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

<TABLE>
<CAPTION>
Year Ended November 30                  1997          1996 (2)      1995          1994         1993           1992       
---------------------------------------------------------------------------------------------------------------------  
Operations
<S>                                   <C>           <C>           <C>           <C>           <C>           <C>          
Net sales                             $601,296      $508,976      $328,345      $331,306      $284,325      $236,476         
Cost of products sold                  373,015       321,748       219,899       214,809       189,111       152,480     
Gross margin percentage                   38.0%         36.8%         33.0%         35.2%         33.5%         35.5%    
Selling, general and
 administrative expenses               139,467       112,361        59,874        61,498        53,319        50,128     
Research and development expenses       18,680        17,294        13,184        12,982        12,325        11,030     
Operating income                        70,134        57,573        35,388        42,017        29,570        22,838     
Operating income percentage               11.7%         11.3%         10.8%         12.7%         10.4%          9.7%    
Interest expense                        19,317        14,466         2,158         2,919         1,925         1,662     
Income taxes                            23,068        11,039        13,510        16,350        11,784         9,201     
Net income                              28,095        24,060        20,264        23,302        16,155        12,706     
EBITDA (3)                              92,470        73,761        44,106        51,536        36,751        30,361     
EBITDA interest coverage (4)               4.8           5.1          20.4          17.7          19.1          18.3     

Per Share Data (5)
Net income                                1.20          1.04           .88          1.00           .70           .55     
Cash dividends                             .32           .32           .31           .27           .24           .22     
Book value                                6.16          5.36          4.86          4.38          3.60          3.16     

Price range of common stock         24 1/8-16 3/4   19 3/4-12 1/4    15-11       18-11 3/4   15 7/8-9 3/8    9 3/4-5 5/8 

Other Data
Total assets                           501,795       521,860       183,582       190,252        167,044      117,049     
Working capital                         52,126        50,579        35,505        41,604         33,270       27,131     
Capital expenditures(6)                 12,673        19,233        15,599         6,693          7,598        3,262     
Depreciation                             8,850         6,453         4,251         4,637          3,746        3,965     
Amortization of intangibles             13,140         9,097         3,923         4,328          3,141        2,827     
Total debt                             224,171       261,561        28,229        35,110         44,101       14,642     
Book value                             142,439       121,889       109,374        99,424         81,128       70,125     
Return on equity                          21.3%         20.8%         19.4%         25.8%          21.4%        17.6%    
Debt to total capitalization                61%           68%           21%           26%            35%          17%    
Sales per employee                         283           274           282           281            253          214     
Operating income per employee               33            31            30            36             26           21     
Average shares outstanding (7)          23,400        23,200        23,100        23,250         23,123       23,189     
</TABLE>


<TABLE>
<CAPTION>
Year Ended November 30                  1991          1990          1989          1988          1987       
-------------------------------------------------------------------------------------------------------            
Operations                                                                                              
<S>                                 <C>           <C>           <C>           <C>           <C>         
Net sales                             $220,508      $240,146      $219,713      $203,499       $189,213    
Cost of products sold                  150,669       161,626       145,592       134,114        122,135    
Gross margin percentage                   31.7%         32.7%         33.7%         34.1%          35.5%   
Selling, general and                                                                                       
 administrative expenses                46,921        50,404        44,113        42,516         39,779    
Research and development expenses       10,606        10,814         9,708         8,980          8,872    
Operating income                        12,312        17,302        20,300        17,889         18,427    
Operating income percentage                5.6%          7.2%          9.2%          8.8%           9.7%   
Interest expense                         2,437         2,635         1,399           806            708    
Income taxes                             4,417         6,850         8,399         7,550          8,599    
Net income                               6,357        10,022        12,574        11,284         10,272    
EBITDA (3)                              20,177        26,179        26,958        23,540         23,050    
EBITDA interest coverage (4)               8.3           9.9          19.3          29.2           32.6    
                                                                                                           
Per Share Data (5)                                                                                         
Net income                                 .27           .41           .51           .45            .40    
Cash dividends                             .21           .20           .17           .15            .14    
Book value                                3.16          3.10          3.00          2.65           2.34    
                                                                                                           
Price range of common stock           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
                                                                                                           
Other Data                                                                                                 
Total assets                           127,342       125,371       129,025       101,357         96,814    
Working capital                         30,405        34,513        40,389        36,368         26,006    
Capital expenditures(6)                  1,928         3,968         2,486         2,930          5,397    
Depreciation                             4,038         4,021         3,387         3,133          2,785    
Amortization of intangibles              2,928         2,651         1,199           767            686    
Total debt                              21,501        28,345        25,560        10,007          8,419    
Book value                              74,187        73,185        74,482        65,987         58,755    
Return on equity                           8.6%         13.6%         17.9%         18.1%          18.3%   
Debt to total capitalization                22%           28%           26%           13%            13%   
Sales per employee                         186           186           174           170            160    
Operating income per employee               10            13            16            15             16    
Average shares outstanding (7)          23,499        24,659        24,863        24,921         25,511
</TABLE>

<PAGE>

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    1996  operations  include  the  effect  of  the  acquisition  of  Guardsman
     Products,  Inc. on April 8, 1996 and exclude the effect of a  restructuring
     charge of $9,607 which reduced net income by $5,284 or $.23 per share.

3    EBITDA  represents  earnings  before  interest,   taxes,  depreciation  and
     amortization.

4    EBITDA  interest  coverage is  determined  by  dividing  EBITDA by interest
     expense.

5    Adjusted for all stock splits and stock dividends through November 30, 1997
     inclusive. Prices are rounded to nearest 1/8.

6    Excludes effect of acquisitions.

7    Used to calculate net income per share.


<PAGE>


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


Operating Results 1997 vs. 1996
================================================================================
Consolidated  net sales  increased  18.1% to a record  $601.3  million for 1997.
Sales benefited from the full-year inclusion of Guardsman Products Inc. ("GPI"),
acquired in April,  1996. During 1997, the Company  experienced volume growth in
each of its end use markets. Sales to the Company's four primary end use markets
(metal,  wood, glass and composites,  and Guardsman  products)  represented 39%,
38%, 12% and 11% of 1997 consolidated sales, respectively.  International sales,
including  U.S.  exports of $17.2  million,  grew 29.7% to $126.5 million during
1997. This  represented an increase of 1.8 percentage  points to 21.0% of sales.
For the first time in the Company's history, international sales exceeded 20% of
total sales,  despite the negative impact of foreign exchange rate volatility in
several  of the  Company's  overseas  markets.  Selling  prices  for most of the
Company's products remained stable during the year.

         Gross profit margin continued to improve in 1997, rising 1.2 percentage
points over 1996 to 38.0%.  Continued  improvements in supply chain  management,
including  leveraging  larger raw  material  order  quantities  and reducing the
number of raw materials,  contributed to a 1.6 percentage point reduction in raw
material  costs as a percentage  of sales.  The Company will  continue to pursue
improvement  in gross  margin by  reducing  the  number of raw  material  items,
process   engineering,   company-wide   purchasing   initiatives,   and  product
reformulations.  Direct  labor  and  overhead  costs  increased  slightly  as  a
percentage of sales during 1997.

         Operating  expenses  totaled  $158.1  million for 1997,  an increase of
$28.5 million, or 22.0%, over 1996 (excluding the restructuring  charge reported
during  1996).  Increases in 1997  operating  expenses were due primarily to the
full-year  inclusion  of GPI  operations.  As a percentage  of sales,  operating
expenses  increased  0.8  percentage  points to 26.3%.  The  increase  primarily
reflects higher amortization expense associated with intangibles acquired in the
GPI  transaction,  as well as higher selling and marketing costs associated with
certain  Guardsman  product  lines,  which target  retail  accounts  rather than
original equipment manufacturers.

         Interest  expense   increased  33.5%  during  1997  to  $19.3  million,
primarily  due to the  full-year  inclusion  of  debt  associated  with  the GPI
acquisition.   The   increase  was   partially   mitigated  by  a  reduction  in
interest-bearing   borrowings  during  1997.  Management  anticipates  that  the
restructuring of the Company's debt capitalization  during the fourth quarter of
1997 should  contribute to a slightly lower average  interest rate on borrowings
going forward. (See "Liquidity and Capital Resources").

         The Company's  effective tax rate remained virtually unchanged for 1997
at 45.1%. The effective tax rate remained above U.S. statutory rates,  primarily
due to the  impact of  non-deductible  intangibles  acquired  as part of the GPI
acquisition, and generally higher foreign tax rates.


Operating Results 1996 vs. 1995
================================================================================
Consolidated  net sales  increased to a record $509.0  million for 1996, up from
$328.3  million,  or 55.0%,  over 1995.  Sales  increased due to higher  volumes
associated  with the  acquisition of GPI,  overall  volume  increases in Lilly's
pre-acquisition  business,  and selected price increases  instituted  during the
second half of 1995.

         Gross  profit  margin  improved  to 36.8% in 1996  from  33.0% in 1995.
Improved 1996 margins were due to lower raw material costs,  efficiencies in raw
material procurement, and selected selling price increases instituted during the
second half of 1995.

         Operating  expenses  increased  to $139.3  million  in 1996 from  $73.1
million  in  1995.  Increases  in  1996  were  due to  the  inclusion  of  GPI's
operations,  increased amortization expense associated with intangibles acquired
as part of the GPI acquisition,  and the one-time  restructuring  charge of $9.6
million discussed below.

         Interest expense in 1996 was $14.5 million, compared to $2.2 million in
1995. The increase was directly  attributable to significantly  higher levels of
interest-bearing debt necessary to fund the GPI acquisition.


<PAGE>

         The  Company's  effective  tax rate rose to 45.0% in 1996 from 40.0% in
1995, due primarily to higher levels of non-deductible  intangible  amortization
associated with the GPI acquisition.

Environmental
================================================================================
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  internal
compliance  efforts,   have  required  and  will  continue  to  require  ongoing
expenditures.  Spending for  environmental  compliance is not  anticipated to be
material to the Company's financial position. The Company has been notified that
it is a potentially responsible party for clean-up costs with respect to several
government  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 position.


Computer Systems - Year 2000 Compliance
================================================================================
The Company has reviewed its  computer and other  operating  systems to identify
those  that  could be  affected  by the  "Year  2000  Issue."  During  1997,  an
implementation plan was developed to ensure that all significant aspects of Year
2000 compliance will be addressed. The Company will achieve Year 2000 compliance
in connection with an upgrade to its computer processing software.  This upgrade
is  scheduled  to  be  completed  in  early  1999.   Management   believes  that
accomplishing  Year 2000 compliance  will not have a material  adverse impact on
its operations or financial position.


Guardsman Acquisition and Restructuring
================================================================================
Effective April 8, 1996, the Company acquired the outstanding  shares of GPI for
$235  million.   The  purchase  was  financed   through  senior  secured  credit
facilities. GPI's technology and related products were complementary to Lilly's,
with little customer overlap. The combination of both companies has strengthened
Lilly's ability to penetrate key markets.

         In 1997, the Company  successfully  completed its initiatives to reduce
costs of the combined  companies by  approximately  $25 million.  These  efforts
included   improving   efficiencies  in  raw  material   procurement,   facility
rationalization,  and workforce reductions. Costs associated with the closure of
Lilly  facilities  and  workforce  reductions  were  recorded in the 1996 second
quarter as a  restructuring  charge  totaling  $9.6  million,  which reduced net
income by $5.3 million or $0.23 per share.  Costs associated with the closure of
GPI facilities and workforce  reductions  totaled $9.0 million and were recorded
in the opening balance sheet of the combined entity at the acquisition date.


Liquidity and Capital Resources
================================================================================
During 1997, the Company  restructured its debt capitalization on more favorable
terms.  The $300  million  secured  credit  agreement  ("Agreement"),  which was
executed to complete the GPI  acquisition,  was  restructured  into a five-year,
$175 million revolving credit facility  ("Facility").  In addition,  the Company
successfully  accessed the public debt market for the first time by issuing $100
million in ten-year senior notes ("Notes").  Both the Facility and the Notes are
unsecured and require no principal  amortization  prior to maturity.  Management
expects to fund required debt service from operating  cash flows.  


<PAGE>

Liquidity and Capital Resources, continued
================================================================================
         As part of the debt  restructuring,  the Company  used net  proceeds of
$99.2  million  from  the  Notes  offering  to  retire  a  portion  of the  debt
outstanding  under the prior Agreement.  The Company reduced total debt by $37.4
million  during 1997.  Additional  amounts  available  for  borrowing  under the
Facility for acquisitions or general  operating  purposes totaled $51 million as
of November 30, 1997. Management believes that funds available from internal and
external  sources  are  sufficient  to meet the  liquidity  needs of the Company
during the next twelve months.

         The  Company  manages  exposure to interest  rate  movements  primarily
through the issuance of fixed-rate  debt securities and the use of interest rate
swap agreements.  As of November 30, 1997, the Company was party to one interest
rate  swap  agreement  with a  notional  principal  amount of $95  million.  The
agreement  effectively  converts a portion of the Company's debt from a floating
to a fixed interest rate, which was 7.03% as of November 30, 1997.

         Cash provided by operating activities increased to $59.3 million during
1997,   driven  by  higher  levels  of  net  income  and  non-cash  charges  for
depreciation and amortization associated with the full-year inclusion of GPI. In
addition,  ongoing efforts to better manage working capital assets provided $5.1
million in operating cash.

         Cash used for investing  activities  returned to more historical levels
during  1997,  totaling a net $7.0  million.  Included in this amount were $12.7
million of capital  expenditures.  Key capital project  expenditures during 1997
included $4.8 million in additional  capacity for the Company's  powder and wood
operations,  and $2.0 million for a new manufacturing  facility in Ireland.  Net
cash used for  investing  activities  was  partially  offset  by sundry  inflows
totaling $5.7 million,  representing disposal of non-operating assets, primarily
company-owned life insurance policies.  Future investing activities are expected
to be financed from internal sources and existing credit facilities.

         Cash used by financing  activities  totaled $49.1 million for 1997, due
principally to the $37.4 million reduction in debt. The Company  maintained cash
dividend payments of $0.32 per share during 1997.

         The Company  focuses on three key measures of  liquidity  and access to
capital  markets:  EBITDA (earnings  before  interest,  taxes,  depreciation and
amortization);  Interest Coverage (EBITDA divided by interest expense); and Debt
Capitalization  (debt  divided by the sum of debt plus  equity).  For 1997,  the
company generated EBITDA of $92.5 million,  an improvement of $19.0 million over
1996.  Interest  Coverage  declined  slightly to 4.8 times, due primarily to the
full-year inclusion of GPI and associated higher average debt outstanding during
the year.  Debt  Capitalization  improved  7.0  percentage  points to 61% due to
higher  levels of net income  retained in the  business and lower levels of debt
outstanding at year-end 1997.


Subsequent Event - Acquisition of Merckens Lackchemie GmbH & Company
================================================================================
In December,  1997, the Company  acquired  Merckens  Lackchemie GmbH and Company
("Merckens").  Located in  Eschweiler,  Germany,  Merckens  supplies  industrial
coatings  to  customers  throughout  Europe.  The  Merckens  product  lines  are
complementary  to Lilly's  existing  products.  Management  anticipates that the
acquisition  will add more than US $15  million  of annual  revenues  to Lilly's
operations.

<PAGE>


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

<TABLE>
<CAPTION>
Year ended November 30                                     1997           1996         1995
---------------------------------------------------------------------------------------------- 
<S>                                                     <C>            <C>           <C>      
Net sales                                               $ 601,296      $ 508,976     $ 328,345
Costs and expenses:
         Cost of products sold                            373,015        321,748       219,899
         Selling, general and administrative              139,467        112,361        59,874
         Research and development                          18,680         17,294        13,184
         Restructuring charge (Note 3)                         --          9,607            --
                                                        --------------------------------------
                                                          531,162        461,010       292,957
                                                        --------------------------------------
                  Operating income                         70,134         47,966        35,388

Other income (expense):
         Interest income and sundry                           346            638           544
         Interest expense                                 (19,317        (14,466)       (2,158)
                                                        --------------------------------------
                                                          (18,971)       (13,828)       (1,614)
                                                        --------------------------------------
                  Income before income taxes               51,163         34,138        33,774

Income taxes (Note 7)                                      23,068         15,362        13,510
                                                        --------------------------------------
                  Net income                               28,095         18,776        20,264

Retained earnings at beginning of year                     62,990         51,446        38,223
                                                        --------------------------------------
                                                           91,085         70,222        58,487
Deduct dividends paid (1997, $.32 per share;
 1996, $.32 per share; 1995, $.31 per share)                7,340          7,232         7,041
                                                        --------------------------------------
                  Retained earnings at end of year      $  83,745      $  62,990     $  51,446
                                                        ======================================

Average number of shares and equivalent shares
 of capital stock outstanding                              23,400         23,200        23,100

Net income per share                                    $    1.20      $     .81     $     .88
</TABLE>




See accompanying notes.

<PAGE>


Consolidated Balance Sheets
(In thousands)


<TABLE>
<CAPTION>
November 30                                                                         1997           1996
--------------------------------------------------------------------------------------------------------- 
<S>                                                                              <C>            <C>      
Assets
Current assets:
         Cash and cash equivalents                                               $  10,079      $   6,790
         Accounts receivable, less allowance for doubtful accounts
          (1997, $2,139; 1996, $2,706)                                              80,011         84,592
         Inventories (Note 4)                                                       45,704         47,546
         Deferred income taxes                                                       4,300          5,717
         Other                                                                       6,580         14,073
                                                                                 ------------------------
                  Total current assets                                             146,674        158,718
Other assets:
         Goodwill, less amortization (1997, $15,368; 1996, $9,028)                 220,897        228,536
         Other intangibles, less amortization (1997, $17,963; 1996, $17,271)        30,059         30,275
         Deferred income taxes                                                       7,722         12,091
         Sundry                                                                     13,604         11,658
                                                                                 ------------------------
                                                                                   272,282        282,560
Property and equipment:
         Land                                                                        8,035          8,396
         Buildings                                                                  50,621         48,087
         Equipment                                                                  78,432         71,056
         Allowances for depreciation (deduction)                                   (54,249)       (46,957)
                                                                                 ------------------------
                                                                                    82,839         80,582
                                                                                 ------------------------
                                                                                 $ 501,795      $ 521,860
                                                                                 ========================

Liabilities and Shareholders' Equity Current liabilities:
         Accounts payable                                                        $  60,510      $  56,593
         Salaries and payroll related items                                         20,814         22,681
         Other                                                                      10,936         11,281
         State and local taxes                                                       1,212            269
         Federal income taxes                                                        1,076            791
         Current portion of long-term debt (Note 6)                                     --         16,524
                                                                                 ------------------------
                  Total current liabilities                                         94,548        108,139

Long-term debt (Note 6)                                                            224,171        245,037

Other liabilities                                                                   40,637         46,795

Shareholders' equity (Note 8):
         Capital stock, $.55 stated value per share:
                  Class A (limited voting) - 27,674 shares issued
                   (1996, 27,184 shares)                                            15,375         15,103
                  Class B (voting) - 540 shares issued                                 300            300
         Additional capital                                                         79,417         75,433
         Retained earnings                                                          83,745         62,990
         Currency translation adjustments                                           (2,254)            88
         Cost of capital stock in treasury (deduction)                             (34,144)       (32,025)
                                                                                 ------------------------
                                                                                   142,439        121,889
                                                                                 ------------------------
                                                                                 $ 501,795      $ 521,860
                                                                                 ========================
</TABLE>

See accompanying notes.


<PAGE>

Consolidated Statements of Cash Flows
(In thousands)


<TABLE>
<CAPTION>
Year ended November 30                                                             1997           1996            1995
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>            <C>            <C>      
Operating Activities
Net income                                                                      $  28,095      $  18,776      $  20,264
Adjustments to reconcile net income to net cash
 provided by operating activities:
         Restructuring charge                                                          --          9,607             --
         Depreciation                                                               8,850          6,453          4,251
         Amortization of intangibles                                               13,140          9,097          3,923
         Deferred income taxes                                                      4,085          2,094            (70)
         Changes in operating assets and liabilities
          net of effects from acquired business:
                  Accounts receivable                                               4,581         (5,849)         1,320
                  Inventories                                                       1,842         (7,086)         8,474
                  Accounts payable and accrued expenses                             2,933          7,825         (9,972)
                  Sundry                                                           (4,226)        (3,466)          (987)
                                                                                ----------------------------------------
                           Net cash provided by operating activities               59,300         37,451         27,203

Investing Activities
Purchases of property and equipment                                               (12,673)        (19,233)      (15,599)
Payment for acquired business                                                          --        (235,000            --
Sundry                                                                              5,716          4,590           (620)
                                                                                ----------------------------------------
                           Net cash used by investing activities                   (6,957)      (249,643)       (16,219)

Financing Activities
Dividends paid                                                                     (7,340)         (7,232)       (7,041)
Proceeds from senior notes                                                         99,200             --             --
Proceeds from short-term and long-term borrowings                                      --        310,600             --
Principal payments on short-term and
 long-term borrowings                                                            (136,590)      (105,817)        (6,888)
Purchases of capital stock for treasury                                                --             --         (4,380)
Sundry                                                                             (4,324)         1,171          1,004
                                                                                ----------------------------------------
                           Net cash (used) provided by financing activities       (49,054)       198,722        (17,305)
                                                                                ----------------------------------------
Increase (decrease) in cash and cash equivalents                                    3,289        (13,470)        (6,321)
Cash and cash equivalents at beginning of year                                      6,790         20,260         26,581
                                                                                ----------------------------------------
Cash and cash equivalents at end of year                                        $  10,079      $   6,790      $  20,260
                                                                                ========================================
</TABLE>

See accompanying notes.


<PAGE>

Notes to Consolidated Financial Statements
November 30, 1997

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 products, including fabric
protectors, furniture care products and cleaning aids.

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.  Coatings  inventories in the United States are stated at the lower
of cost,  determined by the last-in,  first-out  (LIFO) method,  or market.  All
other  inventories 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.

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.  In
February,  1997 the Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  (SFAS) No. 128  "Earnings  Per  Share,"  which
requires certain  modifications to the currently applicable net income per share
calculations  defined  in  Accounting   Principles  Board  Opinion  No.  15  and
restatement of net income per share for all prior periods reported.  The Company
is required to adopt this standard in its first quarter of fiscal 1998. Adoption
of SFAS No. 128 is not expected to  materially  impact the  Company's net income
per share.

2. Acquisition
================================================================================
On  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 used  $275,000,000 of senior secured credit facilities

<PAGE>

(see Note 6) to fund the initial  purchase of shares,  pay-off existing debt and
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
included  $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.

         If the  acquisition  had  occurred on  December 1, 1995,  pro forma net
sales and net income for the year ended November 30, 1996 would be  $598,722,000
and $20,767,000,  respectively,  and net income per share would be $.90. The pro
forma results  include a  restructuring  charge of $9,607,000  which reduced net
income by $5,284,000 or $.23 per share (see Note 3). The pro forma  consolidated
results  of  operations  are not  necessarily  indicative  of future  results of
operations  or actual  results of  operations  that would have  occurred had the
purchase been made at December 1, 1995.


3. Restructuring
================================================================================
In 1996 the  Company  adopted  and  commenced  implementation  of plans  for the
consolidation  of  manufacturing   facilities  related  to  the  acquisition  of
Guardsman.  These  plans  included  the  closure  of both  Lilly  and  Guardsman
facilities  and  workforce  reductions  totaling  approximately  250  employees.
Closure costs included facility and equipment valuation  adjustments,  inventory
disposal costs, dismantling and maintenance costs, and termination benefits. The
primary employee groups affected included manufacturing, selling, administrative
and research and  development  personnel.  As of November 30, 1997 the plans are
complete.

         Costs  associated  with the  closure  of former  Lilly  facilities  and
workforce reductions were recorded in the 1996 second quarter and reflected as a
restructuring charge totaling $9,607,000, which reduced net income by $5,284,000
or $.23 per share.  The  amounts  paid or charged  against  these  reserves  and
amounts remaining as liabilities are as follows (in thousands):

                            Facilities,
                            Equipment,
                            Inventories   Termination
                             and Other     Benefits        Total
                             ---------     --------        -----
Balance December 1, 1995      $   --        $   --        $   --
Provision                      7,827         1,780         9,607
Amounts paid or charged          365           447           812
                              ----------------------------------
Balance November 30, 1996      7,462         1,333         8,795
Amounts paid or charged        7,462         1,333         8,795
                              ----------------------------------
Balance November 30, 1997     $   --        $   --        $   --
                              ==================================
                                                    
         Costs  associated with the closure of former  Guardsman  facilities and
workforce  reductions were recorded in the opening balance sheet of the combined
entity at the  acquisition  date.  The  amounts  paid or charged  against  these
reserves and amounts remaining as liabilities are as follows (in thousands):

<TABLE>
<CAPTION>
                                                 Facilities,
                                                  Equipment,
                                                 Inventories    Termination
                                                  and Other      Benefits        Total
                                                  ---------      --------        -----
<S>                                                <C>           <C>           <C>   
Balance April 8, 1996                               $6,532        $2,476        $9,008
Amounts paid or charged                              1,642           469         2,111
                                                    ----------------------------------
Balance November 30, 1996                            4,890         2,007         6,897
Amounts paid or charged                              3,590           589         4,179
Adjustment of estimated liabilities to goodwill      1,300         1,418         2,718
                                                    ----------------------------------
Balance November 30, 1997                           $   --        $   --        $   --
                                                    ==================================
</TABLE>

<PAGE>
                                                                         

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

                                             1997        1996
--------------------------------------------------------------
Finished products                          $26,361     $25,847
Raw materials                               27,019      29,375
                                           -------------------
                                            53,380      55,222
Less adjustment of certain inventories
 to last-in, first-out (LIFO) basis          7,676       7,676
                                           -------------------
                                           $45,704     $47,546
                                           ===================

         Inventory cost is determined by the LIFO method of inventory  valuation
for  approximately  68% and 69% of  inventories  at November  30, 1997 and 1996,
respectively.


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
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.

         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):

<TABLE>
<CAPTION>
                                                            1997       1996      1995
---------------------------------------------------------------------------------------
<S>                                                        <C>        <C>        <C>   
Defined benefit plans
         Service cost - benefits earned
           during the period                               $2,099     $1,733     $  708
         Interest cost on projected benefit obligation      5,484      4,594      2,742
         Actual net gain on plan assets                    (8,482)    (9,056)    (8,849)
         Net amortization and deferral                      1,012      3,104      5,267
                                                           ----------------------------
         Net pension cost (benefit)                           113        375       (132)
Defined contribution plans                                  3,740      2,219      2,130
                                                           ----------------------------
         Pension expense                                   $3,853     $2,594     $1,998
                                                           ============================
</TABLE>

<PAGE>

         The  expected  long-term  rate of return on assets  used to compute the
defined benefit plans' pension expense was 9.25% for 1997, 1996 and 1995.

         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):

                                                      1997          1996
---------------------------------------------------------------------------
Actuarial present value of benefit obligations:
         Vested                                     $ 60,141      $ 58,699
         Nonvested                                     4,767         6,774
                                                    ----------------------
Total accumulated benefit obligations               $ 64,908      $ 65,473
                                                    ======================
Actuarial present value of projected benefit
 obligations for services rendered to date          $(82,542)     $(79,647)
Plan assets at fair value                             88,594        83,186
                                                    ----------------------
Excess of plan assets over projected
 benefit obligations                                   6,052         3,539
Unrecognized net gains                                (4,277)         (768)
Unrecognized prior service cost                        5,274         2,794
Unrecognized transition obligation at
 December 1, 1985, net of amortization                (1,135)       (1,337)
                                                    ----------------------
Net pension asset                                   $  5,914      $  4,228
                                                    ======================

         The discount rate and rate of increase in  compensation  levels used to
measure  benefit  obligations  were 7% and 5%,  respectively,  for both 1997 and
1996.

         Accumulated  benefits  for  supplemental   executive  retirement  plans
totaled  approximately  $7,953,000 and $5,144,000 at November 30, 1997 and 1996,
respectively.


6. Long-Term Debt
================================================================================
Long-term debt consists of the following as of November 30 (in thousands):

                                   1997         1996
------------------------------------------------------
Revolving Credit Facility        $124,000     $     --
7.75% Senior Unsecured Notes      100,000           --
Facility A Term Note                   --      171,500
Facility B Term Note                   --       49,875
Facility C Revolving Note              --       40,000
Other                                 171          186
                                 ---------------------
                                  224,171      261,561
Less current portion                   --       16,524
                                 ---------------------
                                 $224,171     $245,037
                                 =====================

         In November  1997, the Company  restructured  its long-term debt into a
$175,000,000  revolving credit facility  ("Facility")  with a group of financial
institutions and  $100,000,000 of senior notes ("Notes").  The Notes were issued
as a 144A private placement  offering with registration  rights. The Facility is
unsecured  and  provides  for  borrowings  under a revolving  note.  Interest is
payable upon maturity of each revolving advance,  but in no case less frequently
than  quarterly.  The principal of the Facility is due October,  2002. The Notes
are  unsecured.  Interest  is payable on June 1 and  December 1 of each year the
Notes are outstanding. The principal of the Notes is due December, 2007.


<PAGE>

6. Long-Term Debt, continued
================================================================================
         The Facility bears interest, at the Company's option, at (i) the higher
of the agent bank's prime rate (8.25% at November 30, 1997) or the Federal Funds
rate plus 0.50%, or (ii) the London Interbank Offered Rate for U.S. Dollars plus
0.40% to 1.00%,  depending upon the Company's leverage. A commitment fee ranging
from 0.15% to 0.25%,  depending upon the Company's  leverage,  is payable on the
unused portion of the Facility.

         In April 1996, the Company entered into a forty-four  month  amortizing
interest rate swap agreement  ("Swap") with a notional  amount of  $175,000,000.
This  agreement  effectively  converts  a  portion  of the  revolving  note from
variable rate debt to fixed rate debt with a rate of 7.03% at November 30, 1997.
The  notional  amount of the Swap was  $95,000,000  at November  30,  1997,  and
reduces ratably on an annual basis to $50,000,000 in 1999.

         Interest of $20,628,000,  $12,746,000 and $2,306,000 was paid in fiscal
1997, 1996 and 1995, respectively.

         The Company is subject to various debt covenants under the Facility and
Notes,   including   affirmative  and  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 and incur additional
indebtedness.


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

                                           1997         1996          1995
----------------------------------------------------------------------------
Current expense:
         Federal                        $ 10,612     $  7,204      $  7,953
         Foreign                           7,674        4,736         3,267
         State                               697        1,328         2,360
                                        -----------------------------------
                                          18,983       13,268        13,580
Deferred expense (credit):
         Federal                           2,818        1,829            -- 
         Foreign                             210         (119)          (70)
         State                             1,057          384            --
                                        -----------------------------------
                                           4,085        2,094           (70)
                                        -----------------------------------
                                        $ 23,068     $ 15,362      $ 13,510
                                        ===================================

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

                                                1997        1996        1995
-----------------------------------------------------------------------------
Statutory U.S. federal income tax rate          35.0%       35.0%       35.0%
Increase resulting from:
         Goodwill                                3.9         4.1         2.4
         State income taxes, net of federal
          income tax benefit                     2.3         3.3         3.4
         Foreign                                 2.2         1.3          --
         Other items                             1.7         1.3         (.8)
                                                -----------------------------
Effective income tax rate                       45.1%       45.0%       40.0%
                                                =============================


<PAGE>

         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):

                                                        1997       1996
--------------------------------------------------------------------------
Deferred tax assets:
         Restructuring and closure reserves           $    --     $ 6,127
         Goodwill and intangibles                       1,426       1,316
         Employee benefits                              6,467       4,398
         Accounts receivable, inventory and other      13,937      15,281
                                                      -------------------
                                                       21,830      27,122
Deferred tax liabilities:
         Property and equipment                         7,709       8,003
         Pension                                        2,099       1,311
                                                      -------------------
                                                        9,808       9,314
                                                      -------------------
Net deferred tax assets                               $12,022     $17,808
                                                      ===================

         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  $12,000,000  at November 30, 1997.  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 $20,500,000,  $20,177,000 and $16,524,000  were paid in
1997, 1996 and 1995, respectively.
<PAGE>


8. Capital Stock
================================================================================
The Company has two  classes of common  stock,  Class A stock and Class B stock.
Authorized  shares of Class A and Class B stock are  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 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 percent  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.


<PAGE>

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

<TABLE>
<CAPTION>
                                               Capital Stock        Capital Stock
                                                   Issued          Held in Treasury
                                             Class A    Class B    Class A    Class B
-------------------------------------------------------------------------------------
<S>                                        <C>           <C>      <C>          <C>
Balance at December 1, 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
         Class A exchanged for Class B           --         --        106       (106)
         Class B exchanged for Class A           --         --        (22)        22
         Stock options exercised                490         --         29         75
                                             ---------------------------------------
Balance at November 30, 1997                 27,674        540      4,923        182
                                             =======================================
</TABLE>

                                         

<PAGE>

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

<TABLE>
<CAPTION>
                                                                           Cost of
                                          Capital Stock                    Capital
                                         (Stated Amount)     Additional   Stock in
                                      Class A      Class B     Capital    Treasury
-----------------------------------------------------------------------------------
<S>                                   <C>         <C>         <C>         <C>    
Balance at December 1, 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
         Stock options exercised           272          --       3,834       2,119
         Disqualifying disposition
          of stock options                  --          --         150          --
                                       -------------------------------------------
Balance at November 30, 1997           $15,375     $   300     $79,417     $34,144
                                       ===========================================
</TABLE>


         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  options  vest and  become  exercisable
ratably over a three-year  period  commencing  two years after the date of grant
and expire  five years after the date of grant.  The  options  are granted  with
stock appreciation  rights (SAR) and reload options.  An SAR entitles the option
holder to receive a cash  payment  equal to the  difference  between  the option
price and the current  value of Class A stock.  The reload  option  entitles the
option holder to the same number of options exercised with an option price equal
to the fair market value at the date of exercise.  Shares  reserved  under these
plans were 3,008,125 and 2,008,125 at November 30, 1997 and 1996,  respectively.
A summary of stock option activity for the years ended November 30 follows:

                                                   Weighted
                                                    Average
                                  Number of        Exercise
                                    Shares          Price
----------------------------------------------------------
Balance at December 1, 1994       1,319,418      $    8.99
         Grants                     101,041          13.12
         Exercised                 (208,229)          7.16
         Terminated                 (13,350)         10.60
                                  ------------------------
Balance at November 30, 1995      1,198,880           9.64
         Grants                     311,304          12.88
         Exercised                 (280,962)          7.06
         Terminated                 (16,932          10.84
                                  ------------------------
Balance at November 30, 1996      1,212,290          11.05
         Grants                      77,072          18.43
         Exercised                 (489,610)          8.39
         Terminated                 (10,250)         13.39
                                  ------------------------
Balance at November 30, 1997        789,502      $   13.39
                                  ========================

         At November 30, 1997 the range of exercise prices and  weighted-average
remaining contractual life of outstanding options were $10.59 - $21.63 and three
years,  respectively.  At  November  30,  1997 and 1996,  the  number of options
exercisable  was  279,000  and 570,000  respectively,  and the  weighted-average
exercise price of those options was $12.93 and $8.93, respectively.


<PAGE>

         Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based  Compensation,"  became  effective for the Company in 1997. SFAS
123 permits companies to continue to apply APB Opinion 25, "Accounting for Stock
Issued to Employees," and related  Interpretations  in accounting for its plans.
The Company has elected to follow APB 25 and related Interpretations.  Under APB
25,  because the exercise  price of the Company's  employee stock options is not
less than fair market price of the share at the date of grant,  no  compensation
expense is recognized in the financial statements.

         Pro forma information  regarding net income and net income per share is
required by SFAS 123 and has been determined as if the Company accounted for its
employee stock options using the fair value method of that  Statement.  The fair
value of options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1997 and 1996,
respectively:  risk-free interest rate of 5.8% and 6.0%; dividend yields of 1.9%
for both years; volatility factors of the expected market price of the Company's
Class A stock of .30 and .32; and a weighted-average expected life of options of
4 years.

         For purposes of pro forma  disclosure,  the estimated fair value of the
options is amortized to expense over the option's vesting period.  The Company's
pro forma information follows (in thousands, except per share data):

                                            1997           1996
------------------------------------------------------------------
Net income:
         As reported                    $   28,095     $   18,776
         Pro forma                          27,608         18,439
Net income per share:
         As reported                    $     1.20     $      .81
         Pro forma                            1.18            .79
Weighted-average fair value                            
 of options granted during the year     $     4.93     $     3.71
                                                    
         Due to the required phase-in  provisions,  the effects of applying SFAS
123 to arrive at the above pro forma  amounts may not be  representative  of pro
forma net income or net income per share in future years.



<PAGE>

9. Geographic Information
================================================================================
The Company  maintains  operations in the United  States as well as Canada,  the
United  Kingdom,  Germany,  Taiwan,  Malaysia,  China and Ireland.  A summary of
geographic data for the years ended November 30 is as follows (in thousands):

                                          1997           1996           1995
------------------------------------------------------------------------------
Net sales to unaffiliated customers:
         United States                 $ 491,973      $ 423,753      $ 277,494
         Foreign                         109,323         85,223         50,851
                                       ---------------------------------------
         Consolidated                  $ 601,296      $ 508,976      $ 328,345
                                       =======================================

Income before income taxes:
         United States                 $  48,779      $  41,501      $  25,943
         Foreign                          21,701         16,710          9,989
         Interest expense                (19,317)       (14,466)        (2,158)
         Restructuring charge                 --         (9,607)            --
                                       ---------------------------------------
         Consolidated                  $  51,163      $  34,138      $  33,774
                                       =======================================

Total assets:
         United States                 $ 453,456      $ 473,957      $ 158,338
         Foreign                          49,007         48,325         25,784
         Eliminations (deductions)          (668)          (422)          (540)
                                       ---------------------------------------
         Consolidated                  $ 501,795      $ 521,860      $ 183,582
                                       =======================================


10. Quarterly Results of Operations (Unaudited)

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

                                          Quarter Ended
1997                     Feb. 28      May 31       Aug. 31      Nov. 30
------------------------------------------------------------------------
Net sales                $142,160     $154,238     $150,904     $153,994
Gross profit               52,048       59,193       57,072       59,968
Net income                  4,710        7,401        7,679        8,305
Net income per share          .20          .32          .33          .35

                                            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


<PAGE>

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, 1997 and 1996,  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,  1997.  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,  1997 and 1996,  and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended November 30, 1997, in conformity  with generally
accepted accounting principles.




/s/ Ernst & Young LLP
Indianapolis, Indiana
January 23, 1998




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/ John C. Elbin
John C. Elbin
Vice President, Chief Financial Officer
and Secretary



<PAGE>

Investor Information
================================================================================
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 and Transfer Agent
================================================================================
Harris Trust and Savings Bank
Attn: Shareholder Services
311 W. Monroe Street, 11th Floor
P. O. Box A3504
Chicago, Illinois 60690-3504
(800) 942-5909
(312) 461-6001

         Communications   concerning  shareholder  records,   including  address
changes,  stock  transfers,  cash  dividends  or other  service  needs should be
directed to Harris Trust and Savings Bank.

Analyst Contacts
================================================================================
Security analyst inquiries are welcomed. Please call:

         John C. Elbin
         Chief Financial Officer
         (317) 687-6703

Annual Meeting
================================================================================
Thursday, April 23, 1998
10:00 A.M., EST
Rooms 101 and 102
Indiana Convention Center & RCA Dome
Indianapolis, Indiana

         The meeting notice and proxy materials were mailed to shareholders with
their copies of this annual report.  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 OF PRIOR PAGE]

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:

         Harris Trust and Savings Bank
         Attn: Shareholder Services
         311 W. Monroe Street, 11th Floor
         P. O. Box A3504
         Chicago, Illinois 60690-3504

Stock Trading and Dividend Information
================================================================================
The Company's  Class A stock is traded on the New York Stock  Exchange under the
symbol LI.

         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       Price Range
Fiscal 1997                   Per Share     High       Low
---------------------------------------------------------------
1st quarter ended Feb. 28       $ .08      $20         $17
2nd quarter ended May 31          .08       21          16 3/4
3rd quarter ended Aug. 31         .08       24 1/8      19 3/4
4th quarter ended Nov. 30         .08       22 1/2      17 7/8
                                -----
                                $ .32
                                =====

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

         At  November  30,  1997  there  were  approximately   2,080  registered
shareholders  of Class A stock and 54 registered  shareholders of Class B stock,
which is reserved for employees of the Company.

<PAGE>

Locations

[LEFT COLUMN]

International
================================================================================
Australia
Level 22, 201 Miller Street
North Sydney, NSW 2080
Australia

Canada
1915 Second Street West
Cornwall, Ontario K6H 5T1
Canada

65 Duke Street
London, Ontario N6J 2X3
Canada

China
Lot 3 Xintang
District Administration
Dalinshan, Dongguan
Guangdon, China 511774

England
152 Milton Park
Abingdon
Oxfordshire OX14 4SD
England

Germany
D-8649 Wallenfels/Ofr.
Postfach 1126
Germany

Friedensstrasse 40
D-52249 Eschweiler
Germany

Ireland
Willowfield Road
Ballinamore
Co. Leitrim
Ireland

Malaysia
Lot No. 4963, Jalan Teratai
51/2 Miles
Meru Industrial Zone
41050 Klang
Selangor Darul Ehsan
Malaysia

Singapore
Level 36, Hong Leong Building
16 Raffles Quay 048581
Singapore

Taiwan, R.O.C.
No. 1 Kung Yeh First Road
Zenwu Village
Kaohsiung Hsien
Taiwan, R.O.C.
<PAGE>

[MIDDLE COLUMN OF PRIOR PAGE]

United States
================================================================================
Alabama
1771 Industrial Road
Dothan, AL 36303

Arkansas
1900 E. 145th Street
Little Rock, AR 72206

California
210 East Alondra Blvd.
Gardena, CA 90248

901 West Union Street
Montebello, CA 90640

Connecticut
145 Dividend Road
Rocky Hill, CT 06067

15 Lunar Drive
Woodbridge, CT 06525

Florida
2355 S.W. 66th Terrace
Davie, FL 33317

Illinois
5400 23rd Avenue
Moline, IL 61265

Indiana
28335 Clay Street
Elkhart, IN 46517

546 W. Abbott Street
Indianapolis, IN 46225

Kentucky
347 Central Avenue
Bowling Green, KY 42101

Michigan
411 Darling Street, N.
Fremont, MI 49412

4999 36th Street, SE
Grand Rapids, MI 49512

Missouri
1136 Fayette
N. Kansas City, MO 64116

New Jersey
1991 Nolte Drive
Paulsboro, NJ 08066
<PAGE>
[RIGHT COLUMN OF PRIOR PAGES

North Carolina
10300 Claude Freeman Drive
Charlotte, NC 28262

2147 Brevard Road
High Point, NC 27263

1717 English Road
High Point, NC 27262

Texas
2518 Chalk Hill Road
Dallas, TX 75212

Washington
13535 Monster Road
Seattle, WA 98178


Corporate Offices
================================================================================
733 S. West Street
Indianapolis, Indiana 46225

Corporate Technology Center
521 W. McCarty Street
Indianapolis, Indiana 46225