During the past three years, the Company has made a number of significant strategic acquisitions to enhance our future growth potential throughout North and South America and in the United Kingdom. These acquisitions incorporate some of the most widely recognized brands of paint, coatings and other products in the marketplace today. The acquisition of Pratt & Lambert United, Inc. in January 1996 increased our representation in the independent dealer and mass merchandising channels of distribution. The acquisition of Thompson Minwax Holding Corp. in January 1997 provided us with leading brands in the waterseal, stain and varnish categories. The many other recent acquisitions have strengthened our positions in architectural products, automotive refinish coatings, industrial maintenance and product finish coatings, marine coatings, concrete stains, aerosol products, cleaning supplies, caulks and sealants.

We believe that our acquisition strategy has enabled the Company to effectively gain share in certain markets and product lines where we were under-represented. These acquisitions will help the Company continue to provide greater returns to our shareholders. Total investment for all acquisitions completed in 1995, 1996 and 1997 was $1.6 billion. The Company’s total debt at December 31, 1997 was $1.0 billion while total shareholders’ equity was $1.6 billion. With the Company’s debt balance under 39% of total capitalization, we still have the flexibility to continue to grow through internal expansion or through further acquisitions.

Our national and international growth created an atmosphere of great enthusiasm as 1997 began. Having endured two years of rapid growth through acquisitions, we anticipated additional sales and profit growth in the United States and Latin America. The Company was poised for improvement in comparable sales and earnings during 1997 in addition to the growth we expected from the current year acquisitions. The first quarter lived up to our expectations and the momentum continued through the second quarter. In spite of the fact that certain large U.S. retail customers curtailed their purchases from us, the Company continued to achieve significant sales and profit gains through the first half of the year.

Starting in August, weak do-it-yourself retail sales in the industry began to affect the Company, primarily in the Coatings Segment, and we encountered significant competitive challenges in the United States. Internationally, the South American economies were starting to feel the effects of the financial troubles in Asia. Foreign currencies continued to weaken against the U.S. dollar. Difficulties integrating some of our acquisitions and the rationalizing of previously-existing operations put pressure on maintaining our operating margins. In spite of these challenges faced by our operating divisions during the last half of the year, the Company still achieved another record year of sales and earnings and increased the annual dividend.

We were pleased with the results of the Paint Stores Segment. In 1997, the Segment set the pace for the Company by achieving its sixth consecutive year of sales and operating profit improvement. New products, increased gallons sold, productivity gains and new store openings all combined to produce the improved results. Paint volume gains and increased retail sales in each of the Segment’s four divisions accounted for an 8.1 percent net sales increase over 1996 to a total of $2.6 billion. Comparable-store net sales, including the sales of acquired products through existing stores, increased 6.3 percent. Operating profit of the Paint Stores Segment for the year increased 9.3 percent over last year. This substantial increase in operating profit was directly related to sales volume gains, gains in productivity and the continued containment of selling, general and administrative expenses. The Segment opened 39 net new stores to bring the total number of stores at year-end to 2,195. In 1998, we plan to add 50-60 net new stores which will include several stores in Canada and Mexico. We believe that expanding the store base will allow for the continued growth of our business and for improved efficiency of advertising in selected markets.

The Product Finishes Business Unit, previously referred to as chemical coatings, has been transferred to the Paint Stores Segment from the Coatings Segment; creating a fully-integrated organization responsible for technical development, manufacturing, marketing and selling chemical coatings products. Product finishes include liquid and powder coatings for original equipment manufacturers. Placing control of this business unit in the Paint Stores Segment will allow product development and manufacturing to be more responsive to the needs of our customers while providing greater accountability to the marketing and sales force for the overall profitability of the business unit. We will continue our domestic powder coatings factory expansion to meet the needs of this fast growing market. By the end of 1997, the construction of our fifth powder coatings plant was completed, and we expect the sixth to be finished by the middle of 1998.

The Coatings Segment realized annual net sales of over $2.2 billion. This was an increase of 32.5 percent over 1996 due primarily to acquisitions completed in 1997. Excluding the impact of these acquisitions, net sales for this Segment decreased one-half percent from 1996 sales levels. Sales, excluding acquisitions, were affected by the loss of certain coatings and aerosol business at a large retailer due to price concessions we were unwilling to accept. Sales were also reduced by the loss of powdered detergent business at a large wholesale club, also due to the failure to make pricing concessions. Although we expect sales gains from launching new products and product lines and from expanding our presence at several retailers to offset the effect of these sales shortfalls, total 1998 expected sales increases will be tempered during the first half of 1998.

The operating profit of the Coatings Segment, excluding the effects of acquisitions, increased 6.6 percent due to containment of selling, general and administrative expenses and manufacturing efficiencies in certain business units within the Segment. Weak do-it-yourself retail sales during the last half of the year hampered the operations of this Segment along with the previously-mentioned loss of business of several large retail customers. In addition, certain service and production inefficiencies, primarily related to the acquired dealer business and the closing of our Chicago product finishes plant, also adversely affected this Segment in 1997. Through-put, product availability and service in these under-performing business units have begun to improve. Also affecting 1998 will be the increased cost of titanium dioxide, a major raw material component of paint, as suppliers have announced another price increase due to take effect this Spring. This is the fourth price increase in the last fifteen months. We have absorbed much of this increase but must pass the remainder on to our customers through higher prices for our products.

The Coatings Division continued to focus on integrating acquired production facilities to achieve consolidation benefits and overhead cost reductions. Certain acquired facilities were closed as their production costs were higher than alternative existing facilities. Likewise, rationalization of the Division’s other manufacturing facilities resulted in the transfer of some production from our Chicago manufacturing facility to other facilities where the cost to produce will be more beneficial to overall operations. The Division struggled all year with service and production problems and with efficiently supplying new products for the Consumer Brands Division. We combined the operating responsibility for the Coatings and Consumer Brands Divisions under a new management group to form one cohesive unit to manufacture, market and sell paint and sealants to the dealer and mass merchandiser markets. The new management team has begun to make an impact. Due to this, we expect improvement in 1998 from the combined division in the areas of research and development, production efficiency, dealer product service levels and the production process for new products.

The Consumer Brands Division had a tough year in 1997 with significant competitive pressures and loss of sales at some of its retail customers. For the second year in a row, the Division reached record sales levels with gallon and dollar net sales increasing significantly, primarily from acquired business. Gross margins were up in 1997 as the effects of lower margin sales from businesses acquired in 1996 were offset by higher margin sales of businesses acquired in 1997. Operating profit of the Division remained flat in 1997 as selling, general and administrative expenses, particularly advertising and merchandising expenses, increased as a percent of sales in support of, and offsetting, the acquired higher margin sales.

The Transportation Services Division continued the consolidation of distribution facilities into more strategically located centers and raised the efficiency ratio of all distribution centers. In 1998, the Division will consolidate all our West Coast distribution facilities into a 695,000 square foot facility being constructed in Nevada to further reduce distribution costs throughout the western part of the U.S.

The Automotive Division continues to improve its domestic business as well as its businesses throughout Latin America. The product development efforts undertaken by this Division in 1997 continue to produce good results. New product introductions and new original equipment manufacturer business, particularly with VOLVO Trucks, helped the Division exceed its sales expectations for the year. The acquired businesses in Mexico and South America are performing very well and position the Division for future growth in these emerging markets. In 1998, we expect this Division to again deliver performance over expectations through further product improvements and new customer sales.

The Diversified Brands Division experienced a good year in 1997. As a result of the Thompson Minwax acquisition, various interior stains and varnishes sold under the Minwax® brand name were added to the Division’s product offering. However, the loss of powdered detergent sales and other operating difficulties in the Cleaning Solutions Group offset some of the increased sales and profitability from the Minwax® brand products. Though performing below expectations, we still believe that the Cleaning Solutions Group adds balance to the Division in the long term while expanding distribution for the Division’s other products to discount stores and supermarkets. We expect improvement from this Division in 1998.

Internationally, the businesses acquired in South America since 1995 are performing well. We are excited about the prospects for future growth in this geographic area. We will continue to review and pursue opportunities that fit into our plans for international expansion which meet our requirements for profitable long-term strategic market gains.

Certain management changes were made during 1997 due to retirements, resignations and promotions. Mr. Frank E. Butler, President & General Manager, Coatings Division, retired in 1997 after 39 years of service to the Company. We wish Frank and his wife Grace good health, peace and prosperity throughout their retirement. Mr. Joseph M. Scaminace, formerly President & General Manager, Automotive Division, was named President & General Manager, Coatings Division. Mr. Michael A. Galasso was promoted to President & General Manager, Automotive Division. Mr. Christopher M. Connor, previously President & General Manager, Diversified Brands Division was named President, Paint Stores Group. Mr. Richard M. Wilson was promoted to President & General Manager, Diversified Brands Division. Mr. Mark J. Dvoroznak was named Vice President - Corporate Audit & Loss Prevention and Mr. Thomas E. Hopkins was named Vice President - Human Resources.

International management changes made during 1997 included the naming of Mr. Claudio A. Geiger to the newly created position of President and General Manager - South America and Mr. Clovis Carvalho to Operations Vice President - South America. Mr. Pedro Marcon was promoted to Vice President and General Manager - Sherwin-Williams do Brasil replacing Mr. Geiger. Mr. Hugo Rossi was named Vice President and General Manager - Sherwin-Williams Argentina and Mr. Eugenio Lucero was appointed Vice President and General Manager - Sherwin-Williams Chile. Mr. Jose VillaSenour continues as the Vice President and General Manager - Sherwin-Williams de Mexico.

We are confident that these seasoned managers in their new positions are focused on the tasks and opportunities ahead and will produce record results again in the upcoming year.

In 1998, we will continue to pursue acquisitions that fit our strategic needs. The Company’s expansion into new products and new markets is just the beginning of a presence which we expect will grow for many years and will allow the Company to continue as the leader in the paint and coatings industry. We have continued the assessment, testing and remediation effort regarding our current computer systems to assure ourselves that all such systems will be functional when the annual date changes from 1999 to 2000. Simultaneously, we have begun a multi-year program to enhance our computer systems throughout the Company to make our operations more efficient and integrated.