CONDITION AND RESULTS OF OPERATIONS

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 2004 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 International Corporation 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 income. 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 income. The timing of repayments of intercompany advances could materially impact the Company's consolidated financial statements. Additionally, earnings of foreign subsidiaries are often reinvested outside the U.S. Unforeseen repatriation of such earnings could result in significant 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 goods 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 are 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 past or 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 judgments based on the knowledge and experience of management and its legal counsel. When the Company's exposures 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. Significant changes in steel inventory levels or costs could materially impact the Company's financial statements. 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 a 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 is depreciated principally using 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, a steel mini-mill in California, 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 also reviews intangible assets for impairment at least annually, based on the estimated future, discounted cash flows associated with such assets. Actual cash flows may differ significantly from estimated cash flows. Additionally, current estimates of future cash flows may differ from subsequent estimates of future cash flows. Changes in estimated or actual cash flows could materially impact the Company's consolidated financial statements.

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 Postretirement Benefits Other Than Pensions," when accounting for pension and other postretirement 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. 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. Actual results could vary significantly from projected results, and such deviation could materially impact the Company's consolidated financial statements. Management consults with actuaries when determining these 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.

During 2004, the Company changed the assumed discount rate and projected rates of increase in compensation levels and health care costs. The discount rate is based on market interest rates. At November 30, 2004, the Company decreased the discount rate from 6.00% to 5.85% based on the market interest rates on long-term, fixed-rate 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, 2004, the Company maintained the expected long-term rate of return on assets assumption at 8.75% to reflect the expectations for future returns from investments 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, 2004, the Company decreased the assumed annual rate of compensation increase from 3.50% to 3.35%. 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, 2004, the Company decreased the rate of increase in health care costs from 10% to 9%, 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 postretirement benefits. The following reflects the impact associated with a change in certain assumptions (in thousands):

Additional information regarding pensions and other postretirement benefits is disclosed in Note 15 of Notes to Consolidated Financial Statements in the Company's 2004 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. 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.

LIQUIDITY AND CAPITAL RESOURCES

During 2004, the Company generated $10.1 million of cash from operating activities compared to $43.2 million in the same period in 2003. The lower operating cash flow in 2004 was primarily due to lower earnings, excluding gains on asset sales and earnings from joint ventures in excess of distributions, and reduced liabilities. Liabilities decreased primarily due to the payment of benefits associated with the termination of two executive benefit plans, described below. Receivables increased due to higher sales and the timing of collections.

Net cash provided by investing activities totaled $4.2 million in 2004, compared to $13.9 million used in 2003. Net cash provided by investing activities in 2004 consisted of proceeds from the sale of assets, including $15.3 million from the sale of property vacated as part of a plant consolidation within the Water Transmission Group, and $7.2 million from the liquidation of life insurance policies, offset by capital expenditures which were primarily for normal replacement and upgrades of machinery and equipment and for a new fiberglass pipe plant in Malaysia. In 2003, the Company sold its minority interest in a Mexican coatings venture for $3.0 million. During the fiscal year ending November 30, 2005, the Company anticipates spending between approximately $25 and $35 million on capital expenditures, including additional expenditures on the plant in Malaysia of approximately $8 million. Capital expenditures are expected to be funded by existing cash balances, cash generated from operations or additional borrowings.

Net cash used in financing activities totaled $5.0 million in 2004, compared to $19.8 million in 2003. The net cash used in 2004 consisted of the net repayment of debt of $.8 million, debt issuance costs of $.5 million, and payment of common stock dividends of $6.7 million, offset by a net $3.0 million from the issuance of common stock related to the exercise of stock options and treasury shares used to pay withholding taxes on vested restricted shares.

In June 2004, the Company extended a $100.0 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 June 2008, when all borrowings under the Revolver must be repaid.

The Company's 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 $181.4 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 $76.4 million as of November 30, 2004. 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 2.75 times. As of November 30, 2004, the Company maintained a consolidated leverage ratio of 2.1 times EBITDA. Lending agreements require that the Company maintain qualified consolidated tangible assets at least equal to the outstanding secured funded indebtedness. As of November 30, 2004 qualifying tangible assets equaled 1.9 times funded indebtedness. Under the most restrictive fixed charge coverage ratio, the sum of EBITDA and rental expense less 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, 2004, the Company maintained such a fixed charge coverage ratio of 1.8 times.

Cash and cash equivalents at November 30, 2004 totaled $30.1 million, an increase of $9.7 million from November 30, 2003. At November 30, 2004 the Company had total debt outstanding of $93.7 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 2004 were $108.3 million and $96.3 million, respectively.

In June 2004, the Company terminated two executive benefit programs in consideration of ongoing costs, anticipated legislative restrictions on such programs, and a preference for executive benefit plans having more predictable costs. Ameron had previously purchased life insurance policies which had been set aside to pay benefits under these plans. At the time of termination of the plans, the cash surrender value of such life insurance policies totaled approximately $26.9 million and exceeded the amount that was required if immediate lump-sum payments were elected by all participants, which totaled $25.6 million. Following termination of the plans, $24.7 million was paid to participants to settle most of the obligations of the Company under the plans, initially using existing cash balances and then the cash surrender value of a portion of the life insurance policies. Management anticipates that the remaining portion of the life insurance policies with a cash surrender value of $20.0 million as of November 30, 2004 will continue to be held for general investment purposes and to defer income taxes.

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 2005. Cash available from operations could be affected by any general economic downturn or any downturn or any decline 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 operating costs will increase sufficiently to impact short-term liquidity. The Company's contractual obligations and commercial commitments at November 30, 2004 are summarized as follows (in thousands):

(a) Included in long-term debt is $915 outstanding under a revolving credit facility which is 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. The standby letters of credit are issued under the Revolver.

RESULTS OF OPERATIONS: 2004 COMPARED WITH 2003

General

Net income totaled $13.5 million, or $1.59 per diluted share, on sales of $605.9 million for the year ended November 30, 2004, compared to net income of $29.9 million, or $3.67 per diluted share, on sales of $600.5 million for the same period in 2003. All operating segments had higher sales except the Water Transmission Group. Sales of the Water Transmission Group declined in 2004 because of labor disputes that resulted in strikes at two of its plants and weak demand in its primary market, the western U.S. Net income was lower in 2004 as lower gross profits, higher selling, general and administrative expenses ("SG&A") and the curtailment and settlement costs associated with the termination of the benefit plans were partially offset by higher other income, lower taxes and higher equity in the earnings of TAMCO. Excluding income from joint ventures, the Fiberglass-Composite Pipe Group had higher segment income, while the Performance Coatings & Finishes, Water Transmission and Infrastructure Products Groups had lower segment income.

Sales

Sales increased $5.4 million in 2004, compared to 2003. Sales increased due to the impact of changing foreign exchange rates on the Company's foreign coatings and fiberglass pipe operations and higher demand for poles, partially offset by reduced demand in markets served by the Water Transmission Group.

Performance Coatings & Finishes' sales increased $9.3 million in 2004 due to the appreciation of foreign currencies relative to the U.S. dollar. Sales in local currencies by operations outside the U.S. increased, while sales in the U.S. were lower. Improvements came from sales of fire protection coatings in Europe and coil coatings in New Zealand. Sales of protective coatings in the U.S. and Europe declined as a result of continued weakness in spending in the heavy-industrial and chemical markets. Additionally, sales of coatings for use in offshore oil and gas exploration and production weakened in 2004 as offshore construction slowed in the U.S. The anticipated upturn in spending by industrial customers in the U.S. and Europe remained slower than expected in 2004, and markets served by the Performance Coating & Finishes Group are not forecasted to improve in the near term.

Fiberglass-Composite Pipe's sales increased $1.7 million in 2004 due primarily to the impact of favorable foreign exchange rates and partly to the strength of Asian operations. Asian operations, which serve the marine construction markets located in Korea, China and Japan, benefited from the strong worldwide demand for oil tankers and offshore production vessels. New marine construction in Asia increased due to high oil prices and regulations requiring double-hull tankers. The industrial markets in the U.S. and Europe remained slow due to general economic conditions and a shift of new facilities to Asia and other developing markets. Sales in the U.S. were down due to the weak industrial market and lower activity in the U.S. offshore construction market. Sales of oilfield tubing for onshore applications were flat as spending was concentrated on larger offshore projects constructed in Asia. Overall, expected demand for fiberglass piping remains robust, driven by higher oil prices and the increased cost of substitute products, especially steel piping.

The Water Transmission Group's sales decreased $11.3 million in 2004 due to weak market conditions and labor disputes at two of the Group's principal plants in Southern California in the first half of 2004. Workers at the two plants struck in early February. Agreement was reached at one of the plants in the first quarter, at the end of February, and the second plant in the second quarter, at the end of March. Sales of protective-lining products for sewer pipe also declined due to a cyclical slowdown in the waste water market and increased competition from alternative products and suppliers. 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 significantly higher than at the end of 2003 as a series of large projects were successfully bid; however, the market for concrete and steel pressure pipe remains soft in the western U.S., affected by a cyclical lull in infrastructure spending and government budgetary constraints. The backlog bodes well for 2005, and the expected long-term outlook for the Water Transmission Group remains positive based on the needs for water infrastructure in the western U.S.

Infrastructure Products' sales increased $5.8 million in 2004 due to strong housing and commercial construction spending, which was spurred by low interest rates. Ameron's Hawaiian operations recovered from a labor dispute at the Company's principal aggregates and ready-mix concrete operations on Oahu in Hawaii which began in February and ended in early April. Construction spending in Hawaii was deferred during the strikes, and demand for aggregates, ready-mix concrete and concrete pipe used for public infrastructure, housing and military construction remains strong. Ameron's pole business had higher sales of concrete poles used in street lighting, primarily associated with housing starts. Sales of steel traffic poles also increased. The forecast for the Infrastructure Products Group remains positive due to expectations of continued spending on residential, commercial, government and military construction.

Gross Profit

Gross profit in 2004 was $148.4 million, or 24.5% of sales, compared to gross profit of $166.5 million, or 27.7% of sales, in 2003. Gross profit decreased $18.1 million due to lower margins, the impact in the first half of the strikes on plant utilization and a net $7.3 million expense related to an increase in LIFO reserves caused by higher steel prices.

In 2004, gross profit of the Performance Coatings & Finishes Group was flat compared to gross profit in 2003. Higher profit of $2.8 million from increased sales was offset by a similar reduction in gross profit due to lower margins. Profit margins were adversely impacted by higher manufacturing costs of $1.8 million in the U.S. and Europe, due to inefficient plant utilization, and higher raw material costs of $.7 million. The Group was unable to increase prices sufficiently to cover additional costs due to competitive pressures, especially in dollar-based markets in the Middle East and the former Soviet Union served by the Company's European operations.

The Fiberglass-Composite Pipe Group's gross profit increased $2.4 million in 2004 due to higher sales and improved margins. Higher sales generated $.6 million higher gross profit, while improved margins contributed $1.8 million. The margin increase resulted from the mix of products sold in 2004, especially from Asian operations which benefited from the strength of local markets, and improved conditions in worldwide oilfield markets.

Gross profit of the Water Transmission Group decreased $11.1 million in 2004. Gross profit decreased $2.7 million because of lower sales and $8.4 million due to lower margins. Profit margins were lower due to competitive pressures brought on by slow market conditions and increased workers' compensation costs of $1.2 million. Margins in 2004 and 2003 were adversely affected by the San Francisco/Oakland Bay Bridge project, for which the Water Transmission Group provided lower-margin steel pilings. Deliveries to the San Francisco/Oakland Bay Bridge project were completed in 2004.

The Infrastructure Products Group's gross profit declined slightly as profit on higher sales was offset by slightly lower margins. Margins declined due to wet weather and the labor dispute in Hawaii in the first half of 2004, reducing profits $1.6 million. Higher concrete poles sales generated increased gross profit of approximately $1.3 million.

Additionally, consolidated gross profit was $7.8 million lower in 2004 compared to the same period in 2003 due primarily to increased reserves associated with LIFO accounting of certain steel inventories used by the Water Transmission Group. The LIFO method is used to defer income taxes on operating profit of the Water Transmission Group. Income taxes and the LIFO reserves are not allocated to the operating segments. Gross profit was also $1.3 million lower as a result of other inventory adjustments.

Selling, General and Administrative Expenses ("SG&A")

SG&A totaled $137.5 million, or 22.7% of sales, in 2004, compared to $127.4 million, or 21.2%, in 2003. SG&A increased $10.1 million due to higher costs of third-party insurance coverage of $2.2 million, higher legal and consulting expenses of $3.4 million and Sarbanes-Oxley 404 auditing and implementation costs of $3.5 million, offset by lower compensation expenses of $1.9 million. The appreciation of foreign currencies increased SG&A of foreign operations by approximately $3.9 million. Additionally in 2003, SG&A included a legal expense recovery of $1.0 million, 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 lawsuit.

Pension Plan Curtailment/Settlement

In June 2004, the Company terminated two executive benefit plans in consideration of ongoing costs, anticipated legislative restrictions on such programs, and a preference for executive benefit plans having more predictable costs. The Company incurred a pretax expense of $12.8 million due to the termination of the plans and distributions to plan participants. The Company recorded this expense in accordance with SFAS No. 88,"Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits."SFAS No. 88 requires settlement accounting if the cost of all settlements, including lump-sum retirement benefits paid, in a year exceeds,or is expected to exceed, the total of the service and interest cost components of pension expense for the same period.

Termination and settlement of the plans is expected to reduce benefit expenses in future years. In addition to the termination and settlement costs, Ameron expensed $1.8 million under the plans in 2004 and $2.1 million in 2003.

Other Income

Other income increased to $17.9 million in 2004 from $10.9 million in 2003. Other income included royalties and fees from licensees, foreign currency transaction gains and losses, and other miscellaneous income. Included in 2004 was a gain of $13.1 million on the sale of excess property vacated as part of a program to streamline pipe manufacturing operations within the Water Transmission Group. 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 decreased from $6.3 million in 2003 to $.5 million in 2004 due to the timing of dividend payments. The fiberglass pipe and coatings ventures continued to perform well due to the strength of oilfield and infrastructure markets in Saudi Arabia. The concrete pipe venture experienced a cyclical lull and increased competition from alternative products. Dividends from Ameron's Saudi Arabian ventures are expected to increase in 2005.

Interest

Interest expense totaled $5.3 million in 2004, compared to $6.6 million in 2003. The decrease reflected lower average borrowing levels in combination with lower average effective interest rates related to the repayment of fixed-rate debt with a higher interest rate and increased utilization of floating rate debt.

Provision for Income Taxes

Income taxes declined to $8.0 million compared to $14.0 million in 2003. The effective tax rate increased from 32% in 2003 to 75% in 2004. The effective tax rate was significantly higher in 2004 due to IRS limitations on the deductibility of a portion of the settlements associated with the executive benefit plan terminations. Approximately $18.5 million of the $24.7 million paid to participants of the terminated plans is not expected to receive an associated tax benefit. Excluding the impact of the termination of the benefit plans, the effective rate in 2004 would have been less than in 2003 due to lower levels of earnings from domestic operations. Income from certain foreign operations is taxed at rates that are lower than the U.S. statutory tax rates.

Equity in Earnings of Joint Venture, Net of Taxes

Equity income, which consists of Ameron's share of the results of TAMCO, increased from $.6 million in 2003 to $10.8 million in 2004. Ameron owns 50% of TAMCO, a mini-mill that produces steel rebar for the construction industry in the western U.S. TAMCO performed well throughout 2004 due to increased demand for steel rebar and higher selling prices. The worldwide market for steel products increased dramatically in 2004 because of demand for steel in China. Demand declined at the end of the fourth quarter as TAMCO's customers adjusted inventory levels to reflect confidence in continued supply of product. The recent decline could be a signal of softening in 2005 from the record level of 2004. Nevertheless, the outlook for TAMCO remains strong. Equity income is shown net of income taxes. Dividends from TAMCO are taxed at an effective rate of 9.3%, reflecting the dividend exclusion provided to the Company under current tax laws.

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

Performance Coatings & Finishes' sales increased $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.

Fiberglass-Composite Pipe's sales increased $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 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. Water Transmission's year-end backlog was lower than at the end of 2002, reflecting the lull in water projects in the western U.S.

Infrastructure Products' sales increased $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.

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 $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 was roughly 50% completed at the end of 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

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.

Other Income

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.

Interest

Provision for Income Taxes

The provision for income taxes in 2003 was $14.0 million, a decrease of $.2 million from 2002. The effective tax rate decreased to 32% in 2003 from 36% in 2002. The effective tax rate was lower due to the increase of foreign profits, especially from Asia, and lower foreign income tax rates.

Equity in Earnings of Joint Venture, Net of Taxes

Equity in earnings of joint venture decreased to $.6 million in 2003 from $3.3 million in 2002. Equity income declined due to TAMCO. 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.