<PAGE>
 
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-K
      [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                     FOR THE FISCAL YEAR ENDED MAY 31, 1997
                                       OR
      [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
           FOR THE TRANSITION PERIOD FROM __________ TO ___________

                        COMMISSION FILE NUMBER 0-10796
                                        
                               VALLEN CORPORATION
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                                        
            TEXAS                                             74-1366847
 (STATE OR OTHER JURISDICTION OF                            (I.R.S. EMPLOYER
  INCORPORATION OR ORGANIZATION)                           IDENTIFICATION NO.)

      13333 NORTHWEST FREEWAY
         HOUSTON, TEXAS                                         77040
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
    
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (713) 462-8700

       SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:  NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                         COMMON STOCK, $.50 PAR VALUE
                               (Title of class)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.   Yes   X      No 
                                          ----       ----   
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [x]
     State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant.  The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing:

           $138,750,352 BASED ON THE CLOSING PRICE OF AUGUST 8, 1997
                                        
     Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date:

COMMON STOCK, $.50 PAR VALUE                     7,278,707
     (Title of class)        (Number of shares outstanding as of August 8, 1997)

                      DOCUMENTS INCORPORATED BY REFERENCE
              DOCUMENT                                  PART OF FORM 10-K
              --------                                  -----------------
    Proxy Statement for the 1997 Annual
         Meeting of Shareholders                           Part III
     
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<PAGE>
 
                                   P A R T  I
                                        
ITEM 1.  BUSINESS

     Vallen Corporation, together with its subsidiaries, (the "Company" or
"Vallen") was incorporated under the laws of Texas in 1960 as the successor to a
business founded in 1947.  The Company operates through various domestic
subsidiaries and international affiliates.  Through a 50% owned Mexican company,
Proveedora de Seguridad Industrial Del Golfo, S.A. ("Proveedora"), the Company
engages in safety equipment distribution in Mexico.  Additionally, the Company
owns a 50% interest in an industrial supply distribution company headquartered
in Edmonton, Alberta, Century Sales & Service, Limited ("Century").  The Company
also operates through various partnerships and other affiliated operations.

     Vallen Safety Supply Company ("Vallen Safety") is a distributor of
industrial safety and health products and services designed for the protection
of the individual worker and the workplace environment.  Its customer base is
nationwide; major markets serviced include chemical production, railroad and
automotive transportation, petroleum refining, utilities, pulp and paper
products, primary metals extraction, general manufacturing, various governmental
agencies, business services, transportation equipment, steel production, oil and
gas extraction and construction.  Encon Safety Products, Inc. ("Encon")
manufactures industrial safety equipment and optical quality eyewear for sale
through Vallen Safety and other unaffiliated distributors.  All Supplies, Inc.
("All Supplies") is a Louisiana based distributor of industrial hardware and
welding supplies to industrial and commercial customers.  During the past fiscal
year, the distribution and manufacturing segments contributed 74% and 26%,
respectively, of the Company's operating income before corporate general and
administrative expenses.

     The table included in Note 11 to the Company's Consolidated Financial
Statements provides certain information regarding Vallen's distribution and
manufacturing industry segments for the Company's most recent three fiscal
years.

     The Company's corporate headquarters are in Houston, Texas.  Corporate
management has responsibility for overall organization, planning, business
development and control of Company operations, as well as specific oversight in
the areas of compensation and benefits, finance and accounting, data systems,
risk management, taxes and employee training and development.

                                  DISTRIBUTION

     Vallen Safety distributes a broad range of personal protective and other
safety and health related products and services, including sales and rental of
approved respiratory equipment and gas detection instruments to meet specific
safety and health needs of industrial customers.  Respiratory equipment and
atmospheric hazard detection instruments are used where work is performed in
limited breathing environments, or where workers are exposed to hazards
associated with possible escape of toxic or combustible gases or to carcinogens
and other dangerous atmospheric particulates.  The Company's fire service
division provides inspection and systems maintenance services, as well as system
installations.  Through its Vallen Knowledge Systems product group, Vallen
Safety provides a wide variety of safety training and instruction services,
safety program staffing, and is marketing computer chip enhanced "Smart Cards"
for information storage, security and documentation programs for its customers.

     Supplied-air respiratory equipment includes both portable self-contained
units and air line respirators worn by industrial, fire fighting and other
personnel in environments where ambient conditions require a dependable,
alternative source of breathable air.  Supplied-air respiratory equipment
contributed 5.1%, 6.5% and 7.8% of consolidated net sales for the years ended
May 31, 1997, 1996 and 1995, respectively.  The organization distributes air
purifying equipment including gas masks, chemical cartridge and particulate type
respirators for protection against breathing dusts, mists, fumes and fogs
associated with certain industrial process environments.

     A wide variety of personal protective equipment and other workplace
commodities is distributed, including eye protection devices, head and hearing
protection items, gloves, first aid products and emergency shower and eye-wash
products, as well as protective clothing and similar items.  Vallen Safety
operates a program under which prescription safety eyewear service is provided
at specific customer sites.

                                       2
<PAGE>
 
     Vallen Safety markets a series of portable electronic instruments used to
detect and measure the presence and levels of toxic and combustible gases or
oxygen deficient atmospheres.  Portable devices used in enforcing industrial
pollution control programs are also marketed.

     Other product lines include fire safety equipment, fire prevention systems
and fire control agents, ergonometric enhancing products, material handling
equipment, safety signs, lights and alarms.

     Vallen Safety's "in-plant store" units are physically located on the
customers' premises.  The stores distribute a variety of products directly to
customer personnel, in addition to managing the safety inventory stocks for the
customer.  The number of in-plant stores now totals 53.

     Vallen Safety maintains service centers which inspect, repair and calibrate
respiratory equipment, fire protection equipment and electronic atmospheric
hazard detection instruments.  Mobile respiratory service van units are staffed
by factory certified technicians who perform scheduled in-plant inspection and
repair work for customers.

     Across the U.S. and Canada, Vallen Safety has six regional hubs that use
their large distribution centers to ship products directly to customers and to
supply smaller branch locations and onsite and just in time locations.  Sales
and operations employees receive training from Vallen Safety and certain of its
suppliers regarding appropriate applications and relevant regulatory and
industry standards for various kinds of safety and health equipment.  Vallen
Safety also sponsors safety equipment and safety awareness training programs and
seminars for customer personnel.

     Vallen Safety owns 50% of the outstanding common stock of Proveedora, a
health and safety products distribution company headquartered in Tampico,
Mexico.  Proveedora, a Mexican company, represents many of the same industrial
safety equipment suppliers that Vallen Safety does.  It operates through 16
locations throughout Mexico, and is currently expanding service center
operations providing similar services to those noted above under Vallen Safety.

     Vallen Safety operates three Canadian branches in the province of Ontario.
Vallen Safety Supply Company, Ltd., a company organized under the laws of
Canada, was formed to conduct those operations.  The Canadian company generally
represents the same supplier groups as Vallen Safety's U.S. operations. Sales at
these locations for the year ended May 31, 1997 were approximately $3,881,000
(U.S. dollars).

     Additionally, the Company owns a 50% share of the outstanding common stock
of Century Sales & Service Limited ("Century"), an Edmonton, Alberta based
Canadian corporation.  Century is a distributor of mill supply industrial
hardware and safety equipment.  The Company has the option to purchase the
remaining 50% of Century's outstanding stock, based upon a purchase formula, at
a future date.  Century operates 12 distribution sites in Alberta and
Saskatchewan provinces, in addition to a central distribution center at its
Edmonton headquarters location.  It employs over 200 people in its operations.

     Vallen Corporation purchased 100% of the capital stock and the business of
All Supplies, effective August 18, 1995.  All Supplies is a Baton Rouge,
Louisiana based distributor of mill, safety and welding supplies, primarily to
an industrial customer base in Louisiana.  All Supplies is generally subject to
the same competitive issues as Vallen Safety.

                                       3
<PAGE>
 
     The Company's distribution subsidiaries sell to a diverse customer base.
No customer accounted for 10% or more of consolidated revenues for the year
ended May 31, 1997.  Sales to Proveedora, Century and to domestic companies for
export purposes were less than 4% of distribution net sales during the year
ended May 31, 1997.  Vallen Safety is unable to assess its overall market
position relative to other competing entities due to the overall fragmented
nature of its principal business.

     All products sold by Vallen Safety are purchased through other
manufacturers and suppliers.  Of the more than 700 suppliers whose products are
regularly distributed by Vallen Safety, the top 10 accounted for approximately
37% for the year ended May 31, 1997.  All of the Company's arrangements with
suppliers are terminable by either party on short notice.  Sales of respiratory
equipment purchased from Scott Aviation, a division of Figgie International,
Inc., comprised approximately 7.1% in dollar amount of all products sold by
Vallen Safety during the year ended May 31, 1997.  Termination of Vallen
Safety's distribution of Scott equipment could have a materially adverse effect
on the Company's business.  Vallen has been a distributor of safety equipment
manufactured by Scott continuously since 1953 and considers its relations with
this supplier to be satisfactory.  No other supplier accounted for as much as 6%
in dollar amount of distribution products sold during the year ended May 31,
1997.

     Competitive factors in distribution of safety and health products include
quality and availability of product lines, technical product knowledge as to
applications, usage and maintenance, service and repair capability in certain
product lines, and product pricing.  The Company maintains adequate inventories
in order to meet rapid delivery requirements in many contractual situations.  At
May 31, 1997, distribution inventories constituted approximately 29% of
consolidated assets.  The Company engages in active competition with a large
number of other safety and health product distributors as well as more diverse
MRO distributions in each of its product lines and geographical markets.  Most
such distributors are small enterprises selling to customers in a limited
geographic area.  Most manufacturers of industrial safety and health products
sell through distributors because of the relative direct marketing costs of a
narrow product line to customers.

                                 MANUFACTURING
                                        
     Encon was formed in 1964 to produce specialized safety equipment for which
the Company could find no suitable source of supply to meet customer needs.
Encon currently manufactures various lines of safety equipment for use in
industries where workers are exposed to potentially hazardous conditions.  Many
components of its manufactured products are fabricated by others, with Encon
providing on-site tooling and assembly where justified by logistics, cost and
other factors.

     Encon produces fixed and portable eye-wash and face-wash equipment and
emergency drench and enclosed showers for use in plant areas where workers risk
contact with dangerous chemicals or other similar hazards.

     Encon produces several series of non-prescription goggles and eyewear.  The
primary lines include (1) the Encon 160 Series, a heavy duty chemical splash
goggle, ergonometrically designed, and incorporating a replaceable cylindrical
lens for peripheral, unobstructed vision.  The 160 Series accommodates
respirators, hard hats and prescription lens present on the worker;  (2) the
Encon 500 Series goggle provides an alternative product line, more moderately
priced, featuring regular and fogfree lens composition in various lens colors;
and (3) the Encon 1900 Series Tuff-Spec (R) are high impact performance eye
protection spectacles, featuring a high degree of lens hardness and chemical
resistance properties, which meets industry specifications and standards for
primary protective eyewear.  Encon has recently introduced its Veratti (R) line
of safety eyewear, a contemporary styled line which has quickly gained market
acceptance.

     Encon manufactures cool air delivery systems for individual workers.  These
systems utilize the vortex tube assembly (a no-moving-parts heat exchanger) to
separate delivered compressed air into hot and cold streams and, in conjunction
with insulated aluminized reflective garments, permit safe and comfortable
working environments for extended periods in conditions of high ambient
temperature and radiant heat.

     Encon manufactures a line of storage cabinets to protect safety, emergency
and industrial equipment located in hazardous or corrosive industrial
environments.  The Encon wallcase product group holds and protects SCBA's, fire
extinguishers, escape respirators, gas masks and protective clothing.  With high
visibility appearance and virtually air tight, durable design, Encon wallcases
keep valuable customer property and equipment in ready to use condition.

                                       4
<PAGE>
 
     Encon Custom Plastics, a division of Encon, is a contract manufacturer of
vacuum formed and injection molded thermoplastic parts.  Its primary product
line includes wall cases for emergency self-contained breathing apparatus and
fire extinguishers, Therma Flow covers, AWARENESS(TM) shower signs and various
other products manufactured by vacuum forming and molding.

     During the year ended May 31, 1997, 33% of manufacturing net sales were
made to the Company's distribution operations.  The remaining 67% were made
primarily to unaffiliated regional distributors, industrial mail-order catalog
firms, overseas sales representatives, and certain industrial users.  Encon also
sells vortex tube assemblies and certain other components to original equipment
manufacturers for incorporation into finished products.  Manufactured products
are marketed primarily under the "Encon" name. No single customer accounted for
10% or more of consolidated revenues for the manufacturing operations for the
year ended May 31, 1997.

     Approximately $2,551,000, or 13.1%, of manufacturing net sales for the year
ended May 31, 1997, were to foreign purchasers in various geographical regions.
The Company accepts payment only in United States dollars and makes sales
outside the United States only to established customers or against letters of
credit drawn on major money center banks.

     Encon competes with numerous other manufacturers, some of which have
substantially greater resources.  The Company does not believe that its
manufactured products account for a significant share of any of its markets.
The Company does not consider that its manufacturing operations or its business
as a whole are materially dependent upon any one product or any related group of
products.

     Vallen Safety owns a 50% equity interest in Nuclear Utility Products, Inc.
(NUPRO), a company formed to manufacture and supply protective clothing and
engineered products used in the nuclear power production business.  NUPRO also
operates a commercial sewing business, providing special order uniforms, bags
and other merchandise. Vallen, through its wholly-owned distribution subsidiary,
Vallen Safety, has contracts to supply safety products to nuclear power
production facilities of the Tennessee Valley Authority and other nuclear power
production customers.  Vallen's partner in NUPRO has significant experience in
the manufacture and supply of such protective clothing and related products to
the nuclear power industry.  The size of NUPRO and the results of operations of
this company are not significant to Vallen Corporation or its distribution
subsidiary.

     The Company's manufacturing operations are not dependent on one or a small
number of suppliers or fabricators for any raw materials or tooled components.

                                   REGULATION
                                        
     Marketability of the Company's distributed and manufactured products
depends, in many instances, upon compliance with manufacturing, quality control,
performance, test and other published standards of entities such as the
Occupational Safety and Health Administration ("OSHA"), the National Institute
for Occupational Safety and Health ("NIOSH"), the American National Standards
Institute ("ANSI"), the American Society of Testing Materials ("ASTM"),
Underwriters' Laboratories ("UL"), Factory Mutual ("FM"), and the Canadian
Standards Association ("CSA").  To the extent applicable, the Company's
manufactured products currently meet or exceed such published standards or
criteria, and compliance of various other products marketed by Vallen Safety and
All Supplies are certified by their manufacturers.  Such standards could,
however, change in the future so as to render one or more of Vallen's products
or product lines at least temporarily unmarketable.  The Company believes that
the manufacturers of its products, including its manufacturing subsidiary,
should be able to adapt such products to any reasonably foreseeable new
standards which might be adopted in the future.

     The Company believes that compliance by its customers with federal
regulations regarding occupational safety and health has been an important
factor in its past growth.  The Company cannot predict the level of future
regulation.

                                       5
<PAGE>
 
                                   INSURANCE
                                        
     Failure of a safety product marketed or manufactured by the Company could
expose it to large damage claims.  The Company is named as an additional insured
under the products liability policies maintained by certain of its suppliers and
maintains product liability and other insurance coverage in amounts believed by
the Company to be in accordance with industry practices.  Nevertheless, such
insurance coverage may not be adequate to protect the Company against all
liability or loss which might arise from a product failure.

                                   EMPLOYEES
                                        
     The Company employed 982 persons at May 31, 1997 and believes that
relations with its employees are good.

ITEM 2.  PROPERTIES

     Vallen's corporate and distribution headquarters are located in a 50,000
square foot building in northwest Houston.  The building and the five-acre tract
on which it is situated, are owned by the Company.  The Company owns a 65,000
square foot manufacturing facility in Houston, which also houses its instrument
servicing operations.  The Company owns and operates a 10,000 square foot
manufacturing facility in Coudersport, Pennsylvania and leases a 15,000 square
foot manufacturing facility in Houston, Texas.  The Company owns branch-
warehouses for its distribution operations with an aggregate of 198,000 square
feet of space in Mobile, Alabama; Bolingbrook (Chicago), Illinois; Philadelphia,
Pennsylvania and Beaumont, Brazosport, Corpus Christi, Dallas, Odessa and
Pasadena, Texas; and leases an aggregate of 365,000 square feet of warehouse and
office space in over 50 locations throughout the United States and Canada.

     Aggregate rentals of real property during the year ended May 31, 1997 were
$1,791,000.  Reference is made to Notes 4 and 9 of the Notes to Consolidated
Financial Statements for information regarding mortgages on real estate and
commitments under long-term operating leases.  The Company considers all
property owned or leased by it to be well-maintained, adequately insured and
suitable for its purposes.  Additional expansion of the Company's operations may
require new warehouse locations in existing or new geographical areas.

ITEM 3.  LEGAL PROCEEDINGS

     No claims are currently pending against the Company other than claims in
the ordinary course of business, which are not material or as to which the
Company believes it either has adequate insurance coverage or has made adequate
provision.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     There were no items submitted to a vote of security holders during the
fourth quarter of the year ended May 31, 1997.

                                       6
<PAGE>
 
                                 P A R T   I I
                                        
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's common stock is traded over-the-counter on the NASDAQ
National Market System under the symbol VALN.  At August 8, 1997 there were
approximately 1,400 holders of the Company's common stock including individual
participants in certain security position listings.  The Company has not paid
any cash dividends on its common stock since its organization.

     The following table sets forth for the periods indicated the high and low
sale prices for the Company's common stock as reported by the NASDAQ Stock
Market.
 
          QUARTER                          HIGH      LOW
          -------                          ----      ---
 
     Year Ended May 31, 1997
          Fourth                         $19 1/4  $15 1/2
          Third                           20 1/8   16
          Second                          17 5/8   15 1/4
          First                           19 1/2   16 3/4
     Year Ended May 31, 1996
          Fourth                          22 1/4   17 1/8
          Third                           22 1/4   17 3/8
          Second                          23       18
          First                           19 1/4   16 1/2

ITEM 6.  SELECTED FINANCIAL DATA

                      VALLEN CORPORATION AND SUBSIDIARIES
                            SELECTED FINANCIAL DATA

IN THOUSANDS (EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
OPERATING RESULTS FOR THE YEAR 
ENDED MAY 31,                                            1997          1996           1995           1994           1993
                                                       --------      --------       --------       --------       -------- 
<S>                                               <C>            <C>            <C>            <C>            <C>
  Net sales                                            $257,786       $237,042       $203,284       $185,751       $175,605
  Net earnings                                         $  8,764       $  7,987       $  7,142       $  4,557       $  6,257
  Net earnings per common share                        $   1.21       $   1.10       $   1.00       $    .65       $    .89
 
FINANCIAL POSITION AT MAY 31,
  Total assets                                         $117,402       $111,663       $ 90,654       $ 81,417       $ 74,367
  Working capital                                      $ 63,009       $ 56,554       $ 51,721       $ 44,301       $ 44,508
  Current asset ratio                                     5.3:1          4.3:1          5.5:1          5.0:1          6.0:1
  Long-term debt, excluding current maturities         $ 10,425       $ 10,705       $  5,194       $  3,817       $  3,722
  Debt-to-equity ratio                                    0.1:1          0.1:1          0.1:1          0.1:1          0.1:1
 
SHAREHOLDERS' EQUITY AT MAY 31,
  Shareholders' equity                                 $ 91,339       $ 82,317       $ 72,682       $ 65,532       $ 60,323
  Weighted average number of common
     shares outstanding                                   7,269          7,242          7,108          7,046          7,004
  Book value per share                                 $  12.57       $  11.37       $  10.23       $   9.30       $   8.61
</TABLE>
____________

                                       7
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     Management's discussion and analysis of certain aspects of the Company's
results of operations and financial conditions should be read in conjunction
with the Consolidated Financial Statements and the Selected Financial Data
included elsewhere herein.

                             RESULTS OF OPERATIONS
                                        
     The table below is presented to assist in analyzing changes in operating
results for the fiscal years 1997, 1996 and 1995, indicating changes in various
items in the statement of earnings as a percentage of net sales, and the
increase (decrease) in such items in 1997, 1996 and 1995 compared to the prior
year.

<TABLE>
<CAPTION>
                                                                 YEARS ENDED MAY 31,
                              -------------------------------------------------------------------------------------
                               ITEMS IN CONSOLIDATED STATEMENT OF                     PERCENTAGE OF INCREASE
                                EARNINGS AS A PERCENTAGE OF NET                           (DECREASE) FROM
                                           SALES                                             PRIOR YEAR
 
                                    1997          1996         1995                1997         1996         1995
                              ------------  ------------  -----------         -----------  -----------  -----------
<S>                           <C>           <C>           <C>                 <C>          <C>          <C>
Net sales                           100.0%        100.0%       100.0%                8.8%        16.6%         9.4%
 
Cost of sales                        75.3          74.4         73.8                10.0         17.5          9.9

Selling, general and
 administrative expenses             20.1          20.6         20.7                 6.0         15.8          2.0
 
Other income (expense), net(1)         .6            .2           .1               220.6        140.5        265.3
  
Income taxes                          1.9           1.8          2.0                10.3          5.8         52.5
 
Net earnings                          3.4           3.4          3.5                 9.7         11.8         56.7
</TABLE>
__________________________

(1) Includes the categories interest and dividend income, interest expense,
earnings from foreign affiliates and other income and expense.  Totals for the
specific categories are noted in the Consolidated Statement of Earnings in the
attached financial statements.

     The category "Earnings from Foreign Affiliates" contained herein increased
to $1,453,000 in 1997 from $1,056,000 in fiscal 1996 due to increased earnings
from Proveedora totaling $688,000 and earnings from Century totaling $765,000.

     The Company purchased a 50% interest in Proveedora, based in Tampico,
Mexico, on December 17, 1992, and purchased a 50% interest in Century, based in
Edmonton, Alberta (Canada), on June 6, 1995.  The initial investments and
capital contributions were $2,767,000 and $4,472,000, respectively.  Total sales
for the years ended May 31, 1997, in U.S. dollar equivalents, were $12,780,000
for Proveedora and $48,665,000 for Century, respectively, compared to $9,367,000
for Proveedora and $41,322,000 for Century in 1996.

NET SALES

     Consolidated net sales increased $20,744,000 or 8.8% during fiscal 1997 as
compared to an increase of $33,758,000 or 16.6% in 1996.  Sales increased 10.2%
in the distribution segment and decreased 6.7% in the manufacturing segment
during fiscal 1997.  The increase in consolidated sales for fiscal 1997 and 1996
was primarily due to acquisitions, operation of new distribution branches and
expansion of business lines in fiscal 1997 and 1996, as well as the growth in
the national accounts programs.  The decrease in the manufacturing sales level
was primarily related to a volume decrease in the shower and eye protection
lines due to flat markets for the industry as a whole during the period.

                                       8
<PAGE>
 
GROSS PROFIT

     Consolidated gross profits as a percentage of net sales were 24.7%, 25.6%
and 26.2% for fiscal years 1997, 1996 and 1995, respectively.  The manufacturing
subsidiary's overall gross profit margins decreased slightly in fiscal 1997,
although such margins did firm during the second half of the year.  The
distribution subsidiaries' sales, which are at a lower gross profit margin,
accounted for a significantly greater percentage of the consolidated total
sales.  Gross profit margins for the distribution operations were slightly lower
each of the past three years, due to increased competition in relatively flat
markets in the personal protection product lines, and in part a result of the
increasing percentage of total net sales attributable to high volume, lower
margin national supply contract sales.  These specific factors, in combination
with a trend toward lower distribution margin, resulted in a lower consolidated
gross profit margin in fiscal 1997 and 1996.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expenses, as a percentage of net sales,
were down slightly at 20.1% in fiscal 1997, compared to 20.6% in 1996 and down
compared to 20.7% in 1995.  Selling, general and administrative expenses in
dollar terms increased 6.0% to $51,708,000 in fiscal 1997 and 15.8% to
$48,793,000 in fiscal 1996.  In fiscal year 1997, increased locations, numbers
of personnel and related expenses were the primary expense increase factors.
The primary reasons for the increase in fiscal year 1996 were the acquisitions
of the business of Safety Centers, Inc. and All Supplies in addition to the
opening of new distribution locations.

NET EARNINGS

     Consolidated net earnings as a percentage of net sales were 3.4%, 3.4% and
3.5% for fiscal years 1997, 1996 and 1995, respectively.  Fiscal year 1997 net
earnings of $8,764,000, or $1.21 per share, represented an 9.7% increase
compared to fiscal 1996.

     The increase was primarily the result of increased overall sales, partly
through acquisitions, and reduction of the rate of operating expense growth
relative to the net sales level growth between years.  Additionally, higher
earnings recognized from foreign affiliates on the equity method contributed to
the increase in net earnings levels for 1997 over 1996.

EARNINGS FROM FOREIGN AFFILIATES, INTEREST AND DIVIDEND INCOME, AND OTHER INCOME
(EXPENSE)

     Earnings from foreign affiliates, net to the Company, were $1,453,000 at
May 31, 1997 versus $1,056,000 for the year ended May 31, 1996.  The earnings
are from the Company's 50% position in Proveedora, in addition to affiliate
earnings from Century acquired in June, 1995 through a 50% investment.  Through
the recognition of an exchange rate variance in 1996 related to the devaluation
of the Mexican peso, the total investment in foreign affiliates was reduced by
$356,000.

     Interest and dividend income decreased in 1997 by $290,000 to $252,000 when
compared to interest and dividend income in 1996 due to fluctuating interest
rates and lower cash levels available for investment. Interest expense increased
in 1997 by $15,000 and in 1996 by $389,000 primarily due to the increased long-
term debt due to the acquisition of the assets of Safety Centers, Inc. and the
assumption of debt related thereto and the variable interest rates on the Encon
industrial development bonds. In 1997, other income, net increased to $526,000
due primarily to earnings from the Lion Vallen Limited Partnership of $699,000
and gain on sale of a building of $416,000, offset by the loss on an equity
accounting basis of $303,000 in 1997 from Vallen's investment in Nuclear Utility
Products, as well as amortization of intangible assets including goodwill. In
1996, other expense, net increased $4,000 due primarily to increased
amortization of intangibles from acquisition activity and offset by the loss on
an equity accounting basis of $169,000 in 1996 from Vallen's investment in
Nuclear Utility Products, Inc.

INCOME TAXES

     The effective tax rates for fiscal years 1997, 1996 and 1995 were 35.4%,
35.2% and 36.5%, respectively.

                                       9
<PAGE>
 
EFFECT OF IMPLEMENTATION OF NEW ACCOUNTING STANDARDS

     Effective June 1, 1995, the Company adopted SFAS 121, which establishes the
recognition and measurement standards related to the impairment of long-lived
assets. The adoption of this Standard had no material effect to the Company's
consolidated results of operations. In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123 "Accounting for Stock Based Compensation"
which established financial accounting and reporting standards for stock-based
employee compensation plans; however, SFAS No. 123 allows an entity to continue
to measure compensation cost in accordance with Accounting Principles Board
Opinion No. 25 ("APB 25). The Company elected to continue to measure
compensation cost in accordance with APB No. 25 and therefore has complied with
the disclosure-only provisions of SFAS No. 123. See Notes to Consolidated
Financial Statements for more information.

     In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share", which supersedes APB Opinion
No. 15, "Earnings Per Share" and specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS) for entities with publicly
held common stock or potential common stock.  SFAS 128 was issued to simplify
the computation of EPS and replace the presentation of Primary EPS with Basic
EPS and replace Fully Diluted EPS with Diluted EPS.  It also requires dual
presentation of Basic EPS and Diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the Basic EPS computation to the numerator
and denominator of the Diluted EPS computation.  The Company will adopt SFAS 128
beginning in fiscal year 1998.

                              FINANCIAL CONDITION
                                        
LIQUIDITY AND CAPITAL RESOURCES

     The net cash provided by operations for fiscal years 1997, 1996 and 1995
was $2,998,000, $9,549,000, and $5,799,000 respectively.  The major uses of cash
provided in 1997 were for investment in property and equipment, $2,832,000,
acquisition of businesses, $1,234,000, investment in affiliated companies,
$648,000 and generally, an increase in inventories of $1,273,000, primarily to
service new customers.

     The Company's financial position remains strong with working capital of
$63.0 million, and a current ratio of 5.3 to 1.  In addition to strong internal
cash flow, the Company has significant unused committed borrowing capacity
through major money center commercial banks.  Management believes that its
resources are more than adequate to fund working capital and normal expansion
plans, including planned capital expenditure levels, at this time.

     Capital spending levels for fiscal 1998 are forecast in the range of $3
million, primarily to modernize and upgrade existing production and distribution
capacity and to increase computer system capacity.

LONG-TERM OBLIGATIONS

     On March 28, 1990, the Company issued $2,750,000 in industrial development
bonds (See Note 4 of Notes to Consolidated Financial Statements).  The bonds are
secured by a letter of credit agreement and further secured by a lien upon a
manufacturing facility in Houston constructed with the proceeds.

     On December 1, 1994, the Company signed a long-term loan with a bank for
$1,720,000.  The loan is secured by a mortgage on the regional distribution
center and surrounding property in Bolingbrook, Illinois.  The outstanding
balance at May 31, 1997 was $1,452,000.

     On July 24, 1995, Vallen Safety entered into an unsecured facility with a
major bank.  The facility provides for borrowing of up to $6 million.  During
the first quarter ended August 31, 1996, the credit agreement was amended to
extend periods of amortization of principal amounts by one year.  On July 24,
1997, the credit agreement was again amended to extend periods of amortization
of principal amounts by one year.  The impact of this amendment was to
reclassify $852,000 as of May 31, 1997 to the non-current debt category.  As of
May 31, 1997, Vallen Safety has drawn down $5 million under the facility.  See
further details of the Agreement in Note 4 to the financial statements.

     Other long term debt relates to other mortgage debt obligations
outstanding.

                                       10
<PAGE>
 
IMPACT OF INFLATION

     Management of the Company believes that inflation has not significantly
impacted either net sales or net earnings during the three years ended May 31,
1997.  The Company has generally been able to pass along price increases from
its manufacturing suppliers.

CAPITAL EXPENDITURES

     During fiscal 1997 the Company invested $1,516,000 in capital assets for
its distribution segment and $1,024,000 for its manufacturing segment.  The
distribution expenditures were primarily comprised of $306,000 for rental
equipment, $81,000 for building improvements, $523,000 for new computer hardware
and software, $606,000 for fixtures and operating equipment.  The manufacturing
expenditures were primarily for tools, dies and computer equipment used in the
manufacturing process.

     The capital expenditure program is designed to (1) focus the distribution
activity of the Company in modern, technologically advanced regional centers,
(2) match the Company's management information systems to the demanding,
flexible marketplaces in which the Company competes to maintain its position as
an industry leader in customer satisfaction, and (3) maintain efficient and cost
competitive manufacturing operation facilities.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Not Applicable.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                      VALLEN CORPORATION AND SUBSIDIARIES
              INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE> 
<CAPTION> 


       Page
     Reference
     ---------
       <S>           <C> 
       12     -      Report of KPMG Peat Marwick LLP, Independent Auditors.
 
       13     -      Consolidated Balance Sheets -- May 31, 1997 and 1996.
 
       14     -      Consolidated Statements of Earnings -- Years ended May 31, 1997, 1996 and 1995.
 
       15     -      Consolidated Statements of Shareholders' Equity -- Years ended May 31, 1997, 1996 and 1995
 
       16     -      Consolidated Statements of Cash Flows -- Years ended May 31, 1997, 1996 and 1995.
 
       17            Notes to Consolidated Financial Statements.
 
</TABLE>

                                       11
<PAGE>
 
                           INDEPENDENT AUDITORS' REPORT
                                        


THE BOARD OF DIRECTORS
VALLEN CORPORATION

We have audited the consolidated financial statements of Vallen Corporation and
subsidiaries as listed in the accompanying index.  These consolidated financial
statements are the responsibility of the Corporation's management.  Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vallen Corporation
and subsidiaries as of May 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 31, 1997, in conformity with generally accepted accounting principles.



                                          KPMG PEAT MARWICK LLP


Houston, Texas
July 14, 1997

                                       12
<PAGE>
 
                      VALLEN CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                             (Thousands of Dollars)
<TABLE>
<CAPTION>
                                                                                              May 31,
                                                                                       --------------------
                                       ASSETS                                             1997        1996
                                                                                       --------    --------
Current assets:
<S>                                                                                   <C>         <C>
   Cash and cash equivalents                                                           $    801    $    831
   Investment securities, at cost which approximates market                               2,050       2,001
   Accounts receivable, less allowance for doubtful accounts of $293 and $301 at
    May 31, 1997 and 1996, respectively                                                  35,168      32,316
   Notes receivable, affiliate                                                              650         147
   Inventories (Note 2)                                                                  36,301      33,977
   Prepaid expenses and other current assets                                              2,580       4,621
                                                                                       --------    --------
            Total current assets                                                         77,550      73,893
                                                                                       --------    --------
Property, plant and equipment, at cost (Note 3)                                          43,916      41,580
   Less accumulated  depreciation and amortization                                       23,704      21,191
                                                                                       --------    --------
            Net property, plant and equipment                                            20,212      20,389
Notes receivable, non-current, affiliate                                                    557       1,599
Investment in foreign affiliates, net (Note 8)                                            9,712       8,243
Intangibles, net of accumulated amortization of $2,072 and $1,897 at
   May 31, 1997 and 1996, respectively                                                    5,678       5,107
Other                                                                                     3,693       2,432
                                                                                       --------    --------
                                                                                       $117,402    $111,663
                                                                                       ========    ========
 
 
                                    LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current liabilities:
   Current maturities of long-term debt (Note 4)                                       $    543    $    464
   Accounts payable                                                                      11,469      14,298
   Accrued liabilities                                                                    2,075       2,290
   Income taxes payable                                                                     454         287
                                                                                       --------    --------
            Total current liabilities                                                    14,541      17,339
                                                                                       --------    --------
Long-term debt, excluding current maturities (Note 4)                                    10,425      10,705
Deferred income taxes (Note 6)                                                            1,097       1,302
Shareholders' equity (Note 5):
   Preferred stock, $1.00 par value; 1,000,000 shares authorized and unissued at
    May 31, 1997 and 1996
   Common stock $.50 par value; 20,000,000 shares authorized; 9,740,874 issued and
    7,278,707 outstanding at May 31, 1997 and 9,726,875 issued and 7,263,978
    outstanding at May 31, 1996                                                           4,871       4,864
 
 
 
   Additional paid-in capital                                                             6,076       5,825
   Translation adjustment                                                                  (773)       (773)
   Retained earnings                                                                     83,779      75,015
                                                                                       --------    --------
                                                                                         93,953      84,931
 
   Less cost of common shares held in treasury (2,462,167 and 2,462,897
       shares at May 31, 1997 and 1996, respectively)                                     2,614       2,614
                                                                                       --------    --------
            Total shareholders' equity                                                   91,339      82,317
                                                                                       --------    --------
Commitments and contingencies (Notes 7 and 9)
                                                                                       $117,402    $111,663
                                                                                       ========    ========
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                       13
<PAGE>
 
                      VALLEN CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF EARNINGS
              (Thousands of Dollars Except for Per Share Amounts)


<TABLE>
<CAPTION>
                                                                    Year Ended May 31,
                                                            ----------------------------------
                                                               1997        1996        1995
                                                            ----------  ----------  ----------
 
<S>                                                         <C>         <C>         <C>
Net sales                                                    $257,786    $237,042    $203,284
Cost of sales                                                 194,060     176,396     150,111
                                                             --------    --------    --------
Gross profit                                                   63,726      60,646      53,173
Selling, general and administrative expenses
   (Notes 7 and 9)                                             51,708      48,793      42,123
                                                             --------    --------    --------
Operating income                                               12,018      11,853      11,050
Earnings from foreign affiliates, net (Note 8)                  1,453       1,056         387
Interest and dividend income                                      252         542         537
Interest expense (Note 4)                                        (689)       (674)       (285)
Other income (expense), net                                       526        (443)       (439)
                                                             --------    --------    --------
Earnings before income taxes                                   13,560      12,334      11,250
Income taxes (Note 6)                                           4,796       4,347       4,108
                                                             --------    --------    --------
Net earnings                                                 $  8,764    $  7,987    $  7,142
                                                             ========    ========    ========
Net earnings per common share                                   $1.21       $1.10       $1.00
                                                             ========    ========    ========
Weighted average number of common shares outstanding            7,269       7,242       7,108  
                                                             ========    ========    ========
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                       14
<PAGE>
 
                      VALLEN CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
               (Thousands of Dollars, Except for Share Amounts)

<TABLE>
<CAPTION>
                                          SHARES OF               ADDITIONAL                                         TOTAL    
                                        COMMON STOCK,     COMMON   PAID-IN    TRANSLATION   RETAINED  TREASURY    SHAREHOLDERS'
                                        $.50 PAR VALUE    STOCK    CAPITAL     ADJUSTMENT   EARNINGS    STOCK        EQUITY   
                                        --------------    ------  ---------   -----------   --------  ---------   ------------
<S>                                     <C>              <C>      <C>         <C>           <C>        <C>         <C> 
Balance at May 31, 1994                    9,703,472    $  4,852   $  3,562            -   $  59,886   $  (2,768)   $  65,532 
Net earnings                                       -           -          -            -       7,142           -        7,142 
Employee stock purchases (Note 5)             10,412           5        123            -           -           -          128 
Exercise of stock options (Note 5)                 -           -        270            -           -          27          297 
Currency translation adjustment                    -           -          -         (417)          -           -         (417)
                                           ---------    --------   --------    ---------   ---------   ---------    --------- 
Balance at May 31, 1995                    9,713,884    $  4,857   $  3,955    $    (417)  $  67,028   $  (2,741)   $  72,682 
Net earnings                                       -           -          -            -       7,987           -        7,987 
Employee stock purchases (Note 5)             12,991           7        171            -           -           -          178 
Stock transactions                                 -           -      1,699            -           -         127        1,826 
Currency translation adjustment                    -           -          -         (356)          -           -         (356)
                                           ---------    --------   --------    ---------   ---------   ---------    --------- 
Balance at May 31, 1996                    9,726,875    $  4,864   $  5,825    $    (773)  $  75,015   $  (2,614)   $  82,317 
Net earnings                                       -           -          -            -       8,764           -        8,764 
Employee stock purchases (Note 5)             13,999           7        223            -           -           -          230 
Stock transactions                                 -           -         28            -           -           -           28 
                                           ---------    --------   --------    ---------   ---------   ---------    --------- 
BALANCES AT MAY 31, 1997                   9,740,874      $4,871   $  6,076    $    (773)  $  83,779   $  (2,614)   $  91,339
</TABLE>


         See accompanying Notes to Consolidated Financial Statements.

                                       15
<PAGE>
 
!!!!

                      VALLEN CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Thousands of Dollars)
<TABLE>
<CAPTION>
                                                                                    Year Ended May 31,
                                                                               -----------------------------
OPERATING ACTIVITIES:                                                            1997      1996       1995
                                                                               --------  ---------  --------
<S>                                                                            <C>       <C>        <C>
   Net earnings                                                                $ 8,764   $  7,987   $ 7,142
   Adjustments to reconcile net earnings to net cash
       provided by operating activities:
       (Gain) loss on disposition of property, plant & equipment                  (421)       (60)       69
       Depreciation and amortization                                             3,421      3,439     3,497
       Change in deferred income taxes                                            (230)       106        81
       Undistributed earnings of foreign affiliates, net                        (1,453)      (702)     (387)
       Undistributed earnings from U.S. partnership, net                          (699)       (65)        -
       Loss from affiliate, net                                                    303        169        54
     Decrease (increase) in trading securities                                     (49)     5,254       (24)
     (Increase)in accounts receivable                                           (2,166)    (1,538)   (2,144)
     (Increase) in inventories                                                  (1,273)    (3,086)   (1,960)
     Decrease (increase) in notes receivable, current                             (503)       265      (412)
     (Increase) decrease in prepaid expenses & other current assets              2,077     (1,992)     (503)
     (Increase) in other assets                                                 (1,048)    (1,003)     (125)
     Increase (decrease) in accounts payable & other current liabilities        (3,725)       775       511
                                                                               -------   --------   -------
     Net cash provided by operating activities                                   2,998      9,549     5,799
INVESTING ACTIVITIES:
   Proceeds from disposition of assets                                             841          -         -
   Net additions to property, plant and equipment,
       net of effects of acquisitions                                           (2,832)    (1,628)   (2,467)
   Payments for acquisitions of businesses                                      (1,234)    (8,866)        -
   Decrease (increase) in notes receivable, non-current                          1,042          -    (1,599)
   Investment in affiliates                                                       (648)      (980)     (230)
                                                                               -------   --------   -------
   Net cash used in investing activities                                        (2,831)   (11,474)   (4,296)
FINANCING ACTIVITIES:
   Addition to long term debt                                                        -          -     1,720
   Reduction of long-term debt                                                    (427)       (72)     (225)
   Stock option transactions                                                         -          -       297
   Employee stock purchases                                                        230        178       128
                                                                               -------   --------   -------
   Net cash provided by financing activities                                      (197)       106     1,920
                                                                               -------   --------   -------
Net increase (decrease) in cash and cash equivalents                               (30)    (1,819)    3,423
Effect of exchange rate changes on cash and cash equivalents                         -       (356)     (417)
Cash and cash equivalents at beginning of year                                     831      3,006         -
                                                                               -------   --------   -------
Cash and cash equivalents at end of year                                       $   801   $    831   $ 3,006
                                                                               =======   ========   =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Interest payments                                                           $   760   $    555   $   284
   Income tax payments                                                         $ 4,600   $  3,846   $ 3,833
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company purchased assets or stock of Safety Centers, Inc., All Supplies, Inc., Century Sales and Service Limited, Shepco
Manufacturing, Inc. and Griffin Fire Safety Company in 1996. In fiscal year 1997, the Company purchased assets of Pagel Safety, Inc.
and the safety distribution division of Southeast Rubber & Safety, Inc. In conjunction with the acquisitions, assets acquired,
liabilities assumed and cash paid are as follows:
</TABLE> 

<TABLE>
<CAPTION>
                                                                                    1997               1996
                                                                                 ----------         ----------              
<S>                                                                              <C>                <C>
   Fair value of assets acquired                                                   $ 2,132            $15,961
   Cost in excess of net assets of companies acquired                                  204              4,548
                                                                                   -------            -------
   Total assets recorded                                                           $ 2,336            $20,509
                                                                                   -------            -------
   Liabilities assumed                                                             $(1,102)           $(9,817)
   Stock issued for common stock and assets                                              -             (1,826)
                                                                                   -------            ------- 
   Cash paid for common stock and assets                                           $ 1,234            $ 8,866
                                                                                   =======            =======
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                       16
<PAGE>
 
                      VALLEN CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                        
NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation  --- The consolidated financial statements
include the accounts of Vallen Corporation (the Company) and its wholly-owned
subsidiaries, Vallen Safety Supply Company (Vallen Safety), Encon Safety
Products, Inc. (Encon), Safety World, Inc., All Supplies, Inc. (All Supplies),
and Vallen Safety Supply Company, Limited.  All significant inter-company
transactions and amounts have been eliminated in consolidation.  Unconsolidated
affiliates are included on the equity basis.  Certain prior year amounts have
been reclassified to conform with current year presentation.

     Investment Securities --- The Company held only trading securities for
investment in 1997, 1996 and 1995.  Cost and estimated fair value were
identical, therefore no unrealized gains or losses occurred in any year
presented.  Trading securities consist of obligations of states and political
subdivisions and corporate issuers, and totaled $2,050,000 and $2,001,000 at May
31, 1997 and 1996, respectively.

     Inventory Valuation  --- Inventories are stated at the lower of cost
(weighted average) for Vallen Safety and All Supplies, and lower of cost (first
in, first out) for Encon, or market (replacement).

     Property, Plant and Equipment  ---  Property, plant and equipment are
stated at cost, less allowances for depreciation.  Depreciation expense is
computed using the straight line method over the estimated useful lives of the
related assets.  Estimated useful lives range from 5-30 years for buildings and
improvements, 3-7 years for furniture, fixtures and other equipment, and 3-5
years for data processing equipment and software.

     Acquisitions  ---  Acquisitions have been accounted for by the purchase
method and, accordingly, the acquired company's assets are recorded at fair
value as of the acquisition date.  Results of operations are included from the
date of acquisition.

     Intangibles  ---  Goodwill, which represents purchase price in excess of
fair value of net assets of acquired businesses, is amortized on a straight line
basis over periods up to 40 years, and the related accumulated amortization was
$507,000 and $314,000 at May 31, 1997 and 1996, respectively.  Other intangibles
are amortized over their statutory or estimated useful lives.  Accumulated
amortization of these other intangibles was $1,565,000 and $1,583,000 at May 31,
1997 and 1996, respectively.

     Income Taxes  ---  Income taxes are accounted for under the asset and
liability method.  Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.  Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled.  The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

     Uses of Estimates  --- Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles.  Actual results could differ from those estimates.

     Fair Value of Financial Instruments  ---  The carrying values of cash and
cash equivalents, accounts receivable and payable, notes receivable and accrued
liabilities are considered to approximate fair value due to the short term
nature of these instruments.  The carrying value of long term debt is estimated
to approximate fair value based on the company's incremental borrowing rate for
similar types of borrowing arrangements.

                                       17
<PAGE>
 
                      VALLEN CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---(Continued)

     Foreign Currency Translation  ---  The appropriate functional currency is
determined for each consolidated entity and each entity accounted for on the
equity basis.  The financial statements of entities for which the U.S. dollar is
determined to be the appropriate functional currency under the requirements of
SFAS 52, Foreign Currency Translation, are translated using appropriate current
and historic exchange rates; any gains or losses from currency transactions for
these entities are included in income for the current period.  Financial
statements of all other entities are translated into U.S. dollars from their
functional currencies using current exchange rates, with gains or losses from
translation being accumulated in a separate shareholders' equity account.
Transaction gains and losses are recognized in income for the current period.

Foreign currency effects are summarized as follows:  ($000)
 
                                                    1997      1996       1995
                                                    ----      ----       ----  
Effect of translation adjustments on net income    $  59     $ (56)     $ 107
(Increase) decrease in earnings
 
Currency translation losses charged directly
to equity adjustment account                       $   -     $ 356      $ 417


     Impairment of Long Lived Assets  --  In March 1995, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of"  ("SFAS 121").  This statement establishes
the recognition and measurement standards related to the impairment of long-
lived assets.  Effective June 1, 1995, the Company adopted SFAS 121.
Accordingly, in the event that facts and circumstances indicate that property
and equipment, and intangible or other non-current assets related to
specifically acquired assets may be impaired, an evaluation of the
recoverability of currently recorded costs would be made.  If an evaluation is
required, the estimated future value of undiscounted cash flows associated with
the asset is compared to the asset's carrying value to determine if a write-down
to market value or discounted cash flow value is required.  Adoption of this
standard did not have a material effect on the financial position or
consolidated results of operations of the Company.

     Accounting for Stock Based Compensation  ---  SFAS No. 123 "Accounting for
Stock Based Compensation" was issued in October, 1995.  SFAS No. 123 defines a
fair value based method of accounting for employee stock options. Effective June
1, 1996, the Company adopted SFAS 123; however, SFAS No. 123 allows an entity to
continue to measure compensation cost in accordance with Accounting Principles
Board Opinion No. 25 ("APB 25").  The Company will continue to account for stock
option grants in accordance with APB 25, and accordingly, recognizes no
compensation expense for stock options currently granted. The Company has
provided proforma disclosure of net income and earnings per share in Note 5
Stock Plans.

     Earnings Per Common Share  ---  Earnings per common share computations are
based on the weighted average number of shares of common stock outstanding
during the respective periods.  Common stock equivalents have not been included
from the date of their issuance due to their insignificant effect on the
computation.  In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings Per Share", which supersedes
APB Opinion No. 15, "Earnings Per Share" and specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock.  SFAS 128
was issued to simplify the computation of EPS and replace the presentation of
Primary EPS with Basic EPS and replace Fully Diluted EPS with Diluted EPS.  It
also requires dual presentation of Basic EPS and Diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the Basic EPS computation to
the numerator and denominator of the Diluted EPS computation.  The Company will
adopt SFAS 128 beginning in fiscal year 1998.

     Statements of Cash Flows  ---  For purposes of the statements of cash
flows, the Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.


                                       18
<PAGE>
 
                      VALLEN CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---(Continued)
                                        
NOTE 2.  INVENTORIES

     Effective April 1995, Vallen Safety changed its inventory valuation method
from first-in, first-out (FIFO) to a weighted-average valuation method in order
to provide a better matching of inventory cost with the related revenues.  The
cumulative effect on prior years and on the operating results for the year ended
May 31, 1997 were immaterial.  The All Supplies subsidiary also uses the
weighted average costing in accounting for inventory.  The manufacturing
subsidiary continues to utilize the first-in, first-out (FIFO) method.

     Inventory costs are summarized as follows:
                                                      May 31,
                                              -------------------------
                                               1997              1996
                                              -------           -------         
                                                (Thousands of Dollars)
     Raw materials                            $ 1,329           $ 1,323
     Work in process                              705               740
     Finished goods                            34,267            31,914
                                              -------           -------
     Total inventories                        $36,301           $33,977
                                              =======           =======

NOTE 3. PROPERTY, PLANT AND EQUIPMENT

        Property, plant and equipment costs are summarized as follows:
                                                       May 31,
                                              -------------------------
                                               1997               1996
                                              -------           -------
                                                 (Thousands of Dollars)
     Land and improvements                    $ 2,875           $ 2,930
     Buildings and improvements                12,486            12,673
     Furniture, fixtures and other equipment   17,720            15,842
     Data processing equipment and software    10,835            10,135
                                              -------           -------
       Total property, plant and equipment    $43,916           $41,580
                                              =======           =======

     Maintenance and repairs are expensed as incurred.  Gains and losses from
sales, and retirements are recognized at the time of disposal.  Depreciation
provided for in selling, general and administrative expenses was $2,974,000
$3,149,000, $3,163,000 for the years ended May 31, 1997, 1996 and 1995
respectively.


                                       19
<PAGE>
 
                      VALLEN CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (Continued)
 
NOTE 4.    LONG-TERM DEBT

<TABLE> 
<CAPTION> 

           Long-term debt is summarized as follows:                                                 

                                                                                                  May 31,
                                                                                ----------------------------------------------
                                                                                         1997                    1996
                                                                                ----------------------  ----------------------
                                                                                            (Thousands of Dollars)
<S>                                                                             <C>                     <C>
     Notes payable, bank (1)                                                          $ 5,000                 $ 5,000
     Variable rate, tax exempt, callable at par, industrial development
       bonds due March 1, 2020; interest rate resets weekly
       (4.15% at May 31, 1997); secured by a letter of credit,
       further secured by a manufacturing facility with a depreciated
       cost of $2,088 at May 31, 1997                                                   2,750                   2,750
     9.9% mortgage note payable to a bank, due in equal monthly
       installments, final installment due December 1, 2020; secured
       by land and building with a depreciated cost of $2,016 at
       May 31, 1997                                                                     1,452                   1,558
     9 1/8% first mortgage note payable to an insurance company,
       due in equal monthly installments, final installment due
       May 1, 2008; secured by land and building with a depreciated
       cost of $916 at May 31, 1997                                                       803                     849
     Other notes payable                                                                  963                   1,012
                                                                                      -------                 -------
         Total long-term debt                                                          10,968                  11,169
     Less current maturities                                                              543                     464
                                                                                      -------                 -------
     Long-term debt, less current maturities                                          $10,425                 $10,705
                                                                                      =======                 =======
</TABLE>

     Debt maturities for the five years subsequent to May 31, 1997 are $543,000,
$1,404,000, $1,749,000, $2,443,000, and $1,495,000, respectively, and $3,334,000
thereafter.

(1) - On July 24, 1995, in connection with the purchase of assets and assumption
of certain liabilities of Safety Centers, Inc. (SCI), Vallen Safety borrowed $5
million under a $6 million four year credit facility with a major commercial
bank. During the first quarter ended August 31, 1996, the credit agreement was
amended to extend periods of amortization of principal amounts by one year. On
July 24, 1997, the credit agreement was again amended to extend periods of
amortization of principle amounts by one year. The impact of this amendment was
to reclassify $852,000 as of May 31, 1997 to the non-current debt category. The
unsecured revolving credit facility provides, at Vallen Safety's option,
interest at the prime rate or LIBOR + .75%. Fees related to the facility are not
material. The interest rate at May 31, 1997 was 6.625%. Vallen Safety is
required, under this agreement, to maintain financial ratios and maintain a
minimum tangible net worth of not less than $9,000,000 at any time during the
period of the Credit Agreement.

                                       20
<PAGE>
 
                      VALLEN CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (Continued)
                                        
NOTE 5.  STOCK PLANS

     The Company has a stock option plan for key employees, (the "Plan") and has
reserved for issuance 1,125,000 shares of its common stock.  The Plan authorizes
the Company to grant to its key employees options to purchase shares of common
stock at prices per share equal to the fair market value of such stock at the
date of grant.

     Under the stock option plan, options have been granted and are outstanding
as to 308,000 shares as of May 31, 1997.  These options are exercisable in
increments of 33 1/3%, beginning in years after fiscal 1993, should the Company
achieve three specified consolidated earnings per share targets.  The Company
achieved earnings per share of $1.21 for the year ended May 31, 1997.  This
earnings level resulted in vesting of 1/3 of the options outstanding; or 102,666
options at that date.

     In connection with the acquisition of 100% of the capital stock of All
Supplies in August, 1995, the Compensation Committee and the Board of Directors
of the Company approved the issuance of 100,000 options to the former owner of
All Supplies under terms of an employment agreement.  These options are
exercisable in increments of 33 1/3%, beginning in fiscal year 1996, should the
Company achieve these specified consolidated earnings per share targets, and
should All Supplies achieve certain sales and gross profit levels for the same
fiscal year.  These levels were not achieved as of fiscal year ended May 31,
1997.

     Information relating to stock options is summarized as follows:
<TABLE>
<CAPTION>
                                                                                                          OPTIONS PRICE
                                                                                   SHARES                RANGE PER SHARE
                                                                                   ------                ---------------
<S>                                                                                <C>                   <C>
     Balance outstanding, at May 31, 1994                                          180,600                $ 8.00 - $15.75
     Granted                                                                       131,000                $12.75 - $13.00
     Exercised and expired                                                         (33,600)                    $8.00
                                                                                   -------                ---------------
     Balance outstanding, at May 31, 1995                                          278,000                $12.75 - $15.75
     Expired                                                                       (21,000)                    $15.75
     Granted in All Supplies acquisition (see above)                               100,000                     $14.75
                                                                                   -------                ---------------
     Balance outstanding, at May 31, 1996                                          357,000                $12.75 - $15.75
     Granted                                                                        51,000                $18.20 - $18.75
     Balance outstanding, at May 31, 1997                                          408,000                $12.75 - $18.75
 
     Options exercisable at May 31, 1997                                           102,666                $12.75 - $18.75
</TABLE>

     During fiscal year 1997, the Company and its shareholders established an
Executive Incentive Compensation Plan for executive officers and key employees
of the Company and its subsidiaries.  The incentive plan is administered by the
Compensation Committee of the Board of Directors.  The Company has reserved
100,000 shares of the Company's common stock for issuance in connection with the
stock portion of the incentive awards.  Under the Plan, the award pool criteria
is to be established at the beginning of each fiscal year by the Compensation
Committee based upon net earnings levels and return on shareholder equity
criteria.  The specific employee participants to be included in the incentive
program are to be designated at the same time by this Committee.  At the
discretion of the Committee, up to 50% of each designated participant's award
will be paid in the form of Company stock, with the remaining portion to be paid
in cash at the end of the fiscal year.

     The Company's shareholders approved a non-employee director stock option
plan (the "Director Plan") effective October 12, 1993.  The Company has reserved
for issuance 30,000 shares of its common stock to be used in the plan.  The
Director Plan authorizes the Company to grant non-employee directors options to
purchase shares of common stock at prices equal to the average last sale price
of the Company's stock for the five most recent trading days on which trades
occurred including the date of grant.  Each of the non-employee directors was
granted 5,000 options based upon a formula set forth in the Director Plan.  The
options are exercisable ratably on the first, second and third anniversary dates
of the grant date.  None of the options granted were exercised on any of the
three anniversary dates.

                                       21
<PAGE>
 
                      VALLEN CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (Continued)
                                        

     The Company adopted an employee stock purchase plan effective January 1,
1991.  The Company has reserved for issuance 675,000 shares of its common stock
to be used in the plan.  The plan allows eligible employees to purchase shares
at 85% of the lower of market value on January 1 or December 31.  The difference
between the employees' actual purchase price and the price on December 31 is
compensation expense to the Company.  Employee stock purchase plan expense was
$35,000, $24,000 and $24,000 for the years ended May 31, 1997, 1996 and 1995
respectively.

     In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock Based Compensation" which established financial
accounting and reporting standards for stock-based employee compensation plans.
Under this method compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period; however, SFAS
No. 123 allows an entity to continue to measure compensation cost in accordance
with Accounting Principle Board Opinion No. 25.  The Company elected to continue
to measure compensation cost in accordance with APB No. 25 and therefore must
comply with the disclosure-only provisions of SFAS No. 123.  Accordingly, no
compensation cost has been recognized for stock option plans.  If the Company
had recognized compensation cost on its stock option plan based on the fair
value at the grant date for awards made after 1995, the Company's net earnings
and earnings per share would have been reduced to the pro forma amounts
indicated below:

Year ended May 31,                           1997               1996
-----------------                            ----               ----
Net income - as reported                    $8,764             $7,987
Net income - pro forma                      $8,602             $7,957
Earnings per share - as reported            $ 1.21             $ 1.10
Earnings per share - pro forma              $ 1.19             $ 1.09


     The fair value of each stock option is estimated on the date of grant using
the Black-Scholes model with the following assumptions:

                                             1997               1996
                                             ----               ----
Expected dividend yield                      None               None
Expected stock price volatility              30%                32%
Risk-free interest rate                      5.86%              5.79%
Weighted average expected life of options    5 years            4 years
                                        
     The weighted average fair value of stock options granted for 1997 and 1996
is $5.19 per share and $4.35 per share, respectively.

                                       22
<PAGE>
 
                      VALLEN CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---(Continued)
 
NOTE 6.   INCOME TAXES

          Income tax expense (benefit) consists of:

                                                       Year Ended May 31,
                                                   ----------------------------
                                                    1997       1996     1995
                                                   --------  -------   --------
                                                      (Thousands of Dollars)
     Current:                                      
       Federal                                      $4,464    $3,913    $3,600
       State                                           562       490       408
                                                    ------    ------    ------
                                                     5,026     4,403     4,008
     Deferred:                                                        
       Federal                                        (230)      (56)      100
                                                    ------    ------    ------
                                                                      
                                                    $4,796    $4,347    $4,108
                                                    ======    ======    ======

     The reasons for the differences between the amount of tax expense provided
and the amount of tax expense computed by applying the federal statutory income
tax rate of 34% in 1997, 1996 and 1995, to earnings before income taxes were as
follows:

                                                         Year Ended May 31,
                                                    -------------------------- 
                                                     1997       1996     1995
                                                    -------   --------  ------
                                                       (Thousands of Dollars)
     Tax expense at statutory rates                  $4,646    $4,217   $3,825
     State tax expense, net of federal benefit          371       323      269
     Non-includable foreign earnings                   (471)     (298)     (44)
     Other, net                                         250       105       58
                                                     ------    ------   ------
                                                     $4,796    $4,347   $4,108
                                                     ======    ======   ======

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at May 31, 1997 and 1996 are
presented below.


     Deferred tax assets:

<TABLE>
<CAPTION> 
                                                                  1997    1996
                                                                 ------  ------
<S>                                                              <C>     <C> 
                                                             (Thousands of Dollars)
       Inventories, principally due to additional costs     
         inventoried for tax purposes                             $ 776  $ 657
       Accounts receivable allowance account                          -    101
       Other                                                         52     45
                                                                  -----  -----
       Total deferred tax assets                                  $ 828  $ 803
                                                                  =====  =====
</TABLE> 


                                       23
<PAGE>
 
                      VALLEN CORPORATION AND SUBSIDIARIES
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ---  (Continued)

     Deferred tax liabilities:
<TABLE> 
<CAPTION> 
                                                                  1997      1996
                                                                 ------    ------
                                                              (Thousands of Dollars)
<S>                                                              <C>       <C>
       Plant and equipment, principally due to differences   
         in depreciation                                          $  745   $  866
       Software development expensed for tax                         225      262
       Accelerated property tax deduction                            127      174
                                                                  ------   ------
       Total deferred tax liability                               $1,097   $1,302
                                                                  ------   ------
       Net deferred tax liability                                 $  269   $  499
                                                                  ======   ======
</TABLE>

     There is no valuation allowance for the fiscal years ended May 31, 1997 or
May 31, 1996.  It is the opinion of management that future operations will more
likely than not generate taxable income to realize the deferred tax assets.

     Deferred tax assets are included in the prepaid expenses and other current
assets category on the Consolidated Balance Sheets.

NOTE 7.  PROFIT SHARING, DEFERRED COMPENSATION AND BONUS INCENTIVE PLANS

     The Company has established a profit sharing trust which covers
substantially all employees.  The Company makes quarterly cash contributions of
10% of the net earnings of consolidated operations, as defined by the trust
agreement.  Total profit sharing expense for the years ended May 31, 1997, 1996
and 1995 was $729,000, $632,000 and $622,000, respectively.

     During December 1990, the Company amended the profit sharing plan to
include a 401(k) deferred compensation plan covering a majority of the Company's
employees.  Under the terms of the 401(k) plan, the Company makes matching
contributions equal to 25% of the participants' contributions subject to certain
participant vesting requirements.  Total Company 401(k) contribution expense for
the years ended May 31, 1997, 1996 and 1995 was $320,000, $338,000 and $236,000,
respectively.

     The Company also has bonus incentive plans for its officers, managers and
other key employees.  Cash bonuses are awarded based on incentive award
schedules which measure achievement of individual and corporate objectives,
among other factors.  Bonus incentive plan expense was $601,000, $729,000 and
$713,000, for the years ended May 31, 1997, 1996 and 1995, respectively.

                                       24
<PAGE>
 
                      VALLEN CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (Continued)
                                        

NOTE 8.  INVESTMENT IN FOREIGN AFFILIATES

     A summary of investment in foreign affiliates as of May 31, 1997 is as
follows:

<TABLE>
<CAPTION>       
                                                                         CENTURY SALES &
                                              PROVEEDORA DE                   SERVICE
                                           SEGURIDAD INDUSTRIAL              LIMITED(1)           TOTAL
                                          ---------------------          ---------------          ----- 
<S>                                        <C>                            <C>                     <C>      
Domicile                                           Mexico                       Canada
Ownership % by the Company                          50%                          50%
 
Date of original investment                  December 17, 1992               June 6, 1995
 
Amount of original investment ($000)              $2,767                       $4,472             $7,239
Translation adjustment (unrealized)
adjusted in equity section of
balance sheet                                       (773)                         -0-               (773)
Equity earnings since acquisition,
net of goodwill amortization and
foreign currency translation
amounts recognized in income                       1,922                        1,324              3,246
                                                  ------                       ------             ------
Investment at May 31, 1997                        $3,916                       $5,796             $9,712
                                                  ------                       ------             ------
</TABLE>

(1)  Under the terms of the Stock Purchase Agreement, the Company has the option
to elect to purchase the remaining 50% of the outstanding capital stock of
Century Sales at either five or six years from the date of the original stock
purchase transaction, based upon formulas contained in the Agreement.

NOTE 9.  COMMITMENTS AND CONTINGENCIES

     The Company conducts certain operations from leased premises under
noncancellable operating leases.  Under the terms of some of the leases, the
Company pays taxes, maintenance, insurance and certain other operating expenses.
Various computer, transportation and other equipment is also leased under short-
term operating leases.  Management generally intends to renew leases that expire
during the normal course of business.  Rental expense for the years ended May
31, 1997, 1996 and 1995 amounted to $2,367,000, $1,689,000 and $1,639,000,
respectively.  Lease commitments for noncancellable operating leases for the
five years subsequent to May 31, 1997 are $2,483,000, $1,592,000, $1,108,000,
$668,000 and $455,000, respectively.

     The Company's Vallen Safety subsidiary, in its capacity as a general
partner in a limited partnership whose operations are to provide procurement and
distribution services to the U. S. Air Force, is a guarantor for up to $750,000
of a $3 million revolving term loan agreement facility taken out by the
partnership with a major commercial bank.  Under terms of the loan facility, the
guaranty may be reduced or completely eliminated by June 30, 1997, as a result
of the partnership reaching certain financial ratio tests.  Vallen Safety's
partner, also a general partner in the partnership, has the same guaranty
requirements under the loan facility.

                                       25
<PAGE>
 
                      VALLEN CORPORATION AND SUBSIDIARIES
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ---  (Continued)
                                        
     Certain claims that result from litigation incurred in the ordinary course
of business have been asserted against the Company.  Management believes that
the ultimate resolution of such matters will not materially affect the financial
position or results of operations of the Company.

NOTE 10.  CONCENTRATION OF CREDIT RISK

     The Company has a broad customer base, representing many diverse
industries, doing business in most regions of the United States and in Mexico
and Canada.  The Company evaluates credit risks on an individual customer basis
before extending credit, and believes the allowance for doubtful accounts
adequately provides for losses on uncollectible accounts.  In each of the years
ended May 31, 1997, 1996 and 1995, no single customer accounted for more than
10% of consolidated sales.  Letters of credit are required on most foreign
sales, except to customers in Mexico and Canada.  Consequently, in management's
opinion, no significant concentration of credit risk exists for the Company.

NOTE 11.  BUSINESS SEGMENTS

     The Company operates in two business segments, distribution of a variety of
safety, health and maintenance products and services and the manufacturing of
industrial safety equipment.  The following table summarizes, for the periods
indicated, the amounts of consolidated net sales, operating income, identifiable
assets, capital expenditures and depreciation and amortization attributable to
the Company's distribution and manufacturing operations.  Substantially all
intersegment sales are based on published price lists, the same as to
unaffiliated customers.  The Company does not derive 10% or more of its net
sales from any single customer, nor does the Company derive 10% or more of its
net sales from foreign sources.  Sales of supplied-air respiratory equipment
contributed 5.1%, 6.5% and 7.8% of consolidated net sales for the year ended May
31, 1997, 1996 and 1995, respectively.  The effect of the Company's operations
in Mexico and Canada is immaterial on the amounts in the table below.

<TABLE>
<CAPTION>
                                                                                       Year Ended May 31,
                                                                ----------------------------------------------------------------
                                                                        1997                  1996                  1995
                                                                --------------------  --------------------  --------------------
                                                                                     (Thousands of Dollars)
<S>                                                             <C>                    <C>                    <C>
Net sales:
     Distribution                                                       $246,982              $224,084              $190,610
     Manufacturing                                                        19,457                20,856                19,691
                                                                        --------              --------              --------
                                                                         266,439               244,940               210,301
     Intersegment sales                                                   (8,653)               (7,898)               (7,017)
                                                                        --------              --------              --------
                                                                        $257,786              $237,042              $203,284
Operating income:                                                       ========              ========              ========
     Distribution                                                       $ 11,305              $ 10,338              $  9,281
     Manufacturing                                                         4,026                 4,966                 4,367
                                                                        --------              --------              --------
                                                                          15,331                15,304                13,648
     Corporate general and administrative expenses                        (3,313)               (3,451)               (2,598)
                                                                        --------              --------              --------
       Total                                                            $ 12,018              $ 11,853              $ 11,050
Identifiable assets:                                                    ========              ========              ========
     Distribution                                                       $107,413              $102,349              $ 81,905
     Manufacturing                                                         9,989                 9,314                 8,749
                                                                        --------              --------              --------
       Total                                                            $117,402              $111,663              $ 90,654
Capital expenditures:                                                   ========              ========              ========
     Distribution                                                       $  1,516              $  1,458              $  2,590
     Manufacturing                                                         1,024                   226                   262
                                                                        --------              --------              --------
       Total                                                            $  2,540              $  1,684              $  2,852
Depreciation and amortization:                                          ========              ========              ========
     Distribution                                                       $  3,066              $  3,040              $  2,992
     Manufacturing                                                           355                   399                   505
                                                                        --------              --------              --------
       Total                                                            $  3,421              $  3,439              $  3,497
                                                                        ========              ========              ========
</TABLE>

                                       26
<PAGE>
 
                      VALLEN CORPORATION AND SUBSIDIARIES
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---  (continued)
                                        
NOTE 11.  BUSINESS SEGMENTS (CONTINUED)

Summarized financial information for significant unconsolidated subsidiaries:
The Company uses the equity method of accounting for investments in
unconsolidated subsidiaries over which it exercises ownership of 20% - 50%.  The
summarized balance sheet and income statement information presented below
includes amounts related to the following significant equity investees:
Proveedora de Seguridad Industrial Del Golfo, S.A. (Mexico) (50%), Century Sales
& Service Limited (Canada) (50%), and Nuclear Utility Products, Inc. (NUPRO)
(Delaware) (50%).  The summarized financial information below includes 100% of
the individual company's assets, liabilities, revenues, and expenses as of and
for the years ended May 31, 1997 and 1996.

<TABLE>
<CAPTION>
                                                                1997                         1996
                                                               -------                     ------- 
                                                                      (Thousands of Dollars)
<S>                                                           <C>                         <C>
            Current assets                                     $27,108                     $20,242
            Non-current assets                                   4,666                       3,620
                                                               -------                     -------
            Total assets                                       $31,774                     $23,862
                                                               =======                     =======

            Current liabilities                                $13,587                     $ 8,892
            Non-current liabilities                              4,048                       2,223
                                                               -------                     -------
            Total liabilities                                  $17,635                     $11,115
                                                               =======                     =======

            Net sales                                          $63,775                     $53,207
            Gross profit                                        16,584                      13,682
            Income from continuing operation                     4,400                       3,055
            Net income                                         $ 2,913                     $ 1,988
</TABLE>

NOTE 12.  QUARTERLY FINANCIAL DATA (UNAUDITED)  
 
     The Company's quarterly operating results for 1997 and 1996 are summarized
as follows:

<TABLE>
<CAPTION>
                                                                               QUARTER ENDED
                                               ------------------------------------------------------------------------------
                                                  AUGUST 31         NOVEMBER 30        FEBRUARY 28 AND 29         MAY 31
                                               ----------------  ------------------  ----------------------  ----------------
<S>                                            <C>               <C>                 <C>                     <C>
                                                            (Thousands of Dollars, Except for Per Share Amounts)
     1997
     Net Sales                                     $59,412             $63,797              $67,032                $67,544
                                                   =======             =======              =======                =======
     Gross profit                                   14,875              15,757               16,049                 17,045
                                                   =======             =======              =======                =======
     Net earnings                                    1,604               2,148                2,078                  2,934
                                                   =======             =======              =======                =======
     Net earnings per common share                 $   .22             $   .30              $   .29                $   .40
                                                   =======             =======              =======                =======
     1996                                                                                                    
     Net sales                                     $52,002             $60,830              $61,516                $62,694
                                                   =======             =======              =======                =======
     Gross profit                                  $13,465             $15,370              $15,577                $16,234
                                                   =======             =======              =======                =======
     Net earnings                                  $ 1,557             $ 2,149              $ 2,028                $ 2,253
                                                   =======             =======              =======                =======
     Net earnings per common share                 $   .22             $   .30              $   .28                $   .31
                                                   =======             =======              =======                =======
</TABLE>

                                       27
<PAGE>
 
                      EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table provides information as of August 1, 1997 regarding
each of Vallen's executive officers:
<TABLE>
<CAPTION>
 
                                                                                          EXECUTIVE
                                                                                           OFFICER
          NAME                  AGE  POSITION WITH THE COMPANY                              SINCE
         -----                  ---  -------------------------                            ---------
<S>                              <C> <C>                                                     <C>               
     Leonard J. Bruce            77  Chairman of the Board and Director                      1960
     James W. Thompson           46  President, C.E.O. and Director                          1994
     Robin R. Hutton             51  Executive Vice President, Sales                         1981
     Leighton J. Stephenson      49  Vice President - Finance, Secretary and Treasurer       1993
     Kent M. Edwards             49  Vice President - Human Resources, Assistant Secretary   1990
     David G. Key                41  Vice President and General Manager,
                                     Encon Safety Products, Inc.                             1996
</TABLE>
     The terms of each officer will expire at the next annual meeting of
directors or when his successor is elected and qualified.

     Mr. Bruce, who has over 49 years of experience in safety equipment
distribution, founded the Company in 1947.  He has been Chairman of the Board of
Directors since 1960.

     Mr. Thompson joined the Company in June 1994 as President and Chief
Operating Officer of Vallen Safety Supply Company.  He was named President and
Chief Executive Officer of Vallen Corporation in December 1994.  He was formerly
with Westburne Supply Company and Westinghouse Electric Supply Company.  Mr.
Thompson was elected to the Board of Directors in June 1994.

     Mr. Hutton has been with the Company since 1968.  He was elected Vice
President - Southwest Region in 1981 and after serving in several sales and
managerial positions, including Marketing Manager of North Texas. He was named
Executive Vice President of Sales in 1989.

     Mr. Stephenson has been employed with the Company since December 1993.
Before joining Vallen, he was with United Artists Entertainment and worked six
years with the audit firm of Coopers & Lybrand.

     Mr. Edwards has been with the Company since 1974.  He has served Vallen in
a variety of sales and staff positions including corporate level
responsibilities for Administrative Services and Human Resources.  He was named
Vice President - Human Resources in 1990.

     Mr. Key joined the Company in March 1996 as General Manager of Encon Safety
Products, Inc., the Company's manufacturing subsidiary.  He was previously with
3M.

                                P A R T   I I I
                                        
   In accordance with General Instruction G(3) to Form 10-K, items 10, 11, 12
and 13 have been incorporated by reference to the Company's definitive proxy
statement complying with Regulation 14A involving the election of directors
which will be filed with the Commission not later than 120 days after the close
of its fiscal year.

                                       28
<PAGE>
 
                                 P A R T   I V
                                        
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

   (a) The following financial statements are filed as part of this report.

      1. Consolidated Financial Statements, as listed in the Index to Financial
         Statements provided in response to Item 8 hereof.  (see page 11 for
         Index)

      2. Financial Statement Schedules, as listed in the Index to Financial
         Statements provided in response to Item 8 hereof.  (see page 11 for
         Index)

      3. The following exhibits are filed as part of this report:

         3i.  Restated Articles of Incorporation as amended. Incorporated by
              reference is Exhibit 3a to the Company's 1990 Form 10-K as filed
              with the Securities and Exchange Commission on August 17, 1990
              (the "1990 Form 10-K").

         3ii. Bylaws of the Company as amended. Incorporated by reference is
              Exhibit 3ii to the Company's 1995 Form 10-K as filed with the
              Securities and Exchange Commission on August 25, 1995 (the "1995
              Form 10K".

         10a. Vallen Corporation Stock Incentive Plan, specimen Non-qualified
              Stock Option Agreement and specimen Stock Appreciation Rights
              Agreement. Incorporated by reference is Exhibit 5.1 to the
              Company's Registration Statement No. 2-65349 on Form S-1 as filed
              with the Securities and Exchange Commission on August 27, 1979. *

         10b. Vallen Corporation 1985 Stock Option Plan for Key Employees.
              Incorporated by reference is Exhibit 10b to the Company's Form 
              10-K as filed with the Securities and Exchange Commission on
              August 27, 1985. *

         10c. Amendment to Vallen Corporation 1985 Stock Option Plan for Key
              Employees, as amended. Incorporated by reference is Exhibit 10c to
              the 1995 Form 10-K.

         10d. Vallen Corporation 1990 Employee Stock Purchase Plan. Incorporated
              by reference is Exhibit 10d to the 1990 Form 10-K. *

         10e. Agreement dated June 6, 1994 between the Company and James W.
              Thompson. Incorporated by reference is Exhibit 10f to the
              Company's 1994 Form 10-K as filed with the Securities and Exchange
              Commission on August 17, 1994. *

         10f. Vallen Corporation Executive Incentive Compensation Plan.
              Incorporated by reference is Exhibit 10f to the Company's 1996
              Form 10-K as filed with the Securities and Exchange Commission on
              August 9, 1996 (the "1996 Form 10-K"). *

         21.  Subsidiaries of the Company.  Incorporated by reference is Exhibit
              21 to the Company's 1996 Form 10-K.

         23.  Consent of KPMG Peat Marwick LLP - attached.

         27.  Financial Data Schedule - attached.

              * Management compensation agreement

     4.  The Company hereby agrees to furnish to the Commission, on request, a
         copy of any instrument which defines the rights of holders of any long
         term debt of the Company in excess of 10% of the total assets of the
         Company.

    (b) No reports on Form 8-K were required to be filed by this registrant
        during the last quarter of the fiscal year covered by this report. 

                                       29
<PAGE>
 
                                   SIGNATURES
                                        
   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                    VALLEN CORPORATION



                                    By  /s/  JAMES W. THOMPSON
                                       ------------------------------
                                              JAMES W. THOMPSON
                                                 President


Date:  August 15, 1997

   PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
<CAPTION>
                     NAME                                       CAPACITY                              DATE
----------------------------------------------  -----------------------------------------  ---------------------------
<S>                                             <C>                                        <C>
 
 
 /s/  JAMES W. THOMPSON                             President, Principal Executive
----------------------------------------------            Officer and Director                   August 15, 1997
James W. Thompson
 
 
 /s/  LEIGHTON J. STEPHENSON                            Vice President--Finance
----------------------------------------------           Principal Financial and
Leighton J. Stephenson                                     Accounting Officer                    August 15, 1997
 
 
/s/  KIRBY ATTWELL                                             Director                          August 15, 1997
----------------------------------------------
Kirby Attwell
 
 
/s /  LEONARD J. BRUCE                                   Chairman of the Board                   August 15, 1997
----------------------------------------------                and Director
Leonard J. Bruce
 
 
/s/  DARVIN M. WINICK                                           Director                         August 15, 1997
----------------------------------------------
Darvin M. Winick
</TABLE>

                                       30
<PAGE>
 
                               INDEX TO EXHIBITS
                                        
Exhibit numbers are in accordance with exhibit table in Item 601 of Regulation
S-K.


    23.   --   Consent of KPMG Peat Marwick LLP.

    27.   --   Financial Data Schedule.

                                       31