Synalloy Corporation, a Delaware corporation ("the Company"), was incorporated in 1958 as the successor to a chemical manufacturing business founded in 1945. Its charter is perpetual. The name was changed on July 31, 1967 from Blackman Uhler Industries, Inc. On June 3, 1988, the state of incorporation was changed from South Carolina to Delaware. The Company's executive offices are located at Croft Industrial Park, Spartanburg, South Carolina.

Metals Segment-- This segment is comprised of a wholly-owned subsidiary, Synalloy Metals, Inc. which owns 100 percent of Bristol Metals, L.P., ("Bristol") located in Bristol, Tennessee.

Bristol manufactures welded pipe, primarily from stainless steel, but also from other corrosion-resistant metals. Pipe is produced in sizes from one-half inch to 112 inches in diameter and wall thickness up to one inch. Sixteen-inch and smaller pipe is made on equipment that forms and welds the pipe in a continuous process. Pipe larger than sixteen inches is formed on presses or rolls and welded on batch welding equipment. Pipe is normally produced in standard 20-foot lengths. However, Bristol has unusual capabilities in the production of long length pipe without circumferential welds. This can reduce installation cost for the customer. Lengths up to 60 feet can be produced in sizes up to sixteen inches in diameter. In larger sizes Bristol has a unique ability among domestic producers to make 48-foot lengths in sizes up to 36 inches. During 2004 Bristol added the ability to x-ray pipe in real time mode. This new technology was incorporated with updated material handling equipmen t to double the efficiency of x-raying pipe. Bristol is also expanding the capabilities for forming large pipe on its existing batch equipment. The project, which will be completed in the first quarter of 2005, will give Bristol its capability to produce 36-inch diameter pipe in 48-foot lengths and with increased wall thickness of up to one inch. The increase in wall thickness is allowing Bristol to make pipe of 12-inch through 112-inch diameter with a wall thickness of one inch. Also included in this project is the addition of a shear that has the capacity of shearing stainless steel plate up to one-inch thick.

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A significant amount of the pipe produced is further processed into piping systems that conform to engineered drawings furnished by the customers. This allows the customer to take advantage of the high quality and efficiency of Bristol's fabrication shop instead of performing all of the welding on the construction site. The pipe fabricating shop can make one and one-half diameter cold bends on one-half inch through eight-inch stainless pipe with thicknesses up through schedule 40. Most of the piping systems are produced from pipe manufactured by Bristol.

Bristol also has the capability of producing carbon and chrome piping systems from pipe purchased from outside suppliers since Bristol does not manufacture carbon or chrome pipe. Carbon and chrome pipe fabrication enhances the stainless fabrication business by allowing Bristol to quote inquiries utilizing any of these three material types. Bristol can also produce pressure vessels and reactors, tanks and other processing equipment.

In order to establish stronger business relationships, only a few raw material suppliers are used. Five suppliers furnish more than two-thirds of total dollar purchases of raw materials. However, raw materials are readily available from a number of different sources and the Company anticipates no difficulties in obtaining its requirements.

This segment's products are used principally by customers requiring materials that are corrosion-resistant or suitable for high-purity processes. The largest users are the chemical, petrochemical and pulp and paper industries with some other important industry users being mining, power generation, waste water treatment, liquid natural gas ("LNG"), brewery, food processing, petroleum and pharmaceutical.

Specialty Chemicals Segment-- This Segment includes three operating companies: Blackman Uhler Chemical Company (BU Specialties), a division of the Company; Manufacturers Soap and Chemical Company, which owns 100 percent of Manufacturers Chemicals, L.P. (MC) and Organic-Pigments Corporation (OP). MC and OP are wholly-owned subsidiaries of the Company. BU Specialties operates out of a plant in Spartanburg, South Carolina which is fully licensed for chemical manufacture and maintains a permitted waste treatment system. MC is located in Cleveland, Tennessee and Dalton, Georgia and is fully licensed for chemical manufacture. OP is located in Greensboro, North Carolina. The Segment is a producer of specialty chemicals for the textile, carpet, chemical, paper, metals, photographic, pharmaceutical, agricultural, fiber and paint industries. The Company has been focusing on s pecialty chemicals as a primary growth area over the past several years. Facilities and equipment at the BU Specialties plant produce proprietary product and also provide toll and custom manufacturing of organic chemicals using reactions that include nitrations, hydrogenation, distillation, diazotizations, methylation and custom drying. These chemicals are used in a wide array of products including UV absorbers for plastics, Cetane improver for diesel fuel, absorbers for gaseous pollutants, herbicides, anti-wicking agents, fire retardants, processing aids for PVC, cosmetics, automotive products and paper resins.

The Company purchased MC in 1996. MC produces defoamers, surfactants, dye assists, softening agents, polymers and specialty lubricants for the textile, paper, chemical and metals industries. MC also manufactures chelating agents and water treatment chemicals. Manufacturing capabilities include a wide range of chemical reactions and mixing and blending applications. MC's products are sold to direct users in a variety of manufacturing areas, directly to other chemical companies in the form of intermediates or as finished products for resale, and as contract manufacturing where the customer provides formula specifications and, in some cases, raw materials.

The Company purchased OP in 1998. OP manufactures aqueous pigment dispersions sold to the textile industry and used in printing inks for use on paper and in paints for the industrial coatings industry. OP also sells pigments to the flexographic printing and graphic arts industries. Pigment colors

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are uniquely suitable for printing of multi-colored patterns. Raw materials used to manufacture pigments consist chiefly of organic intermediates and inorganic chemicals which are purchased from manufacturers in the United States, Europe and Asia. Currently, raw materials are readily available and management does not anticipate any difficulty in obtaining adequate supplies. The addition of OP provided the ability to produce higher solid and finer particle size dispersions providing opportunities to diversify into non-textile applications.

In 2000, MC acquired the assets of a manufacturer of sulfated fats and oils. The manufacturing equipment for these products was moved to the Cleveland, Tennessee plant where both capacity and chilling capabilities were increased. These products are used as lubricants, wetting agents, detergents and emulsifiers in a variety of chemical formulations. The addition of these capabilities and processes broadens the range of sulfated products already manufactured at MC.

In 2001, the Company acquired the assets of a manufacturer and reseller of chemical specialties and dyestuffs located in Dalton, Georgia. Dalton resells chemical specialties and heavy chemicals and blends and resells dyestuffs to the carpet and rug industries, selected textile mills and the wire drawing industry. The manufacture of the liquid products is done primarily at the Cleveland plant, and the warehousing and dye blending operation along with the shade matching lab and sales offices are located at a leased facility in Dalton. In addition, Dalton markets the chemical specialties produced at other Specialty Chemicals Segment locations.

The Specialty Chemicals Segment maintains seven laboratories for applied research and quality control which are staffed by 28 employees.

Please see Note R to the Consolidated Financial Statements for financial information about the Company's segments.

Metals Segment-- The Metals Segment utilizes separate sales organizations for its different product groups. Stainless steel pipe is sold nationwide under the Brismet trade name through authorized stocking distributors at warehouse locations throughout the country. In addition, large quantity orders are shipped directly from Bristol's plant to end-user customers. Producing sales and providing service to the distributors and end-user customers are the Vice President of Sales, two outside sales employees, four independent manufacturers' representatives and seven inside sales employees. Reference should be made to Note R to the Consolidated Financial Statements.

Piping systems are sold nationwide under the Bristol Piping Systems trade name by three outside sales employees. They are under the direction of the Vice President in charge of piping systems who spends over half of his time in sales and service to customers. Piping systems are marketed to engineering firms and construction companies or directly to project owners. Orders are normally received as a result of competitive bids submitted in response to inquiries and bid proposals.

Specialty Chemicals Segment-- Specialty chemicals are sold directly to various industries nationwide by ten full-time outside sales employees and seven manufacturers' representatives. In addition, the President and market development manager of MC devote a substantial part of their time to sales.

Metals Segment-- Welded stainless steel pipe is the largest sales volume product of the Metals Segment. Although information is not publicly available regarding the sales of most other producers of

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this product, management believes that the Company is one of the larger domestic producers of such pipe. This commodity product is highly competitive with eight known domestic producers and imports from many different countries. The largest sales volume among the specialized products comes from fabricating stainless, nickel alloys and chrome alloys piping systems. Management believes the Company is one of the larger producers of such systems. There is also significant competition in the piping systems markets with nine known domestic suppliers with similar capabilities as Bristol, along with many other smaller suppliers.

Specialty Chemicals Segment-- The Company is the sole producer of certain specialty chemicals manufactured for other companies under processing agreements and also produces proprietary specialty chemicals. The Company's sales of specialty products are insignificant compared to the overall market for specialty chemicals. The market for most of the products is highly competitive and many competitors have substantially greater resources than does the Company. The market for dyes and pigments is highly competitive and the Company has less than ten percent of the market for its products.

Environmental expenditures that relate to an existing condition caused by past operations and that do not contribute to future revenue generation are expensed. Liabilities are recorded when environmental assessments and/or cleanups are probable and the costs of these assessments and/or cleanups can be reasonably estimated. See Note I to Consolidated Financial Statements for further discussion.

The Company spent approximately $551,000 in 2004, $457,000 in 2003 and $524,000 in 2002 on research and development programs in its Specialty Chemicals Segment. Nine individuals, all of whom are graduate chemists, are engaged primarily in research and development of new products and processes, the improvement of existing products and processes, and the development of new applications for existing products.

The annual requirements of certain specialty chemicals are produced over a period of a few months as requested by the customers. Accordingly, the sales of these products may vary significantly from one quarter to another.

The Specialty Chemicals Segment operates primarily on the basis of delivering products soon after orders are received. Accordingly, backlogs are not a factor in these businesses. The same applies to commodity pipe sales in the Metals Segment. However, backlogs are important in the piping systems products because they are produced only after orders are received, generally as the result of competitive bidding. Order backlogs for these products were $11,500,000 at the end of 2004, all of which should be completed in 2005, and $6,700,000 and $5,800,000 at the 2003 and 2002 respective year ends.

As of January 1, 2005, the Company had 442 employees. The Company considers relations with employees to be satisfactory. The number of employees of the Company represented by unions at the

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Bristol, Tennessee facility is 176. They are represented by two locals affiliated with the AFL-CIO and one local affiliated with the Teamsters. Collective bargaining contracts will expire in February 2009, December 2009 and March 2010

Information about revenues derived from domestic and foreign customers is set forth in Note R to the Consolidated Financial Statements.

The Company operates the major plants and facilities listed below, all of which are in adequate condition for their current usage. All facilities throughout the Company are adequately insured. The buildings are of various types of construction including brick, steel, concrete, concrete block and sheet metal. All have adequate transportation facilities for both raw materials and finished products. The Company owns all of these plants and facilities, except as noted.

(1) Leased facility.
(2) Plant closed in 2001.

For a discussion of legal proceedings, see Notes I and O to the Consolidated Financial Statements.

No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise.

The Company had 1,009 common shareholders of record at January 1, 2005. The Company's common stock trades on the NASDAQ National Market System of The NASDAQ Stock Market and changed its trading symbol to SYNL effective October 6, 2003. In 2001, the Company's Board of Directors voted to suspend cash dividends, and on July 26, 2002, the Company entered into a new credit agreement which prohibits the payment of dividends. The prices shown below are the last reported high and low

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sales prices for the common stock for each full quarterly period in the last two fiscal years as quoted on The NASDAQ National Market System.

The information required by Item 201(d) of Regulation S-K is set forth under Part III, Item 12 of this Form 10-K. Pursuant to the compensation arrangement with directors discussed under Item 12 "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" in this Form 10-K, on February 5, 2004, the Company issued to each of its directors except Ralph Matera, 2,852 shares of its common stock (an aggregate of 14,260 shares). Issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 because no public offering was involved. During the fiscal year ended January 1, 2005, the Registrant issued shares of common stock to the following classes of persons upon the exercise of options issued pursuant to the Registrant's 1998 Stock Option Plan. Issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 because the issu ance did not involve a public offering.

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(Dollars amounts in thousands except for per share data)

(1) See Note Q to Consolidated Financial Statements.

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Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under d ifferent assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of the Company's consolidated financial statements.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of any of the customers of the Company were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

The Company writes down its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and current market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

As noted in Note I to the Consolidated Financial Statements, the Company has accrued $1,121,000 in environmental remediation costs which, in management's best estimate, will satisfy anticipated costs of known remediation requirements as outlined in Note I. As a result of the evolving nature of the environmental regulations, the difficulty in estimating the extent and remedy of environmental contamination, and the availability and application of technology, the estimated costs for future environmental compliance and remediation are subject to uncertainties and it is not possible to predict the amount or timing of future costs of environmental matters which may subsequently be determined. Subject to the difficulty in estimating future environmental costs, the Company believes that the likelihood of material losses in excess of the amounts recorded is remote. However, any changes, including regulatory changes, may require the Company to record additional remediation reserves.

As noted in Notes C and Q to the Consolidated Financial Statements, the Company has recorded asset impairment charges under SFAS 144 in each of the last three years including a $581,000 charge in 2004 as part of the loss recognized for discontinued operations. Based on assessments performed on the continuing assets of the Company, which indicated no write-downs were deemed necessary, the Company believes that it is unlikely that these types of impairment charges will continue to occur. However, if business conditions at any of the plant sites were to deteriorate to an extent where cash flows and other impairment measurements indicate values for the related long-lived assets are less than the carrying values of those assets, additional impairment charges may be necessary.

In the fourth quarter of 2004, the Financial Accounting Standards Board ("FASB") issued Statements No. 151, "Inventory Costs" and No. 153, "Exchanges of Nonmonetary Assets," both having an effective date in June of 2005. The Company does not believe either statement will have an impact on the Company's financial statements.

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The current ratio for the year ended January 1, 2005, was 3.8:1, which is up from the previous year-end ratios of 3.5:1 in 2003 and 2.5:1 in 2002. Working capital for 2004 increased $6,382,000 to $35,088,000 from the amount in 2003. Cash flows provided by operations totaled $504,000 coming from $4,280,000 provided by discontinuing operations offset by $3,776,000 used in continuing operations. The increase in working capital and use of cash flows from continuing operations came primarily from increases in inventories and accounts receivable of $7,836,000 and $3,238,000, respectively, offset by an increase of $399,000 in accounts payable and net income from continuing operations of $5,342,000 before depreciation and amortization expense of $3,068,000. The increases in inventories came from the Metals Segment due primarily to raw material cost increases and to a lesser extent, increased units discussed in the Metals Segment comparisons below. The accounts receivable increases w ere generated from increased sales activity experienced in December of 2004 as compared to the same period in 2003. The cash flows provided by discontinued operations were derived from declines in accounts receivable and inventories coupled with an increase in accounts payable totaling $1,433,000, $2,319,000 and $370,000, respectively. The cash flows were generated from the sale of the Company's liquid dye business in the first quarter of 2004 and the planned reduction of the remaining dye business assets in anticipation of selling off this business as discussed in the Discontinued Operations discussion below. An increase in line of credit borrowings of $2,444,000 funded capital expenditures of $2,313,000. The Company expects that cash flows from 2005 operations and available borrowings will be sufficient to make debt payments and fund estimated capital expenditures of $2,600,000 and normal operating requirements. On July 26, 2002, the Company entered into a new Credit Agreement with a new lender to provide a $19,000,000 line of credit. On July 24, 2003, the Agreement was amended increasing the borrowing amount to $23,000,000, primarily under the existing terms, and extending the expiration date to July 25, 2006. Borrowings under the Agreement are limited to a borrowing base calculation including eligible accounts receivable, inventories, and cash surrender value of the Company's life insurance as defined in the Agreement. As of January 1, 2005, the amount available for borrowing was $23,000,000 of which $21,205,000 was borrowed leaving $1,795,000 of availability. Covenants include, among others, a prohibition on the payment of dividends.

The Company generated net earnings from continuing operations of $2,274,000, or $.37 per share, on a 24 percent sales increase to $99,839,000 in 2004. This compares to a loss from continuing operations of $580,000, or $.10 per share, in 2003. For the fourth quarter of 2004, the Company had earnings from continuing operations of $714,000, or $.12 per share, compared to a loss from continuing operations of $508,000, or $.08 per share, on a twelve percent increase in sales to $24,308,000. The Company recorded losses from discontinued operations of $1,100,000, or $.18 per share, and $673,000, or $.11 per share, for the year and fourth quarter of 2004, respectively, compared to net losses of $840,000, or $.14 per share, and $764,000, or $.13 per share for the same periods of 2003. As a result, the Company earned $1,174,000, or $.19 per share, for 2004 and $40,000, or $.01 per share, for the fourth quarter compared to a loss in 2003 of $1,420,000, or $.24 pre share, and a loss of $1,272,000, or $.21 per sha re, for the fourth quarter of 2003.

Consolidated gross profits improved to 14 percent of sales in 2004 compared to ten percent experienced in 2003 coming primarily from the Metals Segment as discussed in the Metals Segment comparisons below. Consolidated selling, general and administrative expense for 2004 increased $1,255,000 to $9,432,000 compared to 2003, but declined as a percent of sales to nine percent in 2004 from ten percent in 2003. The dollar increase came primarily from a combination of profit incentives

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paid in the Metals Segment and the recording of environmental charges in Corporate expenses discussed in the Corporate comparisons below.

For 2003, the Company incurred a consolidated loss from continuing operations of $580,000, or $.10 per share, on an eight percent sales increase to $80,408,000. This compares to a loss from continuing operations of $1,633,000, or $.27 per share, in 2002. For the fourth quarter of 2003, the Company had a loss from continuing operations of $508,000, or $.08 per share, compared to having net income from continuing operations of $120,000, or $.02 per share in 2002, on a twelve percent increase in sales to $21,782,000. The Company recorded losses from discontinued operations of $841,000, or $.14 per share, and $764,000, or $.13 per share, for the year and fourth quarter of 2003, respectively, compared to losses of $2,975,000, or $.50 per share, and $103,000, or $.02 per share for the same periods in 2002.

The Company incurred a consolidated loss for 2003 of $1,421,000, or $.24 per share compared to a loss of $4,843,000, or $.81 per share in 2002. For the fourth quarter of 2003, the Company had a loss of $1,272,000, or $.21 per share. This compares to net income of $17,000, or $.00 per share earned in the fourth quarter of 2002. Consolidated results from continuing operations in 2003 were significantly impacted by several transactions that were recorded during the year. In the fourth quarter of 2003, the Company recorded charges discussed in the 2003 compared to 2002 Segment comparisons below totaling $655,000, net of tax, or $.11 per share. Included in the 2003 other income are $150,000 of non-recurring income received from the sale of the Company's NASDAQ stock symbol, and $119,000 in dividend income received from the Company's life insurance policies, both recorded in the third quarter of 2003.

Although consolidated selling, general and administrative expense for 2003 increased $176,000 to $8,177,000 compared to 2002, they declined as a percent of sales to ten percent from eleven percent. The decline in percentage of sales came from cost reductions of personnel and non-critical operating expense items, many of which impacted selling and administrative expense, implemented in the third quarter of 2002.

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Metals Segment-- The following table summarizes operating results and backlogs for the three years indicated. Reference should be made to Note R to the Consolidated Financial Statements.

Selling and administrative expense increased $753,000, or 23 percent compared to 2003, but remained at seven percent of sales. The increase in dollars came primarily from increases in profit based incentives, sales commissions from increased sales, and bad debt expense. The Company increased

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its reserves for bad debts to offset exposure from the higher level of accounts receivable consistent with the increase in sales activity experienced through 2004.

Dollar sales increased 12 percent in 2003 compared to 2002. The increase for the year resulted from 19 percent higher average selling prices partially offset by six percent lower unit volumes. Surcharges paid on stainless steel raw materials increased throughout the year increasing from an average of about $.12 per pound in December 2002 to an average of about $.38 per pound in December 2003. The Segment was able to pass through most of these cost increases, which accounted for most of the increase in selling prices, especially in the fourth quarter. The increase in the year-to-date selling price also resulted from a change in product mix to a higher percentage of higher-margin large diameter pipe, experienced primarily in the second and third quarters of 2003. The combination of higher selling prices and favorable product mix along with cost reductions implemented in the third quarter of 2002 contributed to the significant gross profit improvement experienced for the year c ompared to the same period of 2002. While commodity pipe generated operating income for the year, piping systems did not fare as well, incurring losses for the year consistent with 2002. Piping systems' backlog maintained a better than average level throughout the year, ending the year at $6,700,000. However, due to the customers' scheduling requirements for our material, we were unable to get a sufficient amount of work into the shop to enable piping systems to operate profitably through the first nine months. The situation improved in the fourth quarter, and piping systems was able to generate a modest profit for the quarter.

Selling and administrative expense for 2003 decreased $320,000 compared to 2002, or nine percent, and declined slightly as a percentage of sales as a result of cost reductions implemented in September of 2002, including reductions of personnel and non-critical operating expense items, many of which impacted selling and administrative expense.

Specialty Chemicals Segment-- The following tables summarize operating results for the three years indicated. Reference should be made to Note R to the Consolidated Financial Statements.

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Sales were up $5,540,000, or 17 percent, gross profits increased $1,559,000, or 41 percent, and operating income was $1,539,000 compared to a loss of $598,000 in 2004 compared to 2003, respectively. Favorable market conditions for most of the Segments' products and new product development at the Spartanburg location accounted for the increase in sales. The 41 percent increase in gross profits in 2004 compared to 2003 resulted from improved profitability at all three of the chemical plants, and from a $481,000 inventory charge in 2003 at the Greensboro plant discussed below. Unlike 2003, the Segment was able to pass some of the higher operating costs, especially energy costs, to its customers which allowed the Segment to generate additional margin contribution from the increased sales volume. For the fourth quarter of 2004, sales were up $830,000, or 11 percent and gross profits increased $610,000, or 167 percent compared to 2003. Fourth quarter operating income was $146,000 compared to a loss of $1,12 0,000 in the fourth quarter of 2003. The modest level of profitability in the fourth quarter was caused primarily by poor results at the Spartanburg plant because of the low level of contract campaigns. This location often has volatility in its production levels quarter to quarter because of the customers' scheduling requirements. Included in operating income in the fourth quarter of 2003 were the $481,000 inventory charge and a $490,000 impairment loss discussed below. Management is pleased with the dramatic improvement achieved without any benefit from a new product that was the object of much of the Segment's effort in 2004.

Selling and administrative expense declined $88,000 in 2004 compared to 2003, and declined as a percent of sales to ten percent in 2004 compared to 12 percent in 2003. The decline came primarily from reduced bad debt expense at OP caused by the need to increase bad debt reserves in 2003 to account for several customer bankruptcies.

Sales were up a modest two percent and gross profits declined ten percent for 2003 compared to 2002. Profitability in both years was negatively impacted from the recording of long-lived asset impairment write-downs of $490,000 in 2003, discussed in the following paragraph, and $481,000 in 2002 on assets located at the Spartanburg location. Gross profits in 2003 were also hurt by an inventory adjustment discussed below. The Segment was unable to pass higher operating costs, especially energy costs, to its customers. As a result, the Segment experienced only a one percent increase in gross profits for the year compared to 2002, adjusted for the $481,000 inventory write-down. The Segment has been able to expand production at its Spartanburg location by adding new products, which provides a better opportunity for the location to more evenly absorb manufacturing cost and avoid significant negative manufacturing variances this location has historically experienced. This allowed th e location to operate profitably for the year. However, the location continues to have significant swings in profitability from the timing of its contract tolling campaigns as it incurred losses in the first and fourth quarters of 2003, while generating profits in the second and third quarters of 2003.

The Segment's pigment business located in Greensboro, North Carolina, experienced a significant downturn in textile business during the last six months of 2003 incurring losses during that period. Although the non-textile portion of the pigment business is growing, it is not expanding fast enough to offset the declining textile business. The reduced volume did not produce sufficient contribution margin to offset operating costs causing the losses. As a result of lost business, mainly from customers closing their operations, the location accumulated excessive inventories with few or no customers available to systematically sell off and or blend off the inventory. As a result, a $481,000 inventory charge was recorded in the fourth quarter of 2003. Also during the fourth quarter of 2003, the Company completed an impairment assessment on the plant and equipment located at Greensboro and based on the results of the assessment, recorded a $490,000 impairment loss. See Note C to the Consolidated Financial Statem ents.

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Selling and administrative expense increased $390,000 in 2003 compared to 2002, Selling and administrative expenses as a percent of sales increased to 12 percent in 2003 compared to 11 percent in 2002. The increase came primarily from increases in sales commissions from higher sales and bad debt expense at OP caused by the need to increase bad debt reserves in 2003 to account for several customer bankruptcies, coupled with $45,000 of non-recurring miscellaneous income received in 2002 from warehouse rentals at one of the locations.

For information related to environmental matters, see Note I to the Consolidated Financial Statements.

On July 23, 2003 the Company purchased certain assets of Rite Industries. These assets along with Synalloy's existing textile dye business were placed in a newly formed subsidiary of the Company called Blackman Uhler, LLC (BU Colors). The newly formed company is owned 90 percent by the Company with the remaining percentage owned by a group of former Rite Industries executives. The acquisition provided a new customer base in the paper and other non-textile industries. Total cost of the acquisition was $200,000 and the Company funded the acquisition with available cash. As a result of the continuing downward trends in the textile industry and poor financial performance of the textile dye business, the Company decided at the end of the fourth quarter of 2003 to divest the liquid dye portion of its dye business servicing the textile industry, and began downsizing the remaining dye business. In the fourth quarter of 2003, a $290,000 inventory charge was recorded to cost of goods sold to write down inventor ies related to the liquid dye product lines. On March 25, 2004, the Company entered into an agreement to sell the liquid dye business comprised of vat, sulfur, liquid disperse and liquid reactive dyes with annual sales of approximately $4,500,000 for approximately its net book value, and several customers and related products of the remaining textile dye business were rationalized. Business conditions in the remaining dye business were poor throughout 2004, especially in the first six months, as BU Colors experienced operating losses in every quarter of 2004. In the third quarter of 2004, the Company decided to attempt to sell the remaining dye business and on December 28, 2004, entered into an Agreement to sell the dye business, closing the sale on January 31, 2005. The terms included the sale of the inventory of BU Colors along with certain equipment and other property associated with the business being sold, and the licensing of certain intellectual property, for a purchase price of approximately $4,872,0 00 of which $4,022,000 was paid at closing, and the balance of $850,000 will be payable over time based on the operations of the purchaser. In December of 2004, the Company completed an impairment assessment on the plant and equipment located at the Spartanburg facility related to the BU Colors operations. As a result, the Company recognized an impairment loss of $581,000 from the write-down of plant and equipment. As a result of the sale of the dye business, the Company has discontinued the operations of BU Colors and has presented the financial information of BU Colors as discontinued operations, including restating 2003 and 2002.

Reference should be made to Note R to the Consolidated Financial Statements for the schedule that includes these items.

Corporate expense increased $589,000, or 60 percent, to $1,572,000 for 2004 compared to 2003. The increase resulted primarily from the addition of environmental expenses of $572,000 to accrue for $372,000 of environmental remediation costs in the fourth quarter of 2004 at the Spartanburg facility and from the recording of a $200,000 environmental charge in the second quarter of 2004 to reflect the settlement with the Environmental Protection Agency of the Company's obligation as a Potentially Responsible Party in the clean up of a waste disposal site. Reference should be made to Note I to the

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Consolidated Financial Statements. Interest expense in 2004 increased $131,000 from 2003 from increases in borrowings and the prime interest rate under the lines of credit with a lender.

Corporate expense increased $107,000, or twelve percent to $983,000 for 2003 compared to 2002. The increase resulted primarily from an increase in directors' fees and expenses. In 2003, the Company began paying the directors' retainer fees by issuing shares of its common stock, and issued 25,000 shares expensing $103,000 as retainer fees compared to $66,000 paid and expensed in 2002. Other expense, net in 2003 included $150,000 of non-recurring income received from the sale of the Company's NASDAQ stock symbol, and $119,000 in dividend income received from the Company's life insurance policies, both recorded in the third quarter of 2003. Other expense, net in 2002 included the sale of certain non-operating assets, including its investment in a foreign corporation, for a pre-tax gain of $605,000. Interest expense in 2003 increased $150,000 from 2002 due to increases in borrowings under the lines of credit with a lender.

Market conditions in the Metals Segment have improved over the past three months, from December 2004 through February 2005, as sales activity, pricing and unit volumes for commodity pipe have increased from levels experienced over the last half of 2004. Management remains optimistic about the current conditions that exist in the commodity pipe and specialty alloy markets. The Segment has been successful in penetrating new markets, such as projects in the LNG industry, where management believes there is significant growth potential. If piping systems can continue to generate sufficient volume through its operations, and demand for piping continues at it current level, management believes the Metals Segment will operate profitably in 2005.

Management is pleased with the dramatic improvement achieved by the Specialty Chemicals Segment even without any benefit from a new product line that was the object of much of the Segment's effort in 2004. The Segment has introduced a new line of fire retardant chemicals. Applications for this new line of chemicals include mattresses, furniture and home appliances, which are subject to new fire retardant regulations that we believe will become effective in 2005. Qualifications of our products continue to have good success in each of the applications. In addition, our products offer a safer alternative to the use of certain compounds used in products currently servicing these industries. Regulations in California are now requiring mattress manufacturers to utilize fire retardant products that conform to the new regulations in their production process which began January 1, 2005. Management was hopeful that Federal regulations similar to regulations adopted by California would be in place in the first half of 2005, but it now appears that it will be sometime in the first quarter of 2006 before the Federal regulations will address the issue. As a result of these delays, the Segment was unable to generate significant production in 2004. However, management remains confident that demand for fire retardant products will ramp up in the second half of 2005 and grow into significant volumes. Management is encouraged by the performance of this Segment and believes it is positioned to continue to grow from new product opportunities, which has been the hallmark of our Specialty Chemicals Segment. This Segment's business tends to be impacted by general economic conditions, and assuming no significant downturn in the general economy, management expects this Segment to operate profitably in 2005.

The Company is exposed to market risks from adverse changes in interest rates. In this regard, changes in U. S. interest rates affect the interest earned on the Company's cash and cash equivalents as well as interest paid on its indebtedness. As a policy, the Company does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes.

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The Company is exposed to changes in interest rates primarily as a result of its borrowing activities used to maintain liquidity and fund business operations. There have been no significant changes in the Company's risk exposures from the prior year.

Fair value of the Company's debt obligations, which approximated the recorded value, consisted of:

At January 1, 2005

$21,205,000 under a $23,000,000 line of credit expiring July 25, 2006 with an average variable interest rate of 4.95 percent.

At January 3, 2004

$18,761,000 under a $23,000,000 line of credit expiring July 25, 2006 with an average variable interest rate of 3.82 percent.

The Company's consolidated financial statements, related notes, report of management and report of the independent auditors follow on subsequent pages of this report.

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