Selected Financial data1
(in thousands, except per share data and number of employees)

Lilly Industries, Inc. and Subsidiaries
SELECTED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF EMPLOYEES)
<TABLE>
<CAPTION>

Year Ended November 30                               1999            1998            1997          1996 (2)
------------------------------------------------------------------------------------------------------------
<S>                                                <C>             <C>             <C>             <C>
Operations
Net sales                                          $656,201        $619,002        $601,296        $508,976
Cost of products sold                               401,286         379,641         373,015         321,748
Gross margin percentage                                38.8%           38.7%           38.0%           36.8%
Selling, general and administrative expenses        160,861         146,763         139,467         112,361
Research and development expenses                    21,154          20,567          18,680          17,294
Operating income                                     72,900          72,031          70,134          57,573
Operating income percentage                            11.1%           11.6%           11.7%           11.3%
Interest expense, net                                15,791          16,919          18,967          13,938
Income taxes                                         23,155          22,867          23,068          11,039
Effective income tax rate                              41.0%           42.0%           45.1%           45.0%
Net income                                           33,321          31,579          28,095          24,060
EBITDA (3)                                           93,202          91,389          92,120          73,233
EBITDA interest coverage (4)                            5.9             5.4             4.9             5.3

Per Share Data (5)
Net income, diluted                                    1.43            1.35            1.20            1.04
Cash dividends                                          .32             .32             .32             .32
Book value                                             8.28            7.15            6.21            5.36
Price range of common stock                      20 1/8-13 1/8   24 5/8-14 3/8   24 1/8-163/4    19 3/4-12 1/4

Other Data
Total assets                                        550,426         516,485         501,795         521,860
Working capital                                      48,720          50,071          52,126          50,579
Capital expenditures (6)                             41,472          17,015          12,673          19,233
Depreciation                                         10,391           9,102           8,850           6,453
Amortization                                         10,544          10,922          13,140           9,097
Total debt                                          206,803         203,700         224,171         261,561
EBITDA to total debt                                   45.1%           44.9%           41.1%           28.0%
Book value                                          192,171         165,575         142,439         121,889
Return on equity                                       18.6%           20.5%           21.3%           20.8%
Debt to total capitalization                             52%             55%             61%             68%
Number of employees                                   2,395           2,291           2,116           2,140
Sales per employee                                      274             270             283             274
Operating income per employee                            30              31              33              31
Average shares outstanding, diluted (7)              23,320          23,400          23,400          23,100
</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    1996 includes the effect of the acquisition of Guardsman Products,  Inc. on
     April 8, 1996 and excludes the effect of a  restructuring  charge of $9,607
     which reduced net income by $5,284 or $.23 per diluted share.
3    EBITDA  represents  earnings  before  interest,   taxes,  depreciation  and
     amortization.
4    EBITDA  interest  coverage is determined by dividing EBITDA by net interest
     expense.
5    Adjusted for all stock splits and stock dividends through November 30, 1999
     inclusive. Prices are rounded to nearest 1/8th.
6    Excludes effect of acquisitions.
7    Used to calculate net income per diluted share.

<PAGE>

<TABLE>
<CAPTION>

                                           1995        1994           1993          1992          1991          1990         1989
                                        --------------------------------------------------------------------------------------------
<S>                                      <C>         <C>            <C>           <C>           <C>           <C>          <C>
Operations
Net sales                                $328,345    $331,306       $284,325      $236,476      $220,508      $240,146     $219,713
Cost of products sold                     219,899     214,809        189,111       152,480       150,669       161,626      145,592
Gross margin percentage                      33.0%       35.2%          33.5%         35.5%         31.7%         32.7%        33.7%
Selling, general and
        administrative expenses            59,874      61,498         53,319        50,128        46,921        50,404       44,113
Research and development expenses          13,184      12,982         12,325        11,030        10,606        10,814        9,708
Operating income                           35,388      42,017         29,570        22,838        12,312        17,302       20,300
Operating income percentage                  10.8%       12.7%          10.4%          9.7%          5.6%          7.2%         9.2%
Interest expense, net                       1,487       2,465          1,568         1,245         2,254         2,573        1,111
Income taxes                               13,510      16,350         11,784         9,201         4,417         6,850        8,399
Effective income tax rate                    40.0%       41.2%          42.2%         42.0%         41.0%         40.6%        40.6%
Net income                                 20,264      23,302         16,155        12,706         6,357        10,022       12,574
EBITDA (3)                                 43,435      51,082         36,394        29,944        19,994        26,117       26,670
EBITDA interest coverage (4)                 29.2        20.7           23.2          24.1           8.9          10.2         24.0

Per Share Data (5)
Net income, diluted                           .88        1.00            .70           .55           .27           .41          .51
Cash dividends                                .31         .27            .24           .22           .21           .20          .17
Book value                                   4.86        4.38           3.60          3.16          3.16          3.10         3.00
Price range of common stock                 15-11     18-11 3/4   15 7/8-9 3/8   9 3/4-5 5/8   6 1/8-4 1/8     7 5/8-4   7 1/8-5 3/8

Other Data
Total assets                              183,582     190,252        167,044       117,049       127,342       125,371      129,025
Working capital                            35,505      41,604         33,270        27,131        30,405        34,513       40,389
Capital expenditures (6)                   15,599       6,693          7,598         3,262         1,928         3,968        2,486
Depreciation                                4,251       4,637          3,746         3,965         4,038         4,021        3,387
Amortization                                3,923       4,328          3,141         2,827         2,928         2,651        1,199
Total debt                                 28,229      35,110         44,101        14,642        21,501        28,345       25,560
EBITDA to total debt                        153.9%      145.5%          82.5%        204.5%         93.0%         92.1%       104.3%
Book value                                109,374      99,424         81,128        70,125        74,187        73,185       74,482
Return on equity                             19.4%       25.8%          21.4%         17.6%          8.6%         13.6%        17.9%
Debt to total capitalization                   21%         26%            35%           17%           22%           28%          26%
Number of employees                         1,148       1,182          1,176         1,072         1,140         1,230        1,350
Sales per employee                            282         281            253           214           186           186          174
Operating income per employee                  30          36             26            21            10            13           16
Average shares outstanding, diluted (7)    23,086      23,231         22,962        23,048        23,521        24,738       25,043
</TABLE>

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

Operating Results 1999 vs. 1998

Consolidated  net sales  increased 6% to a record $656.2 million for fiscal year
1999.  Sales  benefited from strong volume  increases,  particularly in wood and
metal  coatings.  Wood  coatings  increased in all major  markets  served,  with
especially strong growth in the Asia-Pacific  Region.  Metal coatings sales were
led by continued large increases in powder coatings. The Company's international
sales, including U.S. exports, grew $27.3 million to $176.6 million during 1999,
representing growth of 18.3% over 1998.  International sales now account for 27%
of consolidated sales. Sales to the Company's three end-use markets (wood, metal
and composites  and glass)  represented  46%, 43%, and 11% of 1999  consolidated
sales, respectively. Overall, selling prices were stable during the year.

Gross  profit  margin  improved  slightly to 38.8% of sales in 1999,  rising 0.1
percentage point over 1998. Raw material costs are the largest  component of the
Company's cost structure.  Continued  emphasis on supply chain  management,  raw
material  consolidation,  as well as  favorable  pricing  in  certain  commodity
markets,  produced a 0.2 percentage  point  reduction in raw material costs as a
percentage  of net sales.  Improvements  in raw  material  costs were  partially
offset by a slight increase in direct labor and overhead costs. The Company will
continue to pursue  improvement  in gross  margin by reducing  the number of raw
materials  used in products,  process  re-engineering,  company-wide  purchasing
opportunities, and product re-formulations.

As a percentage of sales,  operating expenses increased 0.7 percentage points to
27.7%. Selling,  general and administrative  expenses, as a percentage of sales,
increased 0.8 percentage points to 24.5%, primarily due to continued investments
in selling,  marketing  and other  infrastructure  enhancements,  as the Company
continues to focus on global expansion and capturing  additional market share in
certain markets.  Research and development  expense increased by $0.6 million to
$21.2 million for 1999.

Net interest expense  continued to decline during 1999,  falling $1.1 million to
$15.8 million,  a decrease of 6.7%. The reduction in interest  expense  reflects
improved cash  management  practices  coupled with lower average market rates of
interest,  which reduced the cost of borrowing under the Company's variable rate
debt facilities.

The Company's effective tax rate declined one full percentage point to 41.0% for
1999, due primarily to a full year's impact of U.S. state and  international tax
planning strategies.  The effective tax rate remained above U.S. statutory rates
principally  due to the impact of  non-deductible  amortization  of  intangibles
acquired as part of the Guardsman  Products,  Inc. ("GPI")  acquisition in 1996,
and generally higher foreign tax rates.

Operating Results 1998 vs. 1997

Consolidated net sales increased 2.9% to a record $619.0 million for fiscal year
1998,   despite  a  $10  million   unfavorable   impact  from  foreign  currency
translations.  Sales benefited from the December, 1997 acquisition in Germany of
Merckens  Lackchemie GmbH & Company.  The acquisition helped boost the Company's
international  sales,  including  U.S.  exports,  to $149.3 million during 1998,
representing  growth of 18.0% over 1997. During 1998, Lilly  experienced  volume
growth in each of its end-use  markets.  Sales to the  Company's  three  end-use
markets (wood, metal, and composites and glass) represented 44%, 44%, and 12% of
1998  consolidated  sales,  respectively.  Overall,  selling  prices were stable
during the year.

Gross profit margin continued to improve in 1998,  rising 0.7 percentage  points
over  1997 to  38.7%.  Raw  material  costs  are the  largest  component  of the
Company's  cost  structure.   However,   continued   emphasis  on  supply  chain
management,  as well as favorable pricing in certain commodity markets, produced
a  1.1%  reduction  in  raw  material  costs  as  a  percentage  of  net  sales.
Improvements in raw material costs were partially mitigated by a slight increase
in direct  labor  and  overhead  costs.  The  Company  will  continue  to pursue
improvement  in gross  margin by reducing  the number of raw  materials  used in
products,  process  re-engineering,  company-wide  purchasing  opportunities and
product re-formulations.

As a percentage of sales,  operating expenses increased 0.7 percentage points to
27.0%. Selling,  general and administrative  expenses, as a percentage of sales,
increased from 23.2% to 23.7%, primarily due to increased marketing initiatives.
In addition,  the Company made record  expenditures on research and development,
which rose 10.1% to $20.6 million.

Net interest expense declined  significantly  during 1998, falling $2.0 million,
reflecting  the  benefits of the  Company's  1997 debt  restructuring  and lower
average debt outstanding. Continued strong cash flow from operations allowed the
Company to reduce  average debt  outstanding  during 1998,  while lower  average
market  rates of interest  reduced  the cost of  borrowing  under the  Company's
variable rate debt facilities. The improvement in interest expense was partially
offset by additional  interest expense associated with borrowings to finance the
Company's acquisition in Germany in December, 1997.

The Company's  effective tax rate declined  significantly  to 42.0% during 1998,
due primarily to implementation of international  tax planning  strategies.  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 in
1996 and generally higher foreign tax rates.

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.

Year 2000

The Company completed all Year 2000 ("Y2K") readiness procedures during 1999 and
did not experience any significant  adverse effects on its systems or operations
from the  transition  to Y2K.  All  critical  IT systems  were  inventoried  and
assessed,  and  replacement of  non-conforming  IT systems began in 1998 and was
completed in 1999.

The Company  estimates the total cost of resolving the Y2K issue was $5 million.
Of this amount,  the Company  estimates $2 million was spent during  fiscal year
1999.  Approximately  70% of total Y2K costs were  comprised  of  equipment  and
software  replacement  costs with the balance being  comprised of assessment and
remediation  costs.  Y2K costs were expensed as incurred  except for new systems
and equipment,  which were  capitalized  and will be charged to expense over the
estimated useful life of the related assets.

Liquidity and Capital Resources

During fiscal 1999, the Company  continued to maintain a $175 million  revolving
credit facility  ("Facility") and $100 million in senior notes  ("Notes").  Both
the Facility and the Notes are unsecured and require no principal  amortization.
The  remaining  terms on the  Facility  and Notes  are  three  and eight  years,
respectively,  as of November 30, 1999. During fiscal 1998, the Company's German
subsidiary  entered  into a  five-year,  Deutsche  Mark-denominated  $10,000,000
revolving credit facility  ("German  Facility") to fund the German  acquisition.
The German  Facility is  unsecured.  Principal  amounts  available for borrowing
under the German  Facility  decline over the  five-year  term of the  agreement.
Management  expects  to  fund  required  debt  service  on all  borrowings  from
operating cash flows.

The  Company's  total debt  increased  during 1999 by $3.1 million to a total of
$206.8  million.  The  relatively  low  increase  was mainly a result of capital
investments in  infrastructure  expansion and improvements.  Additional  amounts
available  for  borrowing  under the  Facility  for general  operating  or other
purposes  totaled  $74.9  million as of November 30, 1999.  Management  believes
funds  available  from internal and external  sources are sufficient to meet the
liquidity needs of the Company during the next twelve months.

Cash provided by operating activities declined by $16.5 million to $38.7 million
during  1999.  Higher net  income  was  offset by the cash  effect of changes in
certain  operating  assets  and  liabilities  including  increases  in  accounts
receivable and inventories to support higher sales levels.

Cash used by investing  activities  increased by $17.2  million to $42.1 million
during  1999.  The increase  was driven by a $24.5  million  increase in capital
expenditures  primarily  offset by a decrease of $8.5  million in  payments  for
acquired  businesses.  Future  investing  activities are expected to be financed
from internal sources and existing credit facilities.

Cash used by financing  activities  decreased  by $22.9  million to $4.2 million
during 1999.  Cash  dividend  payments of $7.4 million  during 1999 remained the
same as 1998 while  long term  borrowings  increased  by $3.1  million.  In 1998
principal payments exceeded borrowings by $20.5 million.

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 net interest expense);  and
Debt Capitalization (debt divided by the sum of debt plus equity). For 1999, the
Company  generated  EBITDA of $93.2  million,  an increase of $1.8  million over
1998. Interest Coverage improved to 5.9 times, due primarily to reduced interest
expense  associated  with lower average  borrowings  and generally  lower market
rates of interest.  Debt Capitalization  improved 3.4 percentage points to 51.8%
due to a  relatively  stable  debt level and higher net income  retained  in the
business during 1999.

Forward-looking statements

Statements  in this  annual  report  that  are not  strictly  historical  may be
"forward-looking  statements,"  which  involve  risks  and  uncertainties.  Risk
factors include general economic and industry  conditions,  effects of leverage,
environmental matters, technological developments, product pricing, raw material
cost changes, and international operations, among others, which are set forth in
the Company's SEC filings.

Consolidated Statements of Income
(in thousands, except per share data)


<TABLE>
<CAPTION>
Year Ended November 30                               1999           1998           1997
------------------------------------------------------------------------------------------
<S>                                               <C>            <C>             <C>
Net sales                                         $ 656,201      $  619,002      $ 601,296
Costs and expenses:
      Cost of products sold                         401,286         379,641        373,015
      Selling, general and administrative           160,861         146,763        139,467
      Research and development                       21,154          20,567         18,680
                                                  ----------------------------------------
                                                    583,301         546,971        531,162
                                                  ----------------------------------------
               Operating income                      72,900          72,031         70,134

Other expenses:
      Sundry expense                                   (633)           (666)            (4)
      Interest expense, net                         (15,791)        (16,919)       (18,967)
                                                  ----------------------------------------
                                                    (16,424)        (17,585)       (18,971)
                                                  ----------------------------------------
               Income before income taxes            56,476          54,446         51,163

Income taxes                                         23,155          22,867         23,068
                                                  ----------------------------------------
               Net income                         $  33,321      $   31,579      $  28,095
                                                  ========================================

Net income per share:
      Basic                                       $    1.44      $     1.36      $    1.22
      Diluted                                     $    1.43      $     1.35      $    1.20
</TABLE>


See accompanying notes.



<PAGE>

Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>

November 30                                                                                        1999            1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>             <C>
Assets
Current assets:
    Cash and cash equivalents                                                                   $    5,714      $  13,326
    Accounts receivable, less allowance for doubtful
        accounts (1999, $1,775; 1998, $1,981)                                                       91,369         82,039
    Inventories                                                                                     58,500         50,796
    Deferred income taxes                                                                            2,848          3,251
    Other                                                                                            3,426          2,620
                                                                                                -------------------------
            Total current assets                                                                   161,857        152,032
Other assets:
    Goodwill, less amortization (1999, $27,769; 1998, $21,547)                                     210,811        214,960
    Other intangibles, less amortization (1999, $23,129; 1998, $22,621)                             23,067         26,068
    Deferred income taxes                                                                            3,974          8,838
    Sundry                                                                                          18,781         12,419
                                                                                                -------------------------
                                                                                                   256,633        262,285
Property and equipment:
    Land                                                                                            13,872         11,845
    Buildings                                                                                       75,232         62,725
    Equipment                                                                                      110,610         87,787
    Accumulated depreciation                                                                       (67,778)       (60,189)
                                                                                                -------------------------
                                                                                                   131,936        102,168
                                                                                                -------------------------
                                                                                                $  550,426      $ 516,485
                                                                                                =========================

Liabilities and Shareholders' Equity
Current liabilities:

    Accounts payable                                                                            $   60,317      $  56,958
    Salaries and payroll related items                                                              20,975         21,624
    Other                                                                                           27,293         21,651
    Income taxes payable                                                                             4,552          1,728
                                                                                                -------------------------
            Total current liabilities                                                              113,137        101,961

Long-term debt                                                                                     206,803        203,700

Other liabilities                                                                                   38,315         45,249

Shareholders' equity:
    Capital stock, $.55 stated value per share:

            Class A (limited voting) - 27,969 shares issued
                (1998, 27,825 shares)                                                               15,539         15,459
            Class B (voting) - 540 shares issued                                                       300            300
    Additional capital                                                                              83,833         81,890
    Retained earnings                                                                              133,807        107,914
    Accumulated other comprehensive loss                                                            (3,509)        (4,096)
    Cost of capital stock in treasury                                                              (37,799)       (35,892)
                                                                                                -------------------------
                                                                                                   192,171        165,575
                                                                                                -------------------------
                                                                                                $  550,426      $ 516,485
                                                                                                =========================
</TABLE>

See accompanying notes.

<PAGE>


Consolidated Statements of Cash Flows
(in thousands)

<TABLE>
<CAPTION>
Year Ended November 30                                           1999           1998          1997
----------------------------------------------------------------------------------------------------
<S>                                                            <C>            <C>           <C>
Operating Activities
Net income                                                     $  33,321      $ 31,579      $ 28,095
Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation                                                  10,391         9,102         8,850
    Amortization                                                  10,544        10,922        13,140
    Deferred income taxes                                          5,267           209         4,085
    Changes in operating assets and liabilities net of
       effects from acquired business:
       Accounts receivable                                        (9,162)         (422)        4,581
       Inventories                                                (7,680)       (2,574)        1,842
       Accounts payable and accrued expenses                      11,101         5,985         2,933
       Sundry                                                    (15,044)          418        (4,226)
                                                               -------------------------------------
            Net cash provided by operating activities             38,738        55,219        59,300

Investing Activities

Purchases of property and equipment                              (41,472)      (17,015)      (12,673)
Payment for acquired business                                     (2,721)      (11,253)           -
Sundry                                                             2,052         3,367         5,716
                                                               -------------------------------------
            Net cash used by investing activities                (42,141)      (24,901)       (6,957)

Financing Activities

Dividends paid                                                    (7,428)       (7,410)       (7,340)
Proceeds from senior notes                                            -             -         99,200
Proceeds from short-term and long-term borrowings                  3,103            -             -
Principal payments on short-term and long-term borrowings             -        (20,470)     (136,590)
Sundry                                                               116           809        (4,324)
                                                               -------------------------------------
            Net cash used by financing activities                 (4,209)      (27,071)      (49,054)
                                                               -------------------------------------

(Decrease) increase in cash and cash equivalents                  (7,612)        3,247         3,289
Cash and cash equivalents at beginning of year                    13,326        10,079         6,790
                                                               -------------------------------------
Cash and cash equivalents at end of year                       $   5,714      $ 13,326      $ 10,079
                                                               =====================================
</TABLE>


See accompanying notes.

<PAGE>



Consolidated Statements of Shareholders' Equity
(in thousands)

<TABLE>
<CAPTION>
                                                                                              Cost of     Accumulated
                                               Class A   Class B                              Capital       Other
                                               Common    Common     Additional   Retained    Stock in    Comprehensive
                                                Stock     Stock      Capital     Earnings    Treasury     Income (Loss)      Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>         <C>      <C>          <C>           <C>           <C>           <C>
Balance at December 1, 1996                   $15,103     $ 300    $  75,433    $  62,990     $ (32,025)    $      88     $ 121,889
   Comprehensive income:
     Net income                                    --        --           --       28,095            --            --        28,095
     Currency translation adjustments              --        --           --           --            --        (2,342)       (2,342)
                                                                                                                          ----------
   Total comprehensive income                      --        --           --           --            --            --        25,753
   Stock options exercised                        272        --        3,834           --        (2,119)           --         1,987
   Disqualifying disposition
        of stock options                           --        --          150           --            --            --           150
   Cash dividends paid                             --        --           --       (7,340)           --            --        (7,340)
                                              -------------------------------------------------------------------------------------

Balance at November 30, 1997                   15,375       300       79,417       83,745       (34,144)       (2,254)      142,439
   Comprehensive income:
     Net income                                    --        --           --       31,579            --            --        31,579
     Currency translation adjustments              --        --           --           --            --        (1,842)       (1,842)
                                                                                                                          ----------
   Total comprehensive income                      --        --           --           --            --            --        29,737
   Stock options exercised                         84        --        1,820           --        (1,018)           --           886
   Disqualifying disposition
        of stock options                           --        --          653           --            --            --           653
   Cash dividends paid                             --        --           --       (7,410)           --            --        (7,410)
   Repurchase of common stock                      --        --           --           --          (730)           --          (730)
                                              -------------------------------------------------------------------------------------

Balance at November 30, 1998                   15,459       300       81,890      107,914       (35,892)       (4,096)      165,575
   Comprehensive income:
     Net income                                    --        --           --       33,321            --            --        33,321
     Currency translation adjustments              --        --           --           --            --           587           587
                                                                                                                          ----------

   Total comprehensive income                      --        --           --           --            --            --        33,908
   Stock options exercised                         80        --        1,870           --        (1,421)           --           529
   Disqualifying disposition
        of stock options                           --        --           73           --            --            --            73
   Cash dividends paid                             --        --           --       (7,428)           --            --        (7,428)
   Repurchase of common stock                      --        --           --           --          (486)           --          (486)
                                              -------------------------------------------------------------------------------------
Balance at November 30, 1999                  $15,539     $ 300    $  83,833    $ 133,807     $ (37,799)    $  (3,509)    $ 192,171
                                              =====================================================================================
</TABLE>


See accompanying notes.


<PAGE>


Notes to Consolidated Financial Statements
November 30, 1999

1. Summary of Significant Accounting Policies

Business.  Lilly  Industries,  Inc. and its  subsidiaries  (the  "Company")  are
principally  in  the  business  of  formulating,  manufacturing,  and  marketing
industrial coatings and specialty chemicals to original equipment  manufacturers
on a worldwide  basis.  Primary  manufacturing  operations  are located in North
America,  Europe and  Asia-Pacific.  The Company  operates within three business
segments which serve three end-use markets.

Consolidation  and  Use of  Estimates.  The  consolidated  financial  statements
include the  accounts  of all  subsidiaries  after  elimination  of  significant
intercompany  accounts and  transactions.  Preparation  of these  statements  in
conformity with accounting  principles  generally  accepted in the United States
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.

Revenue  Recognition.  Revenue from sales of products is  recognized at the time
products are shipped to the customer.

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 carrying 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 45 years)  and  computed
primarily by the straight-line method.

Interest-Rate  Swap Agreements.  The Company  periodically  enters into interest
rate swap  agreements  ("Swaps") to modify the interest  characteristics  of its
outstanding  debt.  Swap  agreements  involve the exchange of floating  rate and
fixed rate interest payment flows between or among counterparties, including the
Company,  banks  and  /  or  other  financial  intermediaries.  Such  flows  are
calculated based upon a predetermined notional principal amount over the life of
the Swaps.  The notional  amount of each Swap represents all or a portion of the
principal  balance  of  the  Company's   underlying  debt   obligation(s).   The
differential  to be paid or received is accrued and  recognized as an adjustment
of interest expense.

Reclassifications.  Certain  prior year  amounts in the  accompanying  financial
statements have been reclassified to conform with the current year presentation.

2. New Accounting Standards

Effective   December  1,  1998,  the  Company  adopted  Statement  of  Financial
Accounting  Standards  (SFAS) No. 130,  "Reporting  Comprehensive  Income." This
statement  establishes new rules for the reporting and display of  comprehensive
income and its components.  The Company has reported, in addition to net income,
the components of other comprehensive  income in its consolidated  statements of
shareholders'  equity. Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130.  Implementation  of this disclosure
standard  had no  impact on the  Company's  financial  position  or  results  of
operations.

Effective  November 30,  1999,  the Company  adopted SFAS No. 131,  "Disclosures
about Segments of an Enterprise and Related Information." Statement 131 requires
public business  enterprises to report  information about operating  segments in
annual financial statements and selected information about operating segments in
interim financial reports.  Statement 131 also establishes standards for related
disclosures  about products and services,  geographic areas and major customers.
The adoption of this statement did not affect the Company's  financial  position
or results of operations.

Effective  December 1, 1998,  the  Company  adopted  SFAS No.  132,  "Employers'
Disclosures  about Pensions and Other  Postretirement  Benefits."  Statement 132
revises the disclosure  requirements  for employers'  pensions and other retiree
benefits.  Implementation  of  this  disclosure  standard  did  not  affect  the
Company's financial position or results of operations.

Effective  December 1, 1998,  the  Company  adopted the  American  Institute  of
Certified  Public  Accountants'   (AICPA)  Statement  of  Position  (SOP)  98-1,
"Accounting  for the  Costs of  Computer  Software  Developed  or  Obtained  for
Internal Use." The SOP requires  capitalization of certain costs incurred in the
development of  internal-use  software,  including  external direct material and
service costs,  employee  payroll and  payroll-related  costs,  and  capitalized
interest.  Prior to adoption of SOP 98-1, the Company  expensed certain of these
costs as incurred.  The effect of the adoption of this statement on consolidated
earnings during the current period is immaterial.

3. Inventories

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

                                                            1999       1998
--------------------------------------------------------------------------------
Finished products                                          $33,628    $29,761
Raw materials                                               30,048     27,411
                                                           ------------------
                                                            63,676     57,172
Less adjustment of certain inventories to LIFO basis         5,176      6,376
                                                           ------------------
                                                           $58,500    $50,796
                                                           ==================

Inventory  cost is  determined  by the LIFO method of  inventory  valuation  for
approximately  61% and  64% of  inventories  at  November  30,  1999  and  1998,
respectively.

4. Long-Term Debt

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

                                                       1999              1998
--------------------------------------------------------------------------------
7.75% Unsecured Senior Notes                         $100,000          $100,000
Revolving Credit Facility                             100,100            93,700
German Credit Facility                                  6,703            10,000
                                                     --------------------------
                                                     $206,803          $203,700
                                                     ==========================

In February 1998, the Company's German subsidiary ("Subsidiary") entered into an
unsecured Deutsche Mark ("DEM")  denominated  revolving credit facility ("German
Facility")  with a bank.  The  maximum  borrowings  available  under the  German
Facility are $6,703,000  until November 29, 2000;  thereafter,  $4,460,000 until
November 29, 2001; thereafter,  $2,060,000 until maturity of the German Facility
in  February,  2003.  German  Facility  advances of greater  than  $52,000  bear
interest, at the Subsidiary's option, at either (i) the money market rate of the
bank's German affiliate,  or (ii) the Frankfurt,  Germany Interbank Offered Rate
for DEM  deposits  plus an  interest  rate  margin of  between  0.40% and 0.80%,
depending  on the  Subsidiary's  leverage at the time of each  borrowing.  Other
advances  bear interest at the prime rate of the bank's  German  affiliate.  The
principal of the German Facility is due upon maturity in February, 2003.

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  and were  subsequently  registered.  The
Facility is unsecured and provides for borrowings under a revolving note.

Interest is payable upon maturity of each revolving  advance under the Facility,
but in no case less frequently than quarterly.  The principal of the Facility is
due in October, 2002. The Notes are unsecured. Interest is payable on June 1 and
December 1 of each year the Notes are outstanding. The principle of the Notes is
due December,  2007. The Facility bears interest,  at the Company's option,  (i)
the higher of the agent  bank's  prime rate (8.50% at November  30, 1999) or the
Federal  Funds rate plus 0.50% or, (ii) the London  Interbank  Offered  Rate for
U.S. Dollars plus 0.30% to 0.75%,  depending upon the Company's credit rating. A
commitment fee ranging from 0.10% to 0.25%,  depending upon the Company's credit
rating, 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  with a notional  amount of  $175,000,000.  This  agreement
expired November 30, 1999. This agreement effectively converted a portion of the
Facility from variable rate debt to fixed rate debt.

Interest of  $15,818,000,  $12,369,000  and $20,628,000 was paid in fiscal 1999,
1998 and 1997, respectively.

The  Company is subject to various  debt  covenants  under the German  Facility,
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.

5. Income Taxes

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

                                    1999            1998             1997
--------------------------------------------------------------------------------
Current expense:
   Federal                        $  8,942        $ 12,757         $ 10,612
   Foreign                           8,126           7,290            7,674
   State                               820           2,358              697
                                  -----------------------------------------
                                    17,888          22,405           18,983
Deferred expense (credit):
   Federal                           4,334             593            2,818
   Foreign                             384            (139)             210
   State                               549               8            1,057
                                  -----------------------------------------
                                     5,267             462            4,085
                                  -----------------------------------------
                                  $ 23,155        $ 22,867         $ 23,068
                                  =========================================

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

                                                                1999        1998        1997
---------------------------------------------------------------------------------------------
<S>                                                             <C>         <C>         <C>
Statutory U.S. federal income tax rate                          35.0%       35.0%       35.0%
Increase resulting from:
   Goodwill                                                      3.5         3.6         3.9
   State income taxes, net of federal income tax benefit         1.6         2.8         2.3
   Foreign                                                       1.3         1.8         2.2
   Other items                                                   (.4)       (1.2)        1.7
                                                                ----------------------------
Effective income tax rate                                       41.0%       42.0%       45.1%
                                                                ============================
</TABLE>


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):

                                                                1999       1998
--------------------------------------------------------------------------------
Deferred tax assets:
   Goodwill and intangibles                                   $ 1,121    $ 1,279
   Employee benefits                                            5,812      5,565
   Accounts receivable, inventory and other                    11,051     13,839
                                                              ------------------
                                                               17,984     20,683
Deferred tax liabilities:
   Property and equipment                                       6,582      5,526
   Pension                                                      4,580      3,068
                                                              ------------------
                                                               11,162      8,594
                                                              ------------------
Net deferred tax assets                                       $ 6,822    $12,089
                                                              ==================

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  $24,500,000  at November 30, 1999.  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 $16,600,000, $21,800,000 and $20,500,000 were paid in 1999, 1998
and 1997, respectively.

6. 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.


<PAGE>

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       Capital Stock
                                               Issued         Held in Treasury
                                         Class A   Class B   Class A    Class B
--------------------------------------------------------------------------------
Balance at December 1, 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
   Class A exchanged for Class B             --        --        92        (92)
   Class B exchanged for Class A             --        --        (9)         9
   Acquisition for treasury                  --        --        39         --
   Stock options exercised                  151        --        37         12
                                         -------------------------------------
Balance at November 30, 1998             27,825       540     5,082        111
   Class A exchanged for Class B             --        --        36        (36)
   Class B exchanged for Class A             --        --       (13)        13
   Acquisition for treasury                  --        --        32         --
   Stock options exercised                  144        --        56         19
                                         -------------------------------------
Balance at November 30, 1999             27,969       540     5,193        107
                                         =====================================

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
or ten years after the date of grant.  Certain  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
1,785,129 and 1,931,420 at November 30, 1999 and 1998, 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, 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
   Grants                                               460,022          18.84
   Exercised                                           (151,233)         12.60
   Terminated                                           (37,975)         17.41
                                                      ------------------------
Balance at November 30, 1998                          1,060,316          15.72
   Grants                                               561,095          18.21
   Exercised                                           (146,291)         13.57
   Terminated                                           (80,230)         18.93
                                                      ------------------------
Balance at November 30, 1999                          1,394,890        $ 16.76
                                                      ========================


<PAGE>

At November 30, 1999 the range of exercise prices and weighted-average remaining
contractual  life of  outstanding  options  were  $12.25 - $21.63 and 6.8 years,
respectively.  At November 30, 1999 and 1998, the number of options  exercisable
was 342,000 and 340,000 respectively, and the weighted-average exercise price of
those options was $13.32 and $13.49, respectively.

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123) permits companies to continue to apply APB Opinion 25,
"Accounting for Stock Issued to Employees" (APB 25) 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 1999, 1998 and 1997,  respectively:  risk-free  interest rate of
6.2%, 4.7%, and 5.8%; dividend yields of 1.9% for all years;  volatility factors
of the expected market price of the Company's Class A stock of .29, .27 and .30;
and a weighted average expected life of options of 7 years, 5 years and 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. Pro forma amounts may not
be  representative of the expected effects on pro forma net income or net income
per share in future  years.  The  Company's  pro forma  information  follows (in
thousands, except per share amounts):

                                              1999          1998          1997
--------------------------------------------------------------------------------
Net income:
   As reported                            $   33,321    $   31,579    $   28,095
   Pro forma                                  32,235        30,924        27,608
Net income per share:
   As reported                            $     1.43    $     1.35    $     1.20
   Pro forma                                    1.38          1.32          1.18
Weighted average fair value of
   options granted during the year        $     6.37    $     5.76    $     4.93


7. Net Income Per Share

Basic and  diluted net income per share are  computed by dividing  net income as
reported by the average number of shares outstanding as follows (in thousands):
<TABLE>
<CAPTION>

                                                        1999      1998      1997
---------------------------------------------------------------------------------
<S>                                                    <C>       <C>       <C>
Basic
   Weighted-average common shares outstanding          23,205    23,160    22,940
                                                      ===========================
Diluted
   Weighted-average common shares outstanding          23,205    23,160    22,940
   Dilutive effect of stock options                       115       240       460
                                                      ---------------------------
Average common shares outstanding assuming dilution    23,320    23,400    23,400
                                                      ===========================
</TABLE>
<PAGE>


8. Benefit Plans

The Company maintains defined benefit retirement plans that cover  substantially
all employees.  The change in benefit obligation,  change in plan assets, funded
status and amounts recognized in the consolidated  balance sheets at November 30
for the Company's defined benefit plans were as follows (in thousands):
<TABLE>
<CAPTION>

                                                                        1999          1998
--------------------------------------------------------------------------------------------
<S>                                                                   <C>           <C>
Change in benefit obligation:
   Benefit obligation at beginning of the year                        $ 76,458      $ 82,542
   Service cost                                                            400           457
   Interest cost                                                         5,020         5,380
   Amendments and termination                                               --            22
   Actuarial gain                                                       (1,461)       (8,085)
   Benefits paid                                                        (4,434)       (3,858)
                                                                      ----------------------
   Benefit obligation at end of year                                  $ 75,983      $ 76,458
                                                                      ======================

Change in plan assets:
   Fair value of plan assets at beginning of year                     $ 96,571      $ 88,594
   Actual return on plan assets                                          7,061        11,830
   Employer contribution                                                    20             5
   Benefits paid                                                        (4,434)       (3,858)
                                                                      ----------------------
   Fair value of plan assets at end of year                           $ 99,218      $ 96,571
                                                                      ======================

Funded status:
   Funded status                                                      $ 23,235      $ 20,113
   Unrecognized net actuarial gain                                     (13,730)      (15,317)
   Unrecognized prior service cost                                       4,329         4,813
   Unrecognized transition asset                                          (731)         (933)
                                                                      ----------------------
   Net amount recognized                                              $ 13,103      $  8,676
                                                                      ======================

Amounts recognized in the consolidated balance sheet consisted of:

   Prepaid benefit cost                                               $ 13,103      $  8,676
                                                                      ----------------------
   Net amount recognized                                              $ 13,103      $  8,676
                                                                      ======================

Components of net periodic benefit cost:

   Service cost                                                       $    400      $    457
   Interest cost                                                         5,020         5,380
   Expected return on plan assets                                       (9,684)       (8,876)
   Amortization of prior service cost                                      484            --
   Amortization of transition asset                                       (202)         (202)
   Recognized net actuarial gain                                          (424)           --
                                                                      ----------------------
   Net periodic benefit                                               $ (4,406)     $ (3,241)
                                                                      ======================

Weighted-average assumptions as of year end:

   Discount rate                                                          6.75%         6.75%
   Expected return on plan assets                                        10.25%        10.25%
   Rate of compensation increase                                          4.00%         4.00%
</TABLE>


Certain employees from one of the Company's German subsidiaries participate in a
frozen  defined  benefit  retirement  plan.  The liability  related to this plan
totaled  $4,000,000  and  $4,400,000  and the  expense  related to this plan was
$440,000 and $402,000 at November 30, 1999 and 1998, respectively.

Accumulated  benefits  for  supplemental   executive  retirement  plans  totaled
approximately   $9,595,000  and  $8,765,000  at  November  30,  1999  and  1998,
respectively. Expense related to this plan amounted to $1,431,000 and $1,321,000
for the years ended November 30, 1999 and 1998, respectively.

The Company also has a defined contribution retirement plan to which the Company
contributed and charged to expense approximately $4,692,000,  and $4,113,000 for
the years ended November 30, 1999 and 1998, respectively.

9. Segment Information

Lilly  formulates,  manufactures and markets  industrial  coatings and specialty
chemicals  primarily to original  equipment  manufacturers on a worldwide basis.
The Company  operates  within three business  segments which serve three end-use
markets:  wood coatings;  metal  coatings;  and  composites and glass  coatings.
Products sold to these markets have similar economic characteristics, production
processes,  distribution  methods and  regulatory  environments.  Based on these
similarities, the Company's products are aggregated into one reportable segment,
Industrial  Coatings and Specialty  Chemicals,  for purposes of this disclosure.
The  accounting  policies  of the  reportable  segment  are the  same  as  those
described in the summary of significant accounting policies.

Net sales of  Industrial  Coatings and  Specialty  Chemical  products by end-use
market are as follows (in thousands):

                                            1999           1998           1997
--------------------------------------------------------------------------------
Wood Coatings                             $297,741       $269,585       $262,816
Metal Coatings                             284,463        274,951        268,826
Composites and Glass Coatings               73,997         74,466         69,654
                                          --------------------------------------
                                          $656,201       $619,002       $601,296
                                          ======================================

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

                                              1999         1998          1997
--------------------------------------------------------------------------------
Net sales to unaffiliated customers:
   United States                           $ 504,875    $ 488,703     $ 491,973
   Outside U.S., excluding U.S. exports      151,326      130,299       109,323
                                           ------------------------------------
   Consolidated                            $ 656,201    $ 619,002     $ 601,296
                                           ====================================

Operating income:
   United States                           $  48,473    $  50,942     $  51,150
   Outside U.S.                               24,427       21,089        18,984
                                           ------------------------------------
   Consolidated                            $  72,900    $  72,031     $  70,134
                                           ====================================

Total assets:
   United States                           $ 446,259    $ 430,081     $ 453,456
   Outside U.S.                              101,618       87,165        49,007
   Eliminations (deductions)                   2,549         (761)         (668)
                                           ------------------------------------
   Consolidated                            $ 550,426    $ 516,485     $ 501,795
                                           ====================================

10. Quarterly Results of Operations (Unaudited)
Quarterly results of operations are summarized as follows (in thousands,  except
per share data):

                                            Quarter Ended
1999                     February 28     May 31       August 31    November 30
--------------------------------------------------------------------------------
Net sales                 $146,139      $171,375      $169,452      $169,235
Gross profit                56,056        67,118        64,229        67,512
Net income                   5,584         9,627         8,677         9,433
Net income per share
   Basic                       .24           .41           .38           .41
   Diluted                     .24           .41           .37           .41

                                            Quarter Ended
1998                     February 28     May 31       August 31    November 30
--------------------------------------------------------------------------------
Net sales                 $143,334      $159,198      $159,345      $157,125
Gross profit                53,431        61,794        61,752        62,384
Net income                   5,140         8,715         8,674         9,050
Net income per share
   Basic                       .22           .38           .37           .39
   Diluted                     .22           .37           .37           .39



<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, 1999 and 1998,  and the
related  consolidated  statements of income, cash flows and shareholders' equity
for each of the  three  years in the  period  ended  November  30,  1999.  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 auditing standards generally accepted
in the United States. 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, 1999 and 1998,  and the  consolidated
results of their  operations and their cash flows for each of the three years in
the period ended  November 30, 1999, in conformity  with  accounting  principles
generally accepted in the United States.


/s/ Ernst & Young LLP
January 14, 2000
Indianapolis, Indiana




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  accounting  principles  generally  accepted in the
United States 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, cash flows and shareholders' equity 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                                  /s/ Kenneth L. Mills
John C. Elbin                                      Kenneth L. Mills
Vice President, Chief Financial Officer            Corporate Controller and
and Secretary                                      Assistant 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.  Contact
Kenneth  L.  Mills,  Corporate  Controller  and  Assistant  Secretary,  at Lilly
Industries,  Inc.  200 W.  103rd  Street  Indianapolis,  IN  46290;  or  E-mail:
millsk@lillyindustries.com.

Registrar and Transfer Agent

Communications concerning shareholder records,  including address changes, stock
transfers,  cash dividends or other service needs should be directed to National
City Bank, Attn: Corporate Trust Operations,  P. O. Box 92301,  Cleveland,  Ohio
44193-0900, (800) 622-6757.

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 or calling:  National  City Bank,  Attn:  Corporate
Trust Operations, P. O. Box 92301, Cleveland, Ohio, 44193-0900 (800) 622-6757.

Analyst Contacts

Security  analyst  inquiries  are  welcomed.  Please call:  John C. Elbin,  Vice
President, Chief Financial Officer, and Secretary (317) 814-8700.

Annual Meeting

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.
The meeting will be held on March 31, 2000 at 10:00 A.M.,  EST, at the Company's
corporate offices located at 200 W. 103rd Street,  Indianapolis,  Indiana. (317)
814-8700.

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 1999                                 Per Share     High        Low
--------------------------------------------------------------------------------
1st quarter ended February 28                $  .08      20 1/8      16 1/4
2nd quarter ended May 31                        .08      19 3/8      14
3rd quarter ended August 31                     .08      19 3/4      15 5/8
4th quarter ended November 30                   .08      16 1/4      13 1/8
                                             ------
                                             $  .32
                                             ======

                                            Dividends       Price Range
Fiscal 1998                                 Per Share     High        Low
--------------------------------------------------------------------------------
1st quarter ended February 28                $  .08      20 5/8      17 7/8
2nd quarter ended May 31                        .08      22 3/4      17 3/4
3rd quarter ended August 31                     .08      24 5/8      18 1/2
4th quarter ended November 30                   .08      19 7/8      14 3/8
                                             ------
                                             $  .32
                                             ======

At November 30, 1999 there were approximately  2,500 registered  shareholders of
Class A stock and 62 registered shareholders of Class B stock, which is reserved
for employees of the Company.


<PAGE>

Locations

International
Australia

283 Alfred Street
North Sydney, NSW 2060
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
Postfach 1126
Germany

Friedensstrasse 40
D-52249 Eschweiler
Germany

Ireland
Willowfield Road
Ballinamore
Co. Leitrim
Ireland

Malaysia
Lot No. 4963, Jalan Teratai
5H Miles
Meru Industrial Zone
41050 Klang
Selangor Darul Ehsan
Malaysia

Mexico
Ave. Central No. 223
Los Lermas, Guadalupe
N.L. Mexico 67190

Singapore
09-09 International Building
360 Orchard Road
Singapore

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


<PAGE>

United States
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

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

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


<PAGE>

Corporate Offices
200 W. 103rd Street

Indianapolis, Indiana 46290

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

Officers and Directors

Douglas W. Huemme, 58
Chairman and
Chief Executive Officer

Robert A. Taylor, 45
President and
Chief Operating Officer

Hugh M. Cates, 56
Vice President and General Manager,
Wood Coatings

Larry H. Dalton, 52
Vice President,
Manufacturing and Engineering

Alain DeBlandre, 43
Vice President and

Managing Director - Europe

William C. Dorris, 56
Vice President,
Corporate Development

John C. Elbin, 46
Vice President,
Chief Financial Officer and Secretary

Ned L. Fox, 58
Vice President,
Supply Chain Management

A. Barry Melnkovic, 42
Vice President, Human Resources

John D. Million, 57
Vice President and Managing Director, Asia-Pacific

Kenneth L. Mills, 51
Corporate Controller and
Assistant Secretary

Gary D. Missildine, 58
Vice President and General Manager,
Industrial Coatings

Virgil E. Underwood, 48
Vice President and General Manager,
Coil Coatings

Keith C. Vander Hyde, Jr., 41
Vice President and General Manager,
Specialty

Jay M. Wiegner, 56
Vice President and General Manager,
Composites and Glass Coatings



<PAGE>

Directors
James M. Cornelius,
Chairman, Guidant Corporation

William C. Dorris,
Vice President,
Corporate Development

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

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

Douglas W. Huemme,
Chairman and
Chief Executive Officer

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

Norma J. Oman,
President and
Chief Executive Officer
Meridian Insurance Group, Inc.

John D. Peterson,
Chairman, City Securities Corporation

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

Robert A. Taylor,
President and
Chief Operating Officer