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 that are not readily apparent from other sources. 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 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 permanently 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 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. 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. Revenue for the period is determined by multiplying total estimated contract revenue by the percentage of completion of the contract and then subtracting the amount of previously recognized revenue. Cost of earned revenue is computed by multiplying estimated contract completion cost by the percentage of completion of the contract and then subtracting the amount of previously recognized cost. 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 two 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. Costs attributable to unpriced change orders are treated as costs of contract performance in the period, and contract revenue is recognized if recovery is probable. Disputed or unapproved change orders are treated as claims. Recognition of amounts of additional contract revenue relating to claims occurs when amounts have been received or awarded with recognition based on the percentage-of-completion methodology.

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 levels or costs could materially impact the Company's financial statements. Reserves are established for excess, obsolete and rework inventories based on 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. and Bondstrand, 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 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 asset 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 purchases varying levels of insurance to cover losses in excess of the self-insured limits. Currently, the Company's primary self-insurance limits are $1.0 million per workers' compensation claim, $.1 million per general, property or product liability claim, and $.25 million per vehicle liability claim.

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 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 values 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 returns on invested assets based principally on prior performance. 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 its 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 2006, 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, 2006, the Company increased the discount rate from 5.60% to 5.95% 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, 2006, the Company maintained the expected long-term rate of return on assets assumption at 8.75 % to reflect the 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, 2006, 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, 2006, the Company maintained the rate of increase in health care costs at 10%, decreasing ratably until reaching 5% in 2011 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 16 of Notes to Consolidated Financial Statements.

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

The following discussion combines the impact of both continuing and discontinued operations unless otherwise noted.

As of November 30, 2006, the Company's working capital totaled $280.5 million, an increase of $64.3 million, from working capital of $216.1 million as of November 30, 2005. The increase was caused by higher business activity and the sale of the Coatings Business for cash. All of the Company's industry segments turned their inventory between four and nine times annually.Average days' sales in accounts receivable ranged between 34 and 160 for all segments. Cash and cash equivalents totaled $139.5 million as of November 30, 2006, compared to $44.7 million as of November 30, 2005.

In accordance with SFAS No. 95,"Statement of Cash Flows", the consolidated statements of cash flows include cash flows for both continuing and discontinued operations. During 2006, net cash of $16.8 million was generated from operating activities of continuing and discontinued operations, compared to $37.2 million generated in 2005. The lower operating cash flow in 2006 was primarily due to higher earnings that were more than offset by increased inventories, higher other assets and lower liabilities. In 2005, the Company's cash from operating activities included net income of $32.6 million, less gain on sale of assets of $1.6 million, plus non-cash adjustments (depreciation, amortization, deferred taxes, dividends from joint-ventures in excess of equity income and stock compensation expense) of $24.2 million, offset by changes in operating assets and liabilities of $18.0 million. In 2006, the Company's cash provided by operating activities included net income of $52.2 million, less gain on sale of assets and loss from sale of discontinued operations of $8.7 million, plus similar non-cash adjustments of $14.8 million, offset by corresponding changes in operating assets and liabilities of $41.5 million. The higher operating cash flow in 2005, compared to 2004,was primarily due to higher earnings, excluding the gains on property sales in both years, partially offset by an increase in net operating capital related to higher sales in 2005. In 2004, $10.1 million was generated from operating activities. Cash from operating activities included net income of $13.5 million, less gain on sale of assets of $13.1 million, plus non-cash adjustments of $22.3 million, offset by changes in operating assets and liabilities of $12.5 million.

Net cash generated from investing activities totaled $89.7 million in 2006, compared to $21.5 million used in 2005. In 2006, the Company generated net proceeds of $9.0 million from the sale of real property in Brea, California. In addition, the Company generated $115.0 million from the sale of the Coatings Business in 2006. In 2005, certain properties held by the Coatings Business' European operations were sold for a gain of $1.8 million. Net cash used in investing activities consisted of capital expenditures of $35.5 million, compared to $25.4 million in the same period of 2005. In addition to capital expenditures for normal replacement and upgrades of machinery and equipment in both 2005 and 2006, a new fiberglass pipe plant in Malaysia was built in 2005. In 2006, the Company spent $10.8 million to enhance the capabilities of its steel fabrication plant in California to manufacture large-diameter wind towers. Additionally, the assets of a Mexican steel fabrication operation were acquired in 2006 for approximately $1.0 million. Net cash provided by investing activities totaled $4.2 million in 2004 which 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 of $18.8 million. During the year ending November 30, 2007, the Company anticipates spending between $30 and $50 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 totaled $14.0 million during 2006, compared to zero in 2005. Net cash used in 2006 consisted of net payment of debt of $16.1 million, payment of common stock dividends of $7.1 million and treasury stock purchases of $1.2 million, related to the payment of taxes associated with the vesting of restricted shares.Also in 2006, the Company received $8.0 million from the issuance of common stock related to exercised stock options. Cash used in 2005 consisted of payment of common stock dividends of $6.8 million, debt issuance costs of $.3 million, offset by net issuance of debt of $2.4 million, and a net $4.8 million from issuance of common stock related to the exercise of stock options and treasury shares used to pay withholding taxes on vested restricted shares. Net borrowings were higher in 2005 than in 2006 because of the timing of scheduled debt repayments. Net cash used in financing activities totaled $5.0 million in 2004 which 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 the issuance of common stock related to the exercise of stock options and treasury shares used to pay withholding taxes on vested restricted shares, totaling $3.0 million.

The Company utilizes 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 (LIBOR plus a spread ranging from .75% to 1.625% determined by the Company's financial condition and performance), at any time until September 2010, 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, guarantees, and financial covenants. 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 $118.7 million as of November 30, 2006.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, 2006, the Company maintained a consolidated leverage ratio of 1.07 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, 2006, qualifying tangible assets equaled 2.21 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 1.35 times the sum of interest expense, rental expense, dividends and scheduled funded debt payments. As of November 30, 2006, the Company maintained such a fixed charge coverage ratio of 2.17 times. Under the most restrictive provisions of the Company's lending agreements, approximately $20.5 million of retained earnings was not restricted, as of November 30, 2006, as to the declaration of cash dividends or the repurchase of Company stock. At November 30, 2006, the Company was in compliance with all covenants.

Cash and cash equivalents at November 30, 2006 totaled $139.5 million, an increase of $94.8 million from November 30, 2005. At November 30, 2006, the Company had total debt outstanding of $82.5 million, compared to $95.4 million at November 30, 2005, and approximately $117.6 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 2006 were $105.8 million and $98.2 million, respectively.

The Company contributed $21.6 million to the U.S. pension plan in 2006. The Company contributed $1.0 million to the non-U.S. pension plans in 2006. The Company expects to contribute approximately $3.0 million to its U.S. pension plan and $.6 million to the non-U.S. pension plans in 2007.

Management believes that cash flow from operations and current cash balances, together with currently available lines of credit, will be sufficient to meet operating requirements in 2007. Cash available from operations could be affected by any general economic downturn or any decline or adverse changes in the Company's business, such as a loss of customers or significant raw material price increases. Management does not believe it likely 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, 2006 are summarized as follows (in thousands):

(a) Included in long-term debt is $3,652 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: 2006 COMPARED WITH 2005

General

Income from continuing operations totaled $50.1 million, or $5.64 per diluted share, on sales of $549.2 million for the year ended November 30, 2006, compared to $29.5 million, or $3.44 per diluted share, on sales of $494.8 million for the same period in 2005. All segments had significantly higher sales and profits, except the Water Transmission Group, due to generally-improved market conditions. Income from continuing operations was higher due primarily to sales growth, the gain from the sale of the Brea property, lower interest, higher equity income and a lower effective tax rate. Equity in earnings of TAMCO, Ameron's 50%-owned steel venture in California, increased by $4.5 million, compared to the same period in 2005.

Income from discontinued operations, net of taxes, totaled $2.1 million, or $.24 per diluted share, for the year ended November 30, 2006, compared to $3.1 million, or $.36 per diluted share, for the same period in 2005. During the third quarter of 2006, the Company completed the sale of its Coatings Business and recognized a pretax gain of $.9 million. The Coatings Business generated sales of $152.2 million and $209.8 million for 2006 and 2005, respectively.

The Fiberglass-Composite Pipe Group achieved record sales and profits in 2006 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 the Company's Asian subsidiary operations. The Infrastructure Products Group had significantly higher sales and profits due to the strong construction sector in Hawaii and throughout the U.S. The Water Transmission Group reported lower sales and profits due to a cyclical slowdown in the market and a major piping project in Northern California that was completed in 2005.

Sales

Sales increased $54.4 million in 2006, compared to 2005. Sales increased due to higher demand for onshore oilfield and marine piping, the impact of foreign exchange rates on the Company's Asian fiberglass pipe subsidiary operations, higher demand for construction materials in Hawaii, and higher demand for concrete and steel poles due to the continued strength of housing construction throughout the U.S.

Fiberglass-Composite Pipe's sales increased $42.7 million, or 31.8%, in 2006, compared to 2005. Sales from operations in the U.S. increased $17.7 million in 2006 primarily due to increased demand for onshore oilfield piping. Sales from Asian subsidiary operations increased $18.6 million in 2006, driven by activity in the industrial, marine and offshore segments and the impact of foreign exchange. Sales in Europe increased $6.4 million in 2006 due to volume growth in industrial and marine markets. The strong 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. The outlook for the Fiberglass-Composite Pipe Group remains favorable.

Water Transmission's sales decreased $17.7 million, or 9.2%, in 2006, compared to 2005. The Water Transmission Group benefited from a major pipe project in Northern California throughout 2005, which was completed in the first quarter of 2006. The demand for largediameter pipe in the western U.S. has been soft due to completion of projects and a cyclical lull in the building of new projects. To maintain activity during the current downturn, the Company expanded its manufacture of wind towers used in wind-energy generation. The Water Transmission Group entered 2007 with a higher backlog due to orders for wind towers. 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. Market conditions for water pipe remain soft due to continuation of a cyclical slowdown in water infrastructure projects in the Company's markets. However, the market for wind towers is robust.

Infrastructure Products' sales increased $29.2 million, or 17.3%, in 2006, compared to 2005. Higher demand for concrete and steel poles was due principally to the continued strong housing market and improved market penetration, particularly in the southeast U.S. The Company's Hawaiian division had higher sales due to the continued strength of the governmental, commercial and residential construction markets on Oahu and Maui. Although the housing market has softened, the outlook for the Infrastructure Products Group's other construction markets remains firm.

Gross Profit

Gross profit in 2006 was $132.4 million, or 24.1% of sales, compared to $125.2 million, or 25.3% of sales, in 2005. Gross profit increased $7.2 million due to higher sales.

Fiberglass-Composite Pipe Group's gross profit increased $17.2 million in 2006, compared to 2005. Profit margins improved to 33.3% for 2006, compared to 31.0% for 2005. Higher margins resulted from improvements in product and market mix, and price increases. Increased sales volume generated additional gross profit of $13.2 million while favorable product mix generated additional gross profit of $4.0 million in 2006.

Water Transmission Group's gross profit decreased $20.1 million in 2006, compared to 2005. Profit margins declined to 15.0% for 2006, compared to 24.1% in 2005. Lower sales volume reduced profit by $4.3 million in 2006. Lower margins from unfavorable mix of projects, start-up costs associated with the introduction of wind towers and lower efficiencies due to lower sales negatively impacted gross profit by $15.8 million.

Gross profit in the Infrastructure Products Group increased $10.5 million in 2006, compared to 2005. Profit margins improved to 23.7% for 2006, compared to 21.6% in 2005. Increased sales volume generated additional gross profit of $6.3 million while higher margins generated additional gross profit of $4.2 million for 2006. Higher margins resulted from price increases and operating efficiencies due to increased production levels.

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

Selling, general and administrative ("SG&A") expenses totaled $94.7 million, or 17.2% of sales, in 2006, compared to $90.3 million, or 18.2% of sales, in 2005. The $4.4 million increase included higher incentive and stock compensation expenses of $4.9 million, higher employee benefit costs of $1.4 million, and higher commission and administrative expenses of $7.5 million associated with higher sales, offset by higher legal fees and settlement costs of $6.8 million and self-insurance expenses of $2.6 million in 2005.

Other Income, Net

Other income increased from $2.1 million in 2005 to $11.4 million in 2006 due primarily to the $9.0 million gain from the sale of the Brea property. Other income included royalties and fees from licensees, foreign currency transaction losses, and other miscellaneous income.

Interest

Net interest expense totaled $1.7 million in 2006, compared to $5.5 million in 2005. The decrease in net interest expense was due to higher interest income from short-term investments and the lower average outstanding debt and less higher-rate, fixed-rate debt.

Provision for Income Taxes

Income taxes decreased to $10.9 million in 2006 from $11.0 million in 2005. The effective tax rate on income from continuing operations decreased to 23% in 2006 from 35% for the same period of 2005. The effective tax in 2006 was lower than the tax at the statutory rate,with the difference of $7.2 million due to settlement of the 1996-1998 and 1999-2002 IRS examinations, final approval of the Company's 1998- 2000 research and development credit refund claims, and settlements with other foreign and local jurisdictions. Income from certain foreign operations and joint ventures 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, increased to $13.6 million in 2006, compared 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 were taxed at an effective rate of 11.32% and 10.41 %, respectively, in 2006 and 2005, reflecting the dividend exclusion provided to the Company under current tax laws. The improvement in TAMCO's earnings was attributable to increased demand for steel rebar and higher selling prices, reflecting the continued strong construction market and the high prices of steel worldwide.

Income from Discontinued Operations, Net of Taxes

RESULTS OF OPERATIONS: 2005 COMPARED WITH 2004

General

Income from continuing operations totaled $29.5 million, or $3.44 per diluted share, on sales of $494.8 million for the year ended November 30, 2005, compared to $11.2 million, or $1.32 per diluted share, on sales of $406.2 million for the same period in 2004. Income from continuing operations rose in 2005 primarily due to higher sales and improved gross margins. Additionally, income from continuing operations 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 segments had significantly higher sales and profits 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 the Company’s Asian subsidiary operations. Equity income from TAMCO, the Company’s 50%-owned steel mini-mill in Southern California, declined $1.8 million from 2004. The decline was attributable to higher conversion costs, primarily energy costs.

Income from discontinued operations, net of taxes, totaled $3.1 million, or $.36 per diluted share, for the year ended November 30, 2005, compared to $2.3 million, or $.27 per diluted share, for the same period in 2004. The Performance Coatings & Finishes Group generated sales of $209.8 million and $199.6 million for 2005 and 2004, respectively. Higher sales came primarily from U.S. operations, due to improved market conditions, and from subsidiary operations in Australia and New Zealand, due to volume gains and favorable currency translation.

Sales

Sales increased $88.5 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 fiberglass pipe operations and higher demand for concrete and steel poles due to the continued strength of housing construction throughout the U.S. The 2004 sales were adversely impacted by the labor strikes within the Water Transmission and Infrastructure Products Groups.

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 the Company's Asian subsidiary operations of fiberglass pipe to the Middle East for industrial projects. Sales of piping supplied by the Company's subsidiary 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 continued to be driven by high oil prices and the high cost of steel piping, the principal substitute for fiberglass pipe. The backlog for the Fiberglass-Composite Pipe Group increased compared to the level at year-end 2004.

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 linings 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.

Infrastructure Products Group's 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, the Company's Hawaiian division recovered from a labor dispute in 2004 at the Company's principal aggregates and ready-mix concrete operations on Oahu in Hawaii. Sales of steel and concrete poles increased due to the continued strength of housing construction throughout the U.S. Additionally, the Company benefited from a major pole-replacement program sponsored by a utility in Southern California.

Gross Profit

Gross profit in 2005 was $125.2 million, or 25.3% of sales, compared to gross profit of $92.2 million, or 22.7% of sales, in 2004. Gross profit increased $33.0 million due to higher sales and improved margins due to a favorable mix of projects.

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 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 totaled $90.3 million, or 18.2% of sales, in 2005, compared to $83.6 million, or 20.6%, in 2004. SG&A increased $6.7 million primarily due to higher legal expenses of $5.1 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 $2.1 million in 2005 from $14.8 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. Income from investments accounted for under the cost method increased from zero in 2004 to $1.3 million in 2005 due to the timing of dividend payments. The fiberglass pipe 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 was flat at $5.5 million in 2005, compared to 2004.

Provision for Income Taxes

Income taxes increased to $11.0 million compared to $4.8 million in 2004. The effective tax rate decreased from 93% in 2004 to 35% 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 in the results of TAMCO, decreased from $10.8 million in 2004 to $9.0 million in 2005. The decline in TAMCO's earnings was attributable principally to higher conversion costs, primarily energy. TAMCO's sales in 2005 reflected the continued strong construction market and the high prices of steel worldwide.

Income from Discontinued Operations, Net of Taxes