**Exhibit 13.1**

 

**INTERNATIONALALUMINUMCORPORATION**

 

 

**2003 Annual Report**

 

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**COMPANYPROFILE**

 

**INTERNATIONALALUMINUM CORPORATION**is an integrated building products manufacturer of diversified lines of qualityaluminum and vinyl products.  TheCompany is headquartered in Monterey Park, California and has approximately1,400 employees.  Operations areconducted through twelve North American subsidiaries.  The Company’s primary Internet website is located atwww.intlalum.com.

 

**PRODUCTS BYSEGMENT**

 

**COMMERCIAL**- Curtainwalls, window walls, slope glazedsystems, storefront framing, entrance doors and frames, commercial operablewindows, interior officefronts, office partitions and interior doors and framesfor the commercial building and tenant improvement markets.  Product information is available atwww.usalum.com and www.racointeriors.com.

 

**RESIDENTIAL**- Extensive lines of windows and patio doorsmanufactured from vinyl and aluminum and aluminum wardrobe mirror doors for theresidential building and remodeling markets. Product information is available at www.intlwindow.com.

 

**ALUMINUMEXTRUSION**- Millfinish, anodized, painted and fabricated aluminum extrusions.  Product information is available atwww.intlextrusion.com.

 

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**CONTENTS**

 
| Financial  Highlights                                                                       |
|---------------------------------------------------------------------------------------------|
| Letter to Shareholders                                                                      |
| Selected  Financial Data                                                                    |
| Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Quarterly  Financial Data                                                                   |
| Report of Independent  Auditors                                                             |
| Consolidated  Financial Statements                                                          |
| Notes to  Consolidated Financial Statements                                                 |
| Corporate  Information                                                                      |
| Subsidiaries  by Segment                                                                    |

 

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**FINANCIAL HIGHLIGHTS**

Fiscal Years Ended June 30,2003, 2002 and 2001

 
|                                             |   | **2003**    |        | **2002**    |   | **2001**    |   |
|--------------------------------------------------|--------|-------------|-------------|-------------|--------|-------------|--------|
|                                             |   |        |        |        |   |        |   |
| **Operating Results:**                           |   |        |        |        |   |        |   |
|                                             |   |        |        |        |   |        |   |
| Net sales                                        |   | $           | 192,549,000 |        | $      | 191,429,000 |   | $ | 207,343,000 |   |
|                                             |   |        |        |        |   |        |   |
| Income from continuing operations                |   | $           | 4,426,000   |        | $      | 1,485,000   |   | $ | 5,212,000 |   |
| Loss from discontinued operations                |   | (1,697,000  | )           | (1,533,000  | )      | (578,000    | )      |
| Cumulative effect of accounting change           |   | —      |        | (7,935,000  | )      | —      |   |
| Net income (loss)                                |   | $           | 2,729,000   |        | $      | (7,983,000  | )      | $ | 4,634,000 |   |
|                                             |   |        |        |        |   |        |   |
| **Financial Data:**                              |   |        |        |        |   |        |   |
|                                             |   |        |        |        |   |        |   |
| Net cash provided by operating activities        |   | $           | 14,715,000  |        | $      | 11,843,000  |   | $ | 23,110,000 |   |
| Capital expenditures                             |   | 2,847,000   |        | 11,848,000  |   | 7,712,000   |   |
|                                             |   |        |        |        |   |        |   |
| Working capital                                  |   | 62,929,000  |        | 58,057,000  |   | 66,097,000  |   |
| Long-term debt                                   |   | —      |        | —      |   | —      |   |
| Shareholders’ equity                        |   | 109,536,000 |        | 110,805,000 |   | 123,755,000 |   |
|                                             |   |        |        |        |   |        |   |
| **Per Share Data:**                              |   |        |        |        |   |        |   |
|                                             |   |        |        |        |   |        |   |
| Continuing operations - Diluted                  |   | $           | 1.04        |        | $      | .35         |   | $ | 1.23 |   |
| Loss from discontinued operations - Diluted      |   | (.40        | )           | (.36        | )      | (.14        | )      |
| Cumulative effect of accounting change - Diluted |   | —      |        | (1.87       | )      | —      |   |
| Net income (loss) - Diluted                      |   | $           | .64         |        | $      | (1.88       | )      | $ | 1.09 |   |
|                                             |   |        |        |        |   |        |   |
| Dividends declared                               |   | $           | 1.20        |        | $      | 1.20        |   | $ | 1.20 |   |
|                                             |   |        |        |        |   |        |   |
| Book value at yearend                            |   | 25.80       |        | 26.10       |   | 29.15       |   |
| Market price at yearend                          |   | 21.85       |        | 20.50       |   | 21.15       |   |

 

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**To Our Shareholders**

# ** **

# **On a slight increase insales, income from continuing operations rose to $4,426,000 or $1.04 per sharefor the year, up sharply from the $1,485,000 or $.35 per share income fromcontinuing operations for fiscal 2002. Sales revenues were $192,549,000 versus the $191,429,000 attained infiscal 2002.  Net income for the year,including a $1,697,000 loss from discontinued operations, was $2,729,000 or$.64 per share versus a loss of $7,983,000 or $1.88 per share for fiscal2002.  Fiscal 2002 included losses fromdiscontinued operations of $1,533,000 and a $7,935,000 write-down of impairedgoodwill resulting from the adoption of SFAS 142 (see notes 8 and 12 to theaccompanying financial statements).**

# ** **

# **Residential Products**

# ** **

# **Fiscal 2003 was a year of recoveryfor our Residential Products Group.  Therefocusing of our marketing efforts towards better serving our dealer networkwas reflected in significantly increased revenues and dramatically improvedoperating income.  Sales for thisproduct segment increased to $53,586,000, up 21% from fiscal 2002.  From essentially a breakeven position infiscal 2002, operating income increased to just short of $8.6 million in fiscal2003.  Fiscal 2002’s results werenegatively impacted by a six month long labor strike at our South Gate,California facility and by our no longer supplying high volume, low margin,high maintenance cost big-box retailers.**

# ** **

# **Late in the fiscal year yourBoard of Directors made the decision to discontinue the operations ofInternational Window-Colorado.  Sinceits acquisition in late calendar year 1998 Window-Colorado had not performed upto expectations and recently had incurred losses at an accelerated pace.  Although the closure resulted in ourincurring a significant loss from discontinued operations for the year, we havebeen able to substantially reduce forecasted group capital expenditurerequirements for fiscal 2004 by the transfer of major equipment items to ourother facilities.**

# ** **

# **Although the overall economyhas shown signs of weakness, interest rates continue at low levels.  New home construction is running at a ratenot seen in well over a decade and home improvement spending continues at arapid pace.  As we move forward infiscal 2004 we plan on building on the success of fiscal 2003.**

# ** **

# **Commercial Products**

# ** **

While the residential marketsremained generally robust throughout the year, the same cannot be said for thecommercial construction arena.  Salesfor this product segment declined 10% from fiscal 2002 which was in itself downmore than 5% from the preceding year. Operating income for the group declined 37.5% to $6,782,000 from fiscal2002’s operating income of $10,862,000. The commercial construction industry continued to face severalconstraints – a general sense of caution arising from the fragile economy, highvacancy rates for commercial properties and the sharply diminished fiscalhealth of the federal and state governments. Market conditions were verysimilar to those which existed in the late 80’s and early 90’s.  As commercial construction declined,competitive pressure forced sharply lower prices in order to maintain marketshare thereby significantly eroding margins.

 

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# **We continue to expand ourproduct offerings to meet the new testing protocols for high wind-zonehurricane prone regions.  Whatoriginally encompassed three counties in Southern Florida has now grown tonearly the entire Eastern seaboard around the Gulf states through Texas.  The events of September 11th haveintensified demand for blast resistant products for institutional andgovernment buildings.  Also underdevelopment are a thermal door line for the extreme Northern marketing areasand a single hung window line to complement the projected, fixed and casementwindow product lines introduced last year.**

# ** **

# **Extruded Products**

 

# **Our Extruded Products Groupcontinues to suffer from reduced demand and extremely competitive pricing.Total tonnage shipped to all customers, including intercompany, remained stablefor the year.  Net tonnage shipped tooutside customers increased approximately 13% over fiscal 2002 while revenuesincreased only 8% due to price competition. A very high percentage of our total volume is directed to thearchitectural building products so until there is improvement in the commercialbuilding environment we anticipate little improvement in net operatingresults.  During the past year ouremphasis has been on pursuing new business while at the same time stringentlycontrolling costs as evidenced by the near $2 million drop in operating loss ona $2.8 million drop in total revenues.**

# ** **

# **Financial Condition**

# ** **

# **We continue to maintain anextremely strong financial condition with no long-term debt and working capitalexceeding $60 million at yearend.  Havingcompleted an extensive three year $28 million capital expenditure program infiscal 2002, capital expenditures for fiscal 2004 are projected at $3,500,000,up from the $2,800,000 expended during 2003 but still well below our fiscal2003 non-cash depreciation charges of nearly $7 million.**

# ** **

 
| **Cornelius C.  Vanderstar** |   | **David C. Treinen**         |
|------------------------------|--------|------------------------------|
| **Chairman of the  Board**   |   | **President**                |
| **Chief Executive  Officer** |   | **Chief Operating  Officer** |

# ** **

September 5, 2003

 

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**SELECTED FINANCIAL DATA**

 
| **Year Ended  June 30**       |   | **2003**    |        | **2002**    |       | **2001**    |       | **2000**    |        | **1999**    |       |
|-------------------------------|--------|-------------|-------------|-------------|------------|-------------|------------|-------------|-------------|-------------|------------|
|                          |   |        | ** **  |        | ** ** |        | ** ** |        | ** **  |        | ** ** |
| **Sales by segment**          |   |        | ** **  |        | ** ** |        | ** ** |        | ** **  |        | ** ** |
| Commercial                    |   | $           | 97,345,000  |        | $          | 108,510,000 |       | $           | 114,436,000 |        | $          | 112,522,000 |   | $ | 124,839,000 |   |
| Residential                   |   | 53,586,000  |        | 44,352,000  |       | 52,822,000  |       | 52,766,000  |        | 45,491,000  |       |
| Aluminum Extrusion            |   | 41,618,000  |        | 38,567,000  |       | 40,085,000  |       | 46,686,000  |        | 56,417,000  |       |
| Total net sales               |   | $           | 192,549,000 |        | $          | 191,429,000 |       | $           | 207,343,000 |        | $          | 211,974,000 |   | $ | 226,747,000 |   |
|                          |   |        |        |        |       |        |       |        |        |        |       |
| **Earnings**                  |   |        |        |        |       |        |       |        |        |        |       |
| Gross profit                  |   | $           | 35,350,000  |        | $          | 33,999,000  |       | $           | 39,929,000  |        | $          | 38,873,000 |   | $ | 52,491,000 |   |
|                          |   |        |        |        |       |        |       |        |        |        |       |
| Continuing operations         |   | $           | 4,426,000   |        | $          | 1,485,000   |       | $           | 5,212,000   |        | $          | 1,274,000 |   | $ | 10,561,000 |   |
| Income (loss) from disc. ops. |   | (1,697,000  | )           | (1,533,000  | )          | (578,000    | )          | 305,000     |        | (222,000    | )          |
| Cum. effect of acctg. change  |   | —      |        | (7,935,000  | )          | —      |       | —      |        | —      |       |
| Net income (loss)             |   | $           | 2,729,000   |        | $          | (7,983,000  | )          | $           | 4,634,000   |        | $          | 1,579,000 |   | $ | 10,339,000 |   |
|                          |   |        |        |        |       |        |       |        |        |        |       |
| Per share:                    |   |        |        |        |       |        |       |        |        |        |       |
| Net income (loss)-Diluted     |   | $           | .64         |        | $          | (1.88       | )          | $           | 1.09        |        | $          | .37 |   | $ | 2.41 |   |
| Dividends declared            |   | 1.20        |        | 1.20        |       | 1.20        |       | 1.20        |        | 1.20        |       |
|                          |   |        |        |        |       |        |       |        |        |        |       |
| **Financial Data at Yearend** |   |        |        |        |       |        |       |        |        |        |       |
| Working capital               |   | $           | 62,929,000  |        | $          | 58,057,000  |       | $           | 66,097,000  |        | $          | 63,586,000 |   | $ | 69,030,000 |   |
| Total assets                  |   | 133,243,000 |        | 132,724,000 |       | 148,070,000 |       | 154,585,000 |        | 153,693,000 |       |
| Long-term debt                |   | —      |        | —      |       | —      |       | —      |        | —      |       |
| Shareholders’ equity     |   | 109,536,000 |        | 110,805,000 |       | 123,755,000 |       | 124,326,000 |        | 128,701,000 |       |

 

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**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

# **Significant Changes in Results ofOperations**

 

**2003vs. 2002**

Net sales for fiscal 2003increased by $1,120,000 or 0.6% from fiscal 2002.  Included is a $9,234,000 or 20.8% increase by the ResidentialProducts Group.  In addition to higherlevels of new home construction and home improvement remodeling, this increasereflects continued recovery of revenues lost due to last year’s trade unionstrike at our South Gate, California facility as well as replacing sales volumeformerly directed to large home improvement centers.  During the prior year the Residential subsidiaries ceased servingas a stocking supplier for these stores that we previously supplied on a regionalbasis.  Last year sales to large homeimprovement centers amounted to 9.0% of Residential segment sales compared toonly 2.2% for the current year.  Salesof the Aluminum Extrusion Group increased by $3,051,000 or 7.9% when comparedto last year.  Net tonnage shipped,particularly in the area served by our Texas facility, increased by 12.5%.  Although the U.S. market for aluminumextrusions remains sluggish, the Texas facility has benefited from expandedgeographic market penetration.  ThisGroup continues to experience strong pressure on pricing.  Sales of the Commercial Products Groupdeclined by $11,165,000 or 10.3% when compared to last year, reflective of thecontinued soft commercial construction market coupled with increasedcompetitive conditions.

 

Gross profit increased to 18.4%of sales in 2003 as compared to 17.8% in 2002. The Residential Products Group achieved significantly decreasedmaterial, labor and overhead cost percentages compared to the prior year,reflecting the substantially higher sales volume and the continued recoveryfrom prior year’s strike related

 

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inefficiencies.  The Aluminum Extrusion Group alsoexperienced decreased cost percentages as production efficiencies gained fromthe higher tonnage offset lower per unit sales prices.  Partially offsetting these decreases werehigher cost percentages incurred at the Commercial Products Group due to lowersales prices resulting from an increasingly competitive marketplace.  The heightened competition for the reducednumber of major projects during this year has especially impacted our UnitedStates Aluminum facility in Texas.

 

Selling, general andadministrative expenses decreased by $3,595,000 to 14.8% of sales in fiscal2003 as compared to 16.7% in fiscal 2002. Excluding a $631,000 gain on the sale of a former operating facilitythat was recognized during the first quarter last year, the overall decreasewould have been $4,226,000.  Of thisdecrease, $1,958,000 is attributable to retrospective workers’ compensationpolicies which provided income of $1,064,000 in fiscal 2003 compared to expenseof $894,000 in fiscal 2002.  This swingresults from anticipated refunds of previously expensed premiums due tofavorable changes in actual and projected claim activity.  The $2,268,000 remainder of the decreaseprimarily reflects reduced employment and advertising costs as well as theprior year containing some additional costs for strike related security andlegal services.

 

Net interest expense decreasedcompared to the prior year reflecting lower utilization of our foreign lines ofcredit.

 

The effective tax rateincreased to 35.7% in fiscal 2003 compared to 23.1% last year.  The prior year was abnormally low due toavailable tax credits offsetting a lower income base.

 

**2002vs. 2001**

Net sales for fiscal 2002decreased by $15,914,000 or 7.7% from fiscal 2001.  The economic slowdown has been felt to varying

 

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degrees at all of our operatinggroups.  Included is an $8,470,000 or16.0% decrease by the Residential Products Group.  A prolonged trade union strike at our South Gate, Californiafacility limited our ability to maintain normal delivery schedules to ourcustomers in the territory serviced from this location.  This led directly to the loss of a largehome improvement chain that was supplied on a regional basis and at mid-yearhad accounted for 14% of residential group sales.  Strike related service, quality, and delivery problems also resultedin some customers temporarily shifting to alternative suppliers during theheart of the strike.  The striketerminated in March with an unconditional offer to return to work.  Sales for the Commercial Products Groupdeclined $5,926,000 or 5.2%.  Most allof the North American marketing areas experienced declines as the softening inthe commercial construction industry continued to take its toll.  Sales for the Aluminum Extrusion Groupdecreased $1,518,000 or 3.8% when compared to last year as they experiencedcontinued pressure on volume and prices. Although overall group sales were down, demand strengthened during thelast half of the year in the area served by our Texas facility.

 

Gross profit decreased to 17.8%of sales in 2002 as compared to 19.3% in 2001. Several factors contributed to this decline.  Due to the aforementioned strike, the Residential Products Groupincurred higher costs due to production inefficiencies resulting from thehiring and training of replacement personnel. In addition, higher labor and overhead costs, including significantlyincreased utility costs, were incurred at our California extrusion facility astheir decline in overall volume increased unit cost of production.  An increase in overall labor costs alsoreflects a significant swing from last year’s recovery to additional expensethis year for current year workers’ compensation claims.

 

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Selling, general andadministrative expenses increased to 16.7% of sales in fiscal 2002 as comparedto 15.4% in fiscal 2001.  The increasereflects additional expense for retrospective workers’ compensation adjustmentsfor prior year claims and strike related high security and legal costs. Partiallyoffsetting these costs was a reduction in employment related costs and thediscontinuance of goodwill amortization (see Note 12).

 

Net interest expense decreasedcompared to the prior year reflecting lower utilization of our domestic line ofcredit.

 

The effective tax ratedecreased to 23.1% in fiscal 2002 compared to 34.8% last year.  This decline reflects available tax creditsoffsetting a lower income base.

 

**Liquidityand Capital Resources**

Working capital at June 30, 2003 was$62,929,000 compared to $58,057,000 at June 30, 2002 and $66,097,000 atJune 30, 2001.  The ratio ofcurrent assets to current liabilities was 4.6 at the end of 2003 compared to4.6 at the end of 2002 and 4.4 at the end of 2001.  The Company continues to be in excellent position to meet itsshort-term operating and discretionary cash requirements.  Funds in excess of current operatingrequirements are invested in short-term interest-bearing instruments.

 

Capital expenditures for property, plant andequipment of approximately $2,847,000 in 2003, $11,848,000 in 2002 and$7,712,000 in 2001 were financed through internal cash flow and cashreserves.  Cash flows include proceedsfor sales of excess facilities of $2,450,000 in fiscal 2003, $1,655,000 infiscal 2002 and $3,060,000 in fiscal 2001. The Company projects net capital expenditures of $3,500,000 for fiscal2004.  These expenditures are forexpansion of production capacity as well as normal recurring capitalizedreplacement items.

 

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The Company anticipates financing theseexpenditures through internal cash flow and cash reserves.

 

The Company had $20,000,000 in availablecredit at the end of 2003 under a short-term borrowing arrangement with adomestic bank.

 

The Company’s financialcondition remains strong.  The Companybelieves that its cash, other liquid assets, operating cash flows and borrowingcapacity, taken together, provide more than adequate resources to fund ongoingoperating requirements and future capital expenditures related to the expansionof existing businesses.

 

**CriticalAccounting Policies**

The summary of Accounting Policies within theNotes to the Consolidated Financial Statements includes the significantpolicies and procedures used in the preparation of the Company’s consolidatedfinancial statements.  The following isa discussion of each of the Company’s critical accounting policies:

 

## *Revenue Recognition*

Sales are recognized whenproducts are shipped or when services are provided assuming no significantCompany obligations remain and the collection of related receivables isprobable.  Revenue recognition onproduct sales is not subject to significant estimates, as the Company has notexperienced significant product returns.

 

*Valuation of Receivables*

The Company maintains allowances for doubtful****accounts for estimated losses resultingfrom the****inability of itscustomers to make required****payments.  The Company performs ongoing credit****evaluations of its customers.  If the financial****condition of the Company’s customers were to****deteriorate, resulting in an impairment oftheir****ability to make payments,additional allowances may****berequired.  Changes in the creditworthiness of****customers, generaleconomic conditions and other****factorsmay

 

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impact the level of future write-offs.

 

### ***Valuation of Inventory***

The Company periodicallyreviews inventory items and overall stocking levels to ensure that adequatereserves exist for inventory deemed obsolete or excessive.  In making this determination, the Companyconsiders historical stocking levels, recent sales of similar items andanticipated demand for these items. Changes in factors such as customer demand, new product offerings andother matters could affect the level of inventory obsolescence in the future.

 

**Current andPending Accounting Changes**

 

In November 2002, the FASB issued FinancialInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantee of Indebtedness of Others” (FIN45).  The disclosure requirements areeffective for financial statements of interim or annual periods ending afterDecember 15, 2002.  The impact of suchadoption did not have a material effect on the Company’s financial statements.  See Note 11 for additional information.

 

In January 2003, the FASBissued Financial Interpretation No. 46, “Consolidation of Variable InterestEntities” (FIN 46).  FIN 46 is aninterpretation of Accounting Research Bulletin 51, “Consolidated FinancialStatements”, and addresses consolidation by business enterprises of variableinterest entities (VIE’s).  The Companydoes not hold any interest in VIE’s and therefore the adoption of thisinterpretation will not impact the Company’s consolidated financial statements.  See Note 11 for additional information.

 

In January 2003, the FASB issued SFASNo. 148, “Accounting for Stock-Based Compensation-Transition andDisclosure, an amendment of FASB Statement No. 123.” SFAS No. 148 providesalternative methods of

 

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transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. It alsorequires disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. SFAS No. 148 is effective for annualand interim periods beginning after December 15, 2002. As the Company haselected not to change to the fair value based method of accounting for stock-basedemployee compensation, the adoption of SFAS No. 148 will not impact thefinancial condition or results of operations.

 

The Company applies APB Opinion25 and related interpretations in accountingfor stock options granted to employees and, accordingly, does not recognizecompensation cost for grants whose exercise price equals the market price ofthe stock on the date of grant.  Therewould have been no change to reported net income and earnings per share amountshad the Company elected to recognize compensation cost based on the fair valueof the options granted at the grant date as prescribed by SFAS No. 123,“Accounting for Stock-Based Compensation”, due to the lack of option grantsduring the last five years, the typical vesting period of the Company’soptions.

 

In May 2003, the FASB issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity”.  As the Companyhas not issued such instruments adoption of this statement will not have animpact on reported results.  See Note 11for additional information.

 

**Forward-LookingInformation**

This annual report contains forward-lookingstatements with respect to the financial condition, results of operations andbusiness of the Company.  Such items aresubject to certain risks and uncertainties that could cause actual results todiffer materially from those set forth in such statements. Readers arecautioned not to place undue reliance on these forward-looking statements,which speak only as of the date the statement was made.  The Company undertakes no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise.

 

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**QUARTERLYFINANCIAL DATA (UNAUDITED)**

For the years ended June 30,2003 and 2002

 
|                                     |   | **First  Quarter** |       | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |       |
|------------------------------------------|--------|--------------------|------------|---------------------|--------|--------------------|--------|---------------------|------------|
| **2003**                                 |   |               |       |                |   |               |   |                |       |
| Net sales                                |   | $                  | 49,144,000 |                | $      | 45,784,000         |   | $                   | 47,648,000 |   | $ | 49,973,000 |   |
| Gross profit                             |   | 9,606,000          |       | 7,106,000           |   | 9,103,000          |   | 9,535,000           |       |
| Income from continuing operations        |   | 912,000            |       | 839,000             |   | 1,129,000          |   | 1,546,000           |       |
| Net income                               |   | 699,000            |       | 662,000             |   | 907,000            |   | 461,000             |       |
| Earnings per share - Basic and Diluted:  |   |               |       |                |   |               |   |                |       |
| Continuing operations                    |   | .21                |       | .20                 |   | .27                |   | .36                 |       |
| Net income                               |   | .16                |       | .16                 |   | .21                |   | .11                 |       |
| Dividends declared                       |   | .30                |       | .30                 |   | .30                |   | .30                 |       |
| Stock price - High                       |   | 20.51              |       | 19.49               |   | 18.74              |   | 22.20               |       |
| Stock price - Low                        |   | 16.05              |       | 16.30               |   | 17.21              |   | 18.15               |       |
|                                     |   |               |       |                |   |               |   |                |       |
| **2002**                                 |   |               |       |                |   |               |   |                |       |
| Net sales                                |   | $                  | 52,555,000 |                | $      | 46,608,000         |   | $                   | 46,065,000 |   | $ | 46,201,000 |   |
| Gross profit                             |   | 9,698,000          |       | 7,549,000           |   | 8,362,000          |   | 8,390,000           |       |
| Income (loss) from continuing operations |   | 1,210,000          |       | (655,000            | )      | 521,000            |   | 409,000             |       |
| Net income (loss)                        |   | (7,003,000         | )          | (1,611,000          | )      | 392,000            |   | 239,000             |       |
| Earnings per share - Basic and Diluted:  |   |               |       |                |   |               |   |                |       |
| Continuing operations                    |   | .28                |       | (.15                | )      | .12                |   | .10                 |       |
| Net income (loss)                        |   | (1.65              | )          | (.38                | )      | .09                |   | .06                 |       |
| Dividends declared                       |   | .30                |       | .30                 |   | .30                |   | .30                 |       |
| Stock price - High                       |   | 26.68              |       | 25.15               |   | 23.85              |   | 22.07               |       |
| Stock price - Low                        |   | 21.05              |       | 21.20               |   | 15.50              |   | 18.50               |       |

 

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**REPORT OFINDEPENDENT AUDITORS**

 

To the Board of Directors and Shareholders of

International Aluminum Corporation

 

In our opinion, the accompanying consolidatedbalance sheets and the related consolidated statements of income, cash flowsand shareholders’ equity present fairly, in all material respects, thefinancial position of International Aluminum Corporation and its subsidiariesat June 30, 2003 and 2002, and the results of their operations and their cashflows for each of the three years in the period ended June 30, 2003, inconformity with accounting principles generally accepted in the United Statesof America.  These financial statementsare the responsibility of the Company’s management; our responsibility is toexpress an opinion on these financial statements based on our audits.  We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United Statesof America, which require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts and disclosuresin the financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

As discussed in Note 12, the Company adoptedStatement of Financial Accounting Standards No. 142, “ Goodwill and OtherIntangible Assets”.  Accordingly, theCompany ceased amortizing goodwill as of July 1, 2001.

 

PricewaterhouseCoopers LLPLos Angeles, CaliforniaAugust 22, 2003

 

16

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**CONSOLIDATEDSTATEMENTS OF INCOME**

For the years ended June 30,2003, 2002 and 2001

 
|                                                  |   | **2003**    |        | **2002**    |   | **2001**    |   |
|-------------------------------------------------------|--------|-------------|-------------|-------------|--------|-------------|--------|
| Net sales                                             |   | $           | 192,549,000 |        | $      | 191,429,000 |   | $ | 207,343,000 |   |
| Cost of sales                                         |   | 157,199,000 |        | 157,430,000 |   | 167,414,000 |   |
| Gross profit                                          |   | 35,350,000  |        | 33,999,000  |   | 39,929,000  |   |
| Selling, general and administrative expenses          |   | 28,448,000  |        | 32,043,000  |   | 31,843,000  |   |
| Income from operations                                |   | 6,902,000   |        | 1,956,000   |   | 8,086,000   |   |
| Interest income                                       |   | 11,000      |        | 44,000      |   | 71,000      |   |
| Interest expense                                      |   | (26,000     | )           | (69,000     | )      | (155,000    | )      |
| Income from continuing operations before income taxes |   | 6,887,000   |        | 1,931,000   |   | 8,002,000   |   |
| Provision for income taxes                            |   | 2,461,000   |        | 446,000     |   | 2,790,000   |   |
| Income from continuing operations                     |   | 4,426,000   |        | 1,485,000   |   | 5,212,000   |   |
| Loss from discontinued operations                     |   | (1,697,000  | )           | (1,533,000  | )      | (578,000    | )      |
| Cumulative effect of accounting change                |   | —      |        | (7,935,000  | )      | —      |   |
| Net income (loss)                                     |   | $           | 2,729,000   |        | $      | (7,983,000  | )      | $ | 4,634,000 |   |
|                                                  |   |        |        |        |   |        |   |
| Earnings per share - Basic and Diluted:               |   |        |        |        |   |        |   |
| Continuing operations                                 |   | $           | 1.04        |        | $      | .35         |   | $ | 1.23 |   |
| Discontinued operations                               |   | (.40        | )           | (.36        | )      | (.14        | )      |
| Cumulative effect of accounting change                |   | —      |        | (1.87       | )      | —      |   |
| Total                                                 |   | $           | .64         |        | $      | (1.88       | )      | $ | 1.09 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

17

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**CONSOLIDATEDBALANCE SHEETS**

June 30, 2003 and 2002

 
|                                                                            |   | **2003**    |        | **2002**    |   |
|---------------------------------------------------------------------------------|--------|-------------|-------------|-------------|--------|
| **Assets**                                                                      |   |        |        |        |   |
|                                                                            |   |        |        |        |   |
| Current assets:                                                                 |   |        |        |        |   |
| Cash and cash equivalents                                                       |   | $           | 12,570,000  |        | $      | 3,495,000 |   |
| Accounts receivable, less reserve of  $1,384,000 in 2003 and $1,092,000 in 2002 |   | 34,336,000  |        | 31,811,000  |   |
| Inventories                                                                     |   | 28,551,000  |        | 33,401,000  |   |
| Prepaid expenses and deposits                                                   |   | 2,583,000   |        | 3,665,000   |   |
| Future income tax benefits                                                      |   | 2,239,000   |        | 1,675,000   |   |
| Total current assets                                                            |   | 80,279,000  |        | 74,047,000  |   |
|                                                                            |   |        |        |        |   |
| Property, plant and equipment, at cost                                          |   | 120,829,000 |        | 122,759,000 |   |
| Accumulated depreciation                                                        |   | (68,999,000 | )           | (65,466,000 | )      |
| Net property, plant and equipment                                               |   | 51,830,000  |        | 57,293,000  |   |
|                                                                            |   |        |        |        |   |
| Other assets:                                                                   |   |        |        |        |   |
| Costs in excess of net assets of purchased businesses                           |   | 605,000     |        | 1,030,000   |   |
| Other                                                                           |   | 529,000     |        | 354,000     |   |
| Total other assets                                                              |   | 1,134,000   |        | 1,384,000   |   |
|                                                                            |   | $           | 133,243,000 |        | $      | 132,724,000 |   |
|                                                                            |   |        |        |        |   |
| **Liabilities and Shareholders’ Equity**                                   |   |        |        |        |   |
|                                                                            |   |        |        |        |   |
| Current liabilities:                                                            |   |        |        |        |   |
| Accounts payable                                                                |   | $           | 7,407,000   |        | $      | 6,575,000 |   |
| Accrued liabilities                                                             |   | 9,054,000   |        | 8,295,000   |   |
| Advances payable to banks                                                       |   | 590,000     |        | 1,034,000   |   |
| Income taxes payable                                                            |   | 299,000     |        | 86,000      |   |
| Total current liabilities                                                       |   | 17,350,000  |        | 15,990,000  |   |
|                                                                            |   |        |        |        |   |
| Deferred income taxes                                                           |   | 6,357,000   |        | 5,929,000   |   |
| Total liabilities                                                               |   | 23,707,000  |        | 21,919,000  |   |
|                                                                            |   |        |        |        |   |
| Commitments (Note 4)                                                            |   |        |        |        |   |
|                                                                            |   |        |        |        |   |
| Shareholders’ equity:                                                      |   |        |        |        |   |
| Common stock                                                                    |   | 4,765,000   |        | 4,765,000   |   |
| Paid-in capital                                                                 |   | 4,123,000   |        | 4,123,000   |   |
| Retained earnings                                                               |   | 99,576,000  |        | 101,941,000 |   |
| Accumulated other comprehensive income                                          |   | 1,072,000   |        | (24,000     | )      |
| Total shareholders’ equity                                                 |   | 109,536,000 |        | 110,805,000 |   |
|                                                                            |   | $           | 133,243,000 |        | $      | 132,724,000 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

18

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# **CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

For the years ended June 30,2003, 2002 and 2001

 
|                                           |   | **2003**   |       | **2002**    |   | **2001**    |   |
|------------------------------------------------|--------|------------|------------|-------------|--------|-------------|--------|
|                                           |   |       |       |        |   |        |   |
| Cash flows from operating activities:          |   |       |       |        |   |        |   |
| Net income (loss)                              |   | $          | 2,729,000  |        | $      | (7,983,000  | )      | $ | 4,634,000 |   |
| Adjustments for noncash transactions:          |   |       |       |        |   |        |   |
| Depreciation and amortization                  |   | 6,985,000  |       | 6,988,000   |   | 7,511,000   |   |
| Change in deferred income taxes                |   | (91,000    | )          | 608,000     |   | 174,000     |   |
| Gain on sale of fixed assets                   |   | —     |       | (631,000    | )      | (390,000    | )      |
| Loss on discontinued operations                |   | 1,144,000  |       | 1,175,000   |   | —      |   |
| Cumulative effect of accounting change         |   | —     |       | 7,935,000   |   | —      |   |
| Changes in assets and liabilities:             |   |       |       |        |   |        |   |
| Receivables                                    |   | (2,362,000 | )          | 5,798,000   |   | 2,217,000   |   |
| Inventories                                    |   | 3,894,000  |       | 3,392,000   |   | 5,609,000   |   |
| Prepaid expenses and other                     |   | 899,000    |       | (1,270,000  | )      | 416,000     |   |
| Accounts payable                               |   | 570,000    |       | (2,687,000  | )      | 2,772,000   |   |
| Accrued liabilities                            |   | 745,000    |       | (1,052,000  | )      | (105,000    | )      |
| Income taxes payable                           |   | 202,000    |       | (430,000    | )      | 272,000     |   |
| Net cash provided by operating activities      |   | 14,715,000 |       | 11,843,000  |   | 23,110,000  |   |
|                                           |   |       |       |        |   |        |   |
| Cash flows from investing activities:          |   |       |       |        |   |        |   |
| Capital expenditures                           |   | (2,847,000 | )          | (11,848,000 | )      | (7,712,000  | )      |
| Proceeds from sales of capital assets          |   | 2,824,000  |       | 1,810,000   |   | 3,234,000   |   |
| Net cash used in investing activities          |   | (23,000    | )          | (10,038,000 | )      | (4,478,000  | )      |
|                                           |   |       |       |        |   |        |   |
| Cash flows from financing activities:          |   |       |       |        |   |        |   |
| Dividends paid to shareholders                 |   | (5,094,000 | )          | (5,094,000  | )      | (5,094,000  | )      |
| Net borrowings under lines of credit           |   | (575,000   | )          | 869,000     |   | (9,294,000  | )      |
| Net cash used in financing activities          |   | (5,669,000 | )          | (4,225,000  | )      | (14,388,000 | )      |
|                                           |   |       |       |        |   |        |   |
| Effect of exchange rate changes                |   | 52,000     |       | —      |   | (7,000      | )      |
|                                           |   |       |       |        |   |        |   |
| Net change in cash and cash equivalents        |   | 9,075,000  |       | (2,420,000  | )      | 4,237,000   |   |
| Cash and cash equivalents at beginning of year |   | 3,495,000  |       | 5,915,000   |   | 1,678,000   |   |
| Cash and cash equivalents at end of year       |   | $          | 12,570,000 |        | $      | 3,495,000   |   | $ | 5,915,000 |   |
|                                           |   |       |       |        |   |        |   |
| Supplemental cash flow information:            |   |       |       |        |   |        |   |
| Interest payments                              |   | $          | 28,000     |        | $      | 67,000      |   | $ | 242,000 |   |
| Income tax payments                            |   | $          | 1,596,000  |        | $      | 1,011,000   |   | $ | 1,841,000 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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# **CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**

For the years ended June 30,2003, 2002 and 2001

 
|                       |       | **Common  Stock** |       | **Paid-in  Capital** |      | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Income** |   | **Total** |        |
|----------------------------|------------|-------------------|------------|----------------------|-----------|------------------------|--------|-----------------------------------------------|--------|-----------|-------------|
|                       |       |              |       |                 |      |
|                       |       |              |       |                 |      |
|                       | **Shares** |              | **Amount** |                 |      |                   |   |                                          |
|                       |       |              |       |                 |      |                   |   |                                          |   |      |        |   |   |
| Balance, June 30, 2000     |       | 4,244,794         |       | $                    | 4,765,000 |                   | $      | 4,123,000                                     |   | $         | 115,478,000 |   | $ | (40,000 | ) | $ | 124,326,000 |   |
|                       |       |              |       |                 |      |                   |   |                                          |   |      |        |   |   |
| Net income                 |       |              |       |                 |      |                   |   | 4,634,000                                     |   |      |        | 4,634,000 |   |
| Translation adjustment     |       |              |       |                 |      |                   |   |                                          |   | (111,000  | )           | (111,000 | ) |
| Total comprehensive income |       |              |       |                 |      |                   |   |                                          |   |      |        | 4,523,000 |   |
| Cash dividends             |       |              |       |                 |      |                   |   | (5,094,000                                    | )      |      |        | (5,094,000 | ) |
| Balance, June 30, 2001     |       | 4,244,794         |       | 4,765,000            |      | 4,123,000              |   | 115,018,000                                   |   | (151,000  | )           | 123,755,000 |   |
|                       |       |              |       |                 |      |                   |   |                                          |   |      |        |   |   |
| Net loss                   |       |              |       |                 |      |                   |   | (7,983,000                                    | )      |      |        | (7,983,000 | ) |
| Translation adjustment     |       |              |       |                 |      |                   |   |                                          |   | 127,000   |        | 127,000 |   |
| Total comprehensive income |       |              |       |                 |      |                   |   |                                          |   |      |        | (7,856,000 | ) |
| Cash dividends             |       |              |       |                 |      |                   |   | (5,094,000                                    | )      |      |        | (5,094,000 | ) |
| Balance, June 30, 2002     |       | 4,244,794         |       | 4,765,000            |      | 4,123,000              |   | 101,941,000                                   |   | (24,000   | )           | 110,805,000 |   |
|                       |       |              |       |                 |      |                   |   |                                          |   |      |        |   |   |
| Net income                 |       |              |       |                 |      |                   |   | 2,729,000                                     |   |      |        | 2,729,000 |   |
| Translation adjustment     |       |              |       |                 |      |                   |   |                                          |   | 1,096,000 |        | 1,096,000 |   |
| Total comprehensive income |       |              |       |                 |      |                   |   |                                          |   |      |        | 3,825,000 |   |
| Cash dividends             |       |              |       |                 |      |                   |   | (5,094,000                                    | )      |      |        | (5,094,000 | ) |
| Balance, June 30, 2003     |       | 4,244,794         |       | $                    | 4,765,000 |                   | $      | 4,123,000                                     |   | $         | 99,576,000  |   | $ | 1,072,000 |   | $ | 109,536,000 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

20

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1.  Significant Accounting Policies andProcedures**

 

**Descriptionof Business and Principles of Consolidation**

 

International AluminumCorporation (the Company) is an integrated building products manufacturer ofdiversified lines of quality aluminum and vinyl products.  The consolidated financial statementsinclude the accounts of the Company and its domestic and foreign subsidiaries.  All significant intercompany transactionsand accounts have been eliminated in consolidation.  Certain reclassifications of prior year information were made toconform to the current presentation.

 

# **Revenue Recognition**

 

Sales are recognized whenproducts are shipped or services are provided assuming no significant Companyobligations remain and the collection of related receivables is probable.

 

**Estimatesand Assumptions**

 

The preparation of the consolidated financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes.  Actual results could differ from those estimates.

 

**Cash andCash Equivalents**

 

Cash and cash equivalents include cash on handand marketable securities with original maturities of three months or less.

 

**ForeignCurrency Translation**

 

Assets and liabilities of the Company’sforeign subsidiaries are translated into U.S. dollars at year-end exchangerates and revenues and expenses are translated at average rates prevailingduring the year.  Local currency isconsidered to be the functional currency. Translation adjustments are deferred into accumulated othercomprehensive income, a separate component of shareholders’ equity.  Foreign currency transaction gains andlosses are included in results of operations as incurred.

 

**Depreciationand Amortization**

 

Depreciation and amortization are providedover the estimated useful lives of the assets (up to 40 years for buildings and3 to 20 years for machinery and equipment) or the remaining terms of theleases, whichever is shorter, using the straight-line method for financialreporting purposes and accelerated methods for tax purposes.

 

The excess of the purchase price over theunderlying book value of the companies acquired is classified as “Costs inexcess of net assets of purchased businesses”. Upon adoption of FAS No. 142 in fiscal 2002, the amortization of thesecosts was discontinued.  At June 30,2003 

 

21

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the related amount of $1,171,000 hadaccumulated amortization of $566,000. At June 30, 2002 the related amount of $1,745,000 had accumulatedamortization of $715,000.  The decreaseduring 2003 relates to the discontinued operations of InternationalWindow-Colorado (see Note 8).

 

**InvestmentTax Credits**

 

Investment tax credits areaccounted for in the period earned in accordance with the flow-through method.

 

**Long-LivedAssets**

 

Whenever events indicate that the carryingvalues of long-lived assets including any related goodwill may not berecoverable, the Company evaluates the carrying values of such assets usingfuture undiscounted cash flows. Management believes that, as of June 30, 2003, the carrying values ofsuch assets are appropriate.

 

# **Shipping and Handling Fees and Costs**

 

Shipping and handling charges incurred by theCompany are included in Cost of Sales and shipping charges billed to customersare included in Net Sales.

 

 

**Note 2.  Balance Sheet Components**

 
| **Inventories, at the Lower of FIFO Cost or Market** |   | **2003**  |       | **2002**  |   |
|------------------------------------------------------|--------|-----------|------------|-----------|--------|
| Raw materials                                        |   | $         | 23,374,000 |      | $      | 28,576,000 |   |
| Work in process                                      |   | 430,000   |       | 560,000   |   |
| Finished goods                                       |   | 4,747,000 |       | 4,265,000 |   |
|                                                 |   | $         | 28,551,000 |      | $      | 33,401,000 |   |

 
| **Property, Plant and Equipment, at Cost** |   | **2003**   |        | **2002**   |   |
|--------------------------------------------|--------|------------|-------------|------------|--------|
| Land                                       |   | $          | 6,846,000   |       | $      | 7,665,000 |   |
| Buildings and improvements                 |   | 29,448,000 |        | 29,900,000 |   |
| Machinery and equipment                    |   | 84,451,000 |        | 84,636,000 |   |
| Construction in process                    |   | 84,000     |        | 558,000    |   |
|                                       |   | $          | 120,829,000 |       | $      | 122,759,000 |   |

 

22

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| **Accrued Liabilities**        |   | **2003**  |      | **2002**  |   |
|--------------------------------|--------|-----------|-----------|-----------|--------|
| Wages and compensated absences |   | $         | 4,704,000 |      | $      | 4,064,000 |   |
| Taxes, other than income taxes |   | 1,470,000 |      | 1,447,000 |   |
| Dividends                      |   | 1,273,000 |      | 1,273,000 |   |
| Other                          |   | 1,607,000 |      | 1,511,000 |   |
|                           |   | $         | 9,054,000 |      | $      | 8,295,000 |   |

 

**Note 3.  Short-Term Debt and Lines of Credit**

 

The Company has a loan agreement with adomestic bank providing for a $20,000,000 unsecured short-term line of credit.There were no amounts outstanding under the agreement at June 30, 2003 or June30, 2002.  Additionally the Company’sforeign subsidiaries have loan agreements with foreign banks providing for$1,850,000 in secured short-term lines of credit, at the prevailing Canadianprime interest rate (5.0%).  There was$590,000 outstanding under the foreign agreements at June 30, 2003 and$1,034,000 outstanding at June 30, 2002.

 

**Note 4.  Commitments**

 

The Company is committed under real propertylease agreements expiring at various dates to 2008.  Certain of the leases have renewal options for periods up to fiveyears and others provide for rent revisions at various dates.  Under the leases the Company is obligated topay property taxes, insurance and maintenance. All facility leases are classified as operating leases.

 

Real property rental expensewas $991,000 in 2003, $1,000,000 in 2002 and $1,065,000 in 2001.  Real property rental commitments are$885,000 in 2004, $670,000 in 2005, $448,000 in 2006, $159,000 in 2007 and$88,000 in 2008.

 

**Note 5.  Stock Options**

 

The Company granted stock options for thepurchase of common stock to certain executive and managerial employees underthe Company’s 1991 Stock Option Plan, whose expired granting authority has beentransferred to the successor plan, the 2001 Stock Option Plan.  Options have an exercise price equal to themarket price of the stock on the date of grant, a term of ten years andgenerally become exercisable over a five-year period.  The Company applies APB Opinion 25 and related Interpretations inaccounting for the plan, accordingly, no compensation cost has been recognizedfor those stock options. There would have been no material change in reportednet income and earnings per share had compensation cost been determined basedon the fair value at the grant dates as prescribed by SFAS 123, “Accounting forStock-Based Compensation”.  Thetransactions for shares under options for the three years ended June 30, 2003were:

 

23

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|                                       |   | **Outstanding**       |   | **Exercisable**                      |   |
|--------------------------------------------|--------|-----------------------|--------|--------------------------------------|--------|
|                                       |   | **Number Of  Shares** |   | **Weighted-Average  Exercise Price** |   | **Number Of  Shares** |   | **Weighted-Average  Exercise Price** |   |
| Outstanding, June 30, 2000                 |   | 147,700               |   | $                                    | 28.76  |   | 103,300 |   | $ | 28.43 |   |
| Forfeited                                  |   | (27,200               | )      | 29.64                                |   |   |   |   |   |
| Outstanding, June 30, 2001                 |   | 120,500               |   | 28.56                                |   | 111,100 |   | 28.36 |   |
| Forfeited                                  |   | (12,500               | )      | 28.71                                |   |   |   |   |   |
| Outstanding, June 30, 2002                 |   | 108,000               |   | 28.54                                |   | 103,800 |   | 28.45 |   |
| Forfeited                                  |   | —                |   |                                 |   |   |   |   |   |
| Outstanding, June 30, 2003                 |   | 108,000               |   | 28.54                                |   | 108,000 |   | 28.54 |   |
|                                       |   |                  |   |                                 |   |   |   |   |   |
| Stock Option Summary at June 30, 2003:     |   |                  |   |                                 |   |   |   |   |   |
| $28.00-$31.56  (Life: 2.4-4.6  years) |   | 108,000               |   | 28.54                                |   | 108,000 |   | 28.54 |   |
| Available for future grants                |   | 389,700               |   |                                 |   |   |   |   |   |
|                                            |        |                       |        |                                      |        |  |  |  |  |  |  |

 

**Note 6.  Earnings Per Share**

 

Basic earnings per share is computed bydividing net income by the weighted average number of shares of common stockoutstanding.  Diluted earnings per shareis computed by dividing net income by the weighted average common andpotentially dilutive common equivalent shares outstanding determined asfollows:

 
|                                                           |   | **2003**  |   | **2002**  |   | **2001**  |   |
|----------------------------------------------------------------|--------|-----------|--------|-----------|--------|-----------|--------|
| Weighted average shares outstanding used to compute basic EPS  |   | 4,244,794 |   | 4,244,794 |   | 4,244,794 |   |
| Incremental shares issuable upon the exercise of stock options |   | —    |   | —    |   | —    |   |
| Shares used to compute diluted EPS                             |   | 4,244,794 |   | 4,244,794 |   | 4,244,794 |   |

 

Incremental shares issuable upon the assumedexercise of outstanding stock options are computed using the average marketprice during the related period.

 

**Note 7.  Capital Stock**

 

The Company has 500,000 shares of preferredstock authorized, with a $10 par value, of which none is outstanding.  There are 10,000,000 shares of common stockauthorized, $1 par value, of which there were 4,244,794 shares outstanding atJune 30, 2003 and 2002.

 

24

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**Note 8.  Acquisitions and Divestitures**

 

During the fourth quarter ofthe current year, the Company ceased operations of InternationalWindow-Colorado, a vinyl window and door subsidiary, which was a component ofthe Residential Products segment.  Inaccordance with SFAS   No.144, International Window-Colorado isaccounted for as a discontinued operation, therefore, amounts in the incomestatements and related notes for all periods shown have been restated toreflect discontinued operations accounting. Included in International Window-Colorado results for the current year are$1,320,000 of charges related to the write down of various assets, primarilyinventory and goodwill.  Related assetsheld for sale are $144,000 of inventory and $236,000 of machinery andequipment.

 

During the second quarter of fiscal 2002, theCompany ceased operations of Maestro Products, its wood window and doorsubsidiary, which was a component of the Residential Products segment.  In accordance with SFAS No. 144, MaestroProducts was accounted for as a discontinued operation, therefore, amounts in theincome statements and related notes for all periods shown have been restated toreflect discontinued operations accounting. Included in Maestro Products results for the prior year are $1,175,000of charges related to the write down of various assets, primarilyinventory.  Due primarily to favorableresults experienced in selling Maestro’s facilities, the Company recognized apre-tax gain of $176,000 in fiscal 2003 which has also been classified asdiscontinued operations.  The Companydoes not anticipate any further activity with respect to Maestro in the future.

 

Summarized results of the discontinuedbusinesses are shown separately as discontinued operations in the accompanyingincome statements.  Results of thediscontinued operations, in thousands of dollars, are as follows:

 
|                                  |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net sales                             |   | $        | 1,787  |     | $      | 3,697    |   | $ | 5,462 |   |
|                                  |   |     |   |     |   |     |   |
| Loss before income taxes              |   | $        | (2,638 | )        | $      | (2,379   | )      | $ | (888 | ) |
| Income tax provision (benefit)        |   | (941     | )      | (846     | )      | (310     | )      |
| Net loss from discontinued operations |   | $        | (1,697 | )        | $      | (1,533   | )      | $ | (578 | ) |
|                                  |   |     |   |     |   |     |   |
| Earnings per share:                   |   |     |   |     |   |     |   |
| Discontinued operations - Diluted     |   | $        | (.40   | )        | $      | (.36     | )      | $ | (.14 | ) |

 

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# **Note 9. Income Taxes**

 

The components of income beforeUnited States and foreign income taxes are:

 
|     |   | **2003** |      | **2002** |   | **2001**   |   |
|----------|--------|----------|-----------|----------|--------|------------|--------|
| Domestic |   | $        | 4,491,000 |     | $      | (8,365,000 | )      | $ | 6,495,000 |   |
| Foreign  |   | (242,000 | )         | (18,000  | )      | 619,000    |   |
|     |   | $        | 4,249,000 |     | $      | (8,383,000 | )      | $ | 7,114,000 |   |

 

The provision for income taxes is comprised ofthe following:

 
|                            |   | **2003**  |      | **2002**   |   | **2001**  |   |
|---------------------------------|--------|-----------|-----------|------------|--------|-----------|--------|
| Current -                       |   |      |      |       |   |      |   |
| Federal                         |   | $         | 1,208,000 |       | $      | (945,000  | )      | $ | 1,857,000 |   |
| State                           |   | 261,000   |      | (337,000   | )      | 191,000   |   |
| Foreign                         |   | 187,000   |      | 274,000    |   | 258,000   |   |
|                            |   | 1,656,000 |      | (1,008,000 | )      | 2,306,000 |   |
| Deferred -                      |   |      |      |       |   |      |   |
| Federal                         |   | 214,000   |      | 918,000    |   | 200,000   |   |
| State                           |   | (31,000   | )         | 19,000     |   | (2,000    | )      |
| Foreign                         |   | (319,000  | )         | (329,000   | )      | (24,000   | )      |
|                            |   | (136,000  | )         | 608,000    |   | 174,000   |   |
|                            |   | $         | 1,520,000 |       | $      | (400,000  | )      | $ | 2,480,000 |   |
| Allocation of total provision - |   |      |      |       |   |      |   |
| Continuing operations           |   | $         | 2,461,000 |       | $      | 446,000   |   | $ | 2,790,000 |   |
| Discontinued operations         |   | (941,000  | )         | (846,000   | )      | (310,000  | )      |
| Total provision                 |   | $         | 1,520,000 |       | $      | (400,000  | )      | $ | 2,480,000 |   |

 

A reconciliation between the provisions forincome taxes, computed by applying the Federal statutory rate to income beforetaxes, and the book provisions for income taxes follows:

 
|                                                     |   | **2003** |      | **2002**  |   | **2001**   |   |
|----------------------------------------------------------|--------|----------|-----------|-----------|--------|------------|--------|
| Tax provision (benefit) on book income at statutory rate |   | $        | 1,445,000 |      | $      | (2,850,000 | )      | $ | 2,419,000 |   |
| Increases (decreases) resulting from:                    |   |     |      |      |   |       |   |
| State income taxes, net of Federal income tax benefit    |   | 78,000   |      | (210,000  | )      | 125,000    |   |
| Nondeductible goodwill                                   |   | —   |      | 2,698,000 |   | 22,000     |   |
| Federal tax credits                                      |   | —   |      | 13,000    |   | (94,000    | )      |
| Other                                                    |   | (3,000   | )         | (51,000   | )      | 8,000      |   |
| Provision for income taxes                               |   | $        | 1,520,000 |      | $      | (400,000   | )      | $ | 2,480,000 |   |

 

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Deferred income taxes result from temporarydifferences in the recognition of income and expenses for tax and financialstatement purposes.  The tax effects ofthe significant temporary differences that comprise the deferred tax assets andliabilities at yearend are as follows:

 
|                          |   | **2003** |      | **2002** |   |
|-------------------------------|--------|----------|-----------|----------|--------|
| Accounts receivable           |   | $        | 477,000   |     | $      | 396,000 |   |
| Inventory                     |   | 296,000  |      | 346,000  |   |
| Accrued liabilities           |   | 979,000  |      | 885,000  |   |
| Operating loss carryforwards  |   | 475,000  |      | —   |   |
| Other                         |   | 12,000   |      | 48,000   |   |
| Net deferred tax asset        |   | $        | 2,239,000 |     | $      | 1,675,000 |   |
|                          |   |     |      |     |   |
| Property, plant and equipment |   | $        | 6,184,000 |     | $      | 5,757,000 |   |
| Other                         |   | 173,000  |      | 172,000  |   |
| Net deferred tax liability    |   | $        | 6,357,000 |     | $      | 5,929,000 |   |

 

No provision for U.S. taxes has been made for undistributedearnings of the foreign subsidiaries since it is expected that the majorportion of such earnings will continue to be reinvested for an indefiniteperiod.  The Company has foreign netoperating loss carryforwards that expire between 2009 and 2010.

 

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**Note10.  Segment Information**

 

The Company’s operations are organized andmanaged by product type.  The Companycurrently operates in three segments of the building products industry:  Commercial Products, Residential Productsand Aluminum Extrusions.  See the frontcover for a description of the products of each segment and the back cover fora listing of the subsidiaries of each segment.

 

The Company uses a portion of its aluminumextrusion production in its Commercial and Residential segments.  Transfers are made at market prices.  Accounting policies for the segments are thesame as those described in Note 1. The Company evaluates performance based onoperating income or loss before any allocation of corporate overhead, interestor taxes.

 

The following is significant financialinformation by operating segment, reconciling to the Company’s totals.

 
|                |   | **Sales** |    | **Operating  Income** |   |
|---------------------|--------|-----------|---------|-----------------------|--------|
| **(In  thousands)** |   | **2003**  |    | **2002**              |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
| Commercial          |   | $         | 98,044  |                  | $      | 108,945 |   | $ | 114,822 |   | $ | 6,782 |   | $ | 10,862 |   | $ | 11,616 |   |
| Residential         |   | 53,784    |    | 44,941                |   | 53,439 |   | 8,581 |   | 163 |   | 4,103 |   |
| Aluminum Extrusion  |   | 83,173    |    | 85,946                |   | 91,860 |   | (209 | ) | (2,181 | ) | 677 |   |
| Total segments      |   | 235,001   |    | 239,832               |   | 260,121 |   | 15,154 |   | 8,844 |   | 16,396 |   |
| Eliminations        |   | (42,452   | )       | (48,403               | )      | (52,778 | ) | (422 | ) | 693 |   | (184 | ) |
| Corporate           |   | —    |    | —                |   | — |   | (7,830 | ) | (7,581 | ) | (8,126 | ) |
| Total               |   | $         | 192,549 |                  | $      | 191,429 |   | $ | 207,343 |   | $ | 6,902 |   | $ | 1,956 |   | $ | 8,086 |   |

 
|                |   | **Capital  Expenditures** |    | **Depreciation  and Amortization** |   |
|---------------------|--------|---------------------------|---------|------------------------------------|--------|
| **(In  thousands)** |   | **2003**                  |    | **2002**                           |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
| Commercial          |   | $                         | 1,091   |                               | $      | 6,343 |   | $ | 2,038 |   | $ | 1,972 |   | $ | 1,863 |   | $ | 2,176 |   |
| Residential         |   | 687                       |    | 1,017                              |   | 2,739 |   | 2,094 |   | 2,126 |   | 2,262 |   |
| Aluminum Extrusion  |   | 789                       |    | 4,032                              |   | 2,585 |   | 2,509 |   | 2,482 |   | 2,323 |   |
| Total segments      |   | 2,567                     |    | 11,392                             |   | 7,362 |   | 6,575 |   | 6,471 |   | 6,761 |   |
| Corporate           |   | 280                       |    | 456                                |   | 350 |   | 410 |   | 517 |   | 750 |   |
| Total               |   | $                         | 2,847   |                               | $      | 11,848 |   | $ | 7,712 |   | $ | 6,985 |   | $ | 6,988 |   | $ | 7,511 |   |
|                |   |                      |    |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                |   | **Total  Assets**         |    |                               |   |   |   |   |   |   |   |
| **(In  thousands)** |   | **2003**                  |    | **2002**                           |   |   |   |   |   |   |   |   |   |
|                |   |                      |    |                               |   |   |   |   |   |   |   |   |   |
| Commercial          |   | $                         | 59,397  |                               | $      | 63,537 |   |   |   |   |   |   |   |   |   |
| Residential         |   | 25,135                    |    | 28,776                             |   |   |   |   |   |   |   |   |   |
| Aluminum Extrusion  |   | 36,016                    |    | 34,915                             |   |   |   |   |   |   |   |   |   |
| Total segments      |   | 120,548                   |    | 127,228                            |   |   |   |   |   |   |   |   |   |
| Corporate           |   | 12,695                    |    | 5,496                              |   |   |   |   |   |   |   |   |   |
| Total               |   | $                         | 133,243 |                               | $      | 132,724 |   |   |   |   |   |   |   |   |   |

 

28

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**Note11.  Current and Pending AccountingChanges**

 

In November 2002, the FASBissued Financial Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantee of Indebtedness ofOthers” (FIN 45).  FIN 45 requires thatupon issuance of a guarantee, a guarantor must recognize a liability for thefair value of the obligation assumed under a guarantee.  FIN 45 also requires additional disclosuresby a guarantor in its interim and annual financial statements about theobligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guaranteesissued or modified after December 31, 2002. The disclosure requirements areeffective for financial statements of interim or annual periods ending afterDecember 15, 2002.  The impact of suchadoption did not have a material effect on the Company’s financial statements.

 

In January 2003, the FASBissued Financial Interpretation No. 46, “Consolidation of Variable InterestEntities” (FIN 46).  FIN 46 is aninterpretation of Accounting Research Bulletin 51, “Consolidated FinancialStatements”, and addresses consolidation by business enterprises of variableinterest entities (VIE’s).  FIN 46provides guidance on the identification of, and financial reporting for,entities over which control is achieved through means other than votingrights.  FIN 46 requires an enterpriseto consolidate a variable interest entity if that enterprise has a variableinterest that will absorb a majority of the entity’s expected losses if theyoccur, receive a majority of the entity’s expected residual return if theyoccur, or both. The Company does not hold any interest in VIE’s and therefore theadoption of this interpretation will not impact the Company’s consolidatedfinancial statements.

 

In January 2003, the FASB issued SFASNo. 148, “Accounting for Stock-Based Compensation-Transition andDisclosure, an amendment of FASB Statement No. 123.” SFAS No. 148 providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation. It alsorequires disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. SFAS No. 148 is effective for annualand interim periods beginning after December 15, 2002. As the Company haselected not to change to the fair value based method of accounting forstock-based employee compensation, the adoption of SFAS No. 148 will notimpact the financial condition or results of operations.

 

The Company applies APB Opinion25 and related interpretations in accountingfor stock options granted to employees and, accordingly, does not recognizecompensation cost for grants whose exercise price equals the market price ofthe stock on the date of grant.  Therewould have been no change to reported net income and earnings per share amountshad the Company elected to recognize compensation cost based on the fair valueof the options granted at the grant date as prescribed by SFAS No. 123,“Accounting for Stock-Based Compensation”, due to the lack of option grantsduring the last five years, the typical vesting period of the Company’soptions.

 

In May 2003, the FASB issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity”.  SFAS No. 150requires classification of financial instruments within its scope as aliability, including financial instruments issued in the form of shares thatare mandatorily redeemable, because those financial instruments are deemed tobe, in essence, obligations of the issuer. As the Company has not issued such instruments, adoption of thisstatement will not have an impact on reported results.

 

**Note12.  Change in Accounting**

 

The Company adopted SFAS No. 142, “Goodwilland Other Intangible Assets” effective July 1, 2001, which required thatexisting goodwill be reviewed for impairment using a revised methodology.  The Company completed the transitionalimpairment test and determined that a $7,935,000 non-cash transition charge wasrequired to reduce goodwill.  Thetransition charge is reflected as a cumulative effect of an accounting changeeffective July 1, 2001.

 

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**CORPORATE INFORMATION**

 
| **DIRECTORS**                                   |   | **OFFICERS**                                                                                                                                                 |
|-------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                            |   |                                                                                                                                                         |
| Cornelius C. Vanderstar                         |   | David C. Treinen                                                                                                                                             |
| Chairman of the Board                           |   | President; Secretary                                                                                                                                         |
| Chief Executive Officer                         |   | Chief Operating Officer                                                                                                                                      |
|                                            |   |                                                                                                                                                         |
| David C. Treinen                                |   | Ronald L. Rudy                                                                                                                                               |
|                                            |   | Senior Vice President -  Operations                                                                                                                          |
| Ronald L. Rudy                                  |   |                                                                                                                                                         |
|                                            |   | Mitchell K. Fogelman                                                                                                                                         |
| David M. Antonini                               |   | Senior Vice President -  Finance                                                                                                                             |
| Partner in White, Nelson  & Co. LLP         |   |                                                                                                                                                         |
|                                            |   | Stanley M.  Kutch                                                                                                                                            |
| John P. Cunningham                              |   | Vice  President - Information Systems                                                                                                                        |
| Retired  President of                           |   |                                                                                                                                                         |
| International  Aluminum Corporation             |   | Susan L.  Leone                                                                                                                                              |
|                                            |   | Vice President - Human  Resources                                                                                                                            |
| Alexander L. Dean                               |   |                                                                                                                                                         |
| President of David Brooks  Company              |   |                                                                                                                                                         |
|                                            |   | **FINANCIAL  INFORMATION ON CORPORATE WEBSITE**                                                                                                              |
| Joel F. McIntyre                                |   |                                                                                                                                                         |
| Attorney At Law                                 |   | The Company makes available  on its website,www.intlalum.com, its reports on Form 10K and 10Q as soon as  reasonably practicable after they have been filed. |
|                                            |   |                                                                                                                                                         |
| **STOCK  TRANSFER AGENT AND REGISTRAR**         |   | **ELECTRONIC  TRANSFER OF DIVIDENDS**                                                                                                                        |
|                                            |   |                                                                                                                                                         |
| Continental Stock Transfer  & Trust Company |   | For information and forms,  write to:                                                                                                                        |
| 17 Battery Place                                |   | Corporate Secretary                                                                                                                                          |
| New York, NY  10004                        |   | International Aluminum  Corporation                                                                                                                          |
| (212) 509-4000                                  |   | P. O. Box 6                                                                                                                                                  |
| Internet at  www.continentalstock.com           |   | Monterey Park, CA  91754                                                                                                                                |
|                                            |   |                                                                                                                                                         |
| **STOCK  EXCHANGE LISTING**                     |   | **ANNUAL  SHAREHOLDERS MEETING**                                                                                                                             |
|                                            |   |                                                                                                                                                         |
| The Company’s common stock  (trading       |   | 2 p.m., Thursday, October  30, 2003                                                                                                                          |
| symbol: IAL) is listed on  the New York         |   | International Aluminum  Corporation                                                                                                                          |
| Stock Exchange                                  |   | 767 Monterey Pass Road                                                                                                                                       |
|                                            |   | Monterey Park, CA  91754                                                                                                                                |

 

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**SUBSIDIARIES BY SEGMENT**

 
| **COMMERCIAL**                                           |   | **RESIDENTIAL**                            |
|----------------------------------------------------------|--------|--------------------------------------------|
|                                                     |   |                                       |
| *Douglas R. Ellerbrock*                                  |   | *George L. Hall*                           |
| *Executive Vice President*                               |   | *Executive Vice President*                 |
| *Commercial Products Group*                              |   | *Residential Products Group*               |
|                                                     |   |                                       |
| **Exterior  Products**                                   |   | International Window  Corporation          |
|                                                     |   | South  Gate, California                    |
| United States Aluminum  Corporation                      |   |                                       |
| Vernon,  California                                      |   | International  Window-Northern California  |
|                                                     |   | Hayward,  California                       |
| United States Aluminum  Corporation-Illinois             |   |                                       |
| Bedford  Park, Illinois                                  |   | International  Window-Arizona, Inc.        |
| Boston,  Massachusetts                                   |   | Phoenix,  Arizona                          |
| Detroit,  Michigan                                       |   |                                       |
|                                                     |   |                                       |
| United States Aluminum  Corporation-Texas                |   |                                       |
| Waxahachie,  Texas                                       |   |                                       |
| Denver,  Colorado                                        |   |                                       |
| St.  Louis, Missouri                                     |   |                                       |
| Dallas,  Texas                                           |   |                                       |
| Houston,  Texas                                          |   |                                       |
|                                                     |   |                                       |
| United States Aluminum  Corporation-Carolina             |   |                                       |
| Rock  Hill, South Carolina                               |   |                                       |
| Atlanta,  Georgia                                        |   |                                       |
| Baltimore,  Maryland                                     |   |                                       |
|                                                     |   |                                       |
| United States Aluminum Of  Canada-British Columbia, Ltd. |   |                                       |
| Langley,  British Columbia, Canada                       |   |                                       |
|                                                     |   | **ALUMINUM  EXTRUSION**                    |
| United States Aluminum Of  Canada-Ontario, Ltd.          |   |                                       |
| Guelph,  Ontario, Canada                                 |   | *Robert Dunn*                              |
|                                                     |   | *Executive Vice President*                 |
|                                                     |   | *Aluminum Extrusion Group*                 |
| **Interior Products**                                    |   |                                       |
|                                                     |   | International Extrusion  Corporation       |
| Raco Interior Products,  Inc.                            |   | Alhambra, California                       |
| Houston,  Texas                                          |   |                                       |
| Waxahachie,  Texas                                       |   | International Extrusion  Corporation-Texas |
| Dallas,  Texas                                           |   | Waxahachie, Texas                          |

 

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| International Aluminum  Corporation  767 Monterey Pass Road  Monterey Park, California 91754 |
|----------------------------------------------------------------------------------------------|
| Tel:                                                                                         | (323) 264-1670 |
| Fax:                                                                                         | (323) 266-3838 |
| Web:                                                                                         | www.intlalum.com |

 

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