AGREEMENT, dated as of the 11th day of May, 2000 (this "Agreement"), by
and between Lilly Industries,  Inc., an Indiana corporation (the "Company"), and
Virgil E. Underwood (the "Executive").

         WHEREAS,  the Board of  Directors  of the Company  (the  "Board"),  has
determined that it is in the best interests of the Company and its  shareholders
to assure that the Company will have the continued  dedication of the Executive,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined herein).  The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal  uncertainties  and risks
created  by a pending  or  threatened  Change of Control  and to  encourage  the
Executive's  full  attention and  dedication  to the current  Company and in the
event of any  threatened  or  pending  Change of  Control,  and to  provide  the
Executive with  compensation and benefits  arrangements upon a Change of Control
that ensure that the  compensation  and benefits  expectations  of the Executive
will be satisfied  and that are  competitive  with those of other  corporations.
Therefore,  in order to accomplish  these  objectives,  the Board has caused the
Company to enter into this Agreement.

         NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

         Section 1. Certain  Definitions.  (a) "Effective  Date" means the first
date during the Change of Control  Period (as defined  herein) on which a Change
of Control occurs.  Notwithstanding  anything in this Agreement to the contrary,
if a Change of Control occurs and if the Executive's employment with the Company
is terminated prior to the date on which the Change of Control occurs, and if it
is reasonably  demonstrated by the Executive that such termination of employment
(1)  was at the  request  of a third  party  that  has  taken  steps  reasonably
calculated  to effect a Change of Control or (2)  otherwise  arose in connection
with or  anticipation of a Change of Control,  then  "Effective  Date" means the
date immediately prior to the date of such termination of employment.

         (b) "Change of Control Period" means the period  commencing on the date
hereof  and  ending  on the  third  anniversary  of the date  hereof;  provided,
however,  that,  commencing  on the date one year after the date hereof,  and on
each  annual  anniversary  of such date (such date and each  annual  anniversary
thereof,  the  "Renewal  Date"),  unless  previously  terminated,  the Change of
Control Period shall be  automatically  extended so as to terminate  three years
from such Renewal Date,  unless, at least 60 days prior to the Renewal Date, the
Company  shall give notice to the  Executive  that the Change of Control  Period
shall not be so extended.

         (c) "Affiliated  Company" means any company  controlled by, controlling
or under common control with the Company.

         (d) "Change of Control" means:

         (1) The  acquisition  by any  individual,  entity or group  (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities  Exchange Act of 1934,
as amended (the "Exchange  Act")) (a "Person") of beneficial  ownership  (within
the meaning of Rule 13d-3  promulgated under the Exchange Act) of 20% or more of
either  (A) the  then-outstanding  shares of common  stock of the  Company  (the
"Outstanding  Company  Common  Stock") or (B) the  combined  voting power of the
then-outstanding  voting securities of the Company entitled to vote generally in
the  election  of  directors  (the  "Outstanding  Company  Voting  Securities");
provided,  however,  that,  for purposes of this  Section  1(d),  the  following
acquisitions  shall not  constitute  a Change of  Control:  (i) any  acquisition
directly  from the  Company,  (ii) any  acquisition  by the  Company,  (iii) any
acquisition  by any  employee  benefit  plan (or  related  trust)  sponsored  or
maintained by the Company or any Affiliated  Company or (iv) any  acquisition by
any  corporation   pursuant  to  a  transaction   that  complies  with  Sections
1(d)(3)(A), 1(d)(3)(B) and 1(d)(3)(C).

         (2) Individuals  who, as of the date hereof,  constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided,  however, that any individual becoming a director subsequent to
the date hereof whose  election,  or  nomination  for election by the  Company's
shareholders,  was  approved by a vote of at least a majority  of the  directors
then  comprising  the  Incumbent  Board  shall  be  considered  as  though  such
individual  were a  member  of the  Incumbent  Board,  but  excluding,  for this
purpose,  any such  individual  whose  initial  assumption of office occurs as a
result of an actual or threatened  election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board.

         (3) Consummation of a reorganization,  merger, consolidation or sale or
other  disposition of all or  substantially  all of the assets of the Company (a
"Business   Combination"),   in  each  case,  unless,  following  such  Business
Combination,  (A) all or substantially  all of the individuals and entities that
were the  beneficial  owners of the  Outstanding  Company  Common  Stock and the
Outstanding  Company  Voting  Securities  immediately  prior  to  such  Business
Combination  beneficially  own,  directly  or  indirectly,  more than 60% of the
then-outstanding  shares of common  stock and the  combined  voting power of the
then-outstanding voting securities entitled to vote generally in the election of
directors,  as the case may be, of the corporation  resulting from such Business
Combination (including,  without limitation,  a corporation that, as a result of
such transaction,  owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in substantially the
same  proportions  as  their  ownership   immediately  prior  to  such  Business
Combination of the Outstanding  Company Common Stock and the Outstanding Company
Voting Securities,  as the case may be, (B) no Person (excluding any corporation
resulting  from such  Business  Combination  or any  employee  benefit  plan (or
related trust) of the Company or such  corporation  resulting from such Business
Combination)  beneficially  owns,  directly  or  indirectly,  20%  or  more  of,
respectively,  the  then-outstanding  shares of common stock of the  corporation
resulting  from such Business  Combination  or the combined  voting power of the
then-outstanding  voting  securities of such  corporation,  except to the extent
that such ownership existed prior to the Business Combination,  and (C) at least
a majority of the members of the board of directors of the corporation resulting
from such Business  Combination  were members of the Incumbent Board at the time
of the  execution  of  the  initial  agreement  or of the  action  of the  Board
providing for such Business Combination; or

         (4)  Approval  by  the  shareholders  of  the  Company  of  a  complete
liquidation or dissolution of the Company.

         Section 2. Employment Period. The Company hereby agrees to continue the
Executive in its employ,  subject to the terms and conditions of this Agreement,
for the  period  commencing  on the  Effective  Date  and  ending  on the  third
anniversary  of the Effective  Date (the  "Employment  Period").  The Employment
Period shall  terminate upon the  Executive's  termination of employment for any
reason.

         Section 3. Terms of Employment. (a) Position and Duties. (1) During the
Employment Period,  (A) the Executive's  position  (including  status,  offices,
titles and reporting requirements), authority, duties and responsibilities shall
be at least  commensurate in all material  respects with the most significant of
those  held,  exercised  and  assigned  at any time  during the  120-day  period
immediately  preceding the Effective Date and (B) the Executive's services shall
be  performed  at the  office  where  the  Executive  was  employed  immediately
preceding  the Effective  Date or at any other  location less than 35 miles from
such office.

         (2) During the Employment Period, and excluding any periods of vacation
and sick leave to which the  Executive  is  entitled,  the  Executive  agrees to
devote  reasonable  attention  and  time  during  normal  business  hours to the
business  and affairs of the Company  and, to the extent  necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable   best   efforts  to  perform   faithfully   and   efficiently   such
responsibilities.  During the Employment  Period, it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate,  civic or charitable
boards or committees,  (B) deliver  lectures,  fulfill  speaking  engagements or
teach at educational  institutions and (C) manage personal investments,  so long
as such  activities do not  significantly  interfere with the performance of the
Executive's  responsibilities  as an employee of the Company in accordance  with
this Agreement.  It is expressly  understood and agreed that, to the extent that
any such  activities have been conducted by the Executive prior to the Effective
Date,  the continued  conduct of such  activities  (or the conduct of activities
similar in nature and scope thereto)  subsequent to the Effective Date shall not
thereafter  be deemed  to  interfere  with the  performance  of the  Executive's
responsibilities to the Company.

         (b) Compensation.  (1) Base Salary.  During the Employment  Period, the
Executive  shall  receive an annual base salary (the "Annual Base Salary") at an
annual rate at least equal to 12 times the highest  monthly  base salary paid or
payable,  including  any base salary that has been earned but  deferred,  to the
Executive by the Company and the Affiliated Companies in respect of the 12-month
period  immediately  preceding the month in which the Effective Date occurs. The
Annual Base Salary shall be paid at such intervals as the Company pays executive
salaries  generally.  During the Employment Period, the Annual Base Salary shall
be reviewed at least  annually,  beginning no more than 12 months after the last
salary  increase  awarded to the  Executive  prior to the  Effective  Date.  Any
increase in the Annual Base Salary  shall not serve to limit or reduce any other
obligation to the Executive under this  Agreement.  The Annual Base Salary shall
not be reduced  after any such  increase and the term "Annual Base Salary" shall
refer to the Annual Base Salary as so increased.

         (2) Annual Bonus. In addition to the Annual Base Salary,  the Executive
shall be awarded,  for each fiscal year ending during the Employment  Period, an
annual  bonus (the  "Annual  Bonus") in cash at least  equal to the  Executive's
target  bonus most  recently  established  before the  Effective  Date under the
Company's  Variable  Compensation Plan, or under any successor plan (the "Target
Bonus"). Each such Annual Bonus shall be paid no later than the end of the third
month of the fiscal  year next  following  the fiscal  year for which the Annual
Bonus is awarded,  unless the Executive shall elect to defer the receipt of such
Annual Bonus.

         (3)  Incentive,  Savings and  Retirement  Plans.  During the Employment
Period,  the Executive  shall be entitled to participate in all cash  incentive,
equity  incentive,  savings  and  retirement  plans,  practices,  policies,  and
programs  applicable  generally to other peer  executives of the Company and the
Affiliated Companies, but in no event shall such plans, practices,  policies and
programs  provide the Executive  with  incentive  opportunities  (measured  with
respect to both regular and special incentive  opportunities,  to the extent, if
any, that such distinction is applicable),  savings opportunities and retirement
benefit opportunities,  in each case, less favorable, in the aggregate, than the
most favorable of those provided by the Company and the Affiliated Companies for
the Executive under such plans, practices, policies and programs as in effect at
any time during the 120-day period immediately  preceding the Effective Date or,
if more favorable to the Executive,  those provided  generally at any time after
the Effective  Date to other peer  executives of the Company and the  Affiliated
Companies.

         (4) Welfare Benefit Plans.  During the Employment Period, the Executive
and/or  the  Executive's  family,  as the case may be,  shall  be  eligible  for
participation  in and shall receive all benefits  under welfare  benefit  plans,
practices,  policies  and  programs  provided by the Company and the  Affiliated
Companies  (including,  without  limitation,   medical,  prescription,   dental,
disability,  employee life,  group life,  accidental  death and travel  accident
insurance plans and programs) to the extent  applicable  generally to other peer
executives of the Company and the  Affiliated  Companies,  but in no event shall
such plans, practices, policies and programs provide the Executive with benefits
that are less  favorable,  in the  aggregate,  than the most  favorable  of such
plans, practices,  policies and programs in effect for the Executive at any time
during the 120-day period  immediately  preceding the Effective Date or, if more
favorable  to the  Executive,  those  provided  generally  at any time after the
Effective  Date to other  peer  executives  of the  Company  and the  Affiliated
Companies.

         (5) Expenses.  During the  Employment  Period,  the Executive  shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the  Executive in accordance  with the most  favorable  policies,  practices and
procedures  of the  Company  and the  Affiliated  Companies  in  effect  for the
Executive  at any time  during the  120-day  period  immediately  preceding  the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and the
Affiliated Companies.

         (6) Fringe Benefits.  During the Employment Period, the Executive shall
be entitled to fringe benefits, including, without limitation, tax and financial
planning  services,  executive  physicals,  and, if applicable,  payment of club
dues, use of an automobile and payment of related  expenses,  in accordance with
the most favorable  plans,  practices,  programs and policies of the Company and
the  Affiliated  Companies  in effect for the  Executive  at any time during the
120-day period immediately preceding the Effective Date or, if more favorable to
the Executive,  as in effect  generally at any time  thereafter  with respect to
other peer executives of the Company and the Affiliated Companies.

         (7)  Office  and  Support  Staff.  During the  Employment  Period,  the
Executive  shall  be  entitled  to an  office  or  offices  of a size  and  with
furnishings and other  appointments,  and to exclusive personal  secretarial and
other assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and the Affiliated  Companies at any time during
the  120-day  period  immediately  preceding  the  Effective  Date  or,  if more
favorable to the Executive,  as provided  generally at any time  thereafter with
respect to other peer executives of the Company and the Affiliated Companies.

         (8) Vacation.  During the  Employment  Period,  the Executive  shall be
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and the Affiliated  Companies as in effect
for the Executive at any time during the 120-day  period  immediately  preceding
the  Effective  Date  or,  if more  favorable  to the  Executive,  as in  effect
generally at any time  thereafter  with respect to other peer  executives of the
Company and the Affiliated Companies.

         Section 4.  Termination  of Employment.  (a) Death or  Disability.  The
Executive's  employment  shall  terminate  automatically  if the Executive  dies
during the Employment  Period. If the Company  determines in good faith that the
Disability  (as  defined  herein)  of the  Executive  has  occurred  during  the
Employment Period (pursuant to the definition of  "Disability"),  it may give to
the Executive  written notice in accordance  with Section 11(b) of its intention
to  terminate  the  Executive's  employment.  In  such  event,  the  Executive's
employment  with the Company  shall  terminate  effective  on the 30th day after
receipt of such  notice by the  Executive  (the  "Disability  Effective  Date"),
provided that,  within the 30 days after such receipt,  the Executive  shall not
have returned to full-time  performance of the Executive's duties.  "Disability"
means the absence of the Executive from the Executive's  duties with the Company
on a full-time basis for 180 consecutive business days as a result of incapacity
due to mental or physical  illness that is  determined to be total and permanent
by a physician  selected by the Company or its  insurers and  acceptable  to the
Executive or the Executive's legal representative.

         (b) Cause. The Company may terminate the Executive's  employment during
the Employment Period for Cause. "Cause" means:

(1)      the  willful  and  continued   failure  of  the  Executive  to  perform
         substantially  the  Executive's  duties  (as  contemplated  by  Section
         3(a)(1)(A)) with the Company or any Affiliated  Company (other than any
         such  failure  resulting  from  incapacity  due to  physical  or mental
         illness  or  following  the   Executive's   delivery  of  a  Notice  of
         Termination  for Good Reason),  after a written demand for  substantial
         performance  is  delivered  to the  Executive by the Board or the Chief
         Executive  Officer of the  Company  that  specifically  identifies  the
         manner in which the Board or the Chief Executive Officer of the Company
         believes  that  the  Executive  has  not  substantially  performed  the
         Executive's duties, or

(2)      the  willful  engaging  by the  Executive  in illegal  conduct or gross
         misconduct  that  is  materially  and  demonstrably  injurious  to  the
         Company.

For purposes of this Section 4(b), no act, or failure to act, on the part of the
Executive  shall be  considered  "willful"  unless it is done,  or omitted to be
done,  by the  Executive  in bad faith or  without  reasonable  belief  that the
Executive's  action or omission was in the best  interests  of the Company.  Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive  Officer of
the  Company  or a senior  officer  of the  Company  or based upon the advice of
counsel for the Company shall be conclusively presumed to be done, or omitted to
be  done,  by the  Executive  in good  faith  and in the best  interests  of the
Company.  The cessation of employment of the Executive shall not be deemed to be
for Cause unless and until there shall have been  delivered  to the  Executive a
copy of a  resolution  duly  adopted  by the  affirmative  vote of not less than
three-quarters  of the entire  membership of the Board (excluding the Executive,
if the  Executive is a member of the Board) at a meeting of the Board called and
held for such purpose (after  reasonable notice is provided to the Executive and
the Executive is given an opportunity,  together with counsel for the Executive,
to be heard before the Board),  finding  that,  in the good faith opinion of the
Board,  the Executive is guilty of the conduct  described in Section  4(b)(1) or
4(b)(2), and specifying the particulars thereof in detail.

         (c) Good Reason.  The  Executive's  employment may be terminated by the
Executive for Good Reason or by the Executive  voluntarily  without Good Reason.
"Good Reason" means:

(1)      the  assignment  to the  Executive  of any duties  inconsistent  in any
         respect  with the  Executive's  position  (including  status,  offices,
         titles   and   reporting    requirements),    authority,    duties   or
         responsibilities   as  contemplated  by  Section  3(a),  or  any  other
         diminution  in such  position,  authority,  duties or  responsibilities
         (whether or not occurring  solely as a result of the Company's  ceasing
         to  be a  publicly  traded  entity),  excluding  for  this  purpose  an
         isolated,  insubstantial and inadvertent  action not taken in bad faith
         and that is remedied by the Company  promptly  after  receipt of notice
         thereof given by the Executive;

(2)      any  failure by the  Company to comply  with any of the  provisions  of
         Section 3(b),  other than an isolated,  insubstantial  and  inadvertent
         failure not  occurring in bad faith and that is remedied by the Company
         promptly after receipt of notice thereof given by the Executive;

(3)      the Company's  requiring the Executive (i) to be based at any office or
         location other than as provided in Section 3(a)(1)(B), (ii) to be based
         at a location other than the principal executive offices of the Company
         if the Executive was employed at such  location  immediately  preceding
         the  Effective  Date,  or (iii) to  travel  on  Company  business  to a
         substantially  greater  extent than required  immediately  prior to the
         Effective Date;

(4)      any purported termination by the Company of the Executive's  employment
         otherwise than as expressly permitted by this Agreement; or

(5)      any failure by the Company to comply with and satisfy Section 10(c).

For purposes of this Section 4(c), any good faith  determination  of Good Reason
made by the Executive  shall be  conclusive.  Anything in this  Agreement to the
contrary notwithstanding, a termination by the Executive for any reason pursuant
to a Notice of Termination given during the 30-day period immediately  following
the first  anniversary of the Effective Date shall be deemed to be a termination
for Good Reason for all purposes of this Agreement.  The  Executive's  mental or
physical  incapacity  following the  occurrence of an event  described  above in
clauses (1) through (5) shall not affect the  Executive's  ability to  terminate
employment for Good Reason.

         (d) Notice of Termination. Any termination by the Company for Cause, or
by the Executive for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in  accordance  with Section  11(b).  "Notice of
Termination" means a written notice that (1) indicates the specific  termination
provision in this  Agreement  relied upon,  (2) to the extent  applicable,  sets
forth in  reasonable  detail  the facts and  circumstances  claimed to provide a
basis for  termination  of the  Executive's  employment  under the  provision so
indicated,  and (3) if the Date of Termination (as defined herein) is other than
the date of receipt of such notice,  specifies  the Date of  Termination  (which
Date of  Termination  shall be not more than 30 days  after  the  giving of such
notice).  The failure by the Executive or the Company to set forth in the Notice
of Termination  any fact or circumstance  that  contributes to a showing of Good
Reason or Cause  shall not waive  any  right of the  Executive  or the  Company,
respectively,  hereunder or preclude the Executive or the Company, respectively,
from asserting  such fact or  circumstance  in enforcing the  Executive's or the
Company's respective rights hereunder.

         (e)  Date  of  Termination.  "Date  of  Termination"  means  (1) if the
Executive's  employment  is  terminated  by the  Company  for  Cause,  or by the
Executive for Good Reason,  the date of receipt of the Notice of  Termination or
any later date specified in the Notice of Termination,  (which date shall not be
more than 30 days after the giving of such  notice),  as the case may be, (2) if
the Executive's  employment is terminated by the Company other than for Cause or
Disability,  the Date of  Termination  shall be the  date on which  the  Company
notifies  the  Executive  of  such  termination,  and  (3)  if  the  Executive's
employment  is  terminated  by  reason  of  death  or  Disability,  the  Date of
Termination  shall  be the  date of death  of the  Executive  or the  Disability
Effective Date, as the case may be.

         Section  5.  Obligations  of the  Company  upon  Termination.  (a) Good
Reason;  Other Than for Cause,  Death or  Disability.  If, during the Employment
Period, the Company  terminates the Executive's  employment other than for Cause
or Disability or the Executive terminates employment for Good Reason:

(1)      the Company shall pay to the Executive, in a lump sum in cash within 30
         days after the Date of  Termination,  the  aggregate  of the  following
         amounts:

         (A) the sum of (i) the Executive's  Annual Base Salary through the Date
of Termination to the extent not  theretofore  paid, (ii) the product of (x) the
higher  of (I) the  Target  Bonus and (II) the  Annual  Bonus  actually  paid or
payable,  including  any  bonus or  portion  thereof  that has been  earned  but
deferred  (and  annualized  for any fiscal year  consisting of less than 12 full
months or during which the Executive was employed for less than 12 full months),
for the most recently  completed fiscal year before the Date of Termination,  if
any (such higher amount,  the "Highest  Annual  Bonus") and (y) a fraction,  the
numerator of which is the number of days in the current  fiscal year through the
Date of Termination  and the  denominator of which is 365, and (iii) any accrued
vacation pay, in each case, to the extent not  theretofore  paid (the sum of the
amounts described in subclauses (i), (ii) and (iii), the "Accrued Obligations");

         (B) the amount  equal to the product of (i) two and (ii) the sum of (x)
the  Executive's  Annual Base Salary,  (y) the Highest  Annual Bonus and (z) the
average  employer  contributions  credited  to the  Executive's  accounts in the
Company's Employee 401(k) Savings Plan,  Defined  Contribution Plan and Employee
Stock  Purchase  Plan,  the  defined   contribution  portion  of  the  Company's
Replacement Plan, and any other or successor defined  contribution pension plans
in which the Executive participates,  for the three most recent plan years ended
before the  Effective  Date or, if higher,  for the three most recent plan years
ended before the Date of Termination; and

         (C) an amount equal to the excess of (i) the actuarial present value of
the benefit under the Company's  qualified  defined benefit  retirement plan, if
any, the Company's Executive Retirement Plan, the defined benefit portion of the
Company's  Replacement  Plan,  and any other or successor  nonqualified  defined
benefit  pension plan in which the  Executive  participates  (collectively,  the
"Retirement  Plans")  that  the  Executive  would  receive  if  the  Executive's
employment  continued for two years after the Date of Termination,  assuming for
this  purpose that all accrued  benefits are fully vested and assuming  that the
Executive's compensation in each of the three years is that required by Sections
3(b)(1) and 3(b)(2),  over (ii) the actuarial  present value of the  Executive's
actual benefit (paid or payable),  if any, under the Retirement  Plans as of the
Date of Termination, including without limitation any amounts paid in connection
with or as a result  of the  occurrence  of the  Change  of  Control,  with such
actuarial  present  values in each case  being  determined  in  accordance  with
Schedule I hereto;

         (2) for two years after the Executive's  Date of  Termination,  or such
longer period as may be provided by the terms of the appropriate plan,  program,
practice or policy,  the Company shall continue  medical and welfare benefits to
the Executive  and/or the  Executive's  family,  and tax and financial  planning
services and executive physicals for the Executive, at least equal to those that
would  have  been  provided  to them in  accordance  with the  plans,  programs,
practices  and policies  described in Section  3(b)(4) and Section  3(b)(6),  as
applicable,  if the  Executive's  employment had not been terminated or, if more
favorable to the Executive,  as in effect  generally at any time thereafter with
respect to other peer executives of the Company and the Affiliated Companies and
their families,  provided,  however,  that, if the Executive becomes  reemployed
with  another  employer  and is  eligible  to receive  medical or other  welfare
benefits  under another  employer  provided  plan, the medical and other welfare
benefits  described herein shall be secondary to those provided under such other
plan  during  such  applicable  period  of  eligibility;  and  for  purposes  of
determining  eligibility  (but not the time of  commencement of benefits) of the
Executive for retiree benefits pursuant to such plans,  practices,  programs and
policies,  the Executive  shall be considered  to have remained  employed  until
three years after the Date of Termination and to have retired on the last day of
such period; and provided, further, that the period of the continuation coverage
required by Section 4980B of the Code shall run concurrently  with the continued
coverage under this Section 5(a)(2);

         (3) the Company shall cause all stock  options that the Executive  then
holds (whether or not such stock options are otherwise exercisable)  ("Options")
to be exercisable from the Date of Termination  through the 90th day thereafter;
provided,  that any tax benefit  provisions  with  respect to any Options  shall
apply;  and provided,  further,  that if as a result of such  acceleration,  any
Options that were  incentive  stock options within the meaning of Section 422 of
the Code cease to qualify as incentive  stock  options,  such  Options  shall be
treated  as  non-qualified  stock  options,  and the  Company  shall  pay to the
Executive,  upon exercise of such Options,  an additional  cash payment equal to
the tax benefit to be received by the Company attributable to its federal income
tax deduction resulting from the exercise of such Options; and

         (4) to the extent not theretofore  paid or provided,  the Company shall
timely pay or provide to the Executive any other amounts or benefits required to
be paid or provided or that the Executive is eligible to receive under any plan,
program,  policy or practice or  contract  or  agreement  of the Company and the
Affiliated Companies (such other amounts and benefits, the "Other Benefits").

         (b) Death. If the Executive's employment is terminated by reason of the
Executive's  death during the Employment  Period,  the Company shall provide the
Executive's estate or beneficiaries with the Accrued  Obligations and the timely
payment or delivery  of the Other  Benefits,  and shall have no other  severance
obligations under this Agreement.  The Accrued  Obligations shall be paid to the
Executive's estate or beneficiary,  as applicable,  in a lump sum in cash within
30 days of the Date of  Termination.  With respect to the provision of the Other
Benefits,  the term "Other  Benefits"  as utilized  in this  Section  5(b) shall
include,  without  limitation,  and the Executive's estate and/or  beneficiaries
shall be  entitled to  receive,  benefits  at least equal to the most  favorable
benefits provided by the Company and the Affiliated Companies to the estates and
beneficiaries  of peer  executives of the Company and the  Affiliated  Companies
under such plans,  programs,  practices and policies relating to death benefits,
if  any,  as  in  effect  with  respect  to  other  peer  executives  and  their
beneficiaries  at any time during the 120-day period  immediately  preceding the
Effective  Date or, if more  favorable  to the  Executive's  estate  and/or  the
Executive's  beneficiaries,  as in effect on the date of the  Executive's  death
with  respect  to  other  peer  executives  of the  Company  and the  Affiliated
Companies and their beneficiaries.

         (c) Disability.  If the Executive's  employment is terminated by reason
of the Executive's  Disability during the Employment  Period,  the Company shall
provide the Executive  with the Accrued  Obligations  and the timely  payment or
delivery of the Other Benefits,  and shall have no other  severance  obligations
under this Agreement.  The Accrued Obligations shall be paid to the Executive in
a lump sum in cash within 30 days of the Date of  Termination.  With  respect to
the provision of the Other  Benefits,  the term "Other  Benefits" as utilized in
this Section 6(c) shall include,  and the Executive  shall be entitled after the
Disability  Effective  Date to receive,  disability  and other benefits at least
equal to the most favorable of those  generally  provided by the Company and the
Affiliated  Companies to disabled executives and/or their families in accordance
with such plans,  programs,  practices and policies  relating to disability,  if
any, as in effect  generally  with  respect to other peer  executives  and their
families  at any time  during  the  120-day  period  immediately  preceding  the
Effective  Date or, if more  favorable to the Executive  and/or the  Executive's
family, as in effect at any time thereafter generally with respect to other peer
executives of the Company and the Affiliated Companies and their families.

         (d) Cause; Other Than for Good Reason. If the Executive's employment is
terminated for Cause during the Employment  Period, the Company shall provide to
the  Executive  (1) the  Executive's  Annual  Base  Salary  through  the Date of
Termination,  (2) the  amount of any  compensation  previously  deferred  by the
Executive,  and (3) the Other Benefits,  in each case, to the extent theretofore
unpaid, and shall have no other severance  obligations under this Agreement.  If
the Executive  voluntarily  terminates  employment during the Employment Period,
excluding  a  termination  for Good  Reason,  the Company  shall  provide to the
Executive  the  Accrued  Obligations  and the timely  payment or delivery of the
Other  Benefits,  and  shall  have no other  severance  obligations  under  this
Agreement.  In such  case,  all the  Accrued  Obligations  shall  be paid to the
Executive in a lump sum in cash within 30 days of the Date of Termination.

         Section 6.  Non-exclusivity of Rights.  Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation in any plan,
program,  policy or practice provided by the Company or the Affiliated Companies
and for which the Executive may qualify,  nor,  subject to Section 11(f),  shall
anything herein limit or otherwise  affect such rights as the Executive may have
under any  other  contract  or  agreement  with the  Company  or the  Affiliated
Companies.  Amounts that are vested  benefits or that the Executive is otherwise
entitled  to  receive  under any plan,  policy,  practice  or  program of or any
contract  or  agreement  with the  Company  or the  Affiliated  Companies  at or
subsequent to the Date of Termination  shall be payable in accordance  with such
plan, policy, practice or program or contract or agreement, except as explicitly
modified by this  Agreement.  Notwithstanding  the  foregoing,  if the Executive
receives payments and benefits  pursuant to Section 5(a) of this Agreement,  the
Executive  shall not be entitled  to any  severance  pay or  benefits  under any
severance plan,  program or policy of the Company and the Affiliated  Companies,
unless otherwise  specifically  provided therein in a specific reference to this
Agreement.

         Section  7.  Full  Settlement.  The  Company's  obligation  to make the
payments provided for in this Agreement and otherwise to perform its obligations
hereunder  shall  not be  affected  by any  set-off,  counterclaim,  recoupment,
defense,  or other claim,  right or action that the Company may have against the
Executive or others.  In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts  payable
to the Executive under any of the provisions of this Agreement, and such amounts
shall not be reduced whether or not the Executive obtains other employment.  The
Company  agrees to pay as  incurred  (within  10 days  following  the  Company's
receipt of an invoice from the Executive),  to the full extent permitted by law,
all legal fees and expenses that the Executive may reasonably  incur as a result
of any contest (regardless of the outcome thereof) by the Company, the Executive
or  others  of the  validity  or  enforceability  of, or  liability  under,  any
provision of this Agreement or any guarantee of performance  thereof  (including
as a result of any  contest by the  Executive  about the  amount of any  payment
pursuant to this Agreement), plus, in each case, interest on any delayed payment
at the  applicable  federal rate  provided for in Section  7872(f)(2)(A)  of the
Internal Revenue Code of 1986, as amended (the "Code").

         Section 8. Certain Additional Payments by the Company.

         (a)  Anything in this  Agreement to the  contrary  notwithstanding  and
except as set forth below,  in the event it shall be determined that any Payment
would be subject to the Excise  Tax,  then the  Executive  shall be  entitled to
receive an additional  payment (the "Gross-Up  Payment") in an amount such that,
after  payment by the  Executive  of all taxes (and any  interest  or  penalties
imposed with respect to such taxes), including,  without limitation,  any income
taxes (and any interest and penalties  imposed with respect  thereto) and Excise
Tax imposed upon the Gross-Up  Payment,  the Executive  retains an amount of the
Gross-Up   Payment   equal  to  the  Excise  Tax  imposed  upon  the   Payments.
Notwithstanding  the  foregoing  provisions of this Section 8(a), if it shall be
determined that the Executive is entitled to the Gross-Up Payment,  but that the
Parachute  Value of all  Payments do not exceed 110% of the Safe Harbor  Amount,
then no Gross-Up  Payment shall be made to the Executive and the amounts payable
under  this  Agreement  shall  be  reduced  so that the  Parachute  Value of all
Payments, in the aggregate,  equals the Safe Harbor Amount. The reduction of the
amounts payable  hereunder,  if applicable,  shall be made by first reducing the
payments under Section 5(a)(1)(B),  unless an alternative method of reduction is
elected by the Executive,  and in any event shall be made in such a manner as to
maximize the Value of all Payments actually made to the Executive.  For purposes
of reducing the Payments to the Safe Harbor Amount,  only amounts  payable under
this Agreement (and no other Payments) shall be reduced. If the reduction of the
amount  payable  under this  Agreement  would not result in a  reduction  of the
Parachute  Value of all Payments to the Safe Harbor Amount,  no amounts  payable
under  the  Agreement  shall be  reduced  pursuant  to this  Section  8(a).  The
Company's obligation to make Gross-Up Payments under this Section 8 shall not be
conditioned upon the Executive's termination of employment.

         (b)  Subject to the  provisions  of Section  8(c),  all  determinations
required to be made under this Section 8, including  whether and when a Gross-Up
Payment is required,  the amount of such Gross-Up Payment and the assumptions to
be utilized in arriving at such  determination,  shall be made by Ernst & Young,
LLP, or such other nationally recognized certified public accounting firm as may
be designated by the Executive (the  "Accounting  Firm").  The  Accounting  Firm
shall  provide  detailed  supporting  calculations  both to the  Company and the
Executive  within 15 business  days of the receipt of notice from the  Executive
that  there has been a  Payment  or such  earlier  time as is  requested  by the
Company.  In the event that the  Accounting  Firm is serving  as  accountant  or
auditor for the individual, entity or group effecting the Change of Control, the
Executive may appoint another nationally  recognized accounting firm to make the
determinations  required hereunder (which accounting firm shall then be referred
to as the Accounting  Firm  hereunder).  All fees and expenses of the Accounting
Firm shall be borne solely by the Company.  Any Gross-Up Payment,  as determined
pursuant to this Section 8, shall be paid by the Company to the Executive within
5 days of the receipt of the Accounting Firm's determination.  Any determination
by the Accounting Firm shall be binding upon the Company and the Executive. As a
result of the  uncertainty in the application of Section 4999 of the Code at the
time of the  initial  determination  by the  Accounting  Firm  hereunder,  it is
possible  that  Gross-Up  Payments  that will not have been made by the  Company
should have been made (the  "Underpayment"),  consistent  with the  calculations
required to be made  hereunder.  In the event the Company  exhausts its remedies
pursuant  to Section  8(c) and the  Executive  thereafter  is required to make a
payment of any Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment  shall be promptly paid
by the Company to or for the benefit of the Executive.

         (c) The  Executive  shall notify the Company in writing of any claim by
the Internal  Revenue Service that, if successful,  would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable,  but no later than 10 business days after the Executive is informed
in writing of such claim.  The Executive shall apprise the Company of the nature
of such  claim and the date on which  such claim is  requested  to be paid.  The
Executive  shall not pay such claim prior to the expiration of the 30-day period
following the date on which the  Executive  gives such notice to the Company (or
such shorter period ending on the date that any payment of taxes with respect to
such claim is due).  If the Company  notifies the  Executive in writing prior to
the  expiration  of such period that the Company  desires to contest such claim,
the Executive shall:

(1)      give the Company any  information  reasonably  requested by the Company
         relating to such claim,

(2)      take such  action  in  connection  with  contesting  such  claim as the
         Company  shall  reasonably  request  in  writing  from  time  to  time,
         including,  without  limitation,  accepting legal  representation  with
         respect  to  such  claim  by an  attorney  reasonably  selected  by the
         Company,

(3)      cooperate  with the  Company  in good  faith in  order  effectively  to
         contest such claim, and

(4)      permit the Company to participate in any  proceedings  relating to such
         claim;

provided,  however,  that the Company  shall bear and pay directly all costs and
expenses  (including  additional  interest and penalties) incurred in connection
with such contest,  and shall indemnify and hold the Executive  harmless,  on an
after-tax  basis,  for any  Excise  Tax or income tax  (including  interest  and
penalties)  imposed as a result of such  representation and payment of costs and
expenses.  Without limitation on the foregoing  provisions of this Section 8(c),
the Company shall control all proceedings taken in connection with such contest,
and,  at its sole  discretion,  may  pursue or forgo any and all  administrative
appeals,  proceedings,  hearings  and  conferences  with the  applicable  taxing
authority  in  respect  of such claim and may,  at its sole  discretion,  either
direct the  Executive to pay the tax claimed and sue for a refund or contest the
claim in any  permissible  manner,  and the Executive  agrees to prosecute  such
contest to a determination  before any  administrative  tribunal,  in a court of
initial  jurisdiction and in one or more appellate  courts, as the Company shall
determine;  provided, however, that, if the Company directs the Executive to pay
such claim and sue for a refund,  the Company  shall  advance the amount of such
payment to the Executive,  on an  interest-free  basis,  and shall indemnify and
hold the  Executive  harmless,  on an  after-tax  basis,  from any Excise Tax or
income tax  (including  interest  or  penalties)  imposed  with  respect to such
advance or with respect to any imputed  income in connection  with such advance;
and provided, further, that any extension of the statute of limitations relating
to payment of taxes for the taxable year of the Executive  with respect to which
such  contested  amount is claimed to be due is limited solely to such contested
amount.  Furthermore,  the Company's  control of the contest shall be limited to
issues with respect to which the Gross-Up  Payment  would be payable  hereunder,
and the  Executive  shall be entitled to settle or contest,  as the case may be,
any other  issue  raised by the  Internal  Revenue  Service or any other  taxing
authority.

         (d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 8(c), the Executive  becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 8(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable  thereto).  If, after the receipt by the Executive of an amount
advanced by the Company  pursuant to Section 8(c), a determination  is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company  does not notify the  Executive  in writing of its intent to contest
such  denial  of  refund  prior  to  the   expiration  of  30  days  after  such
determination,  then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance  shall offset,  to the extent  thereof,
the amount of Gross-Up Payment required to be paid.

         (e)  Notwithstanding any other provision of this Section 8, the Company
may,  in its sole  discretion,  withhold  and pay over to the  Internal  Revenue
Service  or any  other  applicable  taxing  authority,  for the  benefit  of the
Executive,  all or any portion of the Gross-Up Payment, and the Executive hereby
consents to such withholding.

         (f) Definitions.  The following terms shall have the following meanings
for purposes of this Section 8.

         (i) "Excise  Tax" shall mean the excise tax imposed by Section  4999 of
the Code,  together with any interest or penalties  imposed with respect to such
excise tax.

         (ii) The "Net After-Tax  Amount" of a Payment shall mean the Value of a
Payment net of all taxes  imposed on the  Executive  with respect  thereto under
Sections 1 and 4999 of the Code and applicable  state and local law,  determined
by  applying  the  highest  marginal  rates  that are  expected  to apply to the
Executive's taxable income for the taxable year in which the Payment is made.

         (iii) "Parachute Value" of a Payment shall mean the present value as of
the date of the change of control for  purposes  of Section  280G of the Code of
the portion of such Payment that constitutes a "parachute payment" under Section
280G(b)(2),  as determined by the  Accounting  Firm for purposes of  determining
whether and to what extent the Excise Tax will apply to such Payment.

         (iv) A "Payment"  shall mean any payment or  distribution in the nature
of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for
the benefit of the Executive, whether paid or payable pursuant to this Agreement
or otherwise.

         (v) The "Safe Harbor Amount" means the maximum  Parachute  Value of all
Payments that the Executive  can receive  without any Payments  being subject to
the Excise Tax.

         (vi) "Value" of a Payment  shall mean the economic  present  value of a
Payment as of the date of the change of control for  purposes of Section 280G of
the Code, as determined by the Accounting  Firm using the discount rate required
by Section 280G(d)(4) of the Code.

         Section 9.  Confidential  Information.  The  Executive  shall hold in a
fiduciary  capacity  for the benefit of the  Company all secret or  confidential
information,  knowledge  or  data  relating  to the  Company  or the  Affiliated
Companies, and their respective businesses, which information, knowledge or data
shall have been obtained by the Executive  during the Executive's  employment by
the Company or the Affiliated Companies and which information, knowledge or data
shall not be or become public  knowledge (other than by acts by the Executive or
representatives  of  the  Executive  in  violation  of  this  Agreement).  After
termination of the Executive's  employment with the Company, the Executive shall
not,  without the prior  written  consent of the Company or as may  otherwise be
required by law or legal process,  communicate or divulge any such  information,
knowledge or data to anyone other than the Company and those persons  designated
by the Company.  In no event shall an asserted  violation of the  provisions  of
this  Section 9  constitute a basis for  deferring  or  withholding  any amounts
otherwise payable to the Executive under this Agreement.

         Section  10.  Successors.   (a)  This  Agreement  is  personal  to  the
Executive,  and, without the prior written consent of the Company,  shall not be
assignable  by the  Executive  other  than by will or the  laws of  descent  and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representatives.

         (b) This  Agreement  shall inure to the benefit of and be binding  upon
the Company and its successors and assigns. Except as provided in Section 10(c),
without the prior written  consent of the Executive this Agreement  shall not be
assignable by the Company.

         (c) The Company will require any successor (whether direct or indirect,
by purchase, merger,  consolidation or otherwise) to all or substantially all of
the  business  and/or  assets of the  Company to assume  expressly  and agree to
perform  this  Agreement  in the same  manner  and to the same  extent  that the
Company would be required to perform it if no such  succession  had taken place.
"Company"  means the Company as  hereinbefore  defined and any  successor to its
business  and/or  assets as  aforesaid  that  assumes and agrees to perform this
Agreement by operation of law or otherwise.

         Section 11. Miscellaneous.  (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of Indiana, without reference
to principles of conflict of laws.  The captions of this  Agreement are not part
of the provisions  hereof and shall have no force or effect.  This Agreement may
not be amended or  modified  other than by a written  agreement  executed by the
parties hereto or their respective successors and legal representatives.

         (b) All notices and other communications  hereunder shall be in writing
and shall be given by hand  delivery  to the  other  party or by  registered  or
certified mail, return receipt requested, postage prepaid, addressed as follows:

                  if to the Executive:

                           Virgil E. Underwood
                           432 Calumet Way
                           Bowling Green, KY  42104

                  if to the Company:

                           Lilly Industries, Inc.
                           200 West 103rd Street
                           Indianapolis, Indiana  46290

                           Attention:  Chief Executive Officer

or to such other  address as either  party shall have  furnished to the other in
writing in accordance  herewith.  Notice and  communications  shall be effective
when actually received by the addressee.

         (c)  The  invalidity  or  unenforceability  of any  provision  of  this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.

         (d) The  Company  may  withhold  from any  amounts  payable  under this
Agreement such United States  federal,  state or local or foreign taxes as shall
be required to be withheld pursuant to any applicable law or regulation.

         (e) The  Executive's  or the  Company's  failure to insist  upon strict
compliance  with any  provision  of this  Agreement or the failure to assert any
right the  Executive  or the  Company  may have  hereunder,  including,  without
limitation,  the right of the Executive to terminate  employment for Good Reason
pursuant to Sections 4(c)(1) through 4(c)(5), shall not be deemed to be a waiver
of such provision or right or any other provision or right of this Agreement.

         (f)  This  Agreement,  upon  its  execution  by  both  parties  hereto,
supersedes the Change in Control Agreement between the Company and the Executive
dated as of February 3, 2000.  The Executive and the Company  acknowledge  that,
except as may otherwise be provided  under any other written  agreement  between
the Executive and the Company, the employment of the Executive by the Company is
"at will"  and,  subject to  Section  1(a),  prior to the  Effective  Date,  the
Executive's  employment may be terminated by either the Executive or the Company
at any time prior to the Effective  Date, in which case the Executive shall have
no further  rights  under this  Agreement.  From and after the  Effective  Date,
except as specifically provided herein, this Agreement shall supersede any other
agreement between the parties with respect to the subject matter hereof.


<PAGE>



         IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization  from the Board, the Company has caused these
presents to be  executed  in its name on its behalf,  all as of the day and year
first above written.

                                      Virgil E. Underwood

                                      LILLY INDUSTRIES, INC.


                                       By

                                      Name:

                                     Title:


<PAGE>


                                   Schedule I

         Present values shall be determined using (I) a discount factor equal to
the interest rate for the most recently  issued  Ten-Year  U.S.  Treasury  Notes
outstanding  on the  Date of  Termination,  and  (ii)  the  1983  Group  Annuity
Mortality Table for Males.