interest
      expense
                      
                      $
                      -
                      
                      
                      $
                      (978
                      )Fixed
      rate interest swap agreement net settlement payments
                      
                      Cash
      flows from operating activities
                      
                      
                      961
                      
                      
                      
                      630


Page
17


CLARCOR
Inc.


NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(Dollars
in thousands, except per share data)


(Unaudited)





9.
            PENSION AND OTHER
      POSTRETIREMENT PLANS





The
Company provides various retirement benefits, including defined benefit plans
and postretirement healthcare plans covering certain current and retired
employees in the U.S. and abroad.  Components of net periodic benefit
cost and Company contributions for these plans were as follows:





QuarterEnded
                  
                  
                  SixMonthsEndedMay 29,
                  
                  
                  May 30,
                  
                  
                  May 29,
                  
                  
                  May 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Pension Benefits:Components
      of net periodic benefit cost:Service
      cost
                  
                  $
                  527
                  
                  
                  $
                  451
                  
                  
                  $
                  1,055
                  
                  
                  $
                  901Interest
      cost
                  
                  
                  2,031
                  
                  
                  
                  2,298
                  
                  
                  
                  4,070
                  
                  
                  
                  4,595Expected
      return on plan assets
                  
                  
                  (1,777
                  )
                  
                  
                  (1,715
                  )
                  
                  
                  (3,562
                  )
                  
                  
                  (3,428
                  )Amortization
      of unrecognized:Prior
      service cost
                  
                  
                  (99
                  )
                  
                  
                  32
                  
                  
                  
                  (198
                  )
                  
                  
                  65Net
      actuarial loss
                  
                  
                  1,199
                  
                  
                  
                  390
                  
                  
                  
                  2,400
                  
                  
                  
                  779Net
      periodic benefit cost
                  
                  $
                  1,881
                  
                  
                  $
                  1,456
                  
                  
                  $
                  3,765
                  
                  
                  $
                  2,912Cash
      contributions
                  
                  $
                  93
                  
                  
                  $
                  417
                  
                  
                  $
                  186
                  
                  
                  $
                  807





Quarter Ended
                  
                  
                  Six Months EndedMay 29,
                  
                  
                  May 30,
                  
                  
                  May 29,
                  
                  
                  May 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Postretirement Healthcare
      Benefits:Components
      of net periodic benefit income:Interest
      cost
                  
                  $
                  8
                  
                  
                  $
                  15
                  
                  
                  $
                  16
                  
                  
                  $
                  30Amortization
      of unrecognized:Prior
      service cost
                  
                  
                  (31
                  )
                  
                  
                  (31
                  )
                  
                  
                  (62
                  )
                  
                  
                  (62
                  )Net
      actuarial gain
                  
                  
                  (32
                  )
                  
                  
                  (46
                  )
                  
                  
                  (64
                  )
                  
                  
                  (92
                  )Net
      periodic benefit income
                  
                  $
                  (55
                  )
                  
                  $
                  (62
                  )
                  
                  $
                  (110
                  )
                  
                  $
                  (124
                  )Cash
      contributions
                  
                  $
                  39
                  
                  
                  $
                  50
                  
                  
                  $
                  78
                  
                  
                  $
                  100





The
Company’s policy is to contribute to its qualified U.S. and non-U.S. pension
plans at least the minimum amount required by applicable laws and regulations,
to contribute to the U.S. combined nonqualified plans when required for benefit
payments, and to contribute to the postretirement healthcare benefit plan an
amount equal to the benefit payments.  The Company, from time to time,
makes voluntary contributions in excess of the minimum amount required as
economic conditions warrant.  The Company expects to contribute up to
$6,700 to its U.S. qualified plans, $5,719 to its U.S. combined nonqualified
plans, $407 to its non-U.S. plan and $154 to its postretirement healthcare
benefit plan to pay benefits during 2010.  Subsequent to May 29, 2010,
the Company contributed $2,841 to its U.S. combined nonqualified plans for
benefit payments.


Page
18


CLARCOR
Inc.


NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(Dollars
in thousands, except per share data)


(Unaudited)





In
addition to the plan assets related to its qualified plans, the Company has also
funded $1,381 and $1,419 at May 29, 2010 and November 28, 2009, respectively,
into a restricted trust for its U.S. combined nonqualifed plans.  This
trust is included in other noncurrent assets in the Consolidated Condensed
Balance Sheets.





10.
            INCOME
      TAXES





The
following is a reconciliation of the beginning and ending amount of gross
unrecognized tax benefits for uncertain tax positions, including positions which
impact only the timing of tax benefits, for the six months ended May 29, 2010
and May 30, 2009.





2010
                  
                  
                  2009Balance
      at beginning of period
                  
                  $
                  2,161
                  
                  
                  $
                  1,970Changes
      for current period tax positions
                  
                  
                  (39
                  )
                  
                  
                  123Changes
      for prior period tax positions
                  
                  
                  39
                  
                  
                  
                  2Changes
      in interest and penalties
                  
                  
                  (5
                  )
                  
                  
                  112Balance
      at end of period
                  
                  $
                  2,156
                  
                  
                  $
                  2,207





At May
29, 2010, the amount of unrecognized tax benefit, that would impact the
effective tax rate if recognized, was $2,033.  The Company recognizes
interest and penalties related to unrecognized benefits in income tax
expense.  As of May 29, 2010, the Company had $478 accrued for the
payment of interest and penalties.  Due to the various jurisdictions
in which the Company files tax returns and the uncertainty regarding the timing
of settlements it is possible that there could be other significant changes in
the amount of unrecognized tax benefits in fiscal year 2010; however, the amount
cannot be estimated.





The
Company is regularly audited by federal, state and foreign tax
authorities.  The Internal Revenue Service has completed its audits of
the Company’s U.S. income tax returns through fiscal year 2005 and is currently
auditing 2006 through 2008.  With few exceptions, the Company is no
longer subject to income tax examinations by state or foreign tax jurisdictions
for years prior to 2004.





11.
            RESTRUCTURING
      CHARGES





As
discussed more fully in the 2009 Form 10-K, in July 2006, the Company began a
restructuring program focused on the heating, ventilating and air conditioning
(“HVAC”) filter manufacturing operations within its Industrial/Environmental
Filtration segment.  The HVAC restructuring program was substantially
complete in fiscal year 2009.  At November 28, 2009, accrued severance
of $28 related to Kentucky facilities, was included in other accrued
liabilities.  At May 29, 2010, all restructuring expenses were
paid.





The
Company did not incur any restructuring expenses during the quarter and six
months ended May 29, 2010.





During
the six months ended May 30, 2009, the Company consolidated four Louisville,
Kentucky area facilities into one location in Jeffersonville, Indiana to realize
cost savings and efficiency benefits.  Severance costs of $107 and
$133 were accrued during the quarter and six months ended May 30, 2009,
respectively, and were included in cost of sales in the Consolidated Condensed
Statements of Earnings.


Page
19


CLARCOR
Inc.


NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(Dollars
in thousands, except per share data)


(Unaudited)





During
May 2009, the Company closed a small facility in Clover, South
Carolina.  The Company did not incur any material expenses related to
this closure.





During
the quarter and six months ended May 30, 2009, the Company recorded
restructuring expenses of $20 and $47, respectively, related to the Henderson,
North Carolina location mainly for facility consolidation and employee
termination costs.  These expenses were included in cost of sales in
the Consolidated Condensed Statements of Earnings.  Minimal additional
restructuring charges related to facility consolidation costs will be recognized
when the Company exits that facility.  In addition to costs classified
as restructuring expenses, the Company has incurred and will continue to incur
other non-restructuring costs related to this facility until it is
sold.





During
the second quarter of fiscal year 2008, the Company discontinued production at
an HVAC filter manufacturing plant in Davenport, Iowa.  The Company
did not incur any restructuring expenses related to the Davenport, Iowa location
during the quarter and six months ended May 30, 2009.  Minimal
additional restructuring charges related to contract termination costs and
facility consolidation costs will be recognized when the Company exits a lease
related to that facility in 2012.   In addition to costs
classified as restructuring expenses, the Company has incurred and will continue
to incur other non-restructuring costs related to this facility until the
expiration of the lease.





12.
            INSURANCE
      CLAIMS





During
June 2009, an Industrial/Environmental Filtration segment warehouse that the
Company leases was damaged by fire.  A loss of $250, representing the
Company’s deductible, was recorded in cost of sales for the quarter ended August
29, 2009.  During September 2009, the Company received $500 from the
insurance company.  During February 2010, the Company received
additional insurance proceeds of $557.  The Company does not expect to
collect any further amounts related to this claim.





13.
            CONTINGENCIES





Legal
Contingencies





From time
to time, the Company is subject to lawsuits, investigations and disputes (some
of which involve substantial claimed amounts) arising out of the conduct of its
business, including matters relating to commercial transactions, product
liability, intellectual property, and other matters.  Items included in
these other matters are discussed below.  The Company believes
recorded reserves in its Consolidated Condensed Financial Statements are
adequate in light of the probable and estimable outcomes of the items discussed
below.  These recorded liabilities were not material to the Company’s
financial position, results of operation or liquidity and the Company does not
currently believe that any pending claims or litigation, including those
identified below, will materially affect its financial position, results of
operation or liquidity.


Page
20


CLARCOR
Inc.


NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(Dollars
in thousands, except per share data)


(Unaudited)





Donaldson





On May
15, 2009, Donaldson Company, Inc. (“Donaldson”) filed a lawsuit in the U.S.
Federal District Court for the District of Minnesota alleging that certain
“ChannelFlow®” engine/mobile filters manufactured and sold by a subsidiary of
the Company infringe one or more patents held by
Donaldson.   Through this lawsuit Donaldson seeks various
remedies, including injunctive relief and monetary damages of an unspecified
amount.  Management believes that the products in question do not
infringe the asserted patents and that such patents are invalid.  The
Company is vigorously defending the action.





Antitrust





On March
31, 2008, S&E Quick Lube, a filter distributor, filed suit in U.S. District
Court for the District of Connecticut alleging that virtually every major North
American filter manufacturer, including the Company's subsidiary, Baldwin
Filters, Inc., engaged in a conspiracy to fix prices, rig bids and allocate U.S.
customers for aftermarket filters.  This suit is a purported class
action on behalf of direct purchasers of filters from the
defendants.  Parallel purported class actions, including on behalf of
indirect purchasers of filters, have been filed by other plaintiffs in a variety
of jurisdictions in the United States and Canada.  The U.S cases have
been consolidated into a single multi-district litigation in the Northern
District of Illinois.  The Company intends to vigorously defend the
claims raised in these actions.  In this regard, the Company filed a
motion to be dismissed from these cases, due to the lack of any factual
allegations against the Company specifically and the fact that the allegations
center predominantly on the automotive filtration market rather than on the
heavy-duty filtration market.  On November 9, 2009, the presiding
court denied the Company’s motion, a decision that the Company is seeking to
overturn.





The
Company understands that the Antitrust Division of the Department of Justice
(“DOJ”) was investigating the allegations raised in these suits and issued
subpoenas in connection with that investigation. The Company was not contacted
by the DOJ in connection with the DOJ investigation and was not the subject of
any subpoena.  Public reports indicate that the DOJ officially closed
its investigation in January 2010 and took no action against any filter
manufacturer.





Other





Additionally,
the Company is party to various proceedings relating to environmental
issues.  The U.S. Environmental Protection Agency and/or other
responsible state agencies have designated the Company as a potentially
responsible party, along with other companies, in remedial activities for the
cleanup of waste sites under the federal Superfund statute.  Although
it is not certain what future environmental claims, if any, may be asserted, the
Company currently believes that its potential liability for known environmental
matters does not exceed its present accrual of $50.  However,
environmental and related remediation costs are difficult to quantify for a
number of reasons, including the number of parties involved, the difficulty in
determining the nature and extent of the contamination at issue, the length of
time remediation may require, the complexity of the environmental regulation and
the continuing advancement of remediation technology.  Applicable
federal law may impose joint and several liability on each potentially
responsible party for the cleanup.





In
addition to the matters cited above, the Company is involved in legal actions
arising in the normal course of business.  The Company records
provisions with respect to identified claims or lawsuits when it is probable
that a liability has been incurred and the amount of the loss can be reasonably
estimated.  Claims and lawsuits are reviewed quarterly and provisions
are taken or adjusted to reflect the status of a particular
matter.  No such provisions have been taken in respect of the
Donaldson or antitrust legal proceeding referred to above.


Page
21


CLARCOR
Inc.


NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(Dollars
in thousands, except per share data)


(Unaudited)





Other
Contingencies





In the
event of a change in control of the Company, termination benefits are likely to
be required for certain executive officers and other employees.





14.
            EARNINGS PER SHARE AND
      TREASURY STOCK TRANSACTIONS





Diluted
earnings per share reflect the impact of outstanding stock options as if
exercised during the periods presented using the treasury stock
method.  The following table provides a reconciliation of the
numerators and denominators utilized in the calculation of basic and diluted
earnings per share.





QuarterEnded
                
                
                SixMonthsEndedMay 29,
                
                
                May 30,
                
                
                May 29,
                
                
                May 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Weighted
      average number of shares outstanding
                
                
                50,716,443
                
                
                
                51,116,978
                
                
                
                50,661,061
                
                
                
                51,086,280Dilutive
      effect of stock-based arrangements
                
                
                326,374
                
                
                
                292,306
                
                
                
                241,484
                
                
                
                380,932Weighted
      average number of diluted shares outstanding
                
                
                51,042,817
                
                
                
                51,409,284
                
                
                
                50,902,545
                
                
                
                51,467,212Net
      earnings attributable to CLARCOR
                
                $
                23,885
                
                
                $
                16,791
                
                
                $
                38,751
                
                
                $
                25,582Basic
      earnings per share attributable to CLARCOR
                
                $
                0.47
                
                
                $
                0.33
                
                
                $
                0.76
                
                
                $
                0.50Diluted
      earnings per share attributable to CLARCOR
                
                $
                0.47
                
                
                $
                0.33
                
                
                $
                0.76
                
                
                $
                0.50





The
following table provides additional information regarding the calculation of
earnings per share and treasury stock transactions.





QuarterEnded
                      
                      
                      SixMonthsEndedMay 29,
                      
                      
                      May 30,
                      
                      
                      May 29,
                      
                      
                      May 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Weighted
      average exercise price per share of antidilutive options
                      
                      $
                      36.30
                      
                      
                      $
                      32.81
                      
                      
                      $
                      36.16
                      
                      
                      $
                      34.32Options
      with exercises prices greater than the average market price excluded from
      the computation of dilutive earnings per share because the effect would
      have been antidilutive
                      
                      
                      455,987
                      
                      
                      
                      1,840,118
                      
                      
                      
                      512,287
                      
                      
                      
                      1,330,663Common
      stock repurchased pursuant to the Company's $250,000 stock repurchase
      program
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -





As of May
29, 2010, there was approximately $167,443 available under the Company’s
$250,000 stock repurchase program for future purchases.


Page
22


CLARCOR
Inc.


NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(Dollars
in thousands, except per share data)


(Unaudited)





15.
            SEGMENT
      DATA





The
Company operates in three principal product segments: Engine/Mobile Filtration,
Industrial/Environmental Filtration and Packaging. The segment data for the
quarter and six months ended May 29, 2010 and May 30, 2009, respectively, is
shown below. Net sales represent sales to unaffiliated customers as reported in
the Consolidated Condensed Statements of Earnings. Intersegment sales were not
material.





QuarterEnded
                
                
                SixMonthsEndedMay 29,
                
                
                May 30,
                
                
                May 29,
                
                
                May 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      sales:Engine/Mobile
      Filtration
                
                $
                113,434
                
                
                $
                92,277
                
                
                $
                209,862
                
                
                $
                177,657Industrial/Environmental
      Filtration
                
                
                117,566
                
                
                
                119,889
                
                
                
                219,593
                
                
                
                233,347Packaging
                
                
                26,869
                
                
                
                17,229
                
                
                
                43,545
                
                
                
                32,081$
                257,869
                
                
                $
                229,395
                
                
                $
                473,000
                
                
                $
                443,085Operating
      profit:Engine/Mobile
      Filtration
                
                $
                23,643
                
                
                $
                18,457
                
                
                $
                41,505
                
                
                $
                31,758Industrial/Environmental
      Filtration
                
                
                10,371
                
                
                
                5,864
                
                
                
                14,654
                
                
                
                6,527Packaging
                
                
                2,198
                
                
                
                909
                
                
                
                2,949
                
                
                
                63236,212
                
                
                
                25,230
                
                
                
                59,108
                
                
                
                38,917Other
      expense
                
                
                (224
                )
                
                
                (52
                )
                
                
                (718
                )
                
                
                (858
                )Earnings
      before income taxes
                
                $
                35,988
                
                
                $
                25,178
                
                
                $
                58,390
                
                
                $
                38,059





May 29,
                  
                  
                  November 28,2010
                  
                  
                  2009Identifiable
      assets:Engine/Mobile
      Filtration
                  
                  $
                  273,445
                  
                  
                  $
                  252,747Industrial/Environmental
      Filtration
                  
                  
                  628,997
                  
                  
                  
                  629,488Packaging
                  
                  
                  40,438
                  
                  
                  
                  36,456Corporate
                  
                  
                  34,943
                  
                  
                  
                  55,199$
                  977,823
                  
                  
                  $
                  973,890





16.
            SUBSEQUENT
      EVENTS





On June
8, 2010, the Company purchased the 15% noncontrolling ownership interests in
Pujiang Novaeastern International Mesh Co., Ltd. (“Pujiang”) and Purolator
Advanced Filtration (Quzhou) Co., Ltd. (“Quzhou”) for approximately $732,
thereby making the companies 100% owned subsidiaries of
CLARCOR.


Page
23


Part I - Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





The
information presented in this discussion should be read in conjunction with
other financial information provided in the Consolidated Condensed Financial
Statements and Notes thereto. Except as otherwise set forth herein, references
to particular years refer to our applicable fiscal year.  The analysis
of operating results focuses on our three reportable business
segments:  Engine/Mobile Filtration, Industrial/Environmental
Filtration and Packaging.





EXECUTIVE
SUMMARY





Management
Discussion Snapshot


(In
millions except per share data)





SecondQuarter
                
                
                FirstSixMonthsChange
                
                
                
                
                
                Change2010
                
                
                2009
                
                
                $
                
                
                %
                
                
                2010
                
                
                2009
                
                
                $
                
                
                %Net
      sales
                
                $
                257.9
                
                
                $
                229.4
                
                
                $
                28.5
                
                
                
                12
                %
                
                $
                473.0
                
                
                $
                443.1
                
                
                $
                29.9
                
                
                
                7
                %Cost
      of sales
                
                
                173.0
                
                
                
                159.8
                
                
                
                13.2
                
                
                
                8
                %
                
                
                318.4
                
                
                
                312.5
                
                
                
                5.9
                
                
                
                2
                %Gross
      profit
                
                
                84.8
                
                
                
                69.6
                
                
                
                15.2
                
                
                
                22
                %
                
                
                154.6
                
                
                
                130.6
                
                
                
                24.0
                
                
                
                18
                %Selling
      and administrative expenses
                
                
                48.6
                
                
                
                44.4
                
                
                
                4.2
                
                
                
                10
                %
                
                
                95.5
                
                
                
                91.7
                
                
                
                3.8
                
                
                
                4
                %Operating
      profit
                
                
                36.2
                
                
                
                25.2
                
                
                
                11.0
                
                
                
                44
                %
                
                
                59.1
                
                
                
                38.9
                
                
                
                20.2
                
                
                
                52
                %Other
      income (expense)
                
                
                (0.2
                )
                
                
                (0.1
                )
                
                
                (0.1
                )
                
                
                
                
                
                
                (0.7
                )
                
                
                (0.9
                )
                
                
                0.2Provision
      for income taxes
                
                
                12.1
                
                
                
                8.1
                
                
                
                4.0
                
                
                
                48
                %
                
                
                19.6
                
                
                
                12.2
                
                
                
                7.4
                
                
                
                61
                %Net
      earnings attributable to CLARCOR
                
                
                23.9
                
                
                
                16.8
                
                
                
                7.1
                
                
                
                42
                %
                
                
                38.8
                
                
                
                25.6
                
                
                
                13.2
                
                
                
                51
                %Average
      diluted shares
                
                
                51.0
                
                
                
                51.4
                
                
                
                (0.4
                )
                
                
                -1
                %
                
                
                50.9
                
                
                
                51.5
                
                
                
                (0.6
                )
                
                
                -1
                %Diluted
      earnings per share
                
                $
                0.47
                
                
                $
                0.33
                
                
                $
                0.14
                
                
                
                42
                %
                
                $
                0.76
                
                
                $
                0.50
                
                
                $
                0.26
                
                
                
                52
                %Percentages:Gross
      margin
                
                
                32.9
                %
                
                
                30.3
                %
                
                
                
                
                
                2.6
                pt
                
                
                32.7
                %
                
                
                29.5
                %
                
                
                
                
                
                3.2
                ptSelling
      and administrative percentage
                
                
                18.9
                %
                
                
                19.3
                %
                
                
                
                
                
                -0.4
                pt
                
                
                20.2
                %
                
                
                20.7
                %
                
                
                
                
                
                -0.5
                ptOperating
      margin
                
                
                14.0
                %
                
                
                11.0
                %
                
                
                
                
                
                3.0
                pt
                
                
                12.5
                %
                
                
                8.8
                %
                
                
                
                
                
                3.7
                ptEffective
      tax rate
                
                
                33.5
                %
                
                
                32.3
                %
                
                
                
                
                
                1.2
                pt
                
                
                33.6
                %
                
                
                32.1
                %
                
                
                
                
                
                1.5
                ptNet
      earnings margin
                
                
                9.3
                %
                
                
                7.3
                %
                
                
                
                
                
                2.0
                pt
                
                
                8.2
                %
                
                
                5.8
                %
                
                
                
                
                
                2.4
                pt





Second
Quarter





Our strong operating performance in the
second quarter of 2010 was the result of additional net sales and year-over-year
cost improvements.  Our selling markets continued to strengthen as net
sales increased 12% from the second quarter of 2009.  The increase in
net sales from the second quarter of 2009 was primarily the result of
incremental sales of $21.1 million at our Engine/Mobile Filtration
segment resulting from heavy-duty engine filter sales and $9.7 million
at our Packaging segment.  Net sales at our Packaging segment
benefited from a one-time, no margin $4.6 million equipment sale to one of our
customers.  Net sales at our Industrial/Environmental Filtration
segment declined $2.3 million from the second quarter of 2009 due
to the negative impact of a $5.3 million reduction in HVAC filter sales to
the 3M Company (“3M”).


Page
24


MANAGEMENT’S DISCUSSION AND
ANALYSIS





OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS – CONTINUED





The increase in operating profit from
the second quarter of 2009 was primarily the result of the additional net sales
and continued cost benefits from the restructuring program and lower material
costs at our HVAC filter operations.  The increase in selling and
administrative expenses from the second quarter of 2009 was the result of
increased employee incentive compensation and legal fees partially offset
by a reduction in bad debt expense.





The 14.0% operating margin in the
second quarter of 2010 not only was 3.0 points greater than the second quarter
of 2009, but it was equal to the operating margin in the second quarter of 2008
despite $9.3 million lower sales.  This operating margin was
consistent with 2008 despite lower sales due to cost efficiencies implemented in
2009 including the benefits of the restructuring program at our HVAC filter
operations.  As a result of this improved operating performance,
diluted earnings per share of $0.47 in the second quarter of 2010 was greater
than the $0.33 from the second quarter of 2009 and comparable with $0.48 from
the second quarter of 2008.





First
Six Months





Our
operating performance for the first six months of 2010 is improved from the
first six months of 2009 due to higher net sales and improved cost
efficiencies.  The increase in net sales from the first six months of
2009 is driven by a $32.2 million increase at our Engine/Mobile Filtration
segment as a result of higher heavy-duty engine filter sales and an
$11.4 million increase at our Packaging segment.  The higher sales at
these two segments were offset by a $13.7 million decline at our
Industrial/Environmental Filtration segment including a $9.1 million decline in
HVAC filter sales to 3M.  The remainder of the decline in this segment
was the result of lower sales of natural gas vessels.  Net sales at
our Packaging segment benefited from a one-time, no margin $4.6 million
equipment sale to one of our customers.





The
increase in operating profit from the first six months of 2009 was primarily the
result of the incremental net sales and continued cost benefits from the
restructuring program and lower material costs at our HVAC filter
operations.  The increase in selling and administrative expenses from
the first six months of 2009 was primarily the result of increased employee
incentive compensation and legal fees partially offset by lower bad debt
expense.





The
12.5% operating margin in the first six months of 2010 not only was 3.7 points
greater than the first six months of 2009, but it was comparable with the 12.6%
operating margin from the first six months  of 2008 despite $44.3
million lower sales compared to the 2008 period.  This comparable
operating margin despite lower sales resulted from the cost
efficiencies implemented in 2009 including the benefits of the restructuring
program at our HVAC filter operations.  As a result of this improved
operating performance, diluted earnings per share of $0.76 in the first six
months of 2010 was greater than the $0.50 from the first six months of 2009 and
only $0.04 lower than the $0.80 in the first six months of 2008.





·
            Acquisitions





We
completed no acquisitions in the first six months of 2010.  We
completed six acquisitions during fiscal year 2009, some of which were finalized
after the second quarter of 2009.  The net impact of these
acquisitions in the second quarter of 2010 compared to 2009 was to increase net
sales by $1.6 million and operating profit by $0.2 million.  The net
impact of these acquisitions in the first six months of 2010 compared to 2009
was to increase net sales by $3.3 million and operating profit by $0.4
million.





·
            Foreign
      Exchange





The
average exchange rate for foreign currencies versus the U.S. dollar was stronger
in the second quarter of 2010 compared to the second quarter of
2009.  As a result, stronger foreign currencies positively impacted
our translated U.S. dollar value of net sales by $3.6 million and operating
profit by $0.9 million in the second quarter of 2010 versus the second quarter
of 2009.  For the first six months of 2010 compared to 2009, foreign
exchange rates positively influenced net sales by $8.7 million and operating
profit by $1.7 million.


Page
25


MANAGEMENT’S DISCUSSION AND
ANALYSIS





OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS – CONTINUED





·
            Other income
      (expense)





Interest
expense





Interest
expense declined $0.5 million in the second quarter of 2010 compared to the
second quarter of 2009.  $0.4 million of this decrease was due
to the impact of a mark-to-market adjustment on an interest rate swap
agreement in the second quarter of 2009.  The remaining $0.1 million
decline resulted from lower interest expense on our line of credit
driven by a lower average interest rate (0.6% in 2010 and 0.8% in 2009) and
lower average outstanding balances ($10.0 million in 2010 and $65.0 million in
2009).





Interest
expense declined $1.3 million in the first six months of 2010 compared to the
first six months of 2009.  $1.0 million of this decrease was due
to the impact of a mark-to-market adjustment on an interest rate swap
agreement in the first six months of 2009.  The remaining $0.3 million
decline resulted from lower interest expense on our line of credit
driven by a lower average interest rate (0.6% in 2010 and 1.0% in 2009) and
lower average outstanding balances ($15.8 million in 2010 and $70.0 million in
2009).





Foreign currency gains and
losses





Changes
in foreign currency gains and losses negatively impacted other income (expense)
by $0.8 million in the second quarter of 2010 versus the second quarter of 2009
and $1.0 million in the first six months of 2010 versus the first six months of
2009.  Much of the foreign currency gain or loss is caused by the
translation of cash accounts at foreign subsidiaries denominated in a currency
other than their functional currency.





·
            Provisions for income
      taxes





The
higher effective tax rate in the second quarter and the first six months of 2010
compared to the same periods in 2009 was caused by a higher mix of earnings
generated in the U.S.—which has a higher tax rate than some of our foreign tax
jurisdictions.





·
            Shares
      outstanding





Average
diluted shares outstanding declined 0.4 million in the second quarter and 0.6
million in the first six months of 2010 compared with the same periods of
2009.  This reduction resulted from a decrease in average
basic shares outstanding.  Average basic shares outstanding decreased
primarily due to the repurchase of 0.7 million shares in the third quarter of
2009 partially offset by the issuance of shares from stock option
exercises.


Page
26


MANAGEMENT’S DISCUSSION AND
ANALYSIS





OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS – CONTINUED





SEGMENT
ANALYSIS





SecondQuarter
                
                
                FirstSixMonths(Dollars in millions)
                
                2010
                
                
                %Total
                
                
                2009
                
                
                %Total
                
                
                2010
                
                
                %Total
                
                
                2009
                
                
                %TotalNet
      sales:Engine/Mobile
      Filtration
                
                $
                113.4
                
                
                
                44
                %
                
                $
                92.3
                
                
                
                40
                %
                
                $
                209.9
                
                
                
                44
                %
                
                $
                177.7
                
                
                
                40
                %Industrial/Environmental
      Filtration
                
                
                117.6
                
                
                
                46
                %
                
                
                119.9
                
                
                
                52
                %
                
                
                219.6
                
                
                
                46
                %
                
                
                233.3
                
                
                
                53
                %Packaging
                
                
                26.9
                
                
                
                10
                %
                
                
                17.2
                
                
                
                8
                %
                
                
                43.5
                
                
                
                10
                %
                
                
                32.1
                
                
                
                7
                %$
                257.9
                
                
                
                100
                %
                
                $
                229.4
                
                
                
                100
                %
                
                $
                473.0
                
                
                
                100
                %
                
                $
                443.1
                
                
                
                100
                %Operating
      profit:Engine/Mobile
      Filtration
                
                $
                23.6
                
                
                
                65
                %
                
                $
                18.4
                
                
                
                73
                %
                
                $
                41.5
                
                
                
                70
                %
                
                $
                31.8
                
                
                
                82
                %Industrial/Environmental
      Filtration
                
                
                10.4
                
                
                
                29
                %
                
                
                5.9
                
                
                
                23
                %
                
                
                14.7
                
                
                
                25
                %
                
                
                6.5
                
                
                
                17
                %Packaging
                
                
                2.2
                
                
                
                6
                %
                
                
                0.9
                
                
                
                4
                %
                
                
                2.9
                
                
                
                5
                %
                
                
                0.6
                
                
                
                1
                %$
                36.2
                
                
                
                100
                %
                
                $
                25.2
                
                
                
                100
                %
                
                $
                59.1
                
                
                
                100
                %
                
                $
                38.9
                
                
                
                100
                %Operating
      margin:Engine/Mobile
      Filtration
                
                
                20.8
                %
                
                
                
                
                
                
                20.0
                %
                
                
                
                
                
                
                19.8
                %
                
                
                
                
                
                
                17.9
                %Industrial/Environmental
      Filtration
                
                
                8.8
                %
                
                
                
                
                
                
                4.9
                %
                
                
                
                
                
                
                6.7
                %
                
                
                
                
                
                
                2.8
                %Packaging
                
                
                8.2
                %
                
                
                
                
                
                
                5.3
                %
                
                
                
                
                
                
                6.8
                %
                
                
                
                
                
                
                2.0
                %14.0
                %
                
                
                
                
                
                
                11.0
                %
                
                
                
                
                
                
                12.5
                %
                
                
                
                
                
                
                8.8
                %





Engine/Mobile Filtration
Segment





Second
      Quarter
                  
                  
                  First
      Six MonthsChange
                  
                  
                  
                  
                  
                  Change(Dollars
      in millions)
                  
                  2010
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  %
                  
                  
                  2010
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  %Net
      sales
                  
                  $
                  113.4
                  
                  
                  $
                  92.3
                  
                  
                  $
                  21.1
                  
                  
                  
                  23
                  %
                  
                  $
                  209.9
                  
                  
                  $
                  177.7
                  
                  
                  $
                  32.2
                  
                  
                  
                  18
                  %Operating
      profit
                  
                  
                  23.6
                  
                  
                  
                  18.4
                  
                  
                  
                  5.2
                  
                  
                  
                  28
                  %
                  
                  
                  41.5
                  
                  
                  
                  31.8
                  
                  
                  
                  9.7
                  
                  
                  
                  31
                  %Operating
      margin
                  
                  
                  20.8
                  %
                  
                  
                  20.0
                  %
                  
                  
                  
                  
                  
                  0.8
                  pt
                  
                  
                  19.8
                  %
                  
                  
                  17.9
                  %
                  
                  
                  
                  
                  
                  1.9
                  pt





Our
Engine/Mobile Filtration segment primarily sells after-market filters for
heavy-duty trucks, heavy-duty off-highway vehicles, locomotives and
automobiles.  The largest market included in this segment is engine
filters for heavy-duty trucks produced at our Baldwin subsidiary.





The net sales increases for our
Engine/Mobile Filtration segment in the second quarter and first six months of
2010 as compared to the same prior year periods are detailed in the following
table:





(Dollars in millions)
                      
                      Second
                        Quarter
                      
                      
                      First Six
                        Months2009
                      
                      $
                      92.3
                      
                      
                      $
                      177.7U.S.
      sales
                      
                      
                      10.8
                      
                      
                      
                      11.0Foreign
      sales (including export)
                      
                      
                      7.6
                      
                      
                      
                      15.4Foreign
      exchange
                      
                      
                      2.7
                      
                      
                      
                      5.8Net
      increase
                      
                      
                      21.1
                      
                      
                      
                      32.22010
                      
                      $
                      113.4
                      
                      
                      $
                      209.9


Page
27




MANAGEMENT’S DISCUSSION AND
ANALYSIS





OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED




The net increase in U.S. sales for the
Engine/Mobile Filtration segment in the second quarter and first six months of
2010 as compared to the same prior year periods is detailed as
follows:




(Dollars
      in millions)
                    
                    Second
                      Quarter
                    
                    
                    First Six
                      MonthsHeavy-duty
      engine filters
                    
                    $
                    8.2
                    
                    
                    $
                    9.6Railroad
      filters
                    
                    
                    1.6
                    
                    
                    
                    1.7Other
                    
                    
                    1.0
                    
                    
                    
                    (0.3
                    )Increase
      in U.S. sales
                    
                    $
                    10.8
                    
                    
                    $
                    11.0





Heavy-duty truck tonnage in the U.S.
increased in the second quarter of 2010 compared with the second quarter of 2009
and in the first six months of 2010 compared with the first six months of 2009,
which positively impacted our sales during these 2010 periods.  Our
U.S. sales of railroad filtration products increased as additional locomotives
were taken from storage as U.S. rail activity continues to
increase.





Net sales outside the U.S. increased
$7.6 million in the second quarter of 2010 from the second quarter of 2009 and
$15.4 million in the first six months of 2010 from the first six months of
2009.  This sales increase was spread throughout our diverse
international markets; however, $2.4 million of this increase in the second
quarter and $5.0 million in the first six months were from sales in China which
was positively impacted by additional market penetration and an acquisition
completed in the second quarter of 2009.  In addition, both the
European and Canadian market sales performed well compared to 2009.





The increases in operating profit and
operating margin for the Engine/Mobile Filtration segment compared to the second
quarter and first six months of 2009 were primarily due to the sales
increase in heavy-duty engine filter sales and the resulting absorption of fixed
manufacturing costs.  Operating profit from sales of railroad
filtration products increased approximately $0.7 million from the second quarter
of 2009 and $1.1 million from the first six months of 2009.  We
estimate that the change in average foreign exchange rates from 2009 to 2010
positively impacted the translated U.S. dollar value of operating profit by $0.8
million in the second quarter of 2010 and $1.4 million in the first six months
of 2010.





Industrial/Environmental
Filtration Segment





Second Quarter
                      
                      
                      First Six MonthsChange
                      
                      
                      
                      
                      
                      Change(Dollars
      in millions)
                      
                      2010
                      
                      
                      2009
                      
                      
                      $
                      
                      
                      %
                      
                      
                      2010
                      
                      
                      2009
                      
                      
                      $
                      
                      
                      %Net
      sales
                      
                      $
                      117.6
                      
                      
                      $
                      119.9
                      
                      
                      $
                      (2.3
                      )
                      
                      
                      -2
                      %
                      
                      $
                      219.6
                      
                      
                      $
                      233.3
                      
                      
                      $
                      (13.7
                      )
                      
                      
                      -6
                      %Operating
      profit
                      
                      
                      10.4
                      
                      
                      
                      5.9
                      
                      
                      
                      4.5
                      
                      
                      
                      77
                      %
                      
                      
                      14.7
                      
                      
                      
                      6.5
                      
                      
                      
                      8.2
                      
                      
                      
                      125
                      %Operating
      margin
                      
                      
                      8.8
                      %
                      
                      
                      4.9
                      %
                      
                      
                      
                      
                      
                      3.9
                      pt
                      
                      
                      6.7
                      %
                      
                      
                      2.8
                      %
                      
                      
                      
                      
                      
                      3.9
                      pt





Page
28





MANAGEMENT’S DISCUSSION AND
ANALYSIS





OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED





Our
Industrial/Environmental Filtration segment sells a large variety of filtration
products to various end-markets.  Included in this market are HVAC
filters, natural gas vessels and replacement filters, aviation fuel filters and
filter systems, and other markets including oil drilling, aerospace, fibers and
resins and dust collector systems and replacement cartridges.





The decreases in net sales for our
Industrial/Environmental Filtration segment in the second quarter and first six
months of 2010 as compared to the same prior year periods are detailed in the
following table:





(Dollars
      in millions)
                  
                  Second
                    Quarter
                  
                  
                  First Six
                    Months2009
                  
                  $
                  119.9
                  
                  
                  $
                  233.3U.S.
      sales
                  
                  
                  2.5
                  
                  
                  
                  (6.5
                  )Foreign
      sales (including export)
                  
                  
                  (5.7
                  )
                  
                  
                  (10.1
                  )Foreign
      exchange
                  
                  
                  0.9
                  
                  
                  
                  2.9Net
      decrease
                  
                  
                  (2.3
                  )
                  
                  
                  (13.7
                  )2010
                  
                  $
                  117.6
                  
                  
                  $
                  219.6





The net increase (decrease) in
U.S. sales for the Industrial/Environmental Filtration segment in the second
quarter and first six months of 2010 as compared to the same prior year periods
is detailed as follows:





(Dollars
      in millions)
                    
                    Second
                      Quarter
                    
                    
                    FirstSix
                      MonthsAerospace,
      oil drilling and other industrial filters
                    
                    $
                    4.2
                    
                    
                    $
                    2.0HVAC
      filter sales - other than 3M
                    
                    
                    2.2
                    
                    
                    
                    2.9Natural
      gas – vessels and aftermarket filters
                    
                    
                    1.6
                    
                    
                    
                    (1.4
                    )HVAC
      filter sales - 3M
                    
                    
                    (5.3
                    )
                    
                    
                    (9.1
                    )Other
                    
                    
                    (0.2
                    )
                    
                    
                    (0.9
                    )Increase
      (decrease) in U.S. net sales
                    
                    $
                    2.5
                    
                    
                    $
                    (6.5
                    )





·
            The
      increase in second quarter U.S. sales related to aerospace, oil drilling
      and other industrial markets was driven by an increase in orders from
      several industrial customers due to improved economic conditions from the
      second quarter of 2009.  In addition, we recognized some growth
      in these industrial markets from new products and
    customers.





·
            In
      the third quarter of 2009, we were informed by 3M that it would no longer
      be purchasing HVAC filters from us.  Accordingly, we had no HVAC
      filter sales to 3M in the second quarter or the first six months of
      2010.  The remaining increase in HVAC filter sales in the U.S.
      in the second quarter was due to the year-over-year improvement
      in general economic conditions driving growth in industrial, commercial
      and residential applications.  In the second quarter and the
      first six months of 2009, we sold $1.3 million of our high-end Purolator®
      brand HVAC residential filters to a large retail store chain on a trial
      basis.  These sales did not repeat in 2010, creating an
      offsetting negative variance in our year-over-year
      comparisons.  We continue to seek additional opportunities to
      penetrate the residential HVAC filter retail
  market.




Page
29





MANAGEMENT’S DISCUSSION AND
ANALYSIS





OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED





·
            Sales
      of natural gas vessels and replacement filter elements in the U.S.
      increased in the second quarter of 2010 compared to 2009 after declining
      in the first quarter of 2010 compared to 2009.  The
      year-over-year increase in sales in the second quarter was comprised of
      comparable increases in both vessels and aftermarket filter elements, as
      we continue to focus on the growth of the aftermarket filter
      business.  Our vessel backlog continues to be strong, and
      despite a negative sales variance in the first six months compared to
      2009, we anticipate full year-over-year growth in this
    market.





The decline in foreign sales from 2009
was the result of a $4.8 million reduction in the second quarter and a
$8.4 million reduction in the first six months in sales of natural gas vessels
and replacement filter elements primarily in the Malaysia and Canada
markets.  The decline in Malaysia is driven by a reduction of vessel
sales.  However, the Malaysian market has been gaining momentum, and
we anticipate an increase in orders beginning in the fourth quarter of
2010.  The decline in the Canadian market is due to the drop
in the price of natural gas.  Contributing to the decline in foreign
sales in the Industrial/Environmental Filtration segment was a $3.6 million
reduction in the second quarter and a $4.7 million reduction in the first six
months of 2010 compared to 2009 in sales of wastewater and aviation filtration
products to the European markets which continue to be negatively impacted by
financial and economic issues.





The increase in operating profit and
margin at our Industrial/Environmental Filtration segment was the result of the
continued improved operating results at our HVAC filter operations where
operating profit increased $2.0 million in the second quarter and $6.0 million
in the first six months of 2010 compared to 2009.  Despite lower HVAC
filter sales resulting from the loss of 3M sales, operating profit increased due
to the benefits of our restructuring program which was substantially completed
in 2009, lower material costs resulting from lower commodity prices
and improved material efficiency and lower selling and administrative
expenses.  Buoyed by strong sales in the second quarter, operating
profit at our aerospace, oil drilling and other industrial markets business
increased $1.8 million in the second quarter and $1.3 million in the first six
months of 2010 compared with 2009.  Similarly, strong second quarter
sales of wire mesh filters to the chemical fiber and plastics markets and dust
collection filter systems positively influenced operating profit by $0.9 million
in the second quarter and $1.4 million in the first six months of
2010.  Operating profit in this segment in the second quarter was
negatively impacted by the economic issues in Europe.  As a result of
the year-over-year reduction in European net sales, operating profit decreased
$0.9 million in the second quarter of 2010 compared to 2009.  We
estimate that the change in average foreign exchange rates from 2009 to 2010
positively impacted the translated U.S. dollar value of operating profit by $0.1
million in the second quarter and $0.3 million in the first six
months.





Packaging
Segment





Second Quarter
                    
                    
                    First Six MonthsChange
                    
                    
                    
                    
                    
                    Change(Dollars
      in millions)
                    
                    2010
                    
                    
                    2009
                    
                    
                    $
                    
                    
                    %
                    
                    
                    2010
                    
                    
                    2009
                    
                    
                    $
                    
                    
                    %Net
      sales
                    
                    $
                    26.9
                    
                    
                    $
                    17.2
                    
                    
                    $
                    9.7
                    
                    
                    
                    56
                    %
                    
                    $
                    43.5
                    
                    
                    $
                    32.1
                    
                    
                    $
                    11.4
                    
                    
                    
                    36
                    %Operating
      profit
                    
                    
                    2.2
                    
                    
                    
                    0.9
                    
                    
                    
                    1.3
                    
                    
                    
                    142
                    %
                    
                    
                    2.9
                    
                    
                    
                    0.6
                    
                    
                    
                    2.3
                    
                    
                    
                    367
                    %Operating
      margin
                    
                    
                    8.2
                    %
                    
                    
                    5.3
                    %
                    
                    
                    
                    
                    
                    2.9
                    pt
                    
                    
                    6.8
                    %
                    
                    
                    2.0
                    %
                    
                    
                    
                    
                    
                    4.8
                    pt





Our Packaging segment manufactures and
markets consumer and industrial packaging products.





Page
30





MANAGEMENT’S DISCUSSION AND
ANALYSIS





OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED





The increase in net sales at our
Packaging segment includes a one-time, no margin $4.6 million equipment sale to
one of our customers.  Excluding this equipment sale, net sales would
have increased $5.1 million or 29% in the second quarter and $6.8 million or 21%
in the first six months.  This remaining net sales increase was
primarily the result of $2.8 million additional sales from smokeless tobacco
packaging in the second quarter and $4.3 million in the first six
months.  The remainder of the increase was the result of additional
sales of decorated flat sheet metal.  Operating profit in the second
quarter and the first six months of 2010 increased from 2009 primarily due to
the incremental profit from the increase in net sales.





FINANCIAL
CONDITION





Liquidity and Capital
Resources




Our
financial position remains strong with adequate cash resources and sufficient
borrowing capacity under our line of credit.  In the first quarter of
2008, we entered into a five-year multicurrency revolving credit agreement
(“Credit Facility”) with a group of financial institutions under which we may
borrow up to $250.0 million under a selection of currencies and rate
formulas.  We believe the financial institutions that are party to
this arrangement have adequate capital resources and will be able to fund future
borrowings under the Credit Facility.  At our election, the interest
rate is based upon either a defined base rate or the LIBOR interest rate plus or
minus applicable margins.  At the end of the second quarter of 2010,
the LIBOR interest rate plus margin was 0.6%.  At the end of the
second quarter of 2010, there were no amounts outstanding on the Credit
Facility.  However, we had $16.0 million outstanding on a $75.0
million letter of credit sub-line.  Accordingly, we had $234.0 million
available for further borrowing at the end of the second quarter of
2010.




Cash and
cash equivalents, restricted cash and short-term investments decreased $15.7
million to $76.5 million at the end of the second quarter of 2010 from $92.2
million at fiscal year-end 2009.  Short-term investments consisted of
tax-exempt municipal money market funds.  Cash and cash equivalents
are held by financial institutions throughout the world.  We regularly
review the credit worthiness of these institutions and believe our funds at
these institutions are not at significant risk.  The current ratio of
3.1 at the end of the second quarter of 2010 was lower than the current ratio of
3.4 at fiscal year-end 2009.




Total
long-term debt of $17.4 million at the end of the second quarter of 2010
included $15.8 million outstanding on industrial revenue bonds and $1.6 million
of other long-term debt.  At the end of the second quarter of 2010 and
at fiscal year-end 2009, we were in compliance with all financial covenants as
included in our Credit Facility.  We expect to be in compliance with
these covenants in the foreseeable future.  The ratio of total debt to
total capitalization (defined as long-term debt plus total shareholders’ equity)
was 2.4% at the end of the second quarter of 2010 compared to 7.0% at the end of
2009.





Page
31





MANAGEMENT’S DISCUSSION AND
ANALYSIS





OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED




We had
50.6 million shares of common stock outstanding at the end of the second quarter
of 2010 compared to 50.4 million outstanding at fiscal year-end
2009.  This increase in shares outstanding was due to the exercise of
stock options.  Shareholders’ equity increased to $713.1 million at
the end of the second quarter of 2010 compared to $688.5 million at fiscal
year-end 2009.  This $24.6 million increase resulted
from additional net earnings of $38.8 million and items related to stock
compensation and option activity pursuant to incentive plans of $8.3 million
partially offset by currency translation adjustments of $13.9 million and
dividend payments of $9.9 million.




Net cash
provided by operating activities increased $33.4 million to $69.9 million in the
first six months of 2010 from $36.5 million in the first six months of
2009.  This increase was driven by a $48.2 million increase in cash
flow from changes in short-term investments and additional net earnings of $12.9
million offset by additional cash used for increases in working capital of $26.5
million.  The reduction in short-term investments from the end of 2009
to the end of the second quarter of 2010 was the result of our
decision to convert these short-term investments into cash due to a minimal
return differential.  The additional cash outflow for working capital
was driven by incremental working capital requirements to support higher sales
levels notably cash used for an increase in accounts receivables in the first
six months of 2010 compared to cash generated from a decrease in accounts
receivable in the first six months of 2009.




Net cash
used in investing activities decreased $10.7 million to $10.5 million in the
first six months of 2010 compared to $21.2 million in the first six months of
2009.  This $10.7 million decrease was primarily caused by a $9.8
million reduction in cash outflow for business acquisitions.  We
completed several smaller acquisitions in the first six months of 2009, but had
no acquisitions in the first six months of 2010.  Cash outflow for
plant additions were comparable in the first six months of 2010 and
2009.




Net cash
used in the financing activities increased $27.7 million in the first six months
of 2010 compared to the first six months of 2009.  This increase was
driven by a $33.0 million increase in net debt payments, including a $25.0
million increase in payments under the line of credit, offset by a $2.4 million
decrease in payments for acquisitions of noncontrolling interests and a $1.9
million increase in cash received under employee stock and option
plans.




We
believe that our current operations will continue to generate cash and that
sufficient borrowings under the Credit Facility remain available to
fund current operating needs, pay dividends, invest in the development of new
products and filter media, fund planned capital expenditures and expansion of
current facilities, provide for interest payments and required principal
payments related to debt agreements, fund pension plan contributions and
repurchase common stock.  We also continue to assess acquisition
opportunities in related filtration businesses that would expand our market
base, distribution coverage or product offerings.  Any such
acquisitions may affect operating cash flows and may require changes in our debt
and capitalization.   In addition, capital market disruptions may
affect the cost or availability of future borrowings.  We have no
material long-term purchase commitments.  We will also continue to
assess repurchases of our common stock.  At the end of the second
quarter of 2010, there was $167.4 million available for repurchase under the
current authorization.  Future repurchases of our stock may be made
after considering cash flow requirements for internal growth, capital
expenditures, acquisitions, interest rates and the market price of our common
stock.




At the
end of the second quarter of 2010, our liability for uncertain income tax
provisions was $2.2 million, including interest and penalties.  Due to
the high degree of uncertainty regarding the timing of potential future cash
outflows associated with these liabilities, we are unable to make a reasonably
reliable estimate of the amount and period in which these remaining liabilities
might be paid.




In the
first quarter of 2008, we entered into an interest rate swap agreement (“Swap
Agreement”) with a bank to manage our interest rate exposure on certain amounts
outstanding under our Credit Facility.  The Swap Agreement provided
for us to pay a 3.93% fixed interest rate plus applicable margins and receive
interest based on a three-month LIBOR on a notional amount of $100.0
million.  The Swap Agreement was not designated as a hedge for
financial reporting purposes.  Accordingly, unrealized gains and
losses were recorded as interest expense in the Consolidated Statements of
Earnings.  Periodic settlement payments or receipts were recorded as a
component of cash flows from operating activities in the Consolidated Statements
of Cash Flows.  The fair value of the Swap Agreement at November 30,
2009 was approximately $1.0 million and was recorded as part of other accrued
liabilities.  The Swap Agreement expired on January 1, 2010, and the
final $1.0 million settlement was paid in January 2010.
  From time
to time, we use derivative financial instruments such as the Swap Agreement to
mitigate our exposure to certain market risks.  However, by using
derivative financial instruments, we are exposed to credit
risk.  Credit risk is the failure of the counterparty to perform under
the terms of the derivative contract.  When the fair value of a
derivative contract is positive, the counterparty owes us, which creates credit
risk.  We minimize this credit risk by entering into transactions with
counterparties which we believe have the financial resources to meet their
obligations.


Page
32





MANAGEMENT’S DISCUSSION AND
ANALYSIS





OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED




Off-Balance Sheet
Arrangements




Our
off-balance sheet arrangements relate to various operating leases as discussed
in Note H to the Consolidated Financial Statements in our 2009 Form
10-K.  We had no variable interest entity or special purpose entity
agreements during the first six months of 2010 or fiscal 2009.




OTHER
MATTERS





Critical Accounting
Policies





Our
critical accounting policies, including the assumptions and judgments underlying
them, are disclosed in our 2009 Form 10-K in Management’s Discussion and
Analysis of Financial Condition and Results of Operations. There have been no
material changes in our critical accounting policies set forth in the 2009 Form
10-K. These policies have been consistently applied in all material respects.
While the estimates and judgments associated with the application of these
policies may be affected by different assumptions or conditions, we believe the
estimates and judgments associated with the reported amounts are appropriate in
the circumstances.





Environmental Matters and
Climate Change and Energy Legislation and Regulation





Our
operations are subject to U.S. and non-U.S. environmental laws and regulations
governing emissions to air; discharges to water; the generation, handling,
storage, transportation, treatment and disposal of waste materials; and the
cleanup of contaminated properties.  Currently, we believe that any
potential environmental liabilities with respect to our former or
existing operations are not material, but there is no assurance that we will not
be adversely impacted by such liabilities, costs or claims in the future, either
under present laws and regulations or those that may be adopted or imposed in
the future.





Foreign,
federal, state and local regulatory and legislative bodies have proposed various
legislative and regulatory measures relating to climate change, regulating
greenhouse gas emissions and energy policies.  Due to the uncertainty
in the regulatory and legislative processes, as well as the scope of such
requirements and initiatives, we cannot currently determine the effect such
legislation and regulation may have on our operations.





The
potential physical impacts of climate change on our operations are also highly
uncertain and would vary depending on type of physical impact and geographic
location.  Climate change physical impacts could include changing
temperatures, water shortages, changes in weather and rainfall patterns, and
changing storm patterns and intensities.  The occurrence of one or
more natural disasters, whether due to climate change or naturally occurring,
such as tornadoes, hurricanes, earthquakes and other forms of severe weather in
the U.S. or in a country in which we operate or in which our suppliers or
customers are located could adversely impact our operations and financial
performance.  Such events could result in:





·
            physical
      damage to and complete or partial closure of one or more of our
      manufacturing facilities


·
            temporary
      or long-term disruption in the supply of raw materials from our
      suppliers


·
            disruption
      in the transport of our products to customers and end
  users


·
            delay
      in the delivery of our products to our
customers





Recent Relevant Accounting
Pronouncements





A
discussion of recent relevant accounting pronouncements is included in Note 1 to
the Consolidated Condensed Financial Statements.





Page
33





MANAGEMENT’S DISCUSSION AND
ANALYSIS





OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED




Outlook





We are
pleased with our operating results in the first six months of
2010.  Sales and operating profit improvements from 2009 are
significant as we believe we have experienced a positive turning point in sales
in most of our product markets.  More impressive, however, are the
comparisons with the second quarter of 2008 prior to the impact of the recession
on our results of operations.  Despite lower sales, operating profit
and margin in the second quarter of 2010 were comparable to the second quarter
of 2008 on the strength of various cost savings initiatives including the
restructuring of our HVAC filter operations and improved sales over comparable
2009 periods.





While we
remain cautious due to tenuous global economic conditions, we have increased our
2010 guidance for diluted earnings per share to be in the range of $1.70 to
$1.85 up from our previous guidance of $1.55 to $1.70.  Reaching the
high-end of our guidance will require the economy to continue to improve in the
second half of the year.  We are aware that there is concern that
economic growth could stagnate for the remainder of the year.  If the
economy does indeed slow down, reaching the high-end of our guidance would be a
challenge.  The ranges of expected annual 2010 sales growth rates from
2009 and expected 2010 operating margins by segment and in total are as
follows:





2010
      Sales
                            Growth
                          
                          
                          2010
      Operating
                            MarginEngine/Mobile
      Filtration
                          
                          14%
      - 16%
                          
                          
                          20.0%
      - 21.0%Industrial/Environmental
      Filtration
                          
                          4%
      - 5%
                          
                          
                          8.0%
      - 9.0%Packaging
                          
                          19%
      - 20%
                          
                          
                          7.5%
      - 8.5%CLARCOR
                          
                          9%
      - 11%
                          
                          
                          13.0%
      - 14.0%





We expect
our annual effective tax rate to be from 33% to 34%, 2010 cash flow from
operating activities from $90.0 million to $105.0 million and 2010 capital
expenditures from $30.0 million to $35.0 million.





Page
34





MANAGEMENT’S DISCUSSION AND
ANALYSIS





OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED





FORWARD-LOOKING
INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY





This
Second Quarter 2010 Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements made in
this Form 10-Q, other than statements of historical fact, are forward-looking
statements. You can identify these statements from use of the words “may,”
“should,” “could,” “potential,” “continue,” “plan,” “forecast,” “estimate,”
“project,” “believe,” “intent,” “anticipate,” “expect,” “target,” “is likely,”
“will,” or the negative of these terms, and similar expressions. These
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements may
include, among other things:





·
            statements
      and assumptions relating to future growth, earnings, earnings per share
      and other financial performance measures, as well as management’s
      short-term and long-term performance
goals;


·
            statements
      relating to the anticipated effects on results of operations or financial
      condition from recent and expected developments or events, including
      acquisitions;


·
            statements
      relating to our business and growth strategies;
  and


·
            any
      other statements or assumptions that are not historical
    facts.





We
believe that our expectations are based on reasonable assumptions. However,
these forward-looking statements involve known and unknown risks, uncertainties
and other important factors that could cause our actual results, performance or
achievements, or industry results, to differ materially from our expectations of
future results, performance or achievements expressed or implied by these
forward-looking statements.  These
factors include, but are not only limited to, risks associated with: (1) world
economic factors and the ongoing economic uncertainty impacting many regions of
the world, (2) reductions in sales volume and orders, (3) our customers’
financial condition, (4) currency fluctuations, particularly increases or
decreases in the U.S. dollar against other currencies, (5) commodity price
increases and/or limited availability of raw materials and component products,
including steel, (6) compliance costs associated with environmental laws and
regulations, (7) political factors, (8) our international operations, (9) highly
competitive markets, (10) governmental laws and regulations  including
the impact of the economic stimulus and financial reform measures being
implemented by governments around the world, (11) the implementation of new
information systems, (12) potential global events resulting in instability and
unpredictability in the world’s markets, including financial bailouts of
sovereign nations, political changes, military and terrorist activities, health
outbreaks and other factors, (13) changes in accounting standards or adoption of
new accounting standards, (14) adverse effects of natural disasters, and (15)
other factors described in more details in the “Risk Factors” section of our
2009 Form 10-K. In addition, our past results of operations do not
necessarily indicate our future results. Our future results may fluctuate as a
result of these and other risk factors detailed from time to time in our filings
with the Securities and Exchange Commission.





You
should not place undue reliance on any forward-looking statements. These
statements speak only as of the date of this Second Quarter 2010 Form
10-Q.  Except as otherwise required by applicable laws, we undertake
no obligation to publicly update or revise any forward-looking statements or the
risks described in this Second Quarter 2010 Form 10-Q, whether as a result of
new information, future events, changed circumstances or any other reason after
the date of this Second Quarter 2010 Form 10-Q.





Page
35




Part I –Item 3. Quantitative and
Qualitative Disclosures About Market Risk





Our
interest expense on long-term debt is sensitive to changes in interest
rates.  In addition, changes in foreign currency exchange rates may
affect assets, liabilities and commitments that are to be settled in cash and
are denominated in foreign currencies.  Market risks are also
discussed in our 2009 Form 10-K in “Item 7A. Quantitative and Qualitative
Disclosures about Market Risk”.  There have been no material changes
to the disclosure regarding market risk set forth in the 2009 Form
10-K.





Part I -Item 4. Controls and
Procedures





We have
established disclosure controls and procedures which are designed to ensure that
information required to be disclosed in reports filed or submitted under the
Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms.  Our management, with the
participation of Norman E. Johnson, Chairman of the Board, President, and Chief
Executive Officer, and David J. Fallon, Chief Financial Officer and Chief
Accounting Officer, evaluated the effectiveness of our disclosure controls and
procedures as of May 29, 2010.  Based on their evaluation, such
officers concluded that our disclosure controls and procedures pursuant to Rules
13a – 15(e) of the Exchange Act were effective as of May 29, 2010, in achieving
the objectives for which they were designed.  No change in our
internal control over financial reporting occurred during our most recent fiscal
quarter ended May 29, 2010, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.





Page
36





Part II - Other
Information





Part II -Item 1. Legal
Proceedings





The
information required by this Item is incorporated by reference from Note 13
included in Part I, Item 1 of this Second Quarter 2010 Form 10-Q.





Part II -Item 1A. Risk
Factors





There
have been no material changes to the risk factors disclosed in “Item 1A. Risk
Factors” in our 2009 Form 10-K.





Part II -Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds





On June
25, 2007, our Board of Directors approved a three-year, $250 million stock
repurchase program. Pursuant to the authorization, we may purchase shares from
time to time in the open market or through privately negotiated transactions
through June 25, 2010.  We have no obligation to repurchase shares
under the authorization, and the timing, actual number and values of shares to
be purchased will depend on our stock price and market conditions.  As
set forth in the table below, we did not repurchase any shares of our common
stock during the fiscal quarter ended May 29, 2010.  The amount of
$167,442,663 remained available for purchase under such program at the end of
the second quarter of 2010.





COMPANY PURCHASES OF EQUITY SECURITIES(1)(a)
                
                
                (b)
                
                
                (c)
                
                
                (d)Period
                
                Total
                  number of
                  shares
                  purchased
                
                
                Average
                  pricepaid
                  pershare
                
                
                Total numberof
                  sharespurchased as
                  part of the
                  Company'spublicly
                  announcedplan
                
                
                Maximumapproximate
                  dollar value ofshares thatmay yet be
                  purchasedunder the
                  PlanFebruary
      28, 2010 through March 31, 2010
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                167,442,663April
      1, 2010 through April 30, 2010
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                167,442,663May
      1, 2010 through May 29, 2010
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                167,442,663Total
                
                
                -
                
                
                
                
                
                
                
                -





(1) The
stock repurchase program announced June 25, 2007 provides for aggregate
purchases up to $250 million.  The program expires June 25,
2010.





Part II -Item 6.
Exhibits





a.
            Exhibits:31(i)
            Certification
      of Norman E. Johnson pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231(ii)
            Certification
      of David J. Fallon pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232(i)
            Certification
      pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002





Page
37





SIGNATURES





Pursuant
to the requirements 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.




CLARCOR
      Inc.
                                      (Registrant)June
      18, 2010
                                    
                                    
                                    By
                                    /s/
      Norman E. Johnson(Date)
                                    
                                    
                                    Norman
      E. Johnson
                                      Chairman
      of the Board, President and Chief
                                      Executive
      OfficerJune
      18, 2010
                                    
                                    
                                    By
                                    /s/
      David J. Fallon(Date)
                                    
                                    
                                    David
      J. Fallon
                                      Chief
      Financial Officer and
                                      Chief
      Accounting
Officer





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38