CONDITION AND RESULTS OF OPERATIONS

Ameron International Corporation ("Ameron" or the "Company") is a multinational manufacturer of highly-engineered products and materials for the chemical, industrial, energy, transportation and infrastructure markets. Ameron is a leading producer of water transmission lines; high-performance coatings and finishes for the protection of metals and structures; fiberglass-composite pipe for transporting oil, chemicals and corrosive fluids and specialized materials and products used in infrastructure projects. The Company operates businesses in North America, South America, Europe, Australasia and Asia. The Company has four operating segments. The Performance Coatings & Finishes Group manufactures and markets high-performance industrial and marine coatings. The Fiberglass- Composite Pipe Group manufactures and markets filament-wound and molded composite fiberglass pipe, tubing, fittings and well screens. The Water Transmission Group manufactures and supplies concrete and steel pressure pipe, concrete non-pressure pipe, protective linings for pipe,and fabricated steel products.The Infrastructure Products Group manufactures and sells ready-mix concrete, sand and aggregates, concrete pipe and culverts, and concrete and steel lighting and traffic poles. The markets served by the Performance Coatings & Finishes Group and the Fiberglass-Composite Pipe Group are worldwide in scope. The Water Transmission Group serves primarily the western U.S. The Infrastructure Products Group's quarry and ready-mix business operates exclusively in Hawaii, and poles are sold throughout the U.S. Ameron also participates in several joint-venture companies, directly in the U.S. and Saudi Arabia, and indirectly in Kuwait and Egypt.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Liquidity and Capital Resources and Results of Operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities during the reporting periods. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates.

The Company's significant accounting policies are disclosed in Note 1 of Notes to Consolidated Financial Statements in the Company's 2003 Annual Report. Management believes the following accounting policies affect the more significant estimates used in preparing the consolidated financial statements.

The consolidated financial statements include the accounts of Ameron and all wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. The functional currencies for the Company's foreign operations are the applicable local currencies. The translation from the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate during the period. The resulting translation adjustments are recorded in accumulated other comprehensive loss. The Company advances funds to certain foreign subsidiaries that are not expected to be repaid in the foreseeable future. Translation adjustments arising from these advances are also included in accumulated other comprehensive loss. The timing of repayments of intercompany advances could impact the components of equity on the Company's consolidated balance sheets but would not be expected to impact consolidated income statements. Additionally, earnings of foreign subsidiaries are often reinvested outside the U.S. Repatriation of such earnings could result in unrecognized U.S. tax liability. Gains or losses resulting from foreign currency transactions are included in other income.

Revenue for the Performance Coatings & Finishes, Fiberglass-Composite Pipe and Infrastructure Products segments is recognized when risk of ownership and title pass, primarily at the time good s are shipped, provided that an agreement exists between the customer and the Company, the price is fixed or determinable and collection is reasonably assured. In limited circumstances within the Performance Coatings & Finishes Group, revenue recognition associated with shipment of coatings for marine dry dockings is delayed until product returns are processed. Revenue is recognized for the Water Transmission Group primarily under the percentage-of-completion method, typically based on completed units of production, since products manufactured under enforceable and binding construction contracts typically are designed for specific applications, are not interchangeable between projects, and are not manufactured for stock. In some cases, if products are manufactured for stock or are not related to specific construction contracts, revenue is recognized under the same criteria used by the other three segments. Revenue under the percentage-of-completion method is subject to a greater level of estimation, which affects the timing of revenue recognition, costs and profits. Estimates are reviewed on a consistent basis and are adjusted periodically to reflect current expectations.

The Company expenses environmental clean-up costs related to existing conditions resulting from pastor current operations on a site-by site basis. Liabilities and costs associated with these matters, as well as other pending litigation and asserted claims arising in the ordinary course of business, require estimates of future costs and judgements based on the knowledge and experience of management and its legal counsel.When estimates of the Company's exposure can be reasonably estimated and are probable, liabilities and expenses are recorded.The ultimate resolution of any such exposure to the Company may differ due to subsequent developments.

Inventories are stated at the lower of cost or market with cost determined principally on the first-in, first-out (FIFO) method. Certain steel inventories used by the Water Transmission Group are valued using the last-in, first-out (LIFO) method. Reserves are established for excess, obsolete and rework inventories based on age, estimates of salability and forecasted future demand. Management records an allowance for doubtful accounts receivable based on historical experience and expected trends. A significant reduction in demand or significant worsening of customer credit quality could materially impact the Company's consolidated financial statements. Property, plant and equipment is stated on the basis of cost and depreciated principally on a straight-line method based on the estimated useful lives of the related assets, generally two to 40 years.

Investments in unconsolidated joint ventures or affiliates ("joint ventures") over which the Company has significant influence are accounted for under the equity method of accounting, whereby the investment is carried at the cost of acquisition, plus the Company's equity in undistributed earnings or losses since acquisition. Investments in joint ventures over which the Company does not have the ability to exert significant influence over the investee's operating and financing activities are accounted for under the cost method of accounting. The Company's investment in TAMCO is accounted for under the equity method. Investments in Ameron Saudi Arabia, Ltd. , Bondstrand, Ltd.and Oasis-Ameron, Ltd. are accounted for under the cost method due to management's current assessment of the Company's influence over these joint ventures.

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.If the estimated future, undiscounted cash flows from the use of an asset are less than its carrying value, a write-down is recorded to reduce the related assets to estimated fair value.

The Company is self insured for a portion of the losses and liabilities primarily associated with workers' compensation claims and general, product and vehicle liability. Losses are accrued based upon the Company's estimates of the aggregate liability for claims incurred using historical experience and certain actuarial assumptions followed in the insurance industry. The estimate of self insurance liability includes an estimate of incurred but not reported claims, based on data compiled from historical experience. Actual experience could differ significantly from these estimates and could materially impact the Company's consolidated financial statements.

The Company follows the guidance of Statement of Financial Accounting Standards ("SFAS") No. 87, "Employers' Accounting for Pensions,"and SFAS No. 106, "Employers' Accounting for post retirement Benefits Other Than Pensions," when accounting for pension and other post retirement benefits. Under these accounting standards, assumptions are made regarding the valuation of benefit obligations and, in certain cases the performance of plan assets that are controlled and invested by third-party fiduciaries. Delayed recognition of differences between actual results and expected or estimated results is a guiding principle of these standards. Such delayed recognition provides a gradual recognition of benefit obligations and investment performance over the working lives of the employees who benefit under the plans, based on various assumptions. Unforecasted program changes, including termination, freezing of benefits or acceleration of benefits, could result in an immediate recognition of unrecognized benefit obligations; and such recognition could materially impact the Company's consolidated financial statements. Assumed discount rates are used to calculate the present value of benefit payments which are projected to be made in the future, including projections of increases in employees' annual compensation and health care costs. Management also projects the future return on invested assets based principally on prior performance and future expectations. These projected returns reduce the net benefit costs the Company records in the current period. Management consults with actuaries when determining these assumptions.

During 2003, the Company changed the assumed discount rate, expected rate of return on assets and projected rates of increase in compensation levels and health care costs.The discount rate is based on market interest rates.At November 30,2003, the Company decreased the discount rate from 6.75% to 6.00% as a result of the then current market interest rates on long-term, fixed-income debt securities of highly-rated corporations. In estimating the expected return on assets, the Company considers past performance and future expectations for various types of investments as well as the expected long-term allocation of assets. At November 30, 2003, the Company reduced the expected long-term rate of return on assets assumption from 9.75% to 8.75% to reflect reduced expectations for future returns in the equity markets. In projecting the rate of increase in compensation levels, the Company considers movements in inflation rates as reflected by market interest rates. At November 30, 2003, the Company decreased the assumed annual rate of compensation increase from 4.25% to 3.50%. In selecting the rate of increase in health care costs, the Company considers past performance and forecasts of future health care cost trends.At November 30, 2003, the Company increased the rate of increase in health care costs from 9.00% to 10.00%,decreasing ratably until reaching 5.00% in 2008 and beyond.

Different assumptions would impact the Company's projected benefit obligations and annual net periodic benefit costs related to pensions, and the accrued other benefit obligations and benefit costs related to post retirement benefits. The following reflects the impact associated with a change in certain assumptions (in thousands):

Additional information regarding pensions and other post retirement benefits is disclosed in Note 15 of Notes to Consolidated Financial Statements in the Company's 2003 Annual Report.

Management incentive compensation is accrued based on current estimates of the Company's ability to achieve short-term and long-term performance targets.

Deferred income tax assets and liabilities are computed for differences between the financial statement and income tax bases of assets and liabilities. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse.No deferred taxes have been provided for the undistributed earnings of Ameron's foreign subsidiaries that are expected to be permanently reinvested offshore. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amounts expected to be realized. Quarterly income taxes are estimated based on the mix of income by jurisdiction forecasted for the full fiscal year. The Company believes that it has adequately provided for tax-related matters. The Company is subject to examination by taxing authorities in various jurisdictions. Matters raised upon audit may involve substantial amounts and could be material. Management considers it unlikely that resolution of any such matters would have a material adverse effect upon the Company's consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

During 2003, the Company generated $43.2 million of cash from operating activities compared to $54.6 million in the same period in 2002. The lower operating cash flow in 2003 was due to an increase in operating assets partially offset by an increase in operating liabilities.Much of the asset change came from higher receivables and higher other assets. Receivables grew due to increased sales and the timing of collections. Other assets rose due to an increase in the cash surrender value of life insurance policies related to executive benefit plans and prepaid costs related to pensions. Operating liabilities increased due partly to higher pension liabilities and also to defer red payments associated with the settlement of the Central Arizona Project lawsuits reached in January 2003.

Net cash used in investing activities totaled $13.9 million in 2003, compared to $14.0 million in 2002. Net cash used in investing activities consisted of proceeds from the sale of assets, including $3.0 million from the sale of the Company's interest in a Mexican coatings venture in 2003, offset by capital expenditures which were primarily for normal replacement and upgrades of machinery and equipment. Additionally, a coatings distribution warehouse was purchased in 2003 for $1.3 million. During the fiscal year ending November 30, 2004, the Company anticipates spending between $20 and $30 million on capital expenditures. Capital expenditures are expected to be funded by existing cash balances, cash generated from operations or additional borrowings.

Net cash used in financing activities was $19.8 million in 2003, compared to $41.9 million in 2002. The net cash used in 2003 consisted of the net repayment of debt of $18.8 million, debt issuance costs of $1.6 million, payment of common stock dividends totaling $6.1 million, offset by $6.6 million from the issuance of common stock related to the exercise of stock options.

In January 2003, the Company finalized a three-year, $100 million revolving credit facility with six banks (the "Revolver"). Under the Revolver, the Company may, at its option, borrow at floating interest rates based on specified margins over money market rates, at any time until January 2006, when all borrowings under the Revolver must be repaid. Also in January 2003, the Company issued $50 million of notes payable to an insurance company at a fixed rate of 5.36%. These fixed-rate notes are payable $10 million per year beginning in November 2005, with a final maturity in November 2009. The Revolver and the 5.36% notes payable replaced a $150 million revolving credit facility that was maintained at November 30, 2002.

The lending agreements contain various restrictive covenants, including the requirement to maintain specified amounts of net worth and restrictions on cash dividends, borrowings, liens, investments and guarantees.The Company is required to maintain consolidated net worth of $181.5 million plus 50% of net income and 75% of proceeds from any equity issued after January 24, 2003. The Company's consolidated net worth exceeded the covenant amount by $71.1 million as of November 30, 2003. The Company is required to maintain a consolidated leverage ratio of consolidated funded indebtedness to earnings before interest, taxes, depreciation and amortization ("EBITDA") of no more than 3 times.As of November 30, 2003, the Company maintained a consolidated leverage ratio of 1.43 times EBITDA. The Revolver and the notes payable require that the Company maintain qualified consolidated tangible assets at least equal to the outstanding secured funded indebtedness.As of November 30, 2003 qualifying tangible assets equaled 1.89 times funded indebtedness. Under the most restrictive fixed charge coverage ratio, the sum of EBITDA, rental expense and cash taxes must be at least 1.5 times the sum of interest expense, rental expense, dividends and scheduled funded debt payments.As of November 30, 2003, the Company maintained a ratio of 2.38.

Cash and cash equivalents at November 30, 2003 totaled $20.4 million, an increase of $10.0 million from November 30, 2002.At November 30, 2003, the Company had total debt outstanding of $94.4 million and approximately $104 million in unused committed and uncommitted credit lines available from foreign and domestic banks. The Company's highest borrowing and the average borrowing levels during 2003 were $166.6 million and $107.7 million, respectively.The highest borrowing was $50.0 million higher than necessary to fund operations due to the refinancing in 2003, as the new debt was issued prior to the repayment of the replaced debt.

Management believes that cash flows from operations and current cash balances, together with currently available lines of credit will be sufficient to meet operating requirements in 2004. Cash available from operations could be affected by any general economic downturn or any downturn or adverse changes in the Company's business, such as loss of customers or significant raw material price increases. Management believes it is unlikely that business or economic conditions will worsen or that costs will increase sufficiently to impact short term liquidity.

The Company's contractual obligations and commercial commitments at November 30, 2003 are summarized as follows (in thousands):

(a) Included in long-term debt is $3,677 outstanding under a revolving credit facility, due in 2006, supported by the Revolver.
(b) The Company has no capitalized lease obligations, unconditional purchase obligations, or standby repurchase obligations.
(c) Not included are standby letters of credit totaling $16,065 supporting industrial development bonds with a principal of $15,700. The principal amount of the industrial development bonds is included in long-term debt.

RESULTS OF OPERATIONS: 2003 COMPARED WITH 2002

General

Net income totaled $29.9 million, or $3.67 per diluted share, on sales of $600.5 million for the year ended November 30, 2003, compared to net income of $28.1 million, or $3.49 per diluted share, on sales of $539.5 million for the same period in 2002.All operating segments had higher sales. The Performance Coatings & Finishes and Fiberglass-Composite Pipe Groups had higher segment income, while the Water Transmission and Infrastructure Products Groups had lower segment income. The increase in net income came from higher sales and higher gross profit, offset by higher selling, general and administrative expenses and lower equity in earnings of TAMCO.

Sales

Sales increased by $61.0 million in 2003.While all operating segments improved, the largest gains came from the Company's Fiberglass-Composite Pipe and the Water Transmission businesses. The Fiberglass-Composite Pipe Group benefited from strong demand in Asia for fiberglass piping for construction of offshore oil and marine vessels,and the Water Transmission Group's increase came from the fabrication of steel pilings for the San Francisco/Oakland Bay Bridge.

Performance Coatings & Finishes' sales increased by $7.0 million due to the appreciation of foreign currencies relative to the U.S. dollar. Sales in local currencies by operations outside the U.S. were relatively flat, while sales in the U.S. were lower. Sales of protective coatings in the U.S. declined due to continued sluggishness in U.S. chemical, industrial and marine markets caused by general economic conditions. The industrial markets in Europe were similarly sluggish. However, the international demand for offshore and marine coatings improved in 2003. Future improvements by the group remain dependent on increased spending in worldwide industrial, marine and offshore markets, which appear to be strengthening. A market improvement should bode well for the Performance Coatings & Finishes Group.

Fiberglass-Composite Pipe's sales increased by $26.2 million due primarily to the strength of Asian operations and partly to the impact of favorable foreign exchange rates. Asian operations benefited from the strong worldwide demand for oil tankers and offshore production vessels driven by high oil prices. The industrial markets in the U.S. and Europe remained depressed due to general economic conditions. Sales of onshore oilfield piping improved during 2003 as oil prices remained at a relatively high level and oilfield spending increased. The outlook for the Fiberglass-Composite Pipe Group is positive and improving.

The Water Transmission Group's sales increased in 2003 by $20.5 million due to sales of steel pilings for the San Francisco/Oakland Bay Bridge. Sales of concrete and steel pipe for fresh and waste water applications declined during the year due to a cyclical slowdown in the water market in the western U.S. Revenue is recognized in the Water Transmission Group primarily under the percentage-of-completion method and is subject to a certain level of estimation, which affects the timing of revenue recognition, costs and profits. Estimates are reviewed on a consistent basis and are adjusted when actual results are expected to significantly differ from those estimates. Water Transmission's year-end backlog was lower than at the end of 2002, reflecting the recent lull in water projects in the western U.S. The business may be unable to sustain the unusually high level of the last several years in 2004; however, the future outlook for the Water Transmission Group remains positive.

Infrastructure Products' sales increased by $6.9 million due to strong housing and commercial construction spending, which was spurred by low interest rates. Ameron's Hawaiian operations benefited from improved demand for ready-mix concrete and concrete pipe used for public infrastructure, housing and military construction. Ameron's pole business had higher sales of concrete poles used in street lighting, primarily associated with housing starts. Sales of steel traffic poles declined due to the lack of steel tubes.The outlook for the Infrastructure Products Group remains favorable.

Gross Profit

Gross profit in 2003 was $166.5 million, or 27.7% of sales, compared to gross profit of $141.9 million, or 26.3% of sales, in 2002. Gross profit increased $24.6 million due to higher sales and improved margins. Overall margins improved primarily due to a change in product mix as the proportion of higher-margin fiberglass-pipe sales increased.

Gross profit of the Performance Coatings & Finishes Group increased by $2.8 million, with $2.0 million from higher profit on increased sales and $.8 million from higher margins. Margins improved due to better inventory management in 2003, with lower reserves needed for obsolete and slow-moving inventory.

The Fiberglass-Composite Pipe Group's gross profit increased $14.3 million in 2003. The increase was based almost equally on higher sales and higher margins. Gross profit margins improved due to lower raw material costs of $2.0 million, and improved plant efficiencies of $5.2 million. Plant efficiencies improved due to more balanced use of capacity and cost containment programs initiated in 2002.

Gross profit of the Water Transmission Group increased $4.2 million due to higher sales. However, profit margins decreased, offsetting the increase in gross profit by approximately $1.0 million. Margins were impacted by a change in product mix in 2003 due to the higher level of lower-margin steel pilings. The supply of steel pilings for the San Francisco/Oakland Bay Bridge is roughly 50% completed. The balance of the pilings are expected to be supplied in 2004, thus margins in 2004 are expected to be similarly impacted as in 2003.

The Infrastructure Products Group's gross profit increased $1.1 million, on slightly lower margins, due to higher sales. Margins declined as the mix of concrete pole sales included a higher proportion of lower-margin, smaller poles.

Additionally, gross profit was $2.1 million higher in 2003 due primarily to the establishment in 2002 of reserves associated with LIFO accounting of certain steel inventories and certain slow-moving fiberglass-pipe inventories which did not repeat in 2003.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses totaled $127.4 million, or 21.2% of sales, in 2003, compared to $105.9 million, or 19.6%,in 2002.SG&A increased $21.5 million due to higher pension costs of $9.6 million and higher costs for third-party insurance coverage of $2.9 million. Additionally, SG&A in 2003 included higher new product development and marketing costs of $3.5 million, higher employee benefit costs of $2.8 million, higher legal fees of $1.4 million and higher marketing costs associated with higher sales of $.7 million. The appreciation of foreign currencies increased SG&A of the Company's foreign operations by about $4.7 million in 2003; however, the increase was more than offset by the estimated impact of cost reduction programs initiated in 2002. Legal fees were higher due to asbestos and silica claims and due to lower recovery related to the Central Arizona Project lawsuits. In 2003, $1.0 million was recovered representing amounts agreed to be reimbursed to the Company by its own and a supplier's insurance companies for past legal fees and costs in excess of the negotiated settlement of the Central Arizona Project lawsuits reached in January 2003. The resolution of the lawsuit enabled the reversal in 2002 of reserves totaling $1.7 million. Pension and insurance costs are expected to be stable in 2004.

Equity in Earnings of Joint Venture and Other Income

Equity in earnings of joint venture decreased to $.7 million in 2003 from $3.6 million in 2002. Equity income declined due to TAMCO, Ameron's 50%-owned mini-mill in California. Ameron's equity in TAMCO's earnings decreased as TAMCO suffered throughout 2003 from higher energy and scrap costs. Energy costs reflected the lingering impact of California's electricity crisis. Scrap costs rose due to demand for Asian consumption. TAMCO is increasing pricing to recoup these cost increases, and operating results for TAMCO are expected to improve in 2004.

Other income increased to $10.9 million in 2003 from $9.8 million in 2002.Other income included earnings from investments accounted for under the cost method, royalties and fees from licensees, foreign currency transaction gains and losses, and other miscellaneous income. Included in 2003 was a gain of $2.5 million on the sale of Ameron's minority interest in a Mexican coatings venture. Income from investments accounted for under the cost method increased from $5.9 million in 2002 to $6.3 million in 2003. The increase was due primarily to higher dividends received from Ameron's fiberglass-pipe joint venture in Saudi Arabia. The near-term outlook for Ameron's Saudi Arabian joint ventures is uncertain given the competitive environment facing each business.

Interest

Interest expense totaled $6.6 million in 2003, compared to $6.8 million in 2002. The decrease reflected lower average borrowing levels in 2003 offset by the higher interest on the fixed-rate notes placed early in 2003.

Provision for Income Taxes

The provision for income taxes in 2003 was $14.1 million, a decrease of $.4 million from 2002. The effective tax rate decreased to 32% in 2003 from 34% in 2002. The effective tax rate was lower due to the increase of foreign profits, especially from Asia,and lower foreign income tax rates.

RESULTS OF OPERATIONS: 2002 COMPARED WITH 2001

General

Net income totaled $28.1 million, or $3.49 per diluted share, on sales of $539.5 million for the year ended November 30, 2002, compared to net income of $27.7 million, or $3.45 per diluted share, on sales of $551.4 million for the same period in 2001. Higher segment income from the Infrastructure Products Group more than offset lower segment income from the other three groups. The overall improvement in net income came primarily from higher operating margins, higher equity income and lower interest expense.

Sales

Sales decreased by $11.9 million in 2002 primarily due to the sluggishness in U.S. and European chemical and industrial markets, as well as softening in the worldwide oilfield market, that negatively impacted the Company's Fiberglass-Composite Pipe and Performance Coatings & Finishes Groups. The strong U.S. housing market and continued infrastructure spending helped boost sales of the Water Transmission and Infrastructure Products Groups.

Performance Coatings & Finishes' sales decreased by $5.4 million because of the decline in sales of high-performance protective coatings by the Company's U.S. and European operations due to general economic conditions. Market demand remained weak throughout 2002. Sales of light-industrial finishes in Australia and New Zealand were higher, reflecting improved economic conditions.

The Fiberglass-Composite Pipe Group's sales decreased by $18.5 million in 2002, compared to 2001, due to sluggishness in domestic and European industrial and fuel-handling markets, as well as softening in the worldwide oilfield market. Demand for oilfield piping remained lower throughout the year because of lower spending associated with uncertainty regarding the sustainability of oil prices. Additionally, Ameron's U.S. industrial business completed deliveries of a large water pipeline for a project in California during 2001 that did not repeat in 2002.

The Water Transmission Group had $1.8 million higher sales in 2002 than in 2001, primarily as a result of a major sewer pipe project in Southern California and demand for water piping to meet the needs of population growth, infrastructure rehabilitation and the energy markets. During 2002, the Water Transmission Group received a $57 million contract to provide steel pilings for the renovation of the San Francisco / Oakland Bay Bridge. The project did not materially impact 2002.

The Infrastructure Products Group completed 2002 with $9.8 million higher sales. Ameron's Hawaiian operations benefited from the continued strength of residential, military and road construction in Hawaii. Sales of poles increased as low interest rates continued to drive the strong U.S. housing market.

Gross Profit

Gross profit in 2002 was $141.9 million or 26.3% of sales, compared to gross profit of $138.1 million or 25.0% of sales in 2001. Gross profit would have declined an estimated $3.0 million due to lower sales; however, the decline was more than offset by profits associated with higher margins, totaling about $6.8 million. Gross margins increased due a to change in product and project mix, lower raw material costs and improved plant utilization.

Performance Coatings & Finishes' benefited from productivity enhancements, as well as favorable raw material costs. Likewise, margins of the Fiberglass-Composite Pipe Group improved as a result of profitability enhancements, favorable product and project mix and lower raw material costs. Margins of the Water Transmission Group declined due to unfavorable product and project mix and production delays associated with the San Francisco/Oakland Bay Bridge. Infrastructure Products had higher margins as a result of the better product mix, increased plant utilization and more consistent production by the new concrete pole plant in Alabama.

Selling, General and Administrative Expenses

Selling, general and administrative expenses totaled $105.9 million or 19.6% of sales in 2002, compared to $101.8 million or 18.5% in 2001. The $4.1 million increase in expenses was due primarily to higher pension costs of approximately $4.9 million, and severance and productivity enhancement costs for the U.S. and European Fiberglass-Composite Pipe operations and U.S. Performance Coatings & Finishes operation of $2.1 million . Partially offsetting the increases was a reversal of $1.7 million of reserves previously established for the Central Arizona Project lawsuit, based on the settlement reached in early 2003.

Equity in Earnings of Joint Venture and Other Income

Equity in earnings of joint venture increased to $3.6 million in 2002 from $2.3 million in 2001.Equity income improved as TAMCO benefited from continued demand for rebar in the western U.S. and stable energy supplies.

Other income included earnings from investments accounted for under the cost method, royalties and fees from licensees, foreign currency transaction gains and losses, and other miscellaneous income. Other income decrease to $9.8 million from $10.3 million in 2001 primarily due to lower royalties and fees. Income from investments accounted for under the cost method decreased from $6.3 million in 2001 to $5.9 million in 2002. The decrease was due primarily to reduced dividends from Ameron's coatings ventures in Mexico and Saudi Arabia.

Interest

Interest expense totaled $7.0 million in 2002, compared to $10.5 million in 2001. The decrease reflected lower rates and lower average borrowing levels in 2002 than in 2001.

Provision for Income Taxes

The effective tax rate increased to 34% in 2002 from 28% in 2001. The provision for income taxes in 2002 was $14.5 million, an increase of $3.6 million from 2001. In 2001, the Company recorded a $4.0 million benefit from research and development credits related to the 1990 through 2000 tax years, which did not repeat in 2002.

OFF-BALANCE SHEET FINANCING

The Company does not have any off-balance sheet financing, other than listed in the liquidity and capital resources Section herein. All the Company's subsidiaries are included in the financial statements, and the Company does not have relationships with any special purpose entities.

MARKET RISKS

Foreign Currency Risk

The Company operates internationally, giving rise to exposure to market risks from changes in foreign exchange rates. From time to time, the Company borrows in various currencies to reduce the level of net assets subject to changes in foreign exchange rates. In addition, the Company purchases foreign exchange forward and option contracts to hedge firm commitments, such as receivables and payables, denominated in foreign currencies.The Company does not use the contracts for speculative or trading purposes.At November 30, 2003, the Company had 27 foreign currency forward contracts expiring at various dates through May 2004,with an aggregate face value and fair value of $9.4 million and $9.5 million, respectively. Such instruments are carried at fair value, with related adjustments recorded within other income.

Debt Risk

The Company has variable-rate, short-term and long-term debt as well as fixed-rate, long-term debt.The fair value of the Company's fixed rate debt is subject to changes in interest rates.The estimated fair value of the Company's variable-rate debt approximates the carrying value of the debt since the variable interest rates are market-based, and the Company believes such debt could be refinanced on materially similar terms. The Company is subject to the availability of credit to support new requirements, to refinance amortizing long-term debt and to refinance short-term debt.

As of November 30, 2003, the estimated fair value of notes payable by the Company totaling $25.0 million, with a fixed rate of 7.92%, was $27.1 million. The Company is required to repay these notes in annual installments of $8.3 million from 2004 to 2006, inclusive. As of November 30, 2003, the estimated fair value of notes payable by the Company totaling $50.0 million,with a fixed rate of 5.36%,was $50.4 million.The Company is required to repay these notes in annual installments of $10.0 million from 2005 to 2009, inclusive.The Company had $7.2 million of variable rate industrial development bonds payable at a rate of 1.20% as of November 30, 2003, payable in 2016. The Company also had $8.5 million of variable-rate industrial development bonds payable at a rate of 1.35% as of November 30, 2003, payable in 2021. As of November 30, 2003, the Company borrowed $3.7 million under a revolving credit facility supported by the Revolver which perm its borrowings up to $100 million through January, 2006. The average interest rate of such borrowings was 4.75% as of November 30, 2003.

CONTINGENCIES

The Company is one of numerous defendants in various asbestos-related personal injury lawsuits. These cases generally seek unspecified damages for asbestos-related diseases based on alleged exposure to certain products previously manufactured by the Company and others, and at this time the Company is generally not aware of the extent of injuries allegedly suffered by the individuals or the facts supporting the claim that injuries were caused by the Company's products. Based upon the information available to it at this time, the Company is not in a position to evaluate its potential exposure, if any, as a result of such claims. Hence, no amounts have been accrued for loss contingencies related to these lawsuits in accordance with SFAS No. 5,"Accounting for Contingencies."The Company continues to vigorously defend all such lawsuits. As of November 30, 2003, the Company was a defendant in asbestos-related cases involving 17,447 claimants, compared to 8,382 claimants as of November 30, 2002. The Company is not in a position to estimate the number of additional claims that may be filed against it in the future.For the fiscal year ended November 30, 2003, there were new claims involving 9,279 claimants,dismissals and/or settlements involving 211 claimants and judgments involving 3 claimants. Net costs and expenses incurred by the Company for the fiscal year ended November 30, 2003 in connection with asbestos-related claims were less than $.6 million.

The Company is one of numerous defendants in various silica-related personal injury lawsuits. These cases generally seek unspecified damages for silica-related diseases based on alleged exposure to certain products previously manufactured by the Company and others,and at this time the Company is not aware of the extent of injuries allegedly suffered by the individuals or the facts supporting the claim that injuries were caused by the Company's products. Based upon the information available to it at this time, the Company is not in a position to evaluate its potential exposure, if any, as a result of these claims. Hence,no amounts have been accrued for loss contingencies related to these lawsuits in accordance with SFAS No. 5. The Company continues to vigorously defend all such lawsuits. As of November 30, 2003, the Company was a defendant in silica-related cases involving 6,847 claimants, compared to 48 claimants as of November 30, 2002. The Company is not in a position to estimate the number of additional claims that may be filed against it in the future. For the fiscal year ended November 30, 2003, there were new claims involving 6,880 claimants, dismissals and/or settlements involving 81 claimants a nd no judgments. Net costs and expenses incurred by the Company for the fiscal year ended November 30, 2003 in connection with silica-related claims were about $.3 million.

In addition, certain other claims, suits and complaints that arise in the ordinary course of business, have been filed or are pending against the Company. Management believes that these matters are either adequately reserved, covered by insurance, or would not have a material effect on the Company's financial position or its results of operations if disposed of unfavorably.

The Company is subject to federal, state and local laws and regulations concerning the environment and is currently participating in administrative proceedings at several sites under these laws. While the Company finds it difficult to estimate with any certainty the total cost of remediation at the several sites, on the basis of currently available information and reserves provided, the Company believes that the outcome of such environmental regulatory proceedings will not have a material effect on the Company's financial position or its results of operations.

CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of November 30, 2003 pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic Securities and Exchange Commission filings. No significant changes were made in the Company's internal controls or in other factors that could significantly affect these controls subsequent to November 30, 2003.

NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board ("FASB") issued FASB Interpretation ("FIN") No. 46,"Consolidation of Variable Interest Entities" in January 2003, and issued a revision in December 2003. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51,"Consolidated Financial Statements," and addresses consolidation by business enterprises of variable interest entities. FIN No. 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risk among the parties involved. FIN No. 46 also enhances the disclosure requirements related to variable interest entities. This statement is effective for the Company for variable interest entities in the quarter ending May 31, 2004. The adoption of FIN No. 46 is not expected to have a material impact on the Company's consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149,"Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 requires that contracts with comparable characteristics be accounted for similarly. In particular, SFAS No. 149 (1) clarifies under what circumstances a contract with an initial ne t investment meets the characteristic of a derivative discussed in paragraph 6(b) of SFAS No. 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," and (4) amends certain other existing pronouncements. SFAS No. 149 will result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective prospectively for contracts entered into or modified after June 30, 2003, except in certain circumstances, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the Company's consolidated financial statements.

On May 15, 2003, the FASB issued SFAS No. 150,"Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which was effective May 31, 2003 for all new and modified financial instruments. SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS No. 150 requires that those instruments be classified as liabilities (or assets in some circumstances). The adoption of SFAS No. 150 did not have a material impact on the Company's consolidated financial statements.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Any of the statements contained in this Annual Report that refer to the Company's estimated or anticipated future results are forward looking and reflect the Company's current analysis of existing trends and information. Actual results may differ from current expectations based on a number of factors affecting Ameron's businesses, including competitive conditions and changing market conditions. In addition, matters affecting the economy generally, including the state of economies worldwide, can affect the Company's results. These forward looking statements represent the Company's judgment only as of the date of this Annual Report. Since actual results could differ materially, the reader is cautioned not to rely on these forward-looking statements. Moreover, the Company disclaims any intent or obligation to update these forward-looking statements.