Selected Financial Data (1)
(In thousands, except per share data)


<TABLE>
<CAPTION>
Year Ended November 30                      1996(2)             1995              1994              1993     
----------------------------------------------------------------------------------------------------------
Operations                                                                                        
<S>                                         <C>               <C>               <C>               <C>        
Net sales                                   $508,976          $328,345          $331,306          $284,325   
Cost of products sold                        321,748           219,899           214,809           189,111   
Selling, administrative, research and                                                             
  development expenses                       129,655            73,058            74,480            65,644   
Income taxes                                  15,362            13,510            16,350            11,784   
Net income as reported                        18,776            20,264            23,302            16,155   
Net income excluding restructuring charge     24,060            20,264            23,302            16,155   
                                                                                                  
Per Share Data (3)                                                                                  
Net income as reported                           .81               .88              1.00               .70   
Net income excluding restructuring charge       1.04               .88              1.00               .70   
Cash dividends                                  .320              .310              .267              .238   
Book value                                      5.36              4.86              4.38              3.60   
Average number of shares and                                                                      
  equivalent shares outstanding (4)           23,200            23,100            23,250            23,123   
Shares outstanding at year end                22,723            22,502            22,710            22,517   
Price range of Class A stock            19 3/4-12 1/4            15-11         18-11 3/4      15 7/8-9 3/8   
                                                                                                  
Other Data                                                                                        
Working capital                               50,579            35,505            41,604            33,270   
Current ratio                                  1.5:1             1.9:1             1.8:1             1.9:1   
Total assets                                 521,860           183,582           190,252           167,044   
Additions to property and equipment(5)        19,233            15,599             6,693             7,598   
Depreciation                                   6,453             4,251             4,637             3,746   
Cash dividends                                 7,232             7,041             6,049             5,327   
Long-term debt                               245,037            21,200            28,026            40,621   
Shareholders' equity                         121,889           109,374            99,424            81,128   
Return on average equity                        20.8%(6)          19.4%             25.8%             21.4%  
Return on sales                                  4.7%(6)           6.2%              7.0%              5.7% 
</TABLE>     
 
                                                        
1    This table of Selected  Financial Data should be read in  conjunction  with
     Management's Discussion and Analysis of Results of Operations and Financial
     Condition  and the Company's  consolidated  financial  statements  included
     herein.

2    Includes effect of the acquisition of Guardsman Products,  Inc. on April 8,
     1996.

3    Adjusted for all stock splits and stock dividends through November 30, 1996
     inclusive. Prices are rounded to nearest 1/8.

4    Used to calculate net income per share.

5    Excludes effect of acquisitions.

6    Excludes effect of restructuring  charge of $9,607 which reduced net income
     by $5,284 or $.23 per share.

<PAGE>


<TABLE>
<CAPTION>
Year Ended November 30                     1992           1991        1990          1989          1988          1987         1986   
----------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>            <C>         <C>           <C>           <C>           <C>         <C>       
Operations                                                                                                                          
Net sales                                $236,476       $220,508    $240,146      $219,713      $203,499      $189,213    $147,524  
Cost of products sold                     152,480        150,669     161,626       145,592       134,114       122,135      96,196  
Selling, administrative, research                                                                                                
  and development expenses                 61,158         57,527      61,218        53,821        51,496        48,651      35,551  
Income taxes                                9,201          4,417       6,850         8,399         7,550         8,599       7,785  
Net income as reported                     12,706          6,357      10,022        12,574        11,284        10,272       8,515  
Net income excluding                                                                                       
     restructuring charge                  12,706          6,357      10,022        12,574        11,284        10,272       8,515  
                                                                                                                                    
Per Share Data (3)    
Net income as reported                        .55            .27         .41           .51           .45           .40         .33  
Net income excluding                                                                                       
     restructuring charge                     .55            .27         .41           .51           .45           .40         .33  
Cash dividends                               .223           .214        .199          .173          .153          .141        .131  
Book value                                   3.16           3.16        3.10          3.00          2.65          2.34        2.11  
Average number of shares and                                                                                                        
  equivalent shares outstanding (4)        23,189         23,499      24,659        24,863        24,921        25,511      25,482  
Shares outstanding at year end             22,226         23,480      23,634        24,863        24,863        25,104      25,284  
Price range of Class A stock          9 3/4-5 5/8    6 1/8-4 1/8     7 5/8-4   7 1/8-5 3/8   7 1/8-4 7/8   7 5/8-4 5/8     6-4 1/4  
                                                                                                                                    
Other Data                                                                                                                          
Working capital                            27,131         30,405      34,513        40,389        36,368        26,006      31,798  
Current ratio                               2.0:1          2.0:1       2.6:1         2.5:1         2.8:1         2.0:1       3.6:1  
Total assets                              117,049        127,342     125,371       129,025       101,357        96,814      75,924  
Additions to property                                                                                      
     and equipment(5)                       3,262          1,928       3,968         2,486         2,930         5,397       4,304  
Depreciation                                3,965          4,038       4,021         3,387         3,133         2,785       2,123  
Cash dividends                              5,104          5,005       4,923         4,341         3,843         3,603       3,293  
Long-term debt                             10,361         16,638      23,016        21,105         5,829         3,137       1,006  
Shareholders' equity                       70,125         74,187      73,185        74,482        65,987        58,755      53,359  
Return on average equity                     17.6%           8.6%       13.6%         17.9%         18.1%         18.3%       16.9% 
Return on sales                               5.4%           2.9%        4.2%          5.6%          5.4%          5.4%        6.0% 
</TABLE>    




<PAGE>

Management's Discussion and Analysis of
Results of Operations and Financial Condition

(LEFT COLUMN)

Sales for 1996 increased 55% to a new high of $509 million from $328 million for
the prior year.  Net income before the  restructuring  charge  totaled $1.04 per
share, an increase of 19% over 1995 net income.

Guardsman Acquisition and Restructuring

Effective April 8, 1996 the Company acquired the outstanding shares of Guardsman
Products,   Inc.  for  $235  million  financed  through  senior  secured  credit
facilities.  This acquisition represents the most significant transaction in the
Company's 131 year history.

         Guardsman's  technology  and  related  products  are  complementary  to
Lilly's  with  little  customer   overlap.   Guardsman  is  well-known  for  its
technological   strengths  in   two-component   coatings  for  agricultural  and
construction equipment,  high solid coatings for major appliances and waterborne
coatings for furniture and kitchen cabinets.  The combination of both companies'
technologies and products will materially aid Lilly's expansion into several key
strategic markets.

         By  the  end  of  1997,  management  expects  the  combined  companies'
operating costs to be approximately $25 million less than when the two companies
operated separately. These savings will result from the elimination of redundant
functions and expenses.

         Elimination   of  redundant   functions   and   expenses   include  the
consolidation of manufacturing facilities.  These consolidations,  which include
both Lilly and Guardsman  facilities,  will result in the closure of some plants
and workforce  reductions  totaling  approximately 250 employees.  Closure costs
consist of facility and  equipment  valuation  adjustments,  inventory  disposal
costs,   dismantling  and  maintenance  costs,  and  termination   benefits.  In
conjunction with these consolidation plans, the Company announced the closure of
two older plants  located in Tulsa,  Oklahoma  and  Jamestown,  New York.  It is
anticipated all facility  consolidations  will be completed by the end of fiscal
1997.

         Costs  associated with the planned  closure of former Lilly  facilities
and related  reductions  in workforce are  reflected as a  restructuring  charge
totaling  $9.6  million  which  reduced  net income by $5.3  million or $.23 per
share. Costs associated with the planned closure of former Guardsman  facilities
and related  reductions  in  workforce  totaled $9 million  and are  recorded as
liabilities  in the  opening  balance  sheet of the  combined  entity  as of the
acquisition date.

Operating Results

Net income was $18.8  million  ($.81 per share),  $20.3 million ($.88 per share)
and $23.3 million ($1.00 per share) for 1996, 1995 and 1994,  respectively.  The
7%  decline in 1996 net  income  from 1995 was due to a  one-time  restructuring

<PAGE>


(RIGHT COLUMN)

charge of $9.6 million.  Excluding the effect of this one-time charge,  1996 net
income would have been $24.1 million ($1.04 per share), surpassing 1995 earnings
of $.88 per share.

         Sales for 1996  increased  55% to a new high of $509  million from $328
million in 1995.  This increase was due to higher  volumes  associated  with the
acquisition of Guardsman,  overall volume  increases in Lilly's  pre-acquisition
business and some selling price increases instituted in the second half of 1995.
Sales in 1995  decreased  from  1994  sales of  $331.3  million.  This  decrease
resulted  from  lower  demand  for  liquid   coatings  due  to  decreased   U.S.
manufacturing activity in markets served by the Company.

         Gross  profit  margins were 36.8%,  33.0% and 35.2% for 1996,  1995 and
1994, respectively.  Improved 1996 margins were due to lower raw material costs,
efficiencies in raw material procurement, and selling price increases instituted
in the second  half of 1995.  The decline in 1995  margins  from 1994 was due to
sharp increases in raw material prices during the first three quarters of 1995.

         Operating  expenses  totaled  $139.3  million,  $73.1 million and $74.5
million  in 1996,  1995 and  1994,  respectively.  Increases  in 1996  operating
expenses  were  due  to  the  inclusion  of  Guardsman   operations,   increased
amortization  expense  associated  with  intangibles  acquired in the  Guardsman
acquisition  and the one-time  restructuring  charge of $9.6 million  previously
discussed.  Operating  expenses  decreased in 1995  compared to 1994 due to cost
control measures as well as lower business volumes.

         Interest  expense in 1996 was $14.5 million compared to $2.2 million in
1995  resulting  from  borrowings  necessary to fund the Guardsman  acquisition.
Interest  expense in 1995  declined  from 1994  expense of $2.9  million  due to
reductions in outstanding borrowings.

         The Company's  effective tax rate was 45%, 40% and 41.2% in 1996,  1995
and  1994,  respectively.  The  increase  to  45% in  1996  is  due  largely  to
non-deductible goodwill associated with the Guardsman acquisition.

         The Company's operations,  like those of most companies in the coatings
industry,  are subject to  regulations  related to  maintaining or improving the
quality of the  environment.  Such  regulations,  along with the  Company's  own

<PAGE>
[LEFT COLUMN]

internal compliance efforts,  have required and will continue to require capital
expenditures.  Capital spending for environmental  compliance is not anticipated
to be  material  to the  Company's  financial  condition.  The  Company has been
notified  that it is a  potentially  responsible  party for clean-up  costs with
respect to several governmental  investigations at independently  operated waste
disposal  sites  previously  used by the Company.  Management  has  accrued,  as
appropriate,  for  these  environmental  liabilities.  Management  believes  the
liabilities  associated with these sites will not have a material adverse effect
on its operating results or financial condition.

Liquidity and Capital Resources

In 1996 the  Company  changed  its capital  structure  by  entering  into a $300
million credit agreement ("Agreement") that provided funds necessary to complete
the Guardsman acquisition. The Agreement provides for $225 million of borrowings
under  term notes and $75  million  under a  revolving  note.  Annual  principal
payments on the term notes escalate annually and range from $16.5 to $39 million
with final  payment due in 2003.  Final  payment on the revolver is due in 2002.
The Company uses interest rate swap agreements to convert the interest rate on a
portion of these borrowings to a fixed rate which averaged 7.64% at November 30,
1996.  Management  expects to fund all debt service  requirements from operating
cash flows.  As of November 30,  1996,  the Company was in  compliance  with all
restrictive covenants included in the Agreement.

         The Company used $275 million under the Agreement ($225 million in term
notes and $50 million  under the  revolver)  to fund the  purchase of  Guardsman
shares,  pay-off  existing debt and to pay  acquisition  related  expenses.  The
Company made  additional  borrowings  under the revolver  totaling $35.6 million
which were used to fund various  operating  needs. The Company reduced the above
borrowings  by $49.2  million  during 1996.  Additional  amounts  available  for
borrowing under the revolver totaled $35 million at November 30, 1996.

         The Company's 1996  investing  activities  included the  acquisition of
Guardsman as previously  discussed.  The Company also invested  $19.2 million in
property  and  equipment.  These  investments  were made to  increase  capacity,
increase manufacturing efficiencies and improve product quality. Expenditures in
1996 included  amounts for our new facility in Bowling  Green,  Kentucky and the
purchase of a powder coatings  facility in Charlotte,  North  Carolina.  Capital
expenditures in 1997 are expected to be lower than 1996 expenditures and will be
financed from internal sources and existing credit facilities.

         Cash  provided by  operations  increased  to $37.5  million  from $27.2
million in 1995.  The  increase is  primarily  due to the $9.6  million  noncash
restructuring  charge, $5.2 million increase in amortization expense, and higher
accounts payable offset by higher levels of accounts receivable and inventories.

<PAGE>

[RIGHT COLUMN]

Higher levels of accounts  receivable,  inventories and accounts payable reflect
increased business volumes.

         The Company's  1996 current ratio is 1.5:1  compared to 1.9:1 for 1995.
The  decrease is  predominately  due to  non-recurring  restructuring  and other
acquisition  liabilities.  The  significant  increases in deferred income taxes,
goodwill and other  noncurrent  liabilities  on the balance  sheet are primarily
related to the Guardsman acquisition.

         Management  expects the Company to generate  sufficient  cash flow from
operations to fund debt service requirements and meet other operating needs.



--------------------------------------------------------------------------------
Responsibility for Financial Statements

The management of Lilly  Industries,  Inc. is responsible for the preparation of
the  financial  statements  in the  Annual  Report  and  for the  integrity  and
objectivity of the  information  presented.  The financial  statements have been
prepared  in  conformity  with  generally  accepted  accounting  principles  and
necessarily  include amounts which are estimates and judgments.  The fairness of
the  presentation  in these  statements  of the  Company's  financial  position,
results of operations and cash flows is reported on by the independent auditors.

         To assist in  carrying  out the above  responsibility,  the Company has
internal systems which provide for selection of personnel, segregation of duties
and the  maintenance  of accounting  policies,  systems,  procedures and related
controls.

         Although no cost-effective system can insure the elimination of errors,
the Company's systems have been designed to provide  reasonable but not absolute
assurances  that  assets are  safeguarded,  that  policies  and  procedures  are
followed,  and that the financial  records are adequate to permit the production
of reliable financial statements. The Audit Committee of the Board of Directors,
which is  composed  of  directors  who are not  employees  of the Company or its
subsidiaries,  meets regularly with Company officers and independent auditors in
connection with the adequacy and integrity of the Company's  financial reporting
and internal controls.




/s/ Kenneth L. Mills
Kenneth L. Mills
Corporate Accounting Director, Assistant Secretary

<PAGE>

[LEFT COLUMN]

Report of Independent Auditors

Shareholders and Board of Directors
Lilly Industries, Inc.

We  have  audited  the  accompanying   consolidated   balance  sheets  of  Lilly
Industries,  Inc. and  subsidiaries  as of November  30, 1996 and 1995,  and the
related  consolidated  statements of income and retained earnings and cash flows
for each of the  three  years in the  period  ended  November  30,  1996.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated financial position of Lilly Industries,
Inc.  and  subsidiaries  at  November  30, 1996 and 1995,  and the  consolidated
results of their  operations and their cash flows for each of the three years in
the period ended  November 30,  1996,  in  conformity  with  generally  accepted
accounting principles.


/s/ Ernst & Young LLP

January 13, 1997

<PAGE>


Consolidated Statements of Income and Retained Earnings
(In thousands, except per share data)

<TABLE>
<CAPTION>
Year ended November 30                                      1996         1995         1994
--------------------------------------------------------------------------------------------
<S>                                                      <C>          <C>          <C>      
Net sales                                                $ 508,976    $ 328,345    $ 331,306
Costs and expenses
         Cost of products sold                             321,748      219,899      214,809
         Selling, administrative and general               112,361       59,874       61,498
         Research and development                           17,294       13,184       12,982
         Restructuring charge (Note 3)                       9,607           --           --
                                                           ---------------------------------
                                                           461,010      292,957      289,289
                                                           ---------------------------------
                  Operating income                          47,966       35,388       42,017

Other income (expense)
         Interest income and sundry                            638          544          554
         Interest expense                                  (14,466)      (2,158)      (2,919)
                                                           ---------------------------------
                                                           (13,828)      (1,614)      (2,365)
                                                           ---------------------------------
                  Income before income taxes                34,138       33,774       39,652

Income taxes (Note 7)                                       15,362       13,510       16,350
                                                           ---------------------------------
                  Net income                                18,776       20,264       23,302

Retained earnings at beginning of year                      51,446       38,223       20,970
                                                           ---------------------------------
                                                            70,222       58,487       44,272
Deduct dividends paid (1996, $.320 per share;
         1995, $.310 per share; 1994, $.267 per share)       7,232        7,041        6,049
                                                           ---------------------------------
                  Retained earnings at end of year       $  62,990    $  51,446    $  38,223
                                                           =================================
Average number of shares and equivalent shares of
         capital stock outstanding                          23,200       23,100       23,250

Net income per share                                     $     .81    $     .88    $    1.00
</TABLE>



See accompanying notes.



<PAGE>

Consolidated Balance Sheets
(In thousands)

<TABLE>
<CAPTION>
November 30                                                     1996          1995
------------------------------------------------------------------------------------
Assets
Current assets
<S>                                                          <C>          <C>      
         Cash and cash equivalents                           $   6,790    $  20,260
         Accounts receivable, less allowances
           for doubtful accounts
           (1996, $2,706; 1995, $2,051) (Note 6)                84,592       40,911
         Inventories (Note 4 and 6)                             47,546       15,411
         Deferred income taxes                                   5,717           --
         Other                                                  14,073          349
                                                              ---------------------
                  Total current assets                         158,718       76,931

Other assets
         Goodwill, less amortization
         (1996, $9,028; 1995, $4,658)                          228,536       27,390
         Other intangibles, less amortization
         (1996, $17,271; 1995, $12,544)                         30,275       20,011
         Deferred income taxes                                  12,091        2,370
         Sundry                                                 11,658       11,411
                                                              ---------------------
                                                               282,560       61,182

Property and equipment (Note 6)
         Land                                                    8,396        4,176
         Buildings                                              48,087       31,862
         Equipment                                              71,056       50,235
         Allowances for depreciation (deduction)               (46,957)     (40,804)
                                                              ---------------------
                                                                80,582       45,469
                                                              ---------------------
                                                             $ 521,860    $ 183,582
                                                              =====================


<PAGE>

Liabilities and Shareholders' Equity
Current liabilities
         Accounts payable                                    $  56,593    $  23,982
         Salaries and payroll related items                     22,681        7,970
         Other                                                  11,281           --
         State and local taxes                                     269          661
         Federal income taxes                                      791        1,784
         Current portion of long-term debt (Note 6)             16,524        7,029
                                                              ---------------------
                  Total current liabilities                    108,139       41,426

Long-term debt (Note 6)                                        245,037       21,200

Other liabilities                                               46,795       11,582

Shareholders' equity (Note 8)
         Capital stock, $.55 stated value per share:
                  Class A (limited voting) - 27,184 shares
                    issued (1995, 26,903 shares)                15,103       14,947
                  Class B (voting) - 540 shares issued             300          300
         Additional capital                                     75,433       73,450
         Retained earnings                                      62,990       51,446
         Currency translation adjustments                           88          288
         Cost of capital stock in treasury (deduction)         (32,025)     (31,057)
                                                              ---------------------
                                                               121,889      109,374
                                                              ---------------------
                                                             $ 521,860    $ 183,582
                                                              =====================
</TABLE>


See accompanying notes.

<PAGE>

Consolidated Statements of Cash Flows
(In thousands)

<TABLE>
<CAPTION>
Year ended November 30                                                   1996         1995         1994
---------------------------------------------------------------------------------------------------------
<S>                                                                   <C>          <C>          <C>      
Operating Activities
Net income                                                            $  18,776    $  20,264    $  23,302
Adjustments to reconcile net income to net cash provided by
  operating activities:
         Restructuring charge                                             9,607           --           --
         Depreciation                                                     6,453        4,251        4,637
         Amortization of intangibles                                      9,097        3,923        4,328
         Deferred income taxes                                            2,094          (70)      (1,789)
         Changes in operating assets and liabilities net of effects
           from acquired business:
                  Accounts receivable                                    (5,849)       1,320       (2,295)
                  Inventories                                            (7,086)       8,474       (1,158)
                  Accounts payable and accrued expenses                   7,825       (9,972)      10,898
                  Sundry                                                 (3,466)        (987)       1,047
                                                                      -----------------------------------
                  Net cash provided by operating activities              37,451       27,203       38,970

Investing Activities
Purchases of property and equipment                                     (19,233)     (15,599)      (6,693)
Payment for acquired business                                          (235,000)          --           --
Sundry                                                                    4,590         (620)       1,005
                                                                      -----------------------------------
                  Net cash used by investing activities                (249,643)     (16,219)      (5,688)

Financing Activities
Dividends paid                                                           (7,232)      (7,041)      (6,049)
Proceeds from short-term and long-term borrowings                       310,600           --           --
Principal payments on short-term and long-term borrowings              (105,817)      (6,888)      (9,000)
Purchases of capital stock for treasury                                      --       (4,380)          --
Sundry                                                                    1,171        1,004          964
                                                                      -----------------------------------
                  Net cash provided (used) by financing activities      198,722      (17,305)     (14,085)
                                                                      -----------------------------------
                  (Decrease) increase in cash and cash equivalents      (13,470)      (6,321)      19,197

Cash and cash equivalents at beginning of year                           20,260       26,581        7,384
                                                                      -----------------------------------
Cash and cash equivalents at end of year                              $   6,790    $  20,260    $  26,581
                                                                      ===================================
</TABLE>


See accompanying notes.

<PAGE>

[LEFT COLUMN]

Notes to Consolidated Financial Statements
November 30, 1996

1. Summary of Significant Accounting Policies

Business.  Lilly  Industries,  Inc.  and  its  subsidiaries  (the  Company)  are
principally  in the business of  formulating,  producing and selling  industrial
coatings and  specialty  chemicals to  manufacturing  companies.  The  Company's
products  include wood coatings for furniture,  building  products and cabinets;
coil coatings for building products,  appliances and  transportation  equipment;
specialty  coatings for a variety of metal  products and  fiberglass  reinforced
products;  powder coatings for a variety of metal  products;  and glass coatings
for mirrors.  The Company also sells various  household  interior care products,
including fabric protectors and furniture polishes.

Consolidation  and  Use of  Estimates.  The  consolidated  financial  statements
include the  accounts of all  subsidiaries  after  elimination  of  intercompany
accounts and  transactions.  Preparation of these  statements in conformity with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash  Equivalents.  Cash  equivalents  include time deposits and certificates of
deposit with original maturities of three months or less.

Inventories.  Inventories  in the United States are stated at the lower of cost,
determined by the last-in,  first-out (LIFO) method,  or market.  Inventories of
foreign  subsidiaries  are  stated  at the  lower  of  cost,  determined  by the
first-in, first-out (FIFO) method, or market.

Intangible Assets. Goodwill, which represents the excess of cost over fair value
of net assets of purchased businesses,  is amortized by the straight-line method
over periods  ranging from 20 to 40 years.  Other  intangible  assets consist of
noncompete  agreements,  customer  lists and technology and are amortized by the
straight-line  method  over  periods  ranging  from 5 to 20 years.  The  Company
periodically  evaluates  the  value of  intangible  assets  to  determine  if an
impairment has occurred.  This evaluation is based on various analyses including
reviewing anticipated cash flows.

Property and Equipment.  Property and equipment is recorded on the basis of cost
and  includes  expenditures  for new  facilities  and items which  substantially
increase the useful life of existing  buildings and equipment.  Depreciation  is
based on  estimated  useful  lives  (ranging  from 3 to 40 years)  and  computed
primarily by the straight-line method.


<PAGE>

[RIGHT COLUMN]

Interest-Rate   Swap   Agreements.   The   Company   periodically   enters  into
interest-rate  swap  agreements  to modify the interest  characteristics  of its
outstanding  debt.  Swap  agreements  involve the exchange of interest  payments
based  on a  variable  interest  rate  for  interest  payments  based on a fixed
interest rate  calculated by reference to a notional amount over the life of the
agreement.  The  notional  amount of each  swap  agreement  represents  all or a
portion of the principal balance of a specific debt obligation. The differential
to be paid or received is accrued and  recognized  as an  adjustment of interest
expense.

Net  Income Per Share.  Net  income  per share is  computed  on the basis of the
weighted  average number of shares  outstanding  during each year,  adjusted for
stock splits and the dilutive effect, if any, of common stock equivalents.

2. Acquisition

Effective  April 8, 1996 the Company  acquired for  $235,000,000 in cash all the
outstanding shares of Guardsman  Products,  Inc.  ("Guardsman").  To finance the
acquisition, the Company obtained commitments for $300,000,000 of senior secured
credit facilities (see Note 6) and used $275,000,000 of these facilities to fund
the  initial  purchase  of  shares,  pay-off  existing  debt and to pay  related
expenses.  The  acquisition  was  recorded  using the  purchase  method  and the
consolidated financial statements include the results of operations of Guardsman
since the date of  acquisition.  The fair value of net assets  acquired  include
$40,031,000 net working capital,  $50,246,000  noncurrent  assets,  $213,642,000
intangible  assets,  $28,549,000  long-term  debt,  and  $40,370,000  noncurrent
liabilities.  Goodwill is being  amortized by the  straight-line  method over 40
years.

         The following  unaudited pro forma  consolidated  results of operations
for the  years  ended  November  30,  1996 and 1995 are  stated  as  though  the
acquisition occurred on December 1, 1994 (in thousands, except per share data):

                                                         1996       1995
--------------------------------------------------------------------------
Net sales                                              $598,722   $578,919
Net income                                               20,767     20,287
Net income per share                                        .90        .88
                              
         Pro forma  results  for the year  ended  November  30,  1996  include a
restructuring  charge of  $9,607,000  which  reduced net income by $5,284,000 or
$.23 per share (see Note 3). Pro forma  results for the year ended  November 30,
1995 include a restructuring charge of $10,458,000 recorded by Guardsman in 1995
which  reduced  net  income  by  $5,752,000  or $.25 per  share.  The pro  forma
consolidated  results of  operations  are not  necessarily  indicative of future


<PAGE>

[LEFT COLUMN]

results of operations or actual  results of operations  that would have occurred
had the purchase been made at December 1, 1994.

3. Restructuring

The  Company  has  adopted  and  commenced   implementation  of  plans  for  the
consolidation  of  manufacturing   facilities  related  to  the  acquisition  of
Guardsman. These plans, which include both Lilly and Guardsman facilities,  will
result  in  the  closure  of  some  plants  and  workforce  reductions  totaling
approximately  250  employees.  Closure  costs consist of facility and equipment
valuation  adjustments,  inventory  disposal costs,  dismantling and maintenance
costs,  and termination  benefits.  The primary employee groups affected include
manufacturing,  selling,  administrative and research and development personnel.
It is anticipated these plans will be completed by the end of fiscal 1997.

         Costs  associated with the planned  closure of former Lilly  facilities
and related  reductions  in workforce are  reflected as a  restructuring  charge
totaling  $9,607,000,  which reduced net income by $5,284,000 or $.23 per share.
The components of the  restructuring  charge and amounts paid or charged against
these reserves are as follows (in thousands):

                                                     Costs Paid     Ending
                                         Provision   or Charged    Balance
---------------------------------------------------------------------------
Facilities, equipment, inventories,                                 
 and other                                $7,827       $  365       $7,462
Termination benefits                       1,780          447        1,333
                                          --------------------------------
                                          $9,607       $  812       $8,795
                                          ================================
                                                              
         Costs   associated  with  the  planned  closure  of  former   Guardsman
facilities  and related  reductions in workforce are recorded as  liabilities in
the opening balance sheet of the combined entity as of the acquisition date. The
components  of these  liabilities  and  amounts  paid or charged  against  these
reserves are as follows (in thousands):

                                                         Costs Paid    Ending
                                            Liabilities  or Charged   Balance
-----------------------------------------------------------------------------
Facilities, equipment, inventories,
 and other                                     $6,532      $1,642      $4,890
Termination benefits                            2,476         469       2,007
                                               ------------------------------
                                               $9,008      $2,111      $6,897
                                               ==============================



<PAGE>

[RIGHT COLUMN]

4. Inventories

The principal inventory classifications at November 30 are summarized as follows
(in thousands):

                                                        1996          1995
----------------------------------------------------------------------------
Finished products                                      $25,847       $11,065
Raw materials                                           29,375        12,584
                                                       ---------------------
                                                        55,222        23,649
Less adjustment of certain inventories
 to last-in, first-out (LIFO) basis                      7,676         8,238
                                                       ---------------------
                                                       $47,546       $15,411
                                                       =====================

         Inventory cost is determined by the LIFO method of inventory  valuation
for  approximately  82% and 70% of  inventories  at November  30, 1996 and 1995,
respectively.  While  management  believes  the LIFO method  results in a better
matching  of  current  costs  and  revenues,  the  FIFO  method  is used to cost
inventories  of foreign  subsidiaries  because  foreign  statutory  requirements
prohibit use of the LIFO method.

         During fiscal 1995 inventory  quantities  were reduced.  This reduction
resulted in a liquidation of LIFO inventory  layers carried at lower costs which
prevailed  in prior  years.  The  effect  of this  liquidation  was to  increase
earnings by approximately $600,000.


5. Benefit Plans

The Company maintains defined benefit and defined  contribution plans that cover
substantially all employees. Retirement benefits under the defined benefit plans
are  based on final  monthly  compensation  and  years  of  service.  Retirement
benefits under the defined contribution plans are based on employer and employee
contributions  plus earnings to retirement.  The plans' assets consist primarily
of common stock, fixed income securities and guaranteed insurance contracts.  In
addition,   unfunded  supplemental  executive  retirement  plans  cover  certain
employees in which benefits,  determined by the Board of Directors,  are payable
after retirement over periods ranging from 15 years to life of the participant.

         The provision for defined benefit pension cost is determined  using the
projected unit credit actuarial method.  The Company's policy is to fund amounts
as are necessary on an actuarial basis to provide assets  sufficient to meet the
benefits to be paid to plan members in accordance  with the Employee  Retirement
Income  Security Act of 1974.  Amounts  contributed to  union-sponsored  pension
plans are based upon requirements of collective bargaining  agreements.  Company
contributions  to the defined  contribution  plans are based on a percentage  of
employee contributions.

         The Guardsman defined benefit pension plans covering  substantially all
U.S.  employees were amended to freeze years of service at December 31, 1996 and

<PAGE>
[LEFT COLUMN]

merged into the defined  benefit plan  maintained  by the Company.  Concurrently
with this  amendment,  these  employees  became  participants  in the  Company's
defined  contribution  plans.  The  impact of the plan  merger was  recorded  in
connection  with the Guardsman  acquisition.  All 1996 amounts  disclosed  below
reflect the effect of  freezing  years of service  for the  Guardsman  plans and
their merger into the Lilly plan.

         Effective  December  1, 1994 the Lilly  defined  benefit  pension  plan
covering substantially all U.S. employees was amended to freeze years of service
at November 30, 1994.  Concurrently  with this amendment,  the Company increased
its matching  contribution rates to defined contribution plans. A summary of the
components of net pension cost for the defined benefit plans and amounts charged
to expense for the defined  contribution  plans for the years ended  November 30
follows (in thousands):
                                               1996         1995         1994
--------------------------------------------------------------------------------
Defined benefit plans
   Service cost - benefits earned
    during the period                         $ 1,733      $   708      $ 2,109
   Interest cost on projected
    benefit obligation                          4,594        2,742        2,638
   Actual net (gain) loss
    on plan assets                             (9,056)      (8,849)         529
   Net amortization
    and deferral                                3,104        5,267       (4,224)
                                              ---------------------------------
   Net pension cost                               375         (132)       1,052
Defined contribution plans                      2,219        2,130          759
                                              ---------------------------------
   Pension expense                            $ 2,594      $ 1,998      $ 1,811
                                              =================================

         The  expected  long-term  rate of return on assets  used to compute the
defined benefit plans' pension expense was 9.25% for 1996, 1995 and 1994.

         The following table sets forth the funded status and amounts recognized
in the  consolidated  balance  sheets at November 30 for the  Company's  defined
benefit pension plans (in thousands):
                                                           1996          1995
-------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
         Vested                                          $ 58,699      $ 33,498
         Nonvested                                         19,612         3,126
                                                         ----------------------
Total accumulated benefit obligations                    $ 78,311      $ 36,624
                                                         ======================
Actuarial present value of projected benefit
 obligations for services rendered to date               $(79,647)     $(43,118)
Plan assets at fair value                                  83,186        46,510
                                                         ----------------------
Excess of plan assets over projected
 benefit obligations                                        3,539         3,392
Unrecognized net (gains) losses                              (768)          535
Unrecognized prior service cost                             2,794         2,248
Unrecognized transition obligation at
         December 1, 1985, net of amortization             (1,337)       (1,539)
                                                         ----------------------
Net pension asset                                        $  4,228      $  4,636
                                                         ======================
<PAGE>


[RIGHT COLUMN]

         The discount rate and rate of increase in  compensation  levels used to
measure  benefit  obligations  were 7% and 5%,  respectively,  for both 1996 and
1995.  Accumulated benefits for supplemental  executive retirement plans totaled
approximately   $5,144,000  and  $2,235,000  at  November  30,  1996  and  1995,
respectively.

6. Long-Term Debt

Long-term debt consists of the following as of November 30 (in thousands):

                                                      1996             1995
------------------------------------------------------------------------------
Facility A Term Note                                $171,500         $     --
Facility B Term Note                                  49,875               --
Facility C Revolving Note                             40,000               --
4.92% unsecured senior notes                              --           28,000
Other                                                    186              229
                                                    -------------------------
                                                     261,561           28,229
Less current portion                                  16,524            7,029
                                                    -------------------------
                                                    $245,037         $ 21,200
                                                    =========================

         In April 1996 the Company entered into a $300,000,000  credit agreement
("Agreement") with a group of financial  institutions to finance the acquisition
of Guardsman and to repay existing debt. The Agreement provides for $175,000,000
and $50,000,000 of borrowings under term notes and $75,000,000 under a revolving
note. Outstanding principal of the term notes is due in quarterly payments which
escalate annually with final payment due November 30, 2003. Interest on the term
notes is payable quarterly. The principal of the revolving note is due May, 2002
and interest is due quarterly.  Amounts available under the revolver are limited
to a borrowing base, as defined in the Agreement.  Additional  amounts available
for borrowing under the revolver totaled $35,000,000 at November 30, 1996.

         The notes and revolver bear interest,  at the Company's  option, at (i)
the higher of the agent  bank's  prime rate (8.25% at November  30, 1996) or the
Federal Funds rate plus one-half  (1/2%) percent,  or (ii) the London  Interbank
Offered Rate;  plus 50 to 225 basis points  depending on the Company' s Leverage
Ratio.  A commitment  fee,  ranging from .25% to .50%,  is payable on the unused
portion  of the  revolving  note.  The  outstanding  notes  are  secured  by the
Company's accounts receivable and real and personal property.

         In April,  1996 the Company  entered into a forty-four  month  interest
rate swap agreement  with a notional  amount of  $175,000,000;  and in November,
1996, a twenty-four month interest rate swap agreement with a notional amount of
$50,000,000.  These agreements  effectively  convert a portion of the term notes

<PAGE>

[LEFT COLUMN]

from floating rate debt to fixed rate debt with a weighted average rate of 7.64%
at November 30, 1996.  The notional  amount of the  $175,000,000  agreement  was
$135,000,000  at November  30, 1996 and  reduces  ratably on an annual  basis to
$50,000,000 in 1999.

         Minimum  principal  payments of long-term  debt excluding the revolving
note are: 1997 -  $16,524,000;  1998 - $31,141,000;  1999 - $31,518,000;  2000 -
$36,019,000;  2001 -  $39,020,000;  2002  -  $35,937,000;  2003  -  $31,353,000.
Interest of $12,746,000, $2,306,000 and $1,853,000 was paid in fiscal 1996, 1995
and 1994, respectively.

         The Company is subject to various debt  covenants,  including  negative
covenants which require the maintenance of certain ratios for maximum  leverage,
fixed charge coverage and interest coverage.  Additionally, such covenants place
certain  restrictions  on  the  Company's  ability  to  engage  in  mergers  and
acquisitions, incur additional indebtedness, acquire or dispose of fixed assets,
and the use of Excess Cash Flow.


7. Income Taxes

Income tax expense for the years ended November 30 is comprised of the following
components (in thousands):

                                           1996           1995           1994
-------------------------------------------------------------------------------
Current expense:
         Federal                         $  7,204       $  7,953       $ 12,395
         Foreign                            4,736          3,267          2,944
         State                              1,328          2,360          2,800
                                         --------------------------------------
                                           13,268         13,580         18,139
Deferred expense (credit):
         Federal                            1,829             --         (1,627)
         Foreign                             (119)           (70)          (162)
         State                                384             --             --
                                         --------------------------------------
                                            2,094            (70)        (1,789)
                                         --------------------------------------
                                         $ 15,362       $ 13,510       $ 16,350
                                         ======================================

         A  reconciliation  of the statutory U.S.  federal rate to the effective
income tax rate for the years ended November 30 is as follows:

                                                  1996      1995       1994
-----------------------------------------------------------------------------
Statutory U.S. federal
     income tax rate                              35.0%     35.0%      35.0%
Increase resulting from:
         Goodwill                                  4.1       2.4         .5
         State income taxes, net of federal
          income tax benefit                       3.3       3.4        3.7
         Other items                               2.6      (0.8)       2.0
                                                  -------------------------
Effective income tax rate                         45.0%     40.0%      41.2%
                                                  =========================

<PAGE>
[RIGHT COLUMN]

         Deferred income taxes are recorded based upon  differences  between the
financial  statement and tax basis of assets and  liabilities.  The deferred tax
assets and  liabilities  recorded  on the  balance  sheet at  November 30 are as
follows (in thousands):
                                                          1996          1995
------------------------------------------------------------------------------
Deferred tax assets:                                                
         Restructuring and closure reserves             $ 6,127       $    --
         Goodwill                                         1,316         1,152
         Employee benefits                                4,398         1,520
         Accounts receivable, inventory and other        15,281         5,927
                                                        ---------------------
                                                         27,122         8,599
Deferred tax liabilities:                                           
         Property and equipment                           8,003         3,264
         Pension                                          1,311         1,630
         Intangibles and other                               --         1,335
                                                        ---------------------
                                                          9,314         6,229
                                                        ---------------------
Net deferred tax assets                                 $17,808       $ 2,370
                                                        =====================
                                                               
         No  provision  has been made for U.S.  federal  income taxes on certain
undistributed  earnings  of foreign  subsidiaries  that the  Company  intends to
permanently invest or that may be remitted tax-free.  The total of undistributed
earnings that would be subject to federal  income tax if remitted under existing
law is  approximately  $14,000,000  at November 30, 1996.  Determination  of the
unrecognized deferred tax liability related to these earnings is not practicable
because of the complexities with its hypothetical calculation. Upon distribution
of these  earnings,  the Company will be subject to U.S.  taxes and  withholding
taxes payable to various foreign governments. A credit for foreign taxes already
paid would be available to reduce the U.S. tax liability.

         Income taxes of $20,177,000,  $16,524,000 and $13,400,000  were paid in
1996, 1995 and 1994, respectively.

8. Capital Stock

Authorized  shares  of Class A and  Class B stock  were  increased  in 1996 from
48,500,000  and 1,500,000  shares,  respectively,  to 97,000,000  and 3,000,000,
respectively.  The limited  voting rights of Class A  shareholders  are equal to
voting  rights of Class B  shareholders  only with  regard to voting for merger,
consolidation  or  dissolution  of the  Company  and  voting and  electing  four
directors of the Company if there are ten or more directors and two directors if
there are nine or fewer directors. With respect to all rights other than voting,
Class A shareholders are the same as Class B shareholders.

         The  terms of the  Class B  stock,  which  is held  only by  employees,
provide that these shares be  exchanged  for Class A stock on a  share-for-share
basis when the shareholder ceases to be an employee or decides to dispose of the
shares.  Accordingly,  3,000,000 shares of authorized Class A stock are reserved
for this purpose.

         On January 12, 1996 the Company's Board of Directors ("Board") declared
a dividend of one purchase right for each outstanding share of Class A and Class
B stock.  In  addition,  one right is  distributed  for each share  issued after

<PAGE>

[LEFT COLUMN]

January 26, 1996.  Upon exercise,  each right entitles  holders to purchase from
the Company one share of stock at $55 per share, subject to certain adjustments.
The  rights  become  exercisable  when a  person  or group  acquires  beneficial
ownership of 15 percent or more of Class A stock or becomes the beneficial owner
of an amount of Class A stock  (but not less  than 10  percent)  which the Board
determines to be substantial  and not in the Company's best long-term  interests
or following the  announcement  of a tender or exchange offer for 30% or more of
the Class A stock.

         In the event a person  acquires 15 percent or more of Class A stock, or
is determined by the Board to be a substantial  owner whose  ownership is not in
the Company's best long-term interests or an acquiring person engages in certain
self-dealing  transactions,  each  holder  will have the right to  receive  that
number of common shares having a market value of two times the exercise price of
the right.  At any time after a person becomes an acquiring  person,  but before
such person acquires 50 percent or more of outstanding  Class A stock, the Board
may exchange each right for one common share (subject to adjustment).

         In the event the Company is involved  in certain  business  combination
transactions,  or 50% or more of the  Company's  consolidated  assets or earning
power are sold, each holder will have the right to receive, upon exercise at the
then-current  exercise price of the right, that number of shares of common stock
of the acquiring  company  having a market value of two times the exercise price
of the right.

     The  Company may redeem the rights at a price of $.01 per right at any time
prior to the time a person or group  becomes an  acquiring  person as defined by
the rights  agreement.  The rights expire in January,  2006.

     A summary of shares issued and held in treasury follows (in thousands):

                                                       Capital Stock
                                                  Issued        Held in Treasury
                                            Class A    Class B  Class A  Class B
--------------------------------------------------------------------------------
Balance at November 30, 1993                 17,646      360    2,825       170
         Class A exchanged for Class B           --       --       74       (74)
         Class B exchanged for Class A           --       --      (40)       40
         Stock options exercised                161       --        8        17
         Three-for-two stock split            8,888      180    1,437        69
                                             ----------------------------------
Balance at November 30, 1994                 26,695      540    4,304       222
         Class A exchanged for Class B           --       --       78       (78)
         Class B exchanged for Class A           --       --       (8)        8
         Acquisition for treasury                --       --      370        --
         Stock options exercised                208       --       10        35
                                             ----------------------------------
Balance at November 30, 1995                 26,903      540    4,754       187
         Class A exchanged for Class B           --       --       78       (78)
         Class B exchanged for Class A           --       --      (54)       54
         Stock options exercised                281       --       32        28
                                             ----------------------------------
Balance at November 30, 1996                 27,184      540    4,810       191
                                             ==================================


<PAGE>

[RIGHT COLUMN]

         Changes in capital stock are summarized as follows (in thousands):

                                                                         Cost of
                                          Capital Stock                  Capital
                                           (Stated Amount)   Additional Stock in
                                          Class A   Class B   Capital   Treasury
--------------------------------------------------------------------------------
Balance at November 30, 1993               $14,705   $   300   $70,635   $25,587
         Stock options exercised               126        --     1,177       500
         Disqualifying disposition
         of stock options                       --        --       160        --
                                           -------------------------------------
Balance at November 30, 1994                14,831       300    71,972    26,087
         Acquisition for treasury               --        --        --     4,380
         Stock options exercised               116        --     1,376       590
         Disqualifying disposition
         of stock options
                                                --        --       102        --
                                           -------------------------------------
Balance at November 30, 1995                14,947       300    73,450    31,057
         Stock options exercised               156        --     1,828       968
         Disqualifying disposition
         of stock options                       --        --       155        --
                                           -------------------------------------
Balance at November 30, 1996               $15,103   $   300   $75,433   $32,025
                                           =====================================

         Incentive  stock option plans entitle certain  directors,  officers and
other key  employees to buy shares of Class A stock at prices not less than fair
market value on the date of grant.  The number of shares reserved and the number
and price  per share of  options  granted  are  adjusted  for  subsequent  stock
dividends and stock splits.  Shares reserved under these plans totaled 1,604,254
at November 30, 1996 of which option grants have been made for 1,210,322  shares
at prices  ranging  from $5.19 to $17.17.  During  1996,  280,962  options  were
exercised at prices ranging from $5.01 to $14.33 and 309,336  additional options
were granted. Options to buy 648,000 shares are currently exercisable.

         Statement of Financial  Accounting  Standards No. 123,  "Accounting for
Stock-Based Compensation",  encourages, but does not require companies to record
compensation expense for grants of stock options and other equity instruments at
fair value. The Statement  permits companies to continue to apply APB Opinion 25
and related Interpretations in accounting for its plans. The Company has elected
to continue  to apply APB  Opinion 25 which will  result in no income  statement
effect.  However,  additional  disclosures  will be  required  in the  financial
statements for the year ending November 30, 1997 to comply with Statement 123.

         The Company  sponsors an  employees'  stock  purchase  plan and defined
contribution  plans that  allow  participants  to  acquire  Class A stock at the
current fair market  value.  At November 30, 1996,  4,926,000  shares of Class A
stock were reserved for sale under the plans.


<PAGE>

[LEFT COLUMN]

9. Foreign Operations

United  States and foreign  operations,  which include  subsidiaries  located in
Canada, the United Kingdom,  Germany,  Taiwan, Malaysia and China are as follows
(in thousands):

                                               1996         1995         1994
--------------------------------------------------------------------------------
Net sales to unaffiliated customers:
         United States                       $423,753    $ 277,494    $ 284,826
         Foreign                               85,223       50,851       46,480
                                             ----------------------------------
         Consolidated                        $508,976    $ 328,345    $ 331,306
                                             ==================================
Income before income taxes:
         United States                       $ 41,501    $  25,943    $  33,340
         Foreign                               16,710        9,989        9,231
         Interest expense                     (14,466)      (2,158)      (2,919)
         Restructuring charge                  (9,607)          --           --
                                             ----------------------------------
         Consolidated                        $ 34,138    $  33,774    $  39,652
                                             ==================================
Total assets:
         United States                       $463,557    $ 158,338    $ 165,182
         Foreign                               58,725       25,784       25,572
         Eliminations (deductions)               (422)        (540)        (502)
                                             ----------------------------------
         Consolidated                        $521,860    $ 183,582    $ 190,252
                                             ==================================


10. Quarterly Results of Operations (Unaudited)

Quarterly results of operations are summarized as follows (in thousands,  except
per share data):

                                                  Quarter Ended
1996                                 Feb. 29     May 31      Aug. 31     Nov. 30
--------------------------------------------------------------------------------
Net sales                            $73,271    $131,711    $150,859    $153,135
Gross profit                          24,061      47,474      56,188      59,505
Net income                             3,486         616       7,012       7,662
Net income per share                     .15         .03         .30         .33

                                                  Quarter Ended
1995                                 Feb. 28     May 31      Aug. 31     Nov. 30
--------------------------------------------------------------------------------
Net sales                            $80,447    $ 85,407    $ 79,705    $ 82,786
Gross profit                          26,880      28,530      25,119      27,917
Net income                             4,647       5,808       4,577       5,232
Net income per share                     .20         .25         .20         .23


<PAGE>
Shareholder Information


[LEFT COLUMN]

Form 10-K

A copy of the Form  10-K,  which  is filed  with  the  Securities  and  Exchange
Commission, will be sent free to any shareholder upon written request. Write to:

Mr. Kenneth L. Mills, Assistant Secretary
Lilly Industries, Inc.
733 S. West Street
Indianapolis, IN 46225

Registrar & Transfer Agent

KeyCorp Shareholder Services, Inc.
P. O. Box 6477
Cleveland, Ohio 44101
(800) 542-7792
(216) 813-5745

Communications concerning shareholder records,  including address changes, stock
transfers,  cash  dividends or other service needs should be directed to KeyCorp
Shareholder Services, Inc.


Analyst Contacts

Security analyst inquiries are welcomed. Please call:
         Douglas W. Huemme
         (317) 687-6700


Annual Meeting

Thursday, April 24, 1997
10:00 A.M., EST
Rooms 101 and 102
Indiana Convention Center & RCA Dome
Indianapolis, Indiana

The meeting  notice and proxy  materials  will be mailed to  shareholders  on or
about March 20, 1997.  Lilly urges all  shareholders  to vote their  proxies and
thus participate in the decisions that will be made at the annual meeting.


<PAGE>

[RIGHT COLUMN]

Dividend Reinvestment Plan

A dividend  reinvestment and voluntary stock purchase plan for Lilly Industries,
Inc.  shareholders  permits  purchase  of the  Company's  Class A stock  without
payment of brokerage commission or service charge. Participants in this plan may
have cash  dividends  on their  shares  automatically  reinvested  and,  if they
choose, invest by making optional cash payments.  Additional  information on the
plan is available by writing:

KeyCorp Shareholder Services, Inc.
P.O. Box 6477
Cleveland, Ohio 44101


Dividend Information and Common Stock Prices

Dividends are traditionally paid on the 1st business day of January, April, July
and October to shareholders of record approximately three weeks prior.

     The following  table sets forth the  dividends  paid per share of stock and
the high and low  prices in each of the  quarters  in the past two  years  ended
November 30.

                                    Dividends
Fiscal 1996                         Per Share          High             Low
-------------------------------------------------------------------------------
1st quarter ended  February 29       $ .08           $ 19 3/4         $ 16 1/4 
2nd quarter ended May 31               .08             19               15 
3rd quarter ended August 31            .08             15 3/4           12 1/2 
4th quarter ended November 30          .08             14 1/8           12 1/4
                                     -----------------------------------------
                                     $ .32
                                     =========================================

                                    Dividends
Fiscal 1995                         Per Share          High             Low
-------------------------------------------------------------------------------
1st quarter ended February 28        $ .07           $ 14 1/2         $ 11 3/4
2nd quarter ended May 31               .08             15               11
3rd quarter ended August 31            .08             13 1/2           11
4th quarter ended November 30          .08             13 1/2           12 1/8
                                     -----------------------------------------
                                     $ .31
                                     =========================================

Stock Trading

The Company's  Class A stock is traded on the New York Stock  Exchange under the
symbol LI.

         At  November  30,  1996  there  were  approximately   2,300  registered
shareholders  of Class A stock and 65 registered  shareholders of Class B stock,
which is reserved for employees of the Company.


<PAGE>
[TOP PORTION OF PAGE]

Officers and Directors
As of November 30, 1996


Officers
Douglas W. Huemme, 55
Chairman, President
and Chief Executive Officer

Larry H. Dalton, 49
Vice President,
Operations and Manufacturing

Alain DeBlandre, 40
Vice President and General Manager,
Coil Coatings

William C. Dorris, 53
Vice President,
Corporate Development

Ned L. Fox, 55
Vice President and General Manager,
Specialty Coatings

A. Barry Melnkovic, 39
Vice President, Human Resources

Kenneth L. Mills, 48
Corporate Accounting Director,
Assistant Secretary

Gary D. Missildine, 55
Vice President and General Manager,
Powder Coatings

Robert A. Taylor, 42
Vice President and General Manager,
Wood Coatings

Keith C. Vander Hyde, Jr., 38
Vice President and General Manager,
Guardsman Products

Jay M. Wiegner, 53
Vice President and General Manager,
Glass Coatings

--------------------------------------------------------------------------------


<PAGE>
[BOTTOM PORTION OF PAGE]

Directors
H. J. (Jack) Baker, 69
Chairman Emeritus
BMW Constructors, Inc.

James M. Cornelius, 53
Chairman
Guidant Corporation

William C. Dorris, 53
Vice President,
Corporate Development

Paul K. Gaston, 62
Former Chairman
Guardsman Products, Inc.

Douglas W. Huemme, 55
Chairman, President
and Chief Executive Officer

Harry Morrison, Ph.D., 59
Dean, School of Science
Purdue University

John D. Peterson, 63
Chairman
City Securities Corporation

Thomas E. Reilly, Jr., 56
Chairman and Chief Executive Officer
Reilly Industries, Inc.

Van P. Smith, 68
Chairman
Ontario Corporation

Richard A. Steele, 69
Retired President
and Chief Executive Officer
Citizens Gas and Coke Utility





<PAGE>

Locations

Corporate Office
733 S. West Street
Indianapolis, Indiana 46225

Corporate Technology Center
521 W. McCarty
Indianapolis, Indiana 46225

<TABLE>
<CAPTION>
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United States

<S>                               <C>                                  <C>
Alabama                            Illinois                             New Jersey
1771 Industrial Road               5400 23rd Avenue                     1991 Nolte Drive
Dothan, AL 36303                   Moline, IL 61265                     Paulsboro, NJ 08066
                                                                        
Arkansas                           Indiana                              North Carolina
1900 E. 145th Street               28335 Clay Street                    10300 Claude Freeman Drive
Little Rock, AR 72206              Elkhart, IN 46517                    Charlotte, NC 28262
                                                                        
California                         546 W. Abbott Street                 2147 Brevard Road
210 East Alondra Blvd.             Indianapolis, IN 46225               High Point, NC 27216
Gardena, CA 90248                                                       
                                   715 East Maryland Street             1717 English Road
9845 Miller Way                    Indianapolis, IN 46202               High Point, NC 27262
South Gate, CA 90280                                                    
                                   Kentucky                             Texas
901 West Union Street              347 Central Avenue                   2518 Chalk Hill Road
Montebello, CA 90640               Bowling Green, KY 42101              Dallas, TX 75212
                                                                        
Connecticut                        Michigan                             Washington
145 Dividend Road                  411 Darling Street                   13535 Monster Road
Rocky Hill, CT 06067               Fremont, MI 49412                    Seattle, WA 98178
                                                                        
15 Lunar Drive                     4999 36th Street SE                  
Woodbridge, CT 06525               Grand Rapids, MI 49518               
                                                                        
Florida                            Missouri                             
2355 S.W. 66th Terrace             1136 Fayette Street                  
Davie, FL 33317                    N. Kansas City, MO 64116             
                                                                    
</TABLE>

<PAGE>

--------------------------------------------------------------------------------

             
<TABLE>
<CAPTION>

International

<S>                               <C>                         <C>
Canada                             England                     Malaysia
1915 Second Street West            152 Milton Park             Lot No. 4963, Jalan Teratai
Cornwall, Ontario K6H 5T1          Abingdon                    51/2 Miles, Meru Industrial Zone
Canada                             Oxfordshire OX14 4SD        41050 Klang, Selangor Darul Ehsan
                                   England                     Malaysia
65 Duke Street                                                 
London, Ontario N6J 2X3            Germany                     Singapore
Canada                             D-8649 Wallenfels/Ofr.      Level 36, Hong Leong Building
                                   Postfach 1126               16 Raffles Quay 04851
China                              Germany                     Singapore
Lot 3 Xintang                                                  
     District Administration       Ireland                     Taiwan, R.O.C.
Dalinshan, Dongguan                Willowfield Road            No. 1 Kung Yeh First Road
Guangdon, China                    Ballinamore                 Zenwu Village
                                   Co. Leitrim                 Kaohsiung Hsien
                                   Ireland                     Taiwan, R.O.C.

</TABLE>