<PAGE>

                                                               EXHIBIT 13(A)(II)

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                  (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)

     Fiscal 2004 was the 12th consecutive year of both sales and earnings growth
for CLARCOR. Fiscal 2004 sales, operating profit and net earnings increased from
fiscal 2003 by 6.2%, 12.8% and 17.3%, respectively. There were several key
drivers for the increases in sales and operating profit, including: (1)
increased sales of heavy-duty engine filtration products for the aftermarket and
diesel locomotives, (2) increased sales of specialty filtration products used
primarily in oil and gas drilling, aviation and fluid power, and (3) increased
capacity utilization and production efficiencies. Fiscal 2004 sales levels
increased approximately $10 million due to acquisitions made during the year.
Cash flow from operating activities totaled $74.4 million of which $22.4 million
was invested in plant asset additions and $41.9 million was used for
acquisitions. Net earnings per diluted share totaled $2.48 in fiscal 2004
compared to $2.15 in 2003.

     The following are several significant items that occurred during the
periods presented:

     (1) During fiscal 2004, the Company relocated its corporate headquarters to
Franklin, Tennessee. The costs related to the relocation were $2.2 million
pretax and reduced diluted earnings per share by $0.05.

     (2) Tax benefits related to the reversal of a foreign tax credit valuation
allowance as a result of the American Jobs Creation Act of 2004 increased net
earnings by $1.2 million and $0.05 per diluted share in the fourth quarter of
2004.

     (3) In the fourth quarter of 2002 upon the completion of specific tax
reviews, the Company recorded a research and experiment tax credit that
increased 2002 net earnings by $1.0 million and diluted earnings per share by
$0.04.

     The results of operations and financial position discussed in this
Financial Review reflect acquisitions the Company made in fiscal 2004 and 2002.
These acquisitions were not material to sales or results of operations for the
periods presented and are described in Note B to the Consolidated Financial
Statements.

     The information presented in this financial review should be read in
conjunction with other financial information provided throughout this 2004
Annual Report. The following discussion of operating results focuses on the
Company's three reportable business segments: Engine/Mobile Filtration,
Industrial/Environmental Filtration and Packaging.

OPERATING RESULTS

Sales

     Net sales in fiscal 2004 were $787.7 million, a 6.2% increase from $741.4
million in fiscal 2003. The 2004 sales increase was the 18th consecutive year of
sales growth for the Company. Included in the sales growth of $46.3 million for
2004 was approximately $10 million related to acquisitions that were completed
during 2004. Approximately $3.6 million in additional sales resulted from
favorable currency translation rates in 2004.

     Comparative net sales information related to CLARCOR's operating segments
is shown in the following tables.

<Table>
<Caption>
                                                                           2004 VS. 2003
                                                                               CHANGE
                                                                           --------------
NET SALES                                                2004    % TOTAL     $        %
---------                                               ------   -------   ------   -----
<S>                                                     <C>      <C>       <C>      <C>
Engine/Mobile Filtration..............................  $320.1     40.6%   $32.3    11.2%
Industrial/Environmental Filtration...................   396.6     50.4%    10.3     2.7%
Packaging.............................................    71.0      9.0%     3.7     5.5%
                                                        ------    -----    -----    ----
  Total...............................................  $787.7    100.0%   $46.3     6.2%
                                                        ======    =====    =====    ====
</Table>

                                        1
<PAGE>

<Table>
<Caption>
                                                                          2003 VS. 2002
                                                                             CHANGE
                                                                         ---------------
NET SALES                                              2003    % TOTAL      $        %
---------                                             ------   -------   --------   ----
<S>                                                   <C>      <C>       <C>        <C>
Engine/Mobile Filtration............................  $287.8     38.8%    $24.3      9.2%
Industrial/Environmental Filtration.................   386.3     52.1%      2.7      0.7%
Packaging...........................................    67.3      9.1%     (1.2)    -1.7%
                                                      ------    -----     -----     ----
  Total.............................................  $741.4    100.0%    $25.8      3.6%
                                                      ======    =====     =====     ====
</Table>

     The Engine/Mobile Filtration segment's sales increased 11.2% in 2004 from
2003. The growth of $32.3 million included approximately $5 million from a small
acquisition in the U.K. at the beginning of the second quarter of 2004. The
remainder of the sales growth in 2004 resulted primarily from increased domestic
and international heavy-duty filter sales to traditional aftermarket
distribution and also due to increased sales to OEM's and OEM dealer
organizations. Railroad filtration sales increased in part due to increased
North American railway usage. The segment's international sales grew in 2004
primarily through its operations in China and Europe and additional growth is
expected in 2005. Price increases improved the segment's sales by approximately
two percentage points and changes in currency translation rates favorably
impacted sales by one-half percentage point in 2004. The segment's sales
increased 9.2% in 2003 from 2002. The 2003 sales increase included approximately
one percentage point due to price increases and one and one-half percentage
points due to changes in currency translation rates. The additional sales growth
in 2003 resulted primarily from increased domestic and international aftermarket
distribution, increased sales to OEM dealer organizations and approximately $9
million due to an acquisition completed at mid-year 2002.

     The Company's Industrial/Environmental Filtration segment recorded a 2.7%
increase in sales in 2004 over 2003. Sales included approximately $5 million due
to the fourth quarter 2004 acquisition of Purolator EFP. Sales of specialty
filters sold to industrial markets used in applications for oil and gas
drilling, aviation and fluid power were very strong during fiscal 2004 and more
than offset a decrease in sales of HVAC filters for industrial and commercial
markets and for use in automotive manufacturing facilities. The segment's
operations in Europe that sell primarily aviation and specialty filtration
products grew in 2004 and additional growth is expected in 2005. Price increases
and changes in currency translation rates favorably impacted the segment's sales
by less than one percentage point in 2004. The segment's sales increase of 0.7%
in 2003 compared to 2002 reflected strong sales of specialty filters and
increased sales of private label HVAC filters sold through retail mass
merchants. Changes in currency translation rates favorably impacted sales by
approximately one percentage point in 2003. Offsetting these sales increases in
2003 were continued low sales of filtration equipment, mainly dust collectors
and electrostatic precipitators, and sales of HVAC filters used in automotive
manufacturing plants.

     The Packaging segment's sales were $71.0 million in 2004, a 5.5% increase
from 2003. Sales in 2004 increased approximately one percentage point due to
price increases to customers primarily as a result of increased metal costs. The
remaining sales increase was due primarily to higher flat sheet metal decorating
and tooling charges billed to customers that more than offset lower sales of
plastic packaging and metal container sales. The segment recorded a decrease in
sales of 1.7% in 2003 due primarily to reduced sales of plastic packaging
products that more than offset an increase in flat sheet metal decorating and
metal packaging sales in 2003.

Operating Profit

     Operating profit of $98.2 million in 2004 reflects increased sales levels
for each segment and continued improvements in capacity utilization and
production efficiencies. Cost increases for raw materials persisted, especially
during the second half of the year, and were primarily offset by price increases
to customers. Additional cost increases in 2004 for employee health care and
energy reduced operating profit for each of the segments. In fiscal 2004, the
Company's operating profit was reduced by $2.2 million related to its
headquarters relocation to Tennessee and $1.8 million for external consulting
services related to compliance with Sarbanes-Oxley Section 404. Operating profit
of $87.1 million in 2003 was 11.9% higher than in 2002, primarily as a result of
increased sales levels and improved capacity utilization and cost reduction
programs.

                                        2
<PAGE>

The 2003 operating profit was also increased by $0.5 million as a result of
changing to the first-in, first-out (FIFO) method of inventory costing for
certain inventory.

     Operating margin improved to 12.5% in 2004 from 11.7% in 2003 and 10.9% in
2002. Each of the segments reported improved operating margins for the periods
presented primarily as a result of increasing sales which improved manufacturing
leverage and cost reduction efforts. Foreign currency fluctuations did not have
a material impact on consolidated operating profit in 2004, 2003 or 2002.

     Comparative operating profit information related to the Company's business
segments is as follows.

<Table>
<Caption>
                                                                           2004 VS. 2003
                                                                               CHANGE
                                                                           --------------
OPERATING PROFIT                                         2004    % TOTAL     $        %
----------------                                         -----   -------   ------   -----
<S>                                                      <C>     <C>       <C>      <C>
Engine/Mobile Filtration...............................  $66.5     67.8%   $ 8.2    14.2%
Industrial/Environmental Filtration....................   28.7     29.2%     4.5    18.6%
Packaging..............................................    5.2      5.2%     0.6    12.2%
Relocation Costs.......................................   (2.2)    -2.2%    (2.2)     --
                                                         -----    -----    -----    ----
          Total........................................  $98.2    100.0%   $11.1    12.8%
                                                         =====    =====    =====    ====
</Table>

<Table>
<Caption>
                                                                            2003 VS. 2002
                                                                               CHANGE
                                                                            -------------
OPERATING PROFIT                                          2003    % TOTAL     $       %
----------------                                          -----   -------   -----   -----
<S>                                                       <C>     <C>       <C>     <C>
Engine/Mobile Filtration................................  $58.3     67.0%   $5.5    10.5%
Industrial/Environmental Filtration.....................   24.2     27.8%    3.5    16.9%
Packaging...............................................    4.6      5.2%    0.3     6.2%
                                                          -----    -----    ----    ----
          Total.........................................  $87.1    100.0%   $9.3    11.9%
                                                          =====    =====    ====    ====
</Table>

<Table>
<Caption>
OPERATING MARGIN AS A PERCENT OF NET SALES                    2004   2003   2002
------------------------------------------                    ----   ----   ----
<S>                                                           <C>    <C>    <C>
Engine/Mobile Filtration....................................  20.8%  20.3%  20.0%
Industrial/Environmental Filtration.........................   7.2%   6.3%   5.4%
Packaging...................................................   7.3%   6.8%   6.3%
                                                              ----   ----   ----
  Total.....................................................  12.5%  11.7%  10.9%
                                                              ====   ====   ====
</Table>

     Operating profit for the Engine/Mobile Filtration segment increased 14.2%
to $66.5 million from $58.3 million in fiscal 2003. Operating margin improved to
20.8% in 2004 primarily as a result of increased sales and capacity utilization.
The segment incurred substantially higher costs for raw materials in 2004,
specifically for metal products and filter media. These cost increases were
principally offset by price increases to customers and cost reduction efforts.
The segment's 2004 operating profit was impacted by a manufacturing facility in
the U.K. that performed significantly below expectations in the second half of
2004, primarily as a result of the integration of a small acquisition. Operating
profit in 2003 increased 10.5% from 2002 as a result of increased sales levels
and cost reduction programs that included material and labor cost reductions.
Partially offsetting these profit improvements in 2003 were increased costs for
health care, insurance, incentive programs and pensions. Operating margin as a
percent of sales in fiscal 2003 increased to 20.3% from 20.0% in 2002.

     The Industrial/Environmental Filtration segment reported an increase of
18.6% in operating profit, or $4.5 million, in 2004 compared to 2003. The
increase was primarily due to the sale of higher margin specialty filtration
products and improved profitability from cost reduction and capacity utilization
initiatives. Over the past several years, the segment has been actively
integrating newly acquired businesses (primarily acquired from 1999 through
2002) and making organizational changes within several of its businesses that
have reduced overhead and administrative costs. The fourth quarter 2004
acquisition also improved operating profit approximately $0.5 million. Higher
raw material costs in 2004, primarily for metal products and filter media, were
substantially offset by increased prices to customers. The segment's 2003
operating profit improved 16.9% over fiscal 2002 primarily as a result of
significantly improved capacity utilization at several

                                        3
<PAGE>

manufacturing plants, increased sales of industrial products for aviation and
oil and gas drilling applications, and ongoing discretionary cost reduction
programs. As a result of these efforts, the segment's operating margin improved
to 7.2% in 2004 from 6.3% in 2003 and 5.4% in 2002.

     The Packaging segment's 2004 operating profit improved to $5.2 million from
$4.6 million in 2003. The increase resulted from increased utilization of
manufacturing capacity related to flat sheet metal decorating and improved
operating efficiencies. The segment's raw material costs increased during the
second half of 2004 and as a result, customer pricing was increased to
substantially offset the additional costs. Operating profit of $4.6 million in
2003 was nearly the same level as recorded in fiscal 2002 on slightly lower
sales. Although higher capacity utilization of the segment's metal packaging
facilities and cost reduction programs improved the 2003 operating profit, these
improvements were offset by lower sales of plastic packaging. Included in 2003
operating profit is approximately $0.4 million related to a change to FIFO
inventory costing as described in Note C to the Consolidated Financial
Statements.

Other Income(Expense)

     Net other income totaled $0.9 million in 2004, and net other expense
totaled $1.0 million in 2003 and $6.3 million in 2002. Interest expense of $0.4
million in 2004 was lower than the 2003 amount of $1.8 million and $6.1 million
in 2002, due to reduced overall borrowings. Currency gains of $0.5 million in
2004 and $1.0 million in 2003 and currency losses of $0.2 million in 2002
resulted primarily from fluctuations of the Euro against the U.S. dollar. In
2004 a gain of $0.7 million resulted from the first quarter 2004 sale of a
building.

Provision for Income Taxes

     The provision for income taxes in 2004 resulted in an effective tax rate of
35.0% compared to 36.5% in 2003 and 34.7% in 2002. The 2004 provision included a
$1.2 million reduction of tax expense related to the reversal of a foreign tax
credit valuation allowance due to the recently enacted American Jobs Creation
Act of 2004 which extended the period for utilizing tax credits from five years
to ten years. This reduced the effective rate in 2004 by 1.2 percentage points.
The 2002 provision included approximately $1.0 million related to a research and
experiment tax credit recorded in the fourth quarter of 2002 that reduced the
effective rate by 1.4 percentage points. The effective tax rate in 2005 is
expected to be approximately 36.5%.

Net Earnings and Earnings Per Share

     Net earnings of $64.0 million, or diluted earnings per share of $2.48, were
at record levels in 2004. Net earnings were $54.6 million in 2003 or diluted
earnings per share of $2.15, compared to $46.6 million or diluted earnings per
share of $1.85 in 2002. As described in Note A to the Consolidated Financial
Statements, diluted earnings per share would have been $2.33, $2.06 and $1.79
for 2004, 2003 and 2002, respectively, had compensation expense for stock
options been recorded in accordance with SFAS No. 123. Diluted average shares
outstanding for fiscal 2004 were 25,753,369 compared to 25,372,806 for 2003, an
increase of 1.4%. Diluted average shares outstanding for fiscal 2002 were
25,171,931. The increase in diluted average shares outstanding was primarily due
to additional stock option grants.

FINANCIAL CONDITION

Corporate Liquidity

     Cash and short-term cash investments increased to $22.5 million at year-end
2004 from $8.3 million at year-end 2003. As reflected in the Consolidated
Statements of Cash Flows, cash provided by operating activities totaled $74.4
million in 2004 compared to $87.9 million in 2003 and $85.0 million in 2002. The
reduction in cash provided by operating activities in 2004 from the 2003 and
2002 levels resulted primarily from increased investment in working capital as a
result of higher operating activities in 2004. In the fourth quarters of 2004,
2003 and 2002, voluntary contributions of $6.5 million, $3.0 million and $5.0
million, respectively, were made to the Company's defined benefit pension trust
for covered U.S. employees. Under the current assumptions for pension plan asset
returns, interest rates and benefit costs, annual contributions are not

                                        4
<PAGE>

expected to be required until after fiscal 2011 for the qualified U.S. defined
benefit plan although additional voluntary contributions may be made in future
years.

     The Company used cash of $62.2 million for investing activities in 2004,
$13.0 million in 2003 and $19.0 million in 2002. The Company made two
acquisitions in 2004 for a total investment of $41.9 million. The Company made
no acquisitions in fiscal 2003 and cash used for acquisitions in 2002 totaled
$10.7 million, offset partially by a $4.0 million settlement payment received
from the sellers of an acquisition completed in 2001. Additions to plant assets
totaled $22.4 million in 2004 and were primarily for new products, facility
additions and improvements and cost reduction programs. Plant asset additions
totaled $13.0 million in 2003 and $12.2 million in 2002.

     Net cash from financing activities totaled $1.1 million in 2004 and cash
used for financing activities totaled $80.7 million and $59.8 million in 2003
and 2002, respectively. In 2004, proceeds from a revolving credit agreement were
used primarily for a fourth quarter acquisition whereas in 2003 and 2002, net
payments were made on revolving credit agreements. Dividend payments totaled
$12.8 million, $12.4 million and $12.0 million in 2004, 2003 and 2002,
respectively. The Company expects to continue making quarterly dividend payments
to shareholders.

     CLARCOR's current operations continue to generate cash and sufficient lines
of credit remain available to fund current operating needs, pay dividends,
provide for additions and the replacement of necessary plant facilities, and to
service and repay long-term debt. A $165 million credit facility with a group of
financial institutions will expire in April 2008. As of year-end 2004, the
outstanding borrowings against the facility totaled $7.5 million and under a
related $40 million letter of credit line subline, $8.5 million had been issued
for letters of credit for industrial revenue bonds. The Company's other
long-term debt totaled $17.1 million at year-end 2004 and consists principally
of industrial revenue bonds. Required principal payments on long-term debt will
be approximately $0.4 million in 2004 based on scheduled payments in current
debt agreements. In addition, the Company expects to repay the $7.5 million
outstanding on its revolving credit facility in 2005. The Company is in
compliance with all covenants related to its borrowings, as described in Note G
to the Consolidated Financial Statements.

     The Company expects to continue to use future additional cash flow for
dividends, capital expenditures and acquisitions. Capital expenditures for
normal facility maintenance and improvements, expansion of manufacturing and
technical facilities, productivity improvements and new products are expected to
total $25 to $30 million in 2005. The Company's off-balance sheet arrangements
relate to various operating leases as discussed in Note H to the Consolidated
Financial Statements. The Company had no derivative, swap, hedge, variable
interest entity agreements or special purpose entity agreements at fiscal
year-end 2004 or 2003. The Company has no material long-term purchase
commitments.

     The following table summarizes the Company's fixed cash obligations as of
November 30, 2004 over various future years:

<Table>
<Caption>
                                                          YEAR   YEAR    YEAR    THERE-
                                                           1     2 & 3   4 & 5   AFTER
                                                          ----   -----   -----   ------
<S>                                                       <C>    <C>     <C>     <C>
Long-Term Debt..........................................  $0.4   $ 0.2   $ --    $16.5
Credit Facility.........................................    --      --    7.5       --
Operating Leases........................................   9.2    11.5    7.1      7.3
</Table>

     While changes in customer demand for our products will affect operating
cash flow, the Company is not aware of any known trends, demands or reasonably
likely events that would materially affect cash flow from operations in the
future. It is likely that additional investments in working capital may be
required to support increased operations in fiscal 2005. Business acquisitions
or dispositions may also occur in the future that may affect operating cash
flows and may require changes in the Company's debt and capitalization.

                                        5
<PAGE>

Capital Resources

     The Company's financial position at November 30, 2004, continued to be
sufficiently liquid to support current operations and reflects cash flow from
operations that was used for acquisitions and plant asset additions during
fiscal 2004. Total assets increased to $627.8 million at the end of fiscal 2004,
a 16.6% increase from the year-end 2003 level of $538.2 million. Total current
assets increased to $304.0 million from $257.4 million at year-end 2003,
primarily due to increased accounts receivables and inventories as a result of
sales growth, raw material cost increases and acquisitions. Total current
liabilities at year-end 2004 increased to $126.3 million from $111.4 million at
year-end 2003, primarily as a result of increased payables to vendors. The
current ratio was 2.4 at year-end 2004 compared to 2.3 at year-end 2003.

     Long-term debt of $24.1 million at year-end 2004 relates primarily to
various industrial revenue bonds and $7.5 million for an outstanding amount owed
under a revolving credit facility. Shareholders' equity increased to $428.5
million from $370.4 million at year-end 2003. The increase in shareholders'
equity resulted primarily from net earnings of $64.0 million offset by dividend
payments of $12.8 million or $0.5025 per share. Total debt increased to 5.4% of
total capitalization at year-end 2004 compared to 4.5% at year-end 2003.

     At November 30, 2004, CLARCOR had 25,611,527 shares of common stock
outstanding at $1.00 par value, compared to 25,309,127 shares outstanding at the
end of 2003.

OTHER MATTERS

Market Risk

     The Company's market risk is primarily related to the potential loss
arising from adverse changes in interest rates and foreign currency
fluctuations. However, based on the low level of debt obligations as of year-
end 2004, interest rate risk is not expected to be significant to the Company in
fiscal 2005 and as a result, a 1% change in rates would not have a material
impact on the Company's net earnings or cash flows in fiscal 2005. The Company's
debt obligations are primarily at variable LIBOR-associated rates and are
denominated in U.S. dollars. In order to minimize the long-term costs of
borrowing, the Company manages its interest rate risk by monitoring trends in
rates as a basis for determining whether to enter into fixed rate or variable
rate agreements.

     Although the Company continues to evaluate derivative financial
instruments, including forwards, swaps and purchased options, to manage foreign
currency exchange rate changes, the Company did not hold derivatives during
2004, 2003 or 2002. As a result of continued foreign sales and business
activities, the Company will continue to evaluate the use of derivative
financial instruments to manage foreign currency exchange rate changes in the
future.

Critical Accounting Policies

     The Company's critical accounting policies, including the assumptions and
judgments underlying them, are disclosed in the Notes to the Consolidated
Financial Statements. These policies have been consistently applied in all
material respects and address such matters as revenue recognition, depreciation
methods, inventory valuation, asset impairment recognition, business combination
accounting and pension and postretirement benefits.

     While the estimates and judgments associated with the application of these
critical accounting policies may be affected by different assumptions or
conditions, the Company believes the estimates and judgments associated with the
reported amounts are appropriate in the circumstances. The following explains
several of the Company's critical accounting policies that are used in preparing
its consolidated financial statements which require the Company's management to
use significant judgment and estimates:

     Goodwill and Indefinite-lived Intangible Assets -- The Company periodically
reviews goodwill and indefinite-lived intangible assets for impairment. These
reviews of fair value involve judgment and estimates of discount rates,
transaction multiples and future cash flows for the reporting units that may be
impacted by

                                        6
<PAGE>

future sales and operating results for the reporting units, market conditions
and worldwide economic conditions.

     Allowance for Losses on Accounts Receivable -- Allowances for losses on
customer accounts receivable balances are estimated based on economic conditions
in the industries to which the Company sells and on historical experience by
evaluating specific customer accounts for risk of loss, fluctuations in amounts
owed and current payment trends. The Company's concentration of risk is also
monitored and at year-end 2004, the largest outstanding customer account balance
was $6.2 million. The allowances provided are estimates that may be impacted by
economic and market conditions which could have an effect on future allowance
requirements and results of operations.

     Pensions -- The Company's pension obligations are determined using
estimates including those related to discount rates, asset values and changes in
compensation. Actual results and future obligations will vary based on changes
in interest rates, stock and bond market valuations and employee compensation.
In 2005, a reduction in the expected return on plan assets to 8.00% from 8.25%
will result in additional expense in fiscal 2005 of approximately $0.2 million,
while a reduction in the discount rate to 5.5% from 6.0% will result in
additional expense of approximately $0.6 million for the Company's qualified
defined benefit pension plan for U.S. covered employees. Interest rates and
pension plan valuations may vary significantly based on worldwide economic
conditions and asset investment decisions.

     Income Taxes -- The Company is required to estimate and record income taxes
payable for each of the U.S. and international jurisdictions in which the
Company operates. This process involves estimating actual current tax expense
and assessing temporary differences resulting from differing accounting
treatment between tax and book which result in deferred tax assets and
liabilities. In addition, accruals are also estimated for federal, state and
international tax matters that are subject to judgment. Taxes payable and the
related deferred tax differences may be impacted by changes to tax codes,
changes in tax rates and changes in taxable profits and losses.

Recent Relevant Accounting Pronouncements

     On December 23, 2003, the Financial Accounting Standards Board (FASB)
issued SFAS No. 132R, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This Statement requires additional disclosures to be
made by employers regarding pensions and other postretirement benefit plans, but
does not change the measurement or recognition of those plans. The Company
adopted the interim period disclosure provisions of this Statement in fiscal
2004 and Note I to the Consolidated Financial Statements includes the required
disclosures.

     On May 19, 2004, the FASB issued FASB Staff Position (FSP) No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003," (the Act). The Act introduces
a prescription drug benefit under Medicare as well as a federal subsidy to
sponsors of retiree health care benefit plans. The Act did not have a material
effect on the measurement of the Company's postretirement obligations. FSP No.
106-2 was effective for the Company's fourth quarter 2004.

     Subsequent to the Company's 2004 fiscal year end, the FASB issued SFAS No.
123R, "Share-Based Payment," which requires companies to expense the value of
employee stock options and similar awards. SFAS No. 123R is effective for the
Company's fourth quarter 2005. Management has not determined the impact of
adopting SFAS No. 123R.

     On December 21, 2004, subsequent to the Company's 2004 fiscal year end, the
FASB issued two FSPs regarding the accounting implications of the American Jobs
Creation Act of 2004. FSP No. 109-1, "Application of FASB Statement No. 109
'Accounting for Income Taxes' to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004" is not expected
to have an effect on the Company's effective tax rate until fiscal 2006. FSP No.
109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004" is effective for fiscal
year 2004 and is discussed in Note J to the Consolidated Financial Statements.

                                        7
<PAGE>

Outlook

     The Company expects that sales and diluted earnings per share will continue
to grow in 2005, making it the 13th consecutive year of both sales and earnings
per share growth. The Company expects diluted earnings per share to be in the
range of $2.63 to $2.73 in 2005, excluding the effect that will result in the
fourth quarter of 2005 from the implementation of SFAS No. 123R. The Company
expects that continued cost increases will be incurred for raw materials and
employee health insurance and that customer pricing will continue to be
increased to recover cost increases. International growth is expected to
continue and although currency movements do not usually have a significant
impact on sales or operating profit, the Company expects that favorable currency
changes would add to what is expected to be another strong year internationally.

     Continued sales growth and increased operating profits are expected for the
Engine/Mobile Filtration segment as product demand for aftermarket heavy-duty
filtration products remains good due in part to high levels of freight transport
and railway usage. Growth is also expected due to new product introductions and
from sales and marketing initiatives, including growth in sales to OEM dealers.

     Sales growth for the Industrial/Environmental segment is also expected
primarily due to specialty process liquid filters. The Company also remains
optimistic that there will be an upturn in demand for filtration systems sold
into capital good markets and for HVAC filtration products and that the Total
Filtration Program will grow in 2004. Ongoing price competition related to HVAC
filtration products reduced sales in 2004 and may impact sales levels in 2005.
The Total Filtration Program had a slow 2003 and 2004 caused by lower sales of
maintenance filters to automobile and automotive parts manufacturers. The Total
Filtration Program's growth in the future will come from increasing sales to
non-automotive customers and expansion of the filter maintenance business. The
Total Filtration Program is also expected to benefit from the conversion of the
company-owned branches from selling primarily HVAC filtration products to
selling the Company's entire range of liquid and air filter products. The
operating margin for the Industrial/Environmental segment is expected to
continue to improve towards the Company's goal of a 10% annual margin for the
segment.

     The Packaging segment's sales are expected to grow in 2005 as emphasis
continues on increasing sales of flat sheet metal decorating and non-promotional
metal and plastic packaging products. Customer pricing will continue to be
increased to offset higher costs of raw materials, particularly for metal.

     Capital investments will continue to be made in each segment's facilities
to improve productivity, expand technical centers, support the Total Filtration
Program and produce new products. While the Company fully anticipates that sales
and profits will improve as a result of sales initiatives and cost reduction
efforts, the Company has developed contingency plans to reduce discretionary
spending as necessary.

     The Company continues to assess acquisition opportunities, primarily in
related filtration businesses. It is expected that these acquisitions would
expand the Company's market base, distribution coverage or product offerings.
The Company uses financial models and other criteria to review acquisition
opportunities and the Company believes that it has sufficient borrowing capacity
to continue this acquisition program.

FORWARD-LOOKING STATEMENTS

     Certain statements quoted in this Annual Report are forward-looking. These
statements involve risk and uncertainty. Actual future results and trends may
differ materially depending on a variety of factors including: the volume and
timing of orders received during the year; the mix of changes in distribution
channels through which the Company's products are sold; the success of the
Company's Total Filtration Program; the timing and acceptance of new products
and product enhancements by the Company or its competitors; changes in pricing,
labor availability and related costs, product life cycles and purchasing
patterns of distributors and customers; changes in costs of raw materials,
insurance, pensions and energy; competitive conditions in the industry; business
cycles affecting the markets in which the Company's products are sold; the
success of sales and marketing programs; the effectiveness of plant conversions,
plant expansions and productivity improvement programs; the management of both
growth and acquisitions; the cost of compliance with regulatory requirements
such as Sarbanes-Oxley Section 404; the effect of changes in accounting rules;
the fluctuation in foreign and U.S. currency exchange rates; market disruptions
caused by domestic or international conflicts;

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extraordinary events such as litigation, acquisitions or divestitures including
related charges; and economic conditions generally or in various geographic
areas. All of the foregoing matters are difficult to forecast. The future
results of the Company may fluctuate as a result of these and the other risk
factors detailed from time to time in the Company's filings with the Securities
and Exchange Commission.

     Due to the foregoing items, it is possible that, in the future, the
Company's operating results will be below the expectations of stock market
analysts and investors. In such event, the price of CLARCOR common stock could
be materially adversely affected.

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