<PAGE>   1
                                                                   EXHIBIT 13(a)

CONSOLIDATED BALANCE SHEETS

November 30, 1996 and 1995   (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
ASSETS                                                         1996       1995
--------------------------------------------------------------------------------
<S>                                                          <C>        <C>
Current assets:
  Cash and short-term cash investments ....................  $ 17,372   $ 18,769
  Accounts receivable, less allowance for losses
     of $1,784 for 1996 and $1,557 for 1995 ...............    52,509     50,034
  Inventories .............................................    49,773     42,972
  Prepaid expenses ........................................     1,476      2,018
  Deferred income taxes ...................................     3,249      3,777
                                                             --------   --------
              Total current assets ........................   124,379    117,570
                                                             --------   --------
  Marketable securities, at fair value ....................     3,292      4,696
  Investment in affiliates, at cost .......................       530         --
  Plant assets, at cost less accumulated depreciation .....    78,586     67,036
  Excess of cost over fair value of assets acquired,
     less accumulated amortization ........................    15,120     14,893
  Pension assets ..........................................    12,453     11,218
  Other assets ............................................     9,604      7,849
                                                             --------   --------
              Total assets ................................  $243,964   $223,262
                                                             ========   ========

LIABILITIES
--------------------------------------------------------------------------------
Current liabilities:
  Current portion of long-term debt .......................  $  6,928   $  7,596
  Accounts payable and accrued liabilities ................    34,976     32,851
  Income taxes ............................................     3,252      2,013
                                                             --------   --------
              Total current liabilities ...................    45,156     42,460
                                                             --------   --------
Long-term debt, less current portion ......................    35,522     34,417
Postretirement health care benefits .......................     1,914      2,908
Long-term pension liabilities .............................     6,607      5,226
Deferred income taxes .....................................     7,798      6,228
Other liabilities .........................................        --        867
Minority interests ........................................       908        341

Contingencies

SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
Capital stock:
  Preferred, par value $1, authorized 1,300,000
     shares, issuable in series, none issued ..............        --         --
  Common, par value $1, authorized 30,000,000
     shares, issued 14,874,969 in 1996 and
     14,825,296 in 1995 ...................................    14,875     14,825
  Capital in excess of par value ..........................     1,393      1,121
  Foreign currency translation adjustments ................    (1,858)    (1,607)
  Unrealized holding gain on marketable equity
     securities, net of taxes .............................       992      1,285
  Retained earnings .......................................   130,657    115,191
                                                             --------   --------        
              Total shareholders' equity ..................   146,059    130,815
                                                             --------   --------
              Total liabilities and shareholders' equity ..  $243,964   $223,262
                                                             ========   ========
</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements.

                                      24

<PAGE>   2


CONSOLIDATED STATEMENTS OF EARNINGS

for the years ended November 30, 1996, 1995 and 1994
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                           1996      1995       1994
--------------------------------------------------------------------------------------
<S>                                                    <C>         <C>       <C>

Net sales .......................................        $333,388  $290,194  $ 270,123
Cost of sales ...................................         239,119   209,653    192,456
                                                         ------------------------------
   Gross profit .................................          94,269    80,541     77,667
Selling and administrative expenses .............          53,739    45,176     45,301
                                                         ------------------------------
   Operating profit .............................          40,530    35,365     32,366
                                                         ------------------------------
Other income (expense):
 Interest expense ...............................          (3,243)   (2,693)    (2,788)
 Interest and dividend income ...................           1,130     1,076        548
 Gain on sale of investment .....................           1,675        --      4,166
 Other, net .....................................             (73)      459     (2,689)
                                                         ------------------------------
                                                             (511)   (1,158)      (763)
                                                         ------------------------------
    Earnings before income taxes,
         equity in net earnings of
         affiliate, minority interests,
         and cumulative effect of
         change in accounting method ............          40,019    34,207     31,603
Provision for income taxes ......................          14,896    12,182     11,935
                                                         ------------------------------

    Earnings before equity in net earnings
         of affiliate, minority interests,
         and cumulative effect of change
         in accounting method ...................          25,123    22,025     19,668
Equity in net earnings of affiliate .............              --        --        959
Minority interests in earnings of subsidiaries ..           (145)      (71)        (2)
                                                         ------------------------------
    Earnings before cumulative effect of
         change in accounting method ............          24,978    21,954     20,625
Cumulative effect of change
 in accounting method ...........................              --        --        630
                                                         ------------------------------
Net earnings ....................................        $ 24,978  $ 21,954   $ 21,255
                                                         ==============================

Net earnings per common share:
 Earnings before cumulative effect of change
    in accounting method ........................           $1.68    $ 1.48      $1.39
 Cumulative effect of change
     in accounting method .......................              --        --       0.04
                                                         ------------------------------
                                                            $1.68    $ 1.48      $1.43
                                                         ==============================
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.




                                      25
<PAGE>   3


CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

for the years ended November 30, 1996, 1995 and 1994
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                 Common Stock
                                   ----------------------------------------
                                          Issued            In Treasury                   Foreign
                                   --------------------   -----------------  Capital in   Currency    Unrealized
                                     Number                Number            Excess of   Translation   Holding    Retained
                                    of Shares    Amount   of Shares  Amount  Par Value   Adjustments     Gain     Earnings
--------------------------------------------------------------------------------------------------------------------------
<S>                                <C>          <C>       <C>        <C>     <C>         <C>          <C>         <C>

Balance, November 30, 1993 ......  14,819,199   $14,819         --   $  --      $  328      $(1,465)      $  --   $ 90,959

Net earnings ....................          --        --         --      --          --           --          --     21,255
Purchase of treasury stock ......          --        --     72,900   1,327          --           --          --         --
Retirement of treasury stock ....     (30,000)      (30)   (30,000)   (487)       (457)          --          --         --
Stock options exercised .........       5,775         6         --      --          78           --          --         --
Issuance of stock under
  award plans ...................       8,814         9         --      --         234           --          --         --
Cash dividends -- $.6225
  per common share ..............          --        --         --      --          --           --          --     (9,201)
Unrealized holding gain on
  marketable equity securities ..          --        --         --      --          --           --         911         --
Translation adjustments .........          --        --         --      --          --          856          --         --
-------------------------------------------------------------------------------------------------------------------------

Balance, November 30, 1994 ......  14,803,788    14,804     42,900     840         183         (609)        911    103,013

Net earnings ....................          --        --         --      --          --           --          --     21,954
Retirement of treasury stock ....     (42,900)      (43)   (42,900)   (840)       (351)          --          --       (446)
Stock options exercised .........      28,849        29         --      --         547           --          --         --
Issuance of stock under
  award plans ...................      35,559        35         --      --         742           --          --         --
Cash dividends -- $.6325
  per common share ..............          --        --         --      --          --           --          --     (9,330)
Unrealized holding gain on
  marketable equity securities ..          --        --         --      --          --           --         374         --
Translation adjustments .........          --        --         --      --          --         (998)         --         --
--------------------------------------------------------------------------------------------------------------------------
                                                                                                                       
Balance, November 30, 1995 ......  14,825,296    14,825         --      --       1,121       (1,607)      1,285    115,191

Net earnings ....................          --        --         --      --          --           --          --     24,978
Purchase of treasury stock ......          --        --     21,900      22          --           --          --         --
Retirement of treasury stock ....     (21,900)      (22)   (21,900)    (22)       (408)          --          --         --
Stock options exercised .........      58,641        59         --      --         133           --          --         --
Issuance of stock under
  award plans ...................      12,932        13         --      --         547           --          --         --
Cash dividends -- $.6425
  per common share ..............          --        --         --      --          --           --          --     (9,512)
Unrealized holding gain on
  marketable securities .........          --        --         --      --          --           --         653         --
Realized gain on sale of
  marketable securities .........          --        --         --      --          --           72        (946)        --
Translation adjustments .........          --        --         --      --          --         (323)         --         --
--------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1996 ......  14,874,969   $14,875         --   $  --      $1,393      $(1,858)      $ 992   $130,657
==========================================================================================================================
</TABLE>




The accompanying notes are an integral part of the consolidated financial
statements.






                                      26
<PAGE>   4

CONSOLIDATED STATEMENTS OF CASH FLOWS

for the years ended November 30, 1996, 1995 and 1994   (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                     1996       1995       1994
-------------------------------------------------------------------------------------------------
<S>                                                                <C>        <C>        <C>
Cash flows from operating activities:
  Net earnings and cumulative effect of accounting change ..       $ 24,978   $ 21,954   $ 21,255
  Adjustments to reconcile net earnings to net
        cash provided by operations:
     Depreciation ..........................................          9,276      7,736      6,778
     Amortization ..........................................            509        508        514
     Equity in net earnings of affiliate ...................             --         --       (959)
     Gain on sale of investment ............................         (1,675)        --     (4,166)
     Minority interests in earnings of subsidiaries ........            145         71          2
     Net (gain) loss on dispositions of plant assets .......           (243)      (177)     1,862
     Cumulative effect of accounting change ................             --         --       (630)
     Changes in assets and liabilities:
        Accounts receivable ................................         (2,314)    (8,030)    (1,981)
        Inventories ........................................         (6,306)    (6,316)    (2,863)
        Prepaid expenses ...................................            579        899     (1,786)
        Accounts payable and accrued liabilities ...........         (2,702)     4,522      4,021
        Pension assets and liabilities, net ................            185     (1,713)       681
        Income taxes .......................................          1,444         87       (137)
        Deferred income taxes ..............................          2,295        (81)     2,012
                                                                   -------------------------------
           Net cash provided by operating activities .......         26,171     19,460     24,603
                                                                   -------------------------------
Cash flows from investing activities:
  Proceeds from sale of investment .........................          3,067         --     10,731
  Business acquisitions, net of cash acquired ..............         (1,298)   (14,125)    (1,512)
  Investment in affiliate ..................................           (530)        --         --
  Dividends from marketable securities .....................           (302)      (246)        --
  Dividends from affiliate, net of reinvestments ...........             --       (327)       363
  Additions to plant assets ................................        (21,652)   (13,910)   (11,416)
  Dispositions of plant assets .............................          2,290         72        331
  Other, net ...............................................             --        (63)     1,034
                                                                   -------------------------------
           Net cash used in investing activities ...........        (18,425)   (28,599)      (469)
                                                                   -------------------------------
Cash flows from financing activities:
  Borrowing under long-term debt ...........................          8,410     25,000         --
  Reduction of long-term debt ..............................         (8,016)    (7,579)    (7,946)
  Sales of capital stock, stock option plan ................            421        278         69
  Purchases of treasury stock ..............................           (430)        --     (1,327)
  Cash dividends paid ......................................         (9,512)    (9,330)    (9,201)
                                                                   -------------------------------
           Net cash provided by (used in)
              financing activities .........................         (9,127)     8,369    (18,405)
                                                                   -------------------------------
Net effect of exchange rate changes on cash ................            (16)       (28)        --
                                                                   -------------------------------
Net change in cash and short-term cash investments .........         (1,397)      (798)     5,729
Cash and short-term cash investments, beginning of year ....         18,769     19,567     13,838
                                                                   -------------------------------
Cash and short-term cash investments, end of year ..........       $ 17,372   $ 18,769   $ 19,567
                                                                   ===============================
</TABLE>




The accompanying notes are an integral part of the consolidated financial
statements.





                                      27
<PAGE>   5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------------------------------------------------
A. ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include all domestic and foreign
subsidiaries which are more than 50% owned and controlled.  Investments in
nonconsolidated companies which are at least 20% owned are carried at cost plus
equity in undistributed earnings since acquisition.

     Minority interests represent an outside shareholder's 10% ownership of the
common stock of Filtros Baldwin de Mexico (FIBAMEX), an outside shareholder's
30% ownership of Baldwin-Unifil S.A., and an outside shareholder's 50%
ownership of Baldwin Filters (Aust.) Pty. Limited.

FOREIGN CURRENCY TRANSLATION

     Financial statements of foreign subsidiaries are translated into U.S.
dollars at current rates, except that revenues, costs and expenses are
translated at average current rates during each reporting period.  Net exchange
gains or losses resulting from the translation of foreign financial statements
and the effect of exchange rate changes on intercompany transactions of a
long-term investment nature are accumulated and credited or charged directly to
a separate component of shareholders' equity.

INVESTMENTS IN MARKETABLE SECURITIES

     On November 30, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, (SFAS 115) "Accounting for Certain Investments in
Debt and Equity Securities."  The Company's marketable securities, with an
average cost basis, have been classified as available-for-sale.

PLANT ASSETS

     Depreciation is provided by the straight-line and accelerated methods for
financial statement purposes and by the accelerated method for tax purposes.
The provision for depreciation is based on the estimated useful lives of the
assets. It is the policy of the Company to capitalize renewals and betterments
and to charge to expense the cost of current maintenance and repairs.

EXCESS OF COST OVER FAIR VALUE OF
ASSETS ACQUIRED

     The excess of cost over fair value of assets acquired is being amortized
over a forty-year period, using the straight-line method subject to impairment
write-offs determined by underlying cash flows.  Accumulated amortization was
$6,422 and $5,913 at November 30, 1996 and 1995, respectively.

STATEMENTS OF CASH FLOWS

     All highly liquid investments purchased with an original maturity of three
months or less are considered to be short-term cash investments.  The carrying
amount approximates fair value.  The Company has certain noncash transactions
related to stock option and award plans which are described in Note M.

CONCENTRATIONS OF CREDIT

     Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of short-term cash
investments and trade receivables.  The Company places its short-term cash
investments with high credit quality financial institutions and in high grade
municipal securities.  At November 30, 1996 and 1995, the Company held
short-term securities with a total cost of $15,780 and $17,225, respectively.
Concentrations of credit risk with respect to trade receivables are limited due
to the Company's large number of customers and their dispersion across many
different industries and locations.

INCOME TAXES

        As of December 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes."  SFAS
109 requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the financial
statement carrying amounts and the tax basis of assets and liabilities.
Previously, the Company deferred the past tax effects of timing differences
between financial reporting and taxable income.

REVENUE RECOGNITION

     Revenue is recognized upon shipment of goods to customers.




                                      28
<PAGE>   6

------------------------------------------------------------------------------
NET EARNINGS PER COMMON SHARE

     Net earnings per common share is based on the weighted average number of
common shares outstanding during the respective years.

USE OF MANAGEMENT'S ESTIMATES

     The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

ACCOUNTING PERIOD

     The Company's fiscal year ends on the Saturday closest to November 30.
The fiscal years ended November 30, 1996, December 2, 1995, and December 3,
1994, were comprised of fifty-two, fifty-two, and fifty-three weeks,
respectively.  In the consolidated financial statements, all fiscal years are
shown to begin as of December 1 and end as of November 30 for clarity of
presentation.

RECLASSIFICATION

     Certain reclassifications have been made to conform prior years' data to
the current presentation.

B. ACQUISITIONS

     During 1996, Baldwin-Unifil South Africa, in which the Company owns a 70%
equity interest, was incorporated in South Africa.  Baldwin-Unifil South Africa
acquired certain assets from Unifil (Pty.) Ltd. for $1,298 in cash.  The
acquisition did not have a significant impact on the results of the Company.

     During 1996, the Company also entered into a joint venture in China with a
$530 investment, called Baldwin-Weifang Filters Ltd., and accounts for its
investment on a cost basis. The acquisition did not have a significant impact
on the results of the Company

     The Company purchased certain assets comprising the filtration business of
Hastings Manufacturing Company on September 4, 1995 for $14,125 in cash,
including acquisition expenses.  The business is a manufacturer of automotive
and light truck filter products.  The acquisition has been accounted for by the
purchase method of accounting and the operating results of the business are
included in the Company's consolidated statement of earnings from the date of
the acquisition.

     The following unaudited pro forma amounts are presented as if the Hastings
acquisition had occurred at the beginning of the period presented immediately
preceding the acquisition and does not purport to be indicative of what would
have occurred had the acquisition been made as of those dates or of results
which may occur in the future.  Unaudited pro forma net sales for the Company
would have been $320,194 and $310,493 for the years ended November 30, 1995,
and 1994, respectively.  Net earnings and earnings per share for these periods
would not have been significantly affected.

     During 1994, FIBAMEX, in which the Company owns a 90% equity interest, was
incorporated in Mexico.  FIBAMEX acquired certain assets from Filtros
Continental, S.A. de C.V. for $1,512 in cash.  The acquisition did not have a
significant impact on the results of the Company.

C. INVESTMENT IN MARKETABLE SECURITIES

     In October 1994, the Company sold 75% of its 20% interest in G.U.D.
Holdings Limited, recognizing a pretax gain on the sale of $4,166.

     In November 1996, the Company sold 50% of its 5% interest in G.U.D.
Holdings Limited, recognizing a pretax gain on the sale of $1,675.  The
remaining 2.5% has been classified as available for sale under the provisions of
SFAS 115. The quoted market value of the investment was $3,292 and $4,696 as of
November 30, 1996 and 1995, respectively, which includes unrealized holding
gains, net of deferred income taxes, of $992, $1,285, and $911 as of November
30, 1996, 1995, and 1994, respectively.  The 1996, 1995, and 1994 unrealized
holding gains, net of deferred income taxes, have been included as a component
of shareholders' equity at November 30.

     Subsequent to the end of the year, the Company sold its remaining 2.5%
investment, recognizing a pretax gain on the sale of $1,706.




                                      29
<PAGE>   7

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

D. INVENTORIES

     Inventories are stated at the lower of cost or market.  Cost is determined
by the last-in, first-out (LIFO) method for approximately 57% and 62% of the
Company's inventories at November 30, 1996 and 1995, respectively, and by the
first-in, first-out (FIFO) method for all other inventories.  The FIFO method
would approximate the current cost.  The inventories are summarized as follows:


<TABLE>
<CAPTION>

                                                1996     1995
                                             -------  -------
                  <S>                       <C>      <C>
                  Raw materials ...........  $16,315  $14,285
                  Work-in-process .........    9,943    8,392
                  Finished products .......   25,882   23,051
                                             -------  -------
                   Total at FIFO ..........   52,140   45,728
                  Less excess of FIFO
                   cost over LIFO values ..    2,367    2,756
                                             -------  -------
                                             $49,773  $42,972
                                             =======  =======
</TABLE>


     During 1994, LIFO inventory quantities were reduced resulting in a partial
liquidation of the LIFO bases, the effect of which increased net earnings by
approximately $480.

E. PLANT ASSETS

     Plant assets at November 30, 1996 and 1995 were as follows:


<TABLE>
<CAPTION>

                                                 1996             1995
                                             --------         --------
        <S>                                 <C>              <C>        
         Land .............................  $  2,173         $  2,483
         Buildings and building fixtures ..    44,784           42,670
         Machinery and equipment ..........   106,773           90,034
         Construction-in-process ..........     8,593            8,176
                                             --------         --------
                                              162,323          143,363
         Less accumulated depreciation ....    83,737           76,327
                                             --------         --------
                                             $ 78,586         $ 67,036
                                             ========         ========
</TABLE>



F. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

     Accounts payable and accrued liabilities at November 30, 1996 and 1995
were as follows:


<TABLE>
<CAPTION>

                                                 1996     1995
                                                -------  -------
               <S>                             <C>      <C>
                Accounts payable .............  $18,509  $20,378
                Accrued salaries, wages
                  and commissions ............    5,900    3,537
                Compensated absences .........    2,744    2,726
                Accrued pension liabilities ..      996      996
                Other accrued liabilities ....    6,827    5,214
                                                -------  -------
                                                $34,976  $32,851
                                                =======  =======
</TABLE>


G. LONG-TERM DEBT

     Long-term debt at November 30, 1996 and 1995 consists of the following:


<TABLE>
<Caption

                                                1996     1995
                                               -------  -------
               <S>                            <C>      <C>
                Promissory note,
                  interest payable
                  quarterly at 9.71% ........  $ 6,416  $13,416
                Promissory note,
                  interest payable
                  semi-annually at 6.69% ....   25,000   25,000
                Industrial Revenue Bonds,
                 variable interest rate .....    8,410       --
                Other obligations,
                  at 7% to 9% interest rates.    2,624    3,597
                                               -------  ------- 
                                                42,450   42,013
                Less current portion ........    6,928    7,596
                                               -------  -------
                                               $35,522  $34,417
                                               =======  =======
</TABLE>


     The promissory notes mature March 31, 1997 (9.71%) and July 25, 2004
(6.69%),  but the Company is required to prepay, without premium, certain
principal amounts as stated in the agreements.  A fair value estimate of
$42,913 and $41,389 for the long-term debt, in 1996 and 1995, respectively, is
based on the current interest rates available to the Company for debt with
similar remaining maturities.  Under the note agreements, the Company must meet
certain restrictive covenants.  The primary covenants include maintaining
minimum consolidated net worth at $100,000, limiting new borrowings, and certain
restrictions regarding changes in ownership as stipulated in the agreement.

     On February 1, 1996, the Company, in cooperation with the South Dakota
Economic Development Finance Authority, issued $8,410 of Industrial Revenue
Bonds.  The bonds are due February 1, 2016, with a variable rate of interest
which is reset weekly.  In conjunction with the issuance of the Industrial
Revenue Bonds, the Company holds in trust certain investments restricted and
committed for the acquisition of plant equipment.  At November 30, 1996, the
restricted asset balance of $2,780 is included in other assets.

     Other obligations include a 15 year capital lease for a manufacturing
facility acquired in 1991 from the Community Development Authority of the City
of Gothenburg, Nebraska, and debt acquired in the acquisitions of Airguard
Industries and Guardian/U.E.L., including an industrial revenue bond due in
2003.




                                      30
<PAGE>   8

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

     The Company has a $25,000 revolving credit facility with a financial
institution, against which $9,421 letters of credit have been issued at
November 30, 1996.  The agreement related to this obligation includes certain
restrictive covenants that are similar to the promissory notes.  The agreement
expires in 2000.

     Principal maturities of long-term debt for the next five fiscal years
ending November 30, approximates:   $6,928 in 1997, $384 in 1998, $186 in 1999,
$5,210 in 2000 and $5,230 in 2001 and $24,512 thereafter.

     Interest paid totaled $3,399, $2,226, and $2,916 during 1996, 1995 and
1994, respectively.

H. RETIREMENT PLANS

     The Company has defined benefit pension plans covering nonemployee
directors and most of its employees.  Plan benefits are principally based upon
years of service, compensation, and social security benefits.  The Company's
funding policy is to contribute annually the maximum amount that can be
deducted for federal income tax purposes.

     The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheet at November 30:


<TABLE>
<CAPTION>
                                       1996                            1995
                            ------------------------------------------------------
                              Assets       Accumulated    Assets       Accumulated
                              Exceed        Benefits      Exceed        Benefits
                            Accumulated      Exceed     Accumulated      Exceed
                             Benefits        Assets      Benefits        Assets
                            -----------    -----------  -----------    -----------
<S>                         <C>            <C>          <C>            <C>
Accumulated benefit
 obligation, including
 vested benefits of
 $47,269 and $49,294
 in 1996 and 1995,
 respectively ............     $48,628         $7,603      $46,120        $ 6,222
                            =====================================================
Plan assets
 at fair value ...........     $66,857        $     -      $62,647        $     -
Less projected benefit
 obligation for service
 rendered to date ........      54,266          8,785       51,374          7,011
                            -----------------------------------------------------
Plan assets in excess of
 (less than) projected
 benefit obligation ......      12,591         (8,785)      11,273         (7,011)
Unrecognized net loss from
 past experience different
 from that assumed .......       4,214          1,988        5,385          1,398
Unrecognized net asset
 being recognized over
 approximately 15 years ..      (4,352)             -       (5,440)             -
Recognition of additional
 minimum liability .......           -           (806)           -           (609)
                            -----------------------------------------------------
Accrued pension
 asset (liability) for
 defined benefit plans ...     $12,453        $(7,603)     $11,218        $(6,222)
                            =====================================================
</TABLE>


     In addition to the plan assets related to qualified plans, the Company has
funded approximately $2,829 and $2,800 at November 30, 1996 and 1995,
respectively, in a restricted trust for its nonqualified plans.  This trust is
included in other long-term assets in the Company's consolidated balance
sheets.

     The net pension expense includes the following components for the three
years ended November 30:


<TABLE>
<CAPTION>
                                          1996      1995      1994
                                        -------   -------   -------
           <S>                         <C>       <C>       <C>
            Service cost - benefits
            earned during
            the period ...............  $ 1,986   $ 1,789   $ 1,979
            Interest cost on
            projected benefit
            obligation ...............    4,394     4,139     4,046
            Actual return on assets ..   (7,232)   (8,791)     (298)
            Net amortization
            and deferral .............    1,062     3,208    (4,646)
                                        ---------------------------
            Net pension expense ......  $   210   $   345   $ 1,081
                                        ===========================
</TABLE>


     The projected benefit obligation has been determined with a weighted
average discount rate of 7.5% in 1996 and 1995, and a rate of increase in
future compensation of 5.0% for both years.  The expected weighted average
long-term rate of return was 9.0% in 1996 and 1995.  Plan assets consist of
group annuity insurance contracts, corporate stocks, bonds and notes,
certificates of deposit and U.S. Government securities.

     The defined benefit pension plan covering the Company's nonemployee
directors was terminated as of December 1, 1996.  The payment of the net
present value of the Company's obligation for directors' retirement benefits
was deferred and will be paid to the directors at their normal retirement date.

     The Company also has various defined contribution plans.  The Company
recognized expense related to these plans of $707, $476 and $499 in 1996, 1995
and 1994, respectively.

I. POSTRETIREMENT HEALTH CARE BENEFITS

     The Company provides certain health care benefits for certain of the
Company's retired employees.  These employees become eligible for benefits if
they meet minimum age and service requirements and are eligible for retirement
benefits.  The Company has the right to modify or terminate these benefits.


                                      31
<PAGE>   9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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

     The following table sets forth the plan's obligation and cost at November
30, 1996 and 1995:


<TABLE>
<CAPTION>
                                                        1996    1995
                                                       --------------
          <S>                                          <C>     <C>
          Accumulated postretirement
           benefit obligation:
           Retirees .................................  $2,063  $2,260
           Fully eligible active plan participants ..      13      12
           Other active plan participants ...........     147     606
                                                       --------------
          Accumulated postretirement
           benefit obligation .......................   2,223   2,878
          Unrecognized gain .........................       -     327
                                                       --------------
          Accrued postretirement benefit liability ..   2,223   3,205
            Less current portion,
             included in accrued liabilities ........     309     297
                                                       --------------
                                                       $1,914  $2,908
                                                       ==============
</TABLE>


     The net periodic postretirement benefit cost includes the following
components for the three years ended November 30:


<TABLE>
<CAPTION>
                                                      1996  1995  1994
                                                     -------------------
        <S>                                          <C>    <C>    <C>
        Service cost-benefits attributed
         to service during the period .............  $  11  $  25  $  28
        Interest cost on accumulated
         postretirement benefit obligations .......    236    218    216
                                                     -------------------
        Net periodic postretirement benefit cost ..  $ 247  $ 243  $ 244
                                                     ===================
</TABLE>


     During 1996, the Company entered into an irrevocable agreement with the
Healthcare Financing Administration (HCFA), the Federal agency that oversees
Medicare, whereby certain employees and retirees of the Company's locations in
Pennsylvania relinquished their rights to receive Medicare and accepted
healthcare insurance from an insurance carrier.  The HCFA entered into a
contract with the insurance carrier to administer the healthcare claims and
Medicare for these employees and retirees.  This agreement terminated the
Company's primary responsibility to provide for the postretirement benefit
obligation and eliminated significant risks related to the obligation and plan
assets related to those employees and retirees.  The Company recognized a
pretax gain of $672 on the curtailment of its postretirement healthcare plan
for certain employees and retirees as defined above.

     Substantially all future health care benefit cost increases will be
assumed by the participants, and therefore, future increases in health care
costs will not increase the postretirement benefit obligation or cost to the
Company.  The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.5% in 1996 and 1995.

J. INCOME TAXES

     The provision for income taxes consists of:


<TABLE>
<CAPTION>
                                   1996     1995      1994
                                 --------------------------
                    <S>          <C>      <C>       <C>
                    Current:
                    Federal ...  $11,215  $11,000   $ 8,886
                    State .....    1,356    1,372     1,577
                    Foreign ...      225      135        84
                    Deferred ..    2,100     (325)    1,388
                                 --------------------------
                                 $14,896  $12,182   $11,935
                                 ==========================
</TABLE>


     Income taxes paid, net of refunds, totaled $10,723,  $11,868, and $10,087
during 1996, 1995 and 1994, respectively.

     The components of the net deferred tax liability as of November 30, 1996
and 1995 were as follows:


<TABLE>
<CAPTION>
                                                   1996      1995
                                                ------------------
            <S>                                 <C>        <C>
            Deferred tax assets:
             Deferred compensation ...........  $  1,457   $ 1,352
             Other postretirement benefits ...       855     1,191
             Foreign net operating
                 loss carryforward ...........       939     1,132
            Other items ......................     2,441     2,617
                                                ------------------
            Total gross deferred tax assets ..     5,692     6,292
                                                ------------------
            Deferred tax liabilities:
             Pensions ........................    (2,107)   (2,216)
             Plant assets ....................    (6,503)   (5,210)
             Other items .....................    (1,631)   (1,317)
                                                ------------------
            Total gross deferred
             tax liabilities .................   (10,241)   (8,743)
                                                ------------------
            Net deferred tax liability .......  $ (4,549)  $(2,451)
                                                ==================
</TABLE>


     Deferred tax assets, including foreign net operating loss carryforwards,
are expected to be realized through reversal of taxable temporary differences
and future earnings.

     The cumulative effect of adopting SFAS 109 in the first quarter of 1994
was $630.

     Earnings before income taxes, equity in net earnings of affiliates,
minority interests, and cumulative effect of change in accounting method
included the following components:

                                      32
<PAGE>   10
-----------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                           1996     1995     1994
                                        -------  -------  -------
             <S>                       <C>      <C>      <C>
              Domestic income ........  $39,309  $33,683  $32,554
              Foreign income (loss) ..      710      524     (951)
                                        -------  -------  -------
              Total ..................  $40,019  $34,207  $31,603
                                        =======  =======  =======
</TABLE>


     The provision for income taxes resulted in effective tax rates which
differ from the statutory federal income tax rates.  The reasons for these
differences are as follows:


<TABLE>
<CAPTION>
                                                     Percent of
                                                   Pretax Earnings
                                            -----------------------------       
                                            1996        1995        1994
                                            -----  ---------------  -----
      <S>                                  <C>        <C>          <C>
       Statutory U.S. tax rates ..........  35.0%      35.0%        35.0%
       State income taxes,
        net of federal benefit ...........   2.3        2.6          3.2
       Reduction of previously
        established accruals .............     -          -         (1.4)
       Capital loss utilization ..........     -          -         (1.3)
       Foreign tax credit (utilization) ..     -       (0.1)           -
       Foreign net operating
        loss (utilization) ...............     -       (3.3)         1.3
       Other, net ........................  (0.1)       1.4          1.0
                                            ----   --------         ----
       Consolidated effective
        income tax rate ..................  37.2%      35.6%        37.8%
                                            ====   ========         ====
</TABLE>


K. CONTINGENCIES

     The Company is involved in legal actions arising in the normal course of
business.  After taking into consideration legal counsel's evaluation of such
actions, management is of the opinion that their outcome will not have a
material adverse effect on the Company's consolidated results of operations or
financial position.

L. PREFERRED STOCK PURCHASE RIGHTS

     In March 1996, the Board of Directors of the Company adopted a Shareholder
Rights Plan to replace an existing plan that expired on April 25, 1996. Under
the terms of the Plan, each shareholder received rights to purchase shares of
CLARCOR Series B Junior Participating Preferred Stock. The rights become
exercisable only after the earlier to occur of (i) 10 business days after the
first public announcement that a person or group (other than a CLARCOR related
entity) has become the beneficial owner of 15% or more of the outstanding
shares of CLARCOR Common Stock, or (ii) 10 business days (unless extended by
the CLARCOR Board in accordance with the Rights Agreement) after the
commencement of, or the intention to make, a tender or exchange offer the
consumation of which would result in any person or group (other than a CLARCOR
related entity) becoming such a 15% beneficial owner. Each right entitles the
holder to buy one-hundredth of a share of such preferred stock at an exercise
price of $80.
        
     Once the rights become exercisable, each right will entitle the holder,
other than the acquiring individual or group, to purchase a number of CLARCOR
common shares at a 50% discount to the then-market price of CLARCOR Common
Stock.  In addition, under certain circumstances, if the rights become
exercisable, the holder will be entitled to purchase the stock of the acquiring
individual or group, at a 50% discount.  The Board may also elect to redeem the
rights at $.01 per right.  The rights expire on April 25, 2006.

     The authorized preferred stock includes 300,000 shares designated as
Series B Junior Participating Preferred Stock.

M. INCENTIVE PLAN

     In 1994, the shareholders of the Company adopted the 1994 Incentive Plan,
which allows the Company to grant stock options, restricted stock and
performance awards to officers, directors and key employees.  The 1994
Incentive Plan incorporates the various incentive plans in existence prior to
March 1994, including the 1984 Stock Option Plan, the 1987 Long Range
Performance Share Plan, and the 1990 Directors' Restricted Stock Compensation
Plan.

     At the inception of the 1994 Incentive Plan there were 1,000,000 shares
authorized for future grants.  At November 30, 1996 and 1995, respectively,
there were 494,349 and 689,039 shares reserved for future grants, of which
183,260 and 180,258 shares were granted in December 1996 and 1995,
respectively.  The remaining ungranted shares expire in December 2003.

     The following is a description and a summary of key provisions related to
this plan.

STOCK OPTIONS

     Nonqualified stock options may, at the discretion of the Board of
Directors, be granted at the fair market value at the date of grant or an
exercise price less than the fair market value at the date of grant.





                                      33
<PAGE>   11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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

     Shares under nonqualified stock options are as follows:


<TABLE>
<CAPTION>
                                          1996        1995        1994
                                       ---------   ---------   ---------
      <S>                              <C>         <C>         <C>
      Outstanding at beginning
       of year ......................  1,252,906   1,112,269     862,206
      Granted (prices ranging from
       $18.25 to $21.875 per share)..    208,500     195,250     261,500
      Exercised/surrendered .........   (126,606)    (54,613)    (11,437)
                                       ---------   ---------   ---------
      Outstanding at end of year
       (prices ranging from $9.33
       to $21.875 per share) ........  1,334,800   1,252,906   1,112,269
                                       ==========  =========   =========
      Exercisable at end of year ....    744,175     726,000     572,033
                                       ==========  =========   =========
</TABLE>


     On October 23, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" (SFAS 123).  SFAS 123 encourages, but does not require,
companies to adopt a fair value based method for determining expense related to
stock based compensation.  Companies who do not adopt the provisions of SFAS
123 for recognition purposes must disclose pro forma effects as if the fair
value based method of accounting had been applied.  The Company does not intend
to adopt the new recognition aspects of SFAS 123 but will provide required
disclosure of pro forma information beginning in 1997.  The pro forma impact
has not yet been determined.

LONG RANGE PERFORMANCE AWARDS

     Officers and key employees may be granted target awards of Company shares
of common stock and performance units which represent the right to a cash
payment.  The awards are earned and shares are issued only to the extent that
the Company achieves performance goals determined by the Board of Directors
during a three-year performance period.

     During the performance period, officers and key employees are permitted to
vote the restricted stock and receive compensation equal to dividends declared
on common shares.  The Company accrues compensation expense for the performance
opportunity ratably during the performance cycle.  Compensation expense for the
plan totaled $522, $446 and $284 in 1996, 1995 and 1994, respectively.
Distribution of Company common stock and cash for the performance periods ended
November 30, 1996, 1995 and 1994 were $350, $312 and $237, respectively.

DIRECTORS' RESTRICTED STOCK COMPENSATION

     The 1994 Incentive Plan grants all nonemployee directors, in lieu of cash,
shares of common stock equal to five years directors' annual retainer.  The
directors' rights to the shares vest 20% on date of grant and 20% annually
during the next four years.  The directors are entitled to receive dividends
and exercise voting rights with respect to all shares prior to vesting.  Any
unvested shares are forfeited if the director ceases to be a nonemployee
director for any reason.  Compensation expense for the plan totaled $165, $104
and $125 in 1996, 1995 and 1994, respectively.  During 1996 and 1995, $5 and
$26 of Company common stock were issued under the plan.

N. SUBSEQUENT EVENT

     In September, 1996, the Company announced the signing of a definitive
agreement to acquire United Air Specialists, Inc. (UAS), a manufacturer of air
quality equipment based in Cincinnati, Ohio.  Subsequent to year-end, the
Company filed a registration statement in connection with this transaction with
the Securities and Exchange Commission.  The transaction is structured as a
merger under which the Company will issue common stock in exchange for each
fully diluted share of UAS common stock.  It is expected that the acquisition
will be accounted for as a pooling of interests.  As a result of the
acquisition, UAS will become a subsidiary of the Company.

     Consummation of the merger is subject, among other things, to approval by
the shareholders of UAS.

O. UNAUDITED QUARTERLY FINANCIAL DATA

     The unaudited quarterly data for 1996 and 1995 are as follows:


<TABLE>
<CAPTION>
                           First   Second    Third   Fourth
                          Quarter  Quarter  Quarter  Quarter   Total
         -------------------------------------------------------------
         <S>              <C>      <C>      <C>      <C>      <C>
         1996:
         NET SALES .....  $72,084  $81,574  $88,925  $90,805  $333,388
         GROSS PROFIT ..   19,976   23,537   24,836   25,920    94,269
         NET EARNINGS ..    3,937    5,803    6,526    8,712    24,978
         NET EARNINGS
          PER COMMON
          SHARE ........  $  0.27  $  0.39  $  0.44  $  0.58  $   1.68

         1995:
         Net sales .....  $62,137  $70,478  $71,829  $85,750  $290,194
         Gross profit ..   17,692   20,099   20,480   22,270    80,541
         Net earnings ..    3,972    4,906    5,886    7,190    21,954
         Net earnings
          per common
          share ........  $  0.27  $  0.33  $  0.40  $  0.48  $   1.48
</TABLE>




                                      34
<PAGE>   12
------------------------------------------------------------------------------

P. SEGMENT INFORMATION

     The Company operates in two principal product segments:  Filtration
Products and Consumer Products.  Filtration Products manufactures and markets a
complete line of filters used in the filtration of internal combustion engines,
commercial and industrial buildings, residences, clean rooms, and lubrication
oils, air, fuel, coolant, hydraulic and transmission fluids in both the
domestic and international markets, including Europe, Australia, Mexico, South
Africa and the Far East.  Consumer Products manufactures and markets plastic
closures, custom designed lithographed metal and metal-plastic containers, and
collapsible metal tubes in both domestic and international markets, including
Canada and Germany.

     Net sales represent sales to unaffiliated customers, as reported in the
consolidated statements of earnings.  Intersegment sales were not material.
Assets are those assets used in each business segment.  Corporate assets
consist of cash and short-term cash investments,  deferred income taxes, world
headquarters facility, pension assets and various other assets which are not
specific to an industry segment.

     The segment data for the years ended November 30, 1996, 1995 and 1994 are
as follows:


<TABLE>
<CAPTION>
                               1996      1995      1994
----------------------------------------------------------         
<S>                         <C>       <C>       <C>
Net sales:
 Filtration Products ......  $259,617  $221,034  $199,793
 Consumer Products ........    73,771    69,160    70,330
                             ----------------------------
  Total ...................  $333,388  $290,194  $270,123
                             ============================
----------------------------------------------------------        

Operating profit:
 Filtration Products ......  $ 33,149  $ 28,698  $ 26,597
 Consumer Products ........     7,381     6,667     5,769
                             ----------------------------
  Total ...................  $ 40,530  $ 35,365  $ 32,366
                             ============================
----------------------------------------------------------         

Assets:
 Filtration Products ......  $154,252  $138,706  $114,501
 Consumer Products ........    41,334    39,853    32,386
 Corporate ................    48,378    44,703    41,561
                             ----------------------------
  Total ...................  $243,964  $223,262  $188,448
                             ============================
----------------------------------------------------------       

Additions to plant assets:
 Filtration Products ......  $ 12,637  $  8,142  $  6,715
 Consumer Products ........     4,275     5,591     4,157
 Corporate ................     4,740       177       544
                             ----------------------------
  Total ...................  $ 21,652  $ 13,910  $ 11,416
                             ============================
----------------------------------------------------------        

Depreciation:
 Filtration Products ......  $  5,969  $  4,742  $  3,840
 Consumer Products ........     2,946     2,787     2,763
 Corporate ................       361       207       175
                             ----------------------------
  Total ...................  $  9,276  $  7,736  $  6,778
                             ============================
----------------------------------------------------------         
</TABLE>


     The following details sales volume by class of product for Consumer
Products segment for those classes of products which contributed 10% or more to
total Corporate revenue.


<TABLE>
<CAPTION>

                                      1996   1995   1994
--------------------------------------------------------
<S>                                    <C>    <C>    <C>
Containers..........................    17%    18%    20%
</TABLE>


     No class of products within the Company's Filtration Products segment
accounted for as much as 10% of the total sales of the Company

     Financial data relating to the geographic areas in which the Company
operates are shown for the years ended November 30, 1996, 1995, and 1994.  Net
sales by geographic area are based on sales to final customers within that
segment.


<TABLE>
<CAPTION>
                                      1996      1995      1994
              --------------------------------------------------
             <S>                   <C>       <C>       <C>
              Net sales:
              Sales within the
               United States .....  $283,633  $251,483  $242,830
              Export Sales to
               Other Countries ...    34,134    25,760    21,159
              Sales within
                Other Countries ..    15,621    12,951     6,134
                                    --------  --------  --------
                                    $333,388  $290,194  $270,123
                                    ========  ========  ========
              --------------------------------------------------
              Operating profit:
              On Sales within the
               United States .....  $ 34,101  $ 32,381  $ 31,154
              On Export Sales to
               Other Countries ...     5,488     2,505     1,895
              On Sales within
                Other Countries ..       941       479      (683)
                                    --------  --------  --------
                                    $ 40,530  $ 35,365  $ 32,366
                                    ========  ========  ========

              --------------------------------------------------        
              Identifiable Assets:
                United States ....  $231,123  $211,315  $178,969
                Other Countries ..    12,841    11,947     9,479
                                    --------  --------  --------
                                    $243,964  $223,262  $188,448
                                    ========  ========  ========
</TABLE>





                                       35
<PAGE>   13
REPORT OF INDEPENDENT ACCOUNTANTS
================================================================================

The Board of Directors and Shareholders
CLARCOR Inc.
Rockford, Illinois


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

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

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

     As discussed in Note A to the consolidated financial statements, the
Company changed its method of accounting for income taxes, effective December
1, 1993 and changed its method of accounting for certain investments in debt
and equity securities, effective November 30, 1994.


Coopers & Lybrand L.L.P.

Chicago, Illinois
January 3, 1997

<PAGE>   14
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
================================================================================

     The management of CLARCOR is responsible for the preparation, integrity
and objectivity of the Company's financial statements and the other financial
information in this report. The financial statements were prepared in
conformity with generally accepted accounting principles and reflect in all
material respects the results of operations and the Company's financial
position for the periods shown. The financial statements are presented on the
accrual basis of accounting and, where appropriate, reflect estimates based
upon judgments of management.

     In addition, management maintains a system of internal controls designed
to assure that Company assets are safeguarded from loss or unauthorized use or
disposition. Also, the controls system provides assurance that transactions are
authorized according to the intent of management and are accurately recorded to
permit the preparation of financial statements in accordance with generally
accepted accounting principles. For the periods covered by the financial
statements in this report, management believes this system of internal controls
was effective concerning all material matters. The effectiveness of the
controls system is supported by the selection and training of qualified
personnel, an organizational structure that provides an appropriate division of
responsibility, a strong budgetary system of control and a comprehensive
internal audit program.

     The Audit Committee of the Board of Directors, which is composed of three
outside directors, serves in an oversight role to assure the integrity and
objectivity of the Company's financial reporting process. The Committee meets
periodically with representatives of management and the independent and
internal auditors to review matters of a material nature related to financial
reporting and the planning, results and recommendations of audits. The
independent and internal auditors have free access to the Audit Committee. The
Committee is also responsible for making recommendations to the Board of
Directors concerning the selection of the independent auditors.

/s/ Lawrence E. Gloyd    /s/ Bruce A. Klein        /s/ William F. Knese

Lawrence E. Gloyd        Bruce A. Klein            William F. Knese
Chairman of the Board &  Vice President-Finance &  Vice President,
Chief Executive Officer  Chief Financial Officer   Treasurer & Controller

January 3, 1997

<PAGE>   15

11-YEAR FINANCIAL SUMMARY
================================================================================
<TABLE>
<CAPTION>
                                            1996      1995      1994      1993
--------------------------------------------------------------------------------
<S>                                       <C>       <C>       <C>       <C>

PER SHARE DATA
Equity .................................   $  9.82   $  8.82   $  7.96  $   7.06
Earnings from Continuing Operations ....      1.68      1.48      1.39      1.16
Net Earnings ...........................      1.68      1.48      1.43      1.16
Dividends ..............................    0.6425    0.6325    0.6225     0.610
Price: High ............................     25.13     27.00     22.38     20.00
       Low .............................     18.63     18.13     15.88     16.00
--------------------------------------------------------------------------------
EARNINGS DATA ($000)
Net Sales ..............................  $333,338  $290,194  $270,123  $225,319
Operating Profit .......................    40,530    35,365    32,366    29,067
Interest Expense .......................     3,243     2,693     2,788     3,525
Pretax Income (1) ......................    40,019    34,207    31,603    27,078
Income Taxes ...........................    14,896    12,182    11,935     9,827
Earnings from Continuing Operations ....    24,978    21,954    20,625    17,251
Earnings from Discontinued Operations ..        --        --        --        --
Net Earnings ...........................    24,978    21,954    21,255    17,251
Average Shares Outstanding .............    14,859    14,801    14,814    14,838
--------------------------------------------------------------------------------
EARNINGS ANALYSIS
Operating Margin .......................     12.2%     12.2%     12.0%     12.9%
Pretax Margin ..........................     12.0%     11.8%     11.7%     12.0%
Effective Tax Rate .....................     37.2%     35.6%     37.8%     36.3%
Net Margin-Continuing Operations .......      7.5%      7.6%      7.6%      7.7%
Net Margin .............................      7.5%      7.6%      7.9%      7.7%
Return on Assets .......................     11.2%     11.6%     12.2%     10.7%
Return on Equity .......................     19.1%     18.7%     20.3%     17.3%
Dividend Payout to Net Earnings ........     38.1%     42.5%     43.3%     52.4%
--------------------------------------------------------------------------------
BALANCE SHEET DATA ($000)
Current Assets .........................  $124,379  $117,570  $ 98,450  $ 86,161
Plant Assets, net ......................    78,586    67,036    52,615    47,636
Total Assets ...........................   243,964   223,262   188,448   173,567
Current Liabilities ....................    45,156    42,460    39,461    33,288
Long-Term Debt .........................    35,522    34,417    17,013    24,617
Shareholders' Equity ...................   146,059   130,815   117,462   104,641
--------------------------------------------------------------------------------
BALANCE SHEET ANALYSIS ($000)
Debt to Capitalization .................     19.6%     20.8%     12.7%     19.0%
Working Capital ........................  $ 79,223  $ 75,110  $ 58,989  $ 52,873
Quick Ratio ............................     1.5:1     1.6:1     1.6:1     1.6:1
--------------------------------------------------------------------------------
CASH FLOW DATA ($000)
From Operations ........................  $ 26,171  $ 19,460  $ 24,603  $ 19,992
For Investment .........................   (18,425)  (28,599)     (469)   (1,193)
From/(for) Financing ...................    (9,127)    8,369   (18,405)  (20,012)
Change in Cash & Equivalents ...........    (1,397)     (798)    5,729    (1,213)
Capital Expenditures ...................    21,652    13,910    11,416    10,218
Depreciation ...........................     9,276     7,736     6,778     5,816
Dividends Paid .........................     9,512     9,330     9,201     9,036
Interest (Income)/Expense ..............     2,415     1,863     2,240     2,650
Income Taxes Paid ......................    10,723    11,868    10,087     9,860
--------------------------------------------------------------------------------
CASH FLOW ANALYSIS ($000)
Operating Cash Flow (2) ................  $ 39,309  $ 33,191  $ 36,930  $ 32,502
Net Cash Flow (3) ......................    17,657    19,281    25,514    22,284
Elective Cash Flow (4) .................    (4,993)   (3,780)    3,986       738
--------------------------------------------------------------------------------
</TABLE>

(1) Pretax income in 1995 and 1994 was restated to reflect minority interests
    in earnings of subsidiaries and the equity in net earnings of affiliate
    as separate line items after tax in the statements of earnings.
(2) From operations before interest income/expense and taxes paid.
(3) Operating Cash Flow less capital expenditures.
(4) Net Cash Flow less dividends +(-) interest income/expense and less taxes
    paid.

<PAGE>   16
<TABLE>
<CAPTION>
==================================================================== 
  1992      1991      1990      1989      1988      1987      1986
--------------------------------------------------------------------
<C>       <C>       <C>       <C>       <C>       <C>       <C>
$   6.64  $   6.42  $   5.57  $   4.83  $   6.99  $   6.36  $   5.76
    1.10      1.24      1.29      0.69      1.02      0.95      0.90
    0.94      1.26      1.37      0.42      1.15      1.04      0.96
   0.600     0.550     0.520     0.480     0.453     0.431     0.418
   22.50     22.67     17.83     18.92     14.59     16.89     14.17
   15.00     13.00     11.83     11.75      9.75      9.25     10.09
--------------------------------------------------------------------
$188,625  $179,538  $170,279  $156,530  $149,468  $146,225  $135,319
  27,630    30,853    30,832    22,128    27,287    29,045    25,032
   3,803     3,682     3,675     1,327       151       176       192
  25,305    28,543    30,204    22,084    28,833    30,378    29,769
   8,796    10,068    10,999    10,474    10,647    13,270    13,566
  16,509    18,475    19,205    11,610    18,186    17,108    16,203
      --       297     1,200    (4,493)    2,412     1,672     1,165
  14,139    18,772    20,405     7,117    20,598    18,780    17,368
  14,973    14,873    14,843    17,040    17,926    18,121    18,094
--------------------------------------------------------------------
   14.6%     17.2%     18.1%     14.1%     18.3%     19.9%     18.5%
   13.4%     15.9%     17.7%     14.1%     19.3%     20.8%     22.0%
   34.8%     35.3%     36.4%     47.4%     36.9%     43.7%     45.6%
    8.8%     10.3%     11.3%      7.4%     12.2%     11.7%     12.0%
    7.5%     10.5%     12.0%      4.5%     13.8%     12.8%     12.8%
    8.9%     13.0%     15.6%      4.9%     15.3%     15.3%     14.9%
   14.8%     22.7%     28.1%      5.7%     17.9%     18.0%     18.4%
   63.4%     43.5%     37.8%    116.5%     39.4%     41.6%     43.5%
--------------------------------------------------------------------
$ 93,627  $ 75,207  $ 72,623  $ 58,019  $ 70,028  $ 67,523  $ 75,457
  35,584    45,712    42,748    44,223    42,063    39,828    32,431
 161,255   157,999   144,127   131,009   143,842   134,877   122,779
  25,272    20,570    20,758    21,405    14,244    15,899    13,153
  29,325    35,834    35,810    32,634     1,116     1,507     1,634
  99,551    95,662    82,689    72,662   125,012   115,015   104,186
--------------------------------------------------------------------
   22.8%     27.3%     30.2%     31.0%      0.9%      1.3%      1.5%
$ 68,355  $ 54,637  $ 51,865  $ 36,614  $ 55,784  $ 51,624  $ 62,304
   2.5:1     2.1:1     2.1:1     1.4:1     3.3:1     2.9:1     4.2:1
--------------------------------------------------------------------
$ 22,807  $ 18,343  $ 25,284  $ 17,791  $ 18,545  $ 22,015  $ 16,330
  (7,185)  (14,719)   (4,973)   (8,251)   (1,374)  (16,231)   (7,923)
 (10,200)   (8,805)  (10,316)  (23,915)  (11,105)   (8,374)   (7,767)
   5,422    (5,181)    9,995   (14,375)    6,066    (2,590)      640
   7,450     8,128     8,638     8,334     6,137     5,086     9,720
   7,044     6,707     6,619     6,321     6,287     6,008     4,384
   8,958     8,165     7,708     8,290     8,121     7,814     7,560
   3,505     2,560     3,143        53      (946)     (911)   (1,876)
  10,982     9,474    10,068    11,234    13,313    14,502    13,117
--------------------------------------------------------------------
$ 37,294  $ 30,377  $ 38,495  $ 29,078  $ 30,912  $ 35,606  $ 27,571
  29,844    22,249    29,857    20,744    24,775    30,520    17,851
   6,399     2,050     8,938     1,167     4,287     9,115      (950)
--------------------------------------------------------------------
</TABLE>

<PAGE>   17

FINANCIAL REVIEW
----------------
(SHARES AND DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
===============================================================================

     In 1996, CLARCOR reported its third consecutive year of record performance
in sales, operating profit, net earnings and earnings per share. This 
performance was achieved on the strength of new records in sales and operating 
profit in the Filtration Products segment, augmented by a strong performance by
the Consumer Products segment. The information presented in this financial 
review should be read in conjunction with other financial information presented
throughout this 1996 Annual Report.

     CLARCOR's business segment information is shown on page 35, and this
financial review should be read in conjunction with that segment information
and other information presented elsewhere in this report. Operating results for
the current and prior years are shown in comparative form in the table below.


<TABLE>
<CAPTION>

OPERATING RESULTS
                                                                    1996 VS. 1995                     1995 VS. 1994     
                                                                       CHANGE                             CHANGE
                                                 --------------------------------  ---------------------------------
                                                 $1996   %SALES     $        %     $1995   % SALES     $        %
                                                 --------------------------------  ---------------------------------
<S>                                              <C>     <C>     <C>      <C>      <C>     <C>      <C>      <C>

Net Sales .....................................  $333.4  100.0%    $43.2    14.9%  $290.2   100.0%    $20.1     7.4%
Cost of Sales .................................   239.1   71.7%     29.5    14.1%   209.6    72.2%     17.2     8.9%
Selling &  Administrative Expenses ............    53.8   16.1%      8.6    19.0%    45.2    15.6%     (0.1)   (0.3%)
Operating Profit ..............................    40.5   12.2%      5.1    14.6%    35.4    12.2%      3.0     9.3%
Other Income (Deductions) .....................    (0.5)  (0.2%)     0.7       --    (1.2)   (0.4%)    (0.4)      --
Earnings Before Taxes, Equity in Net
 Earnings of Affiliate, Minority Interests, and
 Cumulative Effect of Accounting Change .......    40.0   12.0%      5.8    17.0%    34.2    11.8%      2.6     8.2%
Income Taxes ..................................    14.9    4.5%      2.8    22.3%    12.1     4.2%      0.2     2.1%
Earnings Before Equity in
 Net Earnings of Affiliate, Minority
 Interests and Cumulative Effect of
 Accounting Change ............................    25.1    7.5%      3.0    14.1%    22.1     7.6%      2.4    12.0%
Equity in Net Earnings of Affiliate
 and Minority Interests .......................    (0.1)     --       --       --    (0.1)      --     (1.1)      --
Cumulative Effect of Accounting Change ........      --      --       --       --      --       --     (0.6)      --
Net Earnings ..................................  $ 25.0    7.5%    $ 3.0    13.8%  $ 22.0     7.6%    $ 0.7     3.3%
                                                 ================================  =================================
Earnings Per Share ............................   $1.68            $0.20    13.5%   $1.48             $0.09     6.5%
Cumulative Effect of Accounting Change ........      --               --       --      --            ($0.04)      --
   Total ......................................   $1.68            $0.20    13.5%   $1.48             $0.05     3.5%

Average Shares Outstanding ....................    14.9                              14.8
====================================================================================================================
</TABLE>

SALES

     Consolidated net sales of $333.4 set a new CLARCOR record, the seventh
consecutive year of record sales.  Net sales in 1996 were 14.9% higher than
sales of $290.2 reported in fiscal year 1995. Fiscal 1996 included a full year
of sales from the 1995 Hastings Filters acquisition, compared to one quarter of
Hastings sales included in fiscal 1995.  Excluding Hastings sales, the
Company's net sales increased 5.5% in 1996.  Sales growth came from both the
Filtration Products and Consumer Products segments.  Net sales of $290.2 for
the 1995 fiscal year were 7.4% higher than sales in 1994 and reflected higher
Filtration Products segment and lower Consumer Products segment sales.  The
1995 sales benefited from the inclusion of sales from the fourth quarter
acquisition of Hastings Filters, Inc.  Sales at Baldwin Filters and Clark
Filter increased, while lower sales were recorded at Airguard Industries in
1995.

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

<TABLE>
<CAPTION>
                                          1996 VS. 1995
                                             CHANGE
NET SALES               1996     % TOTAL  $       %
--------------------------------------------------------
<S>                     <C>      <C>      <C>     <C>
Filtration Products ..  $259.6    77.9%    $38.6   17.5%
Consumer Products ....    73.8    22.1%      4.6    6.7%
                        --------------------------------
  Total ..............  $333.4   100.0%    $43.2   14.9%
                        ================================
</TABLE>            



<TABLE>
<CAPTION>
                                          1995 VS. 1994
                                              CHANGE
NET SALES                1995   % TOTAL     $        %
---------------------------------------------------------
<S>                     <C>     <C>      <C>      <C>
Filtration Products ..  $221.0    76.2%    $21.2    10.6%
Consumer Products ....    69.2    23.8%     (1.1)   (1.7%)
                        ---------------------------------
  Total ..............  $290.2   100.0%    $20.1     7.4%
                        =================================
</TABLE>           

<PAGE>   18
================================================================================

     The Filtration Products segment reported 1996 sales of $259.6, an increase
of 17.5% over sales of $221.0 in 1995.  The increase was principally the result
of the inclusion in the current year of a full year of sales from the
acquisition of Hastings Filters, Inc., compared to three months of sales
included in 1995, the year of acquisition. The 1996 sales also benefited from
increased sales in each of the segment's filtration businesses.  Sales from
Baldwin's domestic plants increased over 6% from 1995.  Worldwide sales of
Baldwin's heavy duty filter products increased 5.4%.  Sales of Airguard's
industrial and environmental filter products increased 3.8% over the prior
year.  Clark Filter continued its growth in railroad locomotive filter
products, recording a sales increase of 8.6% over 1995 levels.  Filtration
Products segment 1995 net sales of $221.0 increased 10.6% over sales of $199.8
in 1994, chiefly as a result of the fourth quarter acquisition of Hastings
Filters, Inc., and strong sales growth from Baldwin Filters and Clark Filter,
which more than offset a sales decline at Airguard Industries.

     Current year Consumer Products net sales totaled $73.8, and increased 6.7%
over fiscal 1995 sales. Both plastics and metals sales increased over the prior
year, 9.0% and 7.9%, respectively.  The increase in metals sales resulted from
new products and steady demand from traditional metals customers for flat sheet
decorating, specialty containers and commemorative tins.  In 1995, Consumer
Products segment sales declined 1.7% to $69.2 from $70.3 in 1994.  This decline
was due principally to lower spice can sales, flat sheet decorating and
promotional business in 1995 compared to 1994.

Earnings

     For the third consecutive year, CLARCOR earned record consolidated
operating profit.  Fiscal 1996's operating profit totaled $40.5, and was up
14.6% over fiscal 1995. Both of the Company's business segments recorded double
digit gains.  In 1995, the Company achieved consolidated operating profit of
$35.4. Fiscal 1995 operating profit increased 9.3% over operating profit of
$32.4 recorded in 1994, with gains in both Filtration Products and Consumer
Products. Comparative operating profit information related to the Company's
business segments is as follows.

<TABLE>
<CAPTION>
                                                     1996 vs. 1995
                                                         Change
            OPERATING PROFIT        1996   % Total     $        %
            --------------------------------------------------------
            <S>                     <C>    <C>      <C>      <C>
            Filtration Products ..  $33.1    81.8%     $4.4    15.5%
            Consumer Products ....    7.4    18.2%       .7    10.7%
                                    --------------------------------
              Total ..............  $40.5   100.0%     $5.1    14.6%
                                    ================================
</TABLE>



<TABLE>
<CAPTION>
                                                     1995 vs. 1994
                                                         Change
            OPERATING PROFIT        1995   % Total     $        %
            --------------------------------------------------------
            <S>                     <C>    <C>      <C>      <C>
            Filtration Products ..  $28.7    81.1%     $2.1     7.9%
            Consumer Products ....    6.7    18.9%       .9    15.6%
                                    --------------------------------
              Total ..............  $35.4   100.0%     $3.0     9.3%
                                    ================================    
</TABLE>



<TABLE>
<CAPTION>
               OPERATING PROFIT AS A  
               PERCENT OF NET SALES    1996   1995   1994
               -------------------------------------------
               <S>                     <C>    <C>    <C>
               Filtration Products ..  12.8%  13.0%  13.3%
               Consumer Products ....  10.0%   9.6%   8.2%
                                       -------------------
                 Total ..............  12.2%  12.2%  12.0%
                                       ===================
</TABLE>


     Increased profits in the Filtration segment's businesses offset a loss
recorded at Hastings, an operation acquired in 1995.  Profit gains were led by
Baldwin Filters' domestic operations, which increased operating profits over
12% through productivity improvements, cost reductions and new product
introductions. Clark Filter increased operating profits over 20% on an 8.6%
increase in sales.  Airguard Industries recorded a dramatic improvement over
its 1995 results as margins improved by over three percentage points on a sales
increase of 3.8%.  The Filtration segment's international business continues to
grow.  Profits were recorded in each of Baldwin's international operations,
except in China. FIBAMEX, the segment's Mexican operation, recorded a small
operating profit on flat sales in a weak Mexican economy.  Baldwin's European
operations, Baldwin Ltd. in England and Baldwin N.V. in Belgium, together
reported an operating margin of over 7% on a combined 12% sales increase.
Baldwin-Unifil, the South African operation acquired in early 1996, reported an
operating margin of over 4%.  Baldwin-Australia recorded an operating profit
increase of over 50% on a 9% increase in sales.  Baldwin-Weifang Filters Ltd.,
the start-up Chinese joint venture, began manufacturing filters for the Chinese
market in late 1996 and is expected to be marginally profitable in 1997.

<PAGE>   19
FINANCIAL REVIEW
----------------

(SHARES AND DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================

     Filtration Products segment operating profit totaled $28.7 in 1995, 7.9%
higher than  operating profit of $26.6 reported in the prior year.  The
increased 1995 operating profit reflected gains in the Baldwin heavy duty
operations, both domestic and international.  Profit at the segment's Airguard
unit declined in 1995, the result of severe increases in raw material prices, a
product failure caused by faulty media from an outside vendor, startup problems
with a new distribution center and costs related to a new management
information system.  The September 4, 1995 acquisition of Hastings Filters,
Inc. had an immaterial operating profit impact in 1995.

     Filtration operating profit as a percent of net sales was 12.8% in 1996,
compared to 13.0% in 1995 and 13.3% in 1994.  Operating profit in the
Filtration segment represented 81.8% of the consolidated total, compared to
81.1% in 1995  and 82.2% in 1994.

     Operating profit in 1996 in the Consumer Products segment increased 10.7%
over fiscal 1995 operating profit.  Increased sales levels in both the metals
and plastics businesses were the principal reasons for the increase. Sales of
metals products increased following declines in recent years.  Increased metals
sales resulted from new product introductions and continuing demand for flat
sheet decorating, specialty containers and commemorative tins.  In plastics,
specialty closures, particularly the combiTop(R) and SST Series(TM) closures,
added to growth in the current year.  Consumer Products segment operating
profit in 1995 totaled $6.7.  This was an increase of 15.6% from 1994 and
primarily reflected cost reduction programs.  Operating profit as a percent of
sales increased to 10.0% in 1996 from 9.6% in 1995 and 8.2% in 1994.  The 1996
profit was 18.2% of consolidated operating profit.  This compares to 18.9% of
the total in 1995 and 17.8% in 1994.

     Fiscal 1996 other expense totaled $.5, compared to a total of $1.2 in
fiscal 1995.  Interest expense in the current year was $3.2, up from $2.7
recorded in the prior year, and reflects CLARCOR's higher debt level for all of
the current year, compared to the higher level for approximately one quarter of
1995.  In the fourth quarter of 1995, long-term debt increased to finance the
Hastings Filters acquisition. The 1995 interest expense approximated that of
1994.  Interest income was virtually unchanged from 1995.  In 1996, the Company
recorded a gain of $1.7 on the liquidation of one half of the Company's
remaining investment in the shares of G.U.D. Holdings Ltd.  In 1994, CLARCOR
sold 75% of its original investment in these shares and recorded a pretax gain
of $4.2.

     Current year earnings before taxes, equity in net earnings of affiliate,
minority interests and the cumulative effect of a change in accounting method
totaled $40.0, up $5.8 from last year.  This increase is the result of
increased profitability in both of the Company's business segments.  These
earnings in 1995 totaled $34.2, up 8.2% from $31.6 in the prior year.

     The current year provision for income taxes totaled $14.9, due to
increased profitability and the gain recorded on the sale of the G.U.D. shares.
The 1995 provision for income taxes totaled $12.1 and was higher than the 1994
provision due principally to taxes on higher profits. In 1995, the Company
recorded deferred tax assets on foreign net operating loss carryforwards that
are expected to be realized which reduced the effective tax rate in 1995.
CLARCOR's provision for income taxes in 1994 totaled $11.9.  The effective tax
rates were 37.2% for the current year, compared to 35.6% in 1995 and 37.8% for
1994.

     Fiscal 1996 earnings before equity in the net earnings of affiliate,
minority interests and the cumulative effect of a change in accounting method
totaled $25.1.  In 1995, these earnings were $22.1, compared to $19.7 in 1994.
In 1994, CLARCOR adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."  The adoption of this new standard contributed
$.6 to earnings in the first quarter of the year of adoption.

     Record net earnings reached $25.0 in 1996, up 13.8% over net earnings of
$22.0 in 1995. Net earnings in 1995 were 3.3% higher than 1994 net earnings of
$21.3.

     Net earnings per share set a new CLARCOR record at $1.68, an increase of
13.5% over 1995 per share earnings of $1.48.  Included in the 1996 earnings per
share was a gain of $.07 related to the sale of the G.U.D. shares.  The 1995
earnings reflected an increase of 6.5% over comparable earnings of $1.39 in
1994. In 1994, the cumulative effect of the income tax accounting change
contributed an additional $.04 per share, resulting in 1994 total earnings per
share of $1.43.

     On October 23, 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" (SFAS 123).  SFAS 123 encourages, but does not
require, companies to adopt a fair value

<PAGE>   20
===============================================================================
based method for determining expense related to stock based compensation.  
Companies which do not adopt the provisions of SFAS 123 for recognition 
purposes must disclose pro forma effects as if the fair value based method of 
accounting had been applied.  The Company does not intend to adopt the new 
recognition aspects of SFAS 123, but will provide required disclosure of pro 
forma information at fiscal 1997 year-end. The effect of the pro forma impact 
has not been determined.

FINANCIAL CONDITION

CORPORATE LIQUIDITY

     The Consolidated Statements of Cash Flows are shown on page 27, and the
discussion of corporate liquidity should be read in conjunction with
information presented in those statements.

     In 1996, CLARCOR's cash flows included a new $8.4 borrowing through an
industrial revenue bond to finance the construction of an addition to the
Hastings Filters Yankton, South Dakota plant.  Gross cash flow, consisting of
net earnings plus non-cash charges of depreciation and amortization, reached
$34.8.  Net cash flows from operating activities grew to $26.2, fueled by
higher net earnings and depreciation and amortization.  The investment in
working capital increased by $9.3 in 1996 compared to an increase in 1995 of
$8.8 and an increase in 1994 of $2.7.  Investing activities used $18.4 of cash
in 1996, compared to $28.6 in 1995.  The decrease resulted from a lower cash
use for acquisitions in the current year than in 1995, plus cash proceeds from
the sale of the G.U.D. shares, partially offset by a significant increase in
plant assets from the previous year.  The increase in plant assets was due to
the Hastings plant expansion and related new equipment, completion of a new
plastics facility at J. L. Clark and additional capital expenditures at
Corporate.  Cash flows from financing activities reflected net cash used of
$9.1, compared to net cash provided of $8.4 in 1995.  This change was reflective
of the reduction in current borrowing in 1996 to $8.4, from $25.0 in 1995.  The
net change in cash and short-term cash investments was a reduction of $1.4,
compared to a reduction of $.8 in the prior year.

     CLARCOR's cash flows in the year 1995 included a borrowing under a new
$25.0 note to finance the Hastings Filters, Inc. acquisition. Fiscal 1995 net
cash flows from operating activities totaled $19.5, down 20.9% from net cash
flows which totaled $24.6 in 1994. Fiscal year 1995 operating activities
included higher gross cash flow of $30.2 from net earnings and non-cash charges
of depreciation and amortization.  The higher gross cash flow was reduced by a
net investment in assets and liabilities of $10.6 and asset additions from the
Hastings acquisition.  Cash flows used in investing activities in 1995 totaled
$28.6, compared to $.5 in 1994. In 1995, the Hastings acquisition used $14.1,
and $13.9 was used for investment in other plant assets.  Cash was provided by
financing activities in 1995, and totaled $8.4.  This compares to $18.4 used in
1994. The 1995 total reflects cash inflows of $25.0 from the new note.  Cash
used in financing activities included $7.6 of payments on long-term debt and
dividend payments of $9.3.

     In 1994, cash provided by operating activities totaled $24.6.  Changes in
the assets and liabilities in 1994 were a mix of increases and decreases which
mostly offset each other.  In 1994, cash of $10.7 was provided from the sale of
G.U.D. stock, and cash of $1.7 was received from other sources.  Cash used
included $11.4 for plant additions and $1.5 for the acquisition of a business.
In 1994, cash of $18.4 was used for financing activities, principally for
dividend payments of $9.2, debt payments of $7.9, and treasury share purchases
of $1.3.

     CLARCOR continues to generate sufficient cash to maintain current
operating levels, to provide for the addition and replacement of necessary
plant assets, and to  service and repay long-term debt. Sufficient lines of
credit remain available to fund the Company's current operations and planned
future growth.

CAPITAL RESOURCES

     CLARCOR's balance sheet continues to exhibit liquidity and financial
strength, employing a mixture  of equity and debt capital to finance its
assets.

<TABLE>
<CAPTION>
    SUMMARY BALANCE                            1996               1995
                                      ----------------------------------------
    SHEET                             $          % Change    $     % Change
                                      ----------------------------------------
    <S>                        <C>               <C>       <C>     <C>
    CURRENT ASSETS ..........            $124.4      5.8%  $117.6     19.4%
    Plant Assets, net .......              78.6     17.2%    67.0     27.4%
    Excess Cost over
     Fair Value, net ........              15.1      1.5%    14.9     (2.0%)
    Pension & Other Assets ..              25.9      8.9%    23.8      7.7%
    Total Assets ............            $244.0      9.3%  $223.3     18.5%
    CURRENT LIABILITIES .....            $ 45.2      6.3%  $ 42.5      7.6%
    Long-Term Debt ..........              35.5      3.2%    34.4    102.3%
    Pension & Other Liabilities            17.2     10.6%    15.6      8.3%
    Shareholders' Equity ....             146.1     11.7%   130.8     11.4%
    Total Liabilities &
     Shareholders' Equity ...            $244.0      9.3%  $223.3     18.5%
</TABLE>

<PAGE>   21
FINANCIAL REVIEW
----------------
(SHARES AND DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
===============================================================================
     At the end of fiscal 1996, CLARCOR's total assets reached $244.0, up $20.7
from year-end 1995 levels. Working capital increased to $79.2 from $75.1 in
1995. The current ratio remained unchanged from 1995 at 2.8:1. Current assets
rose a modest $6.8, principally in inventories which were increased at Hastings
to maintain customer service levels while production machinery was moved from
Michigan to the Hastings plant in Yankton, South Dakota. Net plant assets
totaled $78.6 at year-end 1996, and rose $11.6, reflecting the Hastings plant
expansion and related new equipment, completion of a new plastics facility at
J.L. Clark and additional capital expenditures at Corporate. Capital
expenditures totaled $21.7 in 1996. Capital additions in 1997 are not
anticipated to be at this level. With the exception of the industrial revenue
bond used to finance the Hastings plant addition, the Company funded capital
additions with internally generated funds. Net plant assets totaled $67.0 at
the end of 1995, reflecting both the Hastings acquisition and normal asset
additions. In 1996 and 1995, marketable equity securities reflected the
Company's remaining 2.5% and 5.0% interest, respectively, in G.U.D. Holdings
Limited which was classified as available-for-sale and valued at current market
value under the provisions of Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities."

     Current liabilities increased modestly, to $45.2 in 1996, from $42.5 in
the prior year. Long-term debt remained approximately constant, at $35.5,
reflecting the additional debt from the IRB financing offset by scheduled
repayment on the 9.71% promissory note. The long-term debt balance increased to
$34.4 in 1995, and reflected the new promissory note, reduced by scheduled
repayments on the old note. Shareholders' equity continued to grow, increasing
11.7% during 1996 to $146.1, from $130.8 at year-end 1995. The current year
ratio of long-term debt to equity was 24.3% compared to 26.3% in 1995.
Shareholders' equity represented 80.4% of total capitalization at year-end 1996
compared to 79.2% at the end of 1995.

<TABLE>
<CAPTION>
                                                   1996   1995
                                                   ------------
                 <S>                               <C>    <C>
                 Current Ratio ..................  2.8:1  2.8:1
                 Quick Ratio ....................  1.5:1  1.6:1
                 Long-Term Debt/Equity ..........  24.3%  26.3%
                 Long-Term Debt/Capitalization ..  19.6%  20.8%
</TABLE>


     At November 30, 1996, CLARCOR had 14,874,969 shares of common stock
outstanding at $1.00 par value, compared to 14,825,296 shares outstanding at
the end of 1995.

THE FUTURE

     The Company continues to be very optimistic about the future, and believes
that sales, operating profit, and earnings will continue to increase in future
years.  CLARCOR's operations, Baldwin Filters, Airguard Industries, Clark
Filter and J. L. Clark continue to demonstrate a superior ability to grow while
maintaining strong operating margins.  The strength of these operations is
demonstrated by CLARCOR's ability to realize its 1996 earnings target while
absorbing $2.2 in unanticipated losses from the Hastings Filters operation.
The Hastings Filters business is expected to improve throughout 1997 and reach
expected levels of profitability by 1999.  Baldwin Filters will continue to be
the principal driving force for CLARCOR.  The primary focus at Baldwin will
continue to be supplying the highest quality mobile filtration products to its
customers and distributors.  The combination of Hastings Filters with Baldwin
provides CLARCOR with the widest product range and the largest distribution
network of any company in the mobile filtration industry.  Hastings Filters is
expected to add to earnings per share in 1997 and will be a significant part of
CLARCOR's future growth and profits.

     Both Airguard's sales and margins are expected to continue the improvement
which began in 1996.  Operating profit as a percent of sales is anticipated to
progress toward its ultimate goal of 8% to 10%.

     On September 23, 1996 the Company announced the signing of a definitive
agreement to acquire United Air Specialists, Inc. (UAS), based in Cincinnati,
Ohio.  Upon the completion of the transaction, UAS will become a wholly-owned
subsidiary of CLARCOR.

     UAS is engaged in the design, manufacture and sale of commercial and
industrial air cleaners, electrostatic fluid contamination and control
equipment and high precision spraying equipment. For the fiscal year ended June
30, 1996, UAS had net sales of approximately $40.8 and net earnings of
approximately $1.5. For the first quarter of fiscal 1997, its net sales were
approximately $9.7 and net earnings approximately $.3.

     J. L. Clark will continue to invest resources in the expansion of its
plastics business and expects to continue strong growth in sales and operating
margins.  In early 1996, J. L. Clark completed a 25,000 sq. ft. addition to its
plastics manufacturing facility enabling it to continue meeting the increasing
demand for its plastic products.

     Continued growth is anticipated in international sales, from nearly 15% of
sales in 1996 to the Company's

<PAGE>   22
===============================================================================

goal of 25% of sales in the year 2000. Continued profit growth is expected.  
The Company is exploring other acquisitions and alliances outside the United 
States and expects to announce additional ventures in the future.

     CLARCOR's plan for internal growth, coupled with anticipated future
acquisitions and expected strategic alliances, will further the realization of
the Company's sales, profits, and earnings objectives.  The realization of
these objectives will provide liquidity and financial strength and lead to an
increase in shareholder value.

FORWARD-LOOKING STATEMENTS

     Certain statements quoted in the body of this report, and statements in
the "The Future" section of this review 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 timing and acceptance of new
products and product enhancements by the Company or its competitors, changes in
pricing, product life cycles, purchasing patterns of distributors and
customers, competitive conditions in the industry, business cycles affecting
the markets in which the Company's products are sold, extraordinary events,
such as litigation or acquisitions, including related charges, and economic
conditions generally or in various geographic areas.  All of the foregoing 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 Securities and Exchange Commission reports.

     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.