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.

A summary of the Company's significant accounting policies is provided in Note (1) of the Notes to Consolidated Financial Statements, in the Company's 2005 Annual Report. In addition, 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/(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 income/(loss). 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, net.

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, are typically 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. 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 investees' 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.

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 three to 40 years.

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 Statements 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 employee's 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. Actual results could vary significantly from projected results, and such deviation could materially impact the Company's consolidated financial statements. 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 2005, 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, 2005, the Company decreased the discount rate from 5.85% to 5.60% as a result of 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 longterm allocation of assets. At November 30, 2005, the Company maintained the expected long-term rate of return on assets assumption at 8.75% to reflect 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, 2005, the Company decreased the assumed annual rate of compensation increase from 3.35% to 3.10%. 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, 2005, the Company increased the rate of increase in health care costs from 9.00% to 10.00%, decreasing ratably until reaching 5.00% in 2010 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 2005 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 an adverse finding could have a material impact on the Company's consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

During 2005, the Company generated $37.2 million of cash from operating activities compared to $10.1 million in the same period in 2004. The higher operating cash flow in 2005 was primarily due to higher earnings, excluding the gains on property sales in 2004 and 2005, partially offset by an increase in net operating capital. The increase in operating assets was the result of higher receivables and inventories due to higher sales. Operating liabilities increased due to higher trade payables and pension liabilities.

Net cash used in investing activities totaled $21.5 million in 2005, compared to $4.2 million provided by investing activities in 2004. Net cash used in 2005 for investing activities consisted of proceeds from the sale of assets, including $1.8 million from the sale of excess property held by the Company's European coatings business, 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 2004, the Company generated $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. During the fiscal year ending November 30, 2006, the Company anticipates spending between approximately $25 and $35 million on capital expenditures. Capital expenditures are expected to be funded by existing cash balances, cash generated from operations or additional borrowings.

No net cash was provided by financing activities in 2005, compared to $5.0 million used in 2004. Cash used in 2005 consisted of payment of common stock dividends of $6.8 million, debt issuance costs of $.3 million, offset by issuance of debt of $2.4 million, and a net $4.8 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 November 2005, the Company amended and extended a $100.0 million revolving credit facility with six banks (the "Revolver"). Under the amendment, the maturity date of the Revolver was extended to September 2010. 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 September 2010, when all borrowings under the Revolver must be repaid. Also in November 2005, the Company issued SGD51.0 million, equivalent to approximately US$30.0 million, of senior secured notes payable to an insurance company at a fixed rate of 4.25% per annum. Proceeds from the notes payable were used to repatriate earnings from a foreign subsidiary in connection with The American Jobs Creation Act of 2004. These fixed-rate notes are payable in Singapore dollars equivalent to approximately US$6.0 million per year, beginning in November 2008,with a final maturity in November 2012.

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 $79.2 million as of November 30, 2005. 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 2.5 times. As of November 30, 2005, the Company maintained a consolidated leverage ratio of 1.32 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, 2005, qualifying tangible assets equaled 2.05 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 1.25 times the sum of interest expense, rental expense, dividends and scheduled funded debt payments.As of November 30, 2005, the Company maintained such a fixed charge coverage ratio of 1.72 times.

Cash and cash equivalents at November 30, 2005 totaled $44.7 million, an increase of $14.5 million from November 30, 2004.At November 30, 2005, the Company had total debt outstanding of $95.4 million and approximately $118.0 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 2005 were $128.1 million and $107.0 million, respectively. Debt and cash increased at November 30, 2005 partly due to the timing of the issuance of the fixed-rate notes outlined above.

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 2006. The Company expects to contribute $16.6 million to the U.S. pension plan and $1.3 million for the non- U.S. pension plan in 2006. 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, 2005 are summarized as follows (in thousands):

(a) Included in long-term debt is $1,251 outstanding under a revolving credit facility which is supported by the Revolver.
(b) Obligation to purchase sand used in the Company's ready-mix operations in Hawaii.
(c) The Company has no capitalized lease obligations, guarantees or standby repurchase obligations.
(d) Not included are standby letters of credit totaling $16,065 supporting industrial development bonds with 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: 2005 COMPARED WITH 2004

General

Net income totaled $32.6 million, or $3.80 per diluted share, on sales of $704.6 million for the year ended November 30, 2005, compared to net income of $13.5 million, or $1.59 per diluted share, on sales of $605.9 million for the same period in 2004. Net income rose in 2005 primarily due to improved operations. Additionally, net income in 2004 was adversely impacted by labor strikes, the costs associated with the termination of two executive benefit plans and increased reserves associated with LIFO accounting of certain steel inventories, partially offset by the gain on the sale of property.

All operating segments had higher sales and segment income in 2005 compared to 2004. The Water Transmission Group had record sales in 2005 due principally to a major sewer upgrade project in Northern California. The Infrastructure Products Group had significantly higher sales and profits due to the strong construction sector in Hawaii and throughout the U.S. In 2004, the Water Transmission and Infrastructure Products Groups were disrupted by labor strikes.The Fiberglass-Composite Pipe Group achieved record sales and profits in 2005 as a result of the increased demand for oilfield piping in North America, continued strong demand in the marine market worldwide and increased shipments to the Middle East from Ameron's Asian operations. The Performance Coatings & Finishes Group had higher sales, primarily from U.S. operations, due to improved market conditions, and from operations in Australia and New Zealand, due to volume gains and favorable currency translation. Equity income from TAMCO,Ameron's 50%-owned steel mini-mill in Southern California, declined $1.8 million from 2004's record level. The decline was attributable to higher conversion costs, primarily energy costs.

Sales

Sales increased $98.7 million in 2005, compared to 2004. Sales increased due to a large sewer pipe project, increased demand for protective lining products, higher demand for onshore oilfield piping, the impact of foreign exchange rates on the Company's foreign coatings and fiberglass pipe operations and higher demand for concrete and steel poles due to the continued strength of housing construction throughout the U.S. Prior-year sales were adversely impacted by the labor strikes within the Water Transmission and Infrastructure Products Groups.

Performance Coatings & Finishes' sales increased $10.2 million in 2005. The sales increase resulted from improved market conditions in the U.S., higher selling prices, higher shipments of lighter-duty product finishes by Ameron's Australian and New Zealand operations, and favorable foreign currency exchange rates. Ameron's European coatings operations had essentially flat sales as lower shipments to the Middle East and lower intumescent sales due to timing of product introductions offset selling price gains in Europe.The relative strength of the euro and the British pound constrained exports of Ameron's European operations, and sales of marine coatings declined primarily due to the loss in the middle of 2004 of a contract to supply coatings to the U.S.Navy. The U.S. coatings market has strengthened, and orders are increasing. The Performance Coatings & Finishes Group should benefit as the U.S.market improves. In addition, the business is expected to participate in the rebuilding of the chemical, oil and industrial infrastructure along the U.S. Gulf Coast.

The Fiberglass-Composite Pipe Group's sales increased $17.8 million in 2005 due primarily to demand for onshore oilfield piping in the U.S. and Canada, higher fiberglass pipe demand for marine applications and increased shipments from Ameron's Asian operations of fiberglass pipe to the Middle East for industrial projects. Sales of piping supplied by Ameron's operations in Europe declined due to market conditions and the impact of the appreciated euro on exports into the Middle East and the former Soviet Union. The strength of demand for oilfield and marine piping continues to be driven by high oil prices and the high cost of steel piping, the principal substitute for fiberglass pipe. Ameron's new state-of-the-art fiberglass pipe plant in Malaysia is scheduled to begin production during the second quarter of 2006. The backlog for the Fiberglass-Composite Pipe Group increased compared to the level at year-end 2004, and the key market segments such as oilfield and marine remain strong. The outlook for the Fiberglass-Composite Pipe Group is favorable.

The Water Transmission Group's sales increased $38.5 million in 2005 compared to the same period in 2004. The sales improvement was primarily due to pipe sales for a major sewer upgrade project in Northern California, higher demand for protective lining products that are used to provide corrosion protection of concrete sewer pipe, and sales of towers used for wind-powered electrical generation. Also, the Group's operations and sales were adversely affected by labor disputes at two plants in 2004. 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. The Water Transmission Group entered 2006 with a lower backlog due to completion of most of the major sewer project. Market conditions remain soft due to fiscal constraints and continuation of a cyclical slowdown in water infrastructure spending in the Company's markets.

Infrastructure Products' sales increased $32.7 million in 2005 compared to 2004 due to higher housing and commercial construction spending in Hawaii and throughout the U.S. In addition, Ameron's Hawaiian operations recovered from a labor dispute in 2004 at the Company's principal aggregates and ready-mix concrete operations on Oahu in Hawaii. Construction spending in Hawaii and demand for aggregates and ready-mix concrete used for public infrastructure, housing and military construction, remain strong. Sales of steel and concrete poles increased due to the continued strength of housing construction throughout the U.S. Additionally,Ameron benefited from a major pole-replacement program sponsored by a utility in Southern California. The forecast for the Infrastructure Products Group remains positive due to expectations of continued high level of spending on residential, commercial, and military construction spurred partly by low interest rates.

Gross Profit

Gross profit in 2005 was $182.1 million, or 25.8% of sales, compared to gross profit of $148.4 million, or 24.5% of sales, in 2004. Gross profit increased $33.7 million due to higher sales and improved margins due to a favorable mix of projects.

In 2005, gross profit of the Performance Coatings & Finishes Group was essentially equal to gross profit in 2004. Higher profit of $2.9 million from increased sales was offset by lower margins. Profit margins were adversely impacted by higher raw material costs and underutilization of plant capacity.

The Fiberglass-Composite Pipe Group's gross profit increased $.8 million in 2005 compared to gross profit in 2004 due to higher sales. Higher sales generated $6.2 million higher gross profit, offset by lower margins of $5.4 million due to an unfavorable shift in product mix to industrial and onshore oilfield from higher margin offshore applications, higher raw material costs and lower plant utilization in Europe.

Gross profit of the Water Transmission Group increased $16.0 million in 2005 compared to gross profit in 2004. Gross profit increased $7.6 million because of higher sales and $8.4 million due to higher margins. Profit margins were higher largely due to a favorable change in product and project mix due primarily to the large sewer project. Profits were impacted in 2004 by inefficient plant utilization caused by two labor strikes, higher workers' compensation costs and weak market conditions. The margins on projects in backlog at the beginning of 2006 are lower than achieved in 2005 due to the soft market in the western U.S. and competitive pressures.

The Infrastructure Products Group's gross profit increased $8.4 million compared to gross profit in 2004. Gross profit increased $6.7 million from higher sales and $1.7 million due to higher margins. Profit margins were higher due to improved plant utilization, improved pricing, and a favorable change in product mix. Plant operating efficiency had been adversely affected by a labor strike in Hawaii in 2004.

Additionally, consolidated gross profit was $8.4 million lower in 2004 compared to the same period in 2005 due primarily to increased reserves in 2004 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.

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

SG&A totaled $146.0 million, or 20.7% of sales, in 2005, compared to $137.5 million, or 22.7% in 2004. SG&A increased $8.5 million due to higher legal expenses of $5.1 million, higher severance costs of $1.2 million, higher stock and incentive compensation expense of $3.4 million, offset by insurance recoveries of $1.5 million.

Pension Plan Curtailment/Settlement

In June 2004, the Company terminated two executive benefit plans and incurred a pretax expense of $12.8 million due to the termination of the plans and distribution to plan participants.

Other Income, Net

Other income decreased to $7.1 million in 2005 from $17.9 million in 2004. 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 2005 was a gain of $1.8 million on the sale of excess properties held by the Performance Coatings & Finishes Group. Income from investments accounted for under the cost method increased from $.4 million in 2004 to $1.8 million in 2005 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.

Interest

Net interest expense totaled $5.2 million in 2005, compared to $5.3 million in 2004. The decrease reflected higher interest income from short-term investments offset partially by higher average borrowing levels and slightly higher interest rates.

Provision for Income Taxes

Income taxes increased to $14.5 million compared to $8.0 million in 2004. The effective tax rate decreased from 75% in 2004 to 38% in 2005. 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 termination. Approximately $18.5 million of the $24.7 million paid to participants of the terminated plans did not receive an associated tax benefit. Excluding the impact of the termination of the benefit plans, the effective rate in 2005 would have been higher than in 2004 due to higher 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. Also, the rate in 2005 was higher as a result of the one-time repatriation of foreign earnings under the American Jobs Creation Act of 2004.

Equity in Earnings of Joint Venture, Net of Taxes

Equity income, which consists of Ameron's share of the results of TAMCO, decreased from $10.8 million in 2004 to $9.0 million in 2005. Ameron owns 50% of TAMCO, a mini-mill that produces steel rebar for the construction industry in the western U.S. Equity income is shown net of income taxes. Dividends from TAMCO are taxed at an effective rate of 10.4%, reflecting the dividend exclusion provided to the Company under current tax laws. The decline in TAMCO's earnings was attributable principally to higher conversion costs,primarily energy. TAMCO sales in 2005 were at a record level, reflecting the continued strong construction market and the high prices of steel worldwide.

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 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.

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.

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.Water Transmission's year-end backlog was significantly higher than at the end of 2003 as a series of large projects were successfully bid.

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 strike. 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.

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 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

Other Income, Net

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.

Interest

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 did not 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 level 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. 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.