RPM International (RPM) 10-Q 2006 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended November 30, 2005,

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                                        to                                        .

Commission File No.      1-14187

RPM International Inc.

(Exact name of Registrant as specified in its charter)

DELAWARE	02-0642224
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

P.O. BOX 777; 2628 PEARL ROAD; MEDINA, OHIO		44258
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number including area code (330)273-5090

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to the filing requirements for the past 90 days.

Yes  þNo o.

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerþ Accelerated filero Non-acclerated filero

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes oNo þ.

As of December 29, 2005

118,260,656 Shares of RPM International Inc. Common Stock were outstanding.

RPM INTERNATIONAL INC. AND SUBSIDIARIES*

INDEX

			Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
		Consolidated Balance Sheets		3
		Consolidated Statements of Income		4
		Consolidated Statements of Cash Flows		5
		Notes to Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			36
Item 4.	Controls and Procedures			36
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings			37
Item 4.	Submission of Matters to a Vote of Security Holders			43
Item 6.	Exhibits			44
Signatures				46

* As used herein, the terms “RPM” and the “Company” refer to RPM International Inc. and its subsidiaries, unless the context indicates otherwise.

3

PART I. — FINANCIAL INFORMATION
ITEM 1. — FINANCIAL STATEMENTS

RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share amounts)

	November 30, 2005			May 31, 2005
ASSETS
Current Assets
Cash and short-term investments	$	103,332		$	184,140
Trade accounts receivable (less allowances of $20,609 and $18,565, respectively)		511,964			553,084
Inventories		364,324			334,404
Deferred income taxes		37,598			40,876
Prepaid expenses and other current assets		183,720			158,991
Total current assets		1,200,938			1,271,495
Property, Plant and Equipment, at Cost		823,899			775,564
Allowance for depreciation and amortization		(409,980	)		(385,586	)
Property, plant and equipment, net		413,919			389,978
Other Assets
Goodwill		717,456			663,224
Other intangible assets, net of amortization		318,254			275,744
Other		67,276			55,804
Total other assets		1,102,986			994,772
Total Assets	$	2,717,843		$	2,656,245
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	228,028		$	274,573
Current portion of long-term debt		18,422			97
Accrued compensation and benefits		76,898			95,667
Accrued loss reserves		69,530			65,452
Asbestos-related liabilities		55,000			55,000
Other accrued liabilities		91,557			84,550
Total current liabilities		539,435			575,339
Long-Term Liabilities
Long-term debt, less current maturities		848,014			837,948
Asbestos-related liabilities		46,244			46,172
Other long-term liabilities		82,013			71,363
Deferred income taxes		102,905			78,914
Total long-term liabilities		1,079,176			1,034,397
Stockholders’ Equity
Preferred stock, par value $0.01; authorized 50,000 shares; none issued
Common stock, par value $0.01 authorized 300,000 shares; issued and outstanding 118,257 as of November 2005; issued and outstanding 117,554 as of May 2005		1,183			1,176
Paid-in capital		547,517			535,204
Treasury stock, at cost
Accumulated other comprehensive income		18,448			10,004
Retained earnings		532,084			500,125
Total stockholders’ equity		1,099,232			1,046,509
Total Liabilities and Stockholders’ Equity	$	2,717,843		$	2,656,245

The accompanying notes to consolidated financial statements are an integral part of these statements.

4

RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

(In thousands, except per share amounts)

	Six Months Ended				Three Months Ended
	November 30,				November 30,
	2005		2004		2005		2004
Net Sales	$	1,486,702	$	1,284,982	$	739,350	$	623,469
Cost of Sales		871,324		719,407		440,091		352,781
Gross Profit		615,378		565,575		299,259		270,688
Selling, General and Administrative Expenses		461,668		404,476		246,808		202,034
Asbestos Charges		30,000		47,000		15,000		47,000
Interest Expense, Net		18,429		16,885		9,854		8,915
Income Before Income Taxes		105,281		97,214		27,597		12,739
Provision for Income Taxes		36,793		33,616		9,070		3,627
Net Income	$	68,488	$	63,598	$	18,527	$	9,112
Average Number of Shares of Common Stock Outstanding:
Basic		116,626		116,413		116,710		116,659
Diluted		127,400		125,719		127,542		126,318
Basic earnings per share of common stock	$	0.59	$	0.55	$	0.16	$	0.08
Diluted earnings per share of common stock	$	0.55	$	0.52	$	0.15	$	0.08
Cash dividends per share of common stock	$	0.310	$	0.290	$	0.160	$	0.150

The accompanying notes to consolidated financial statements are an integral part of these statements.

5

RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(In thousands)

	Six Months Ended
	November 30,
	2005			2004
Cash Flows From Operating Activities:
Net income	$	68,488		$	63,598
Depreciation and amortization		35,043			32,736
Items not affecting cash and other		12,247			14,265
Changes in operating working capital		(20,614	)		(28,013	)
Changes in asbestos-related liabilities, net of tax		398			7,886
		95,562			90,472
Cash Flows From Investing Activities:
Capital expenditures		(20,376	)		(21,791	)
Acquisition of businesses, net of cash acquired		(135,780	)		(9,900	)
Purchases of marketable securities		(25,236	)		(17,098	)
Proceeds from the sale of marketable securities		15,000			19,078
Proceeds from the sale of assets					4,500
Other		525			574
		(165,867	)		(24,637	)
Cash Flows From Financing Activities:
Additions to long-term and short-term debt		175,005			200,000
Reductions of long-term and short-term debt		(151,937	)		(74,431	)
Cash dividends		(36,529	)		(33,730	)
Exercise of stock options		4,122			7,156
		(9,339	)		98,995
Effect of Exchange Rate Changes on Cash and Short-Term Investments		(1,164	)		8,368
Increase (Decrease) in Cash and Short-Term Investments		(80,808	)		173,198
Cash and Short-Term Investments at Beginning of Period		184,140			34,559
Cash and Short-Term Investments at End of Period	$	103,332		$	207,757

The accompanying notes to consolidated financial statements are an integral part of these statements.

6

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2005
(Unaudited)

NOTE A — BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by generally accepted accounting principles (“GAAP”) in the U.S. for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included for the three month periods ended November 30, 2005 and 2004. For further information, refer to the Consolidated Financial Statements and notes included in our Annual Report on Form 10-K for the year ended May 31, 2005.

Our business is dependent on external weather factors. Historically, we have experienced strong sales and net income in our first, second and fourth fiscal quarters comprised of the three month periods ending August 31, November 30 and May 31, respectively, with weaker performance in our third fiscal quarter (December through February).

Effective June 1, 2004, we voluntarily adopted the preferable fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” for our stock-based employee compensation plans by applying the modified prospective method as outlined by SFAS No. 148, “Accounting for Stock-Based Compensation —Transition and Disclosure.” On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), “Share Based Payment,” which is a revision of SFAS No. 123. SFAS No. 123(R) also supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95, “Statement of Cash Flows.” The approach outlined in SFAS No. 123(R) is generally similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.

SFAS No. 123(R) originally required adoption no later than the first interim or annual period beginning after June 15, 2005. In April, 2005, the Securities and Exchange Commission (“SEC”) issued a release that deferred the compliance dates for SFAS No. 123(R). In accordance with the SEC’s new rule, we expect to adopt SFAS No. 123(R), utilizing the modified-prospective method of accounting, on June 1, 2006. We do not anticipate that our adoption of SFAS No. 123(R) will have a material impact on our results of operations or financial position, however, the total expense recorded in future periods will depend on several variables, including the number of share-based awards that vest and the fair values of those vested awards.

Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

7

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2005
(Unaudited)

NOTE B — INVENTORIES

Inventories were composed of the following major classes:

	November 30, 2005		May 31, 2005
	(In thousands)
Raw materials and supplies	$	114,100	$	105,060
Finished goods		250,224		229,344
	$	364,324	$	334,404

NOTE C — DEBT

On October 19, 2005, RPM United Kingdom G.P., an indirect wholly-owned finance subsidiary of RPM International Inc., issued and sold $150 million of 6.70 percent Senior Unsecured Notes due 2015, which are fully and unconditionally guaranteed by RPM International Inc. The total net proceeds of the offering of the Senior Unsecured Notes were used to refinance $138 million of revolving credit facility borrowings in conjunction with the August 31, 2005 acquisition of illbruck Sealant Systems (see Note E), and for other general corporate purposes. Concurrent with the issuance of the Senior Unsecured Notes, RPM United Kingdom G.P. entered into a cross-currency swap, which fixed the interest and principal payments in euros for the life of the Senior Unsecured Notes and resulted in an effective euro fixed rate borrowing of 5.31 percent.

NOTE D — COMPREHENSIVE INCOME

Other comprehensive income includes foreign currency translation adjustments, minimum pension liability adjustments and unrealized gains or losses on securities. Total comprehensive income, comprised of net income and other comprehensive income, amounted to $15.7 million and $44.1 million during the second quarter of fiscal years 2006 and 2005, respectively, and $76.9 and $101.7 million during the six month periods ended November 30, 2005 and 2004, respectively.

8

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2005
(Unaudited)

NOTE E — ILLBRUCK ACQUISITION

On August 31, 2005, Tremco, Inc., a wholly-owned subsidiary of RPM, completed its acquisition of privately-owned illbruck Sealant Systems, located in Leverkusen, Germany, for approximately $132 million, plus debt assumption of approximately $10.2 million, subject to certain post-closing adjustments. The acquisition agreement had been previously announced on July 25, 2005 and the customary European approvals were subsequently obtained. The results of operations of illbruck Sealant Systems are included in RPM’s consolidated statements of income beginning with the date of acquisition.

illbruck had sales of approximately $190 million for its fiscal year ended December 31, 2004, bringing to the RPM family a leading manufacturer of innovative, high-performance sealants and installation systems for pre-fabricated construction elements and for window and door applications. The acquisition brings an extensive line of products including joint sealing tapes, flashing tapes, cartridge sealants and adhesives, strips, foils and accessories marketed under brand names such as illbruck, Festix, Perennator and Coco.

The purchase price will be allocated to the underlying assets acquired and liabilities assumed based upon their fair values at the date of acquisition. We will determine estimated fair values based on independent appraisals, discounted cash flow analyses, quoted market prices and estimates made by management. To the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired, such excess will be recorded as goodwill. Prior to the date of acquisition, we began investigating the potential for synergies associated with restructuring the operations at certain locations, including possible involuntary termination or relocation of certain employees, along with possible closure of certain plants. At this time, restructuring plans have not been finalized, pending investigation of the costs and associated benefits of consolidating operations.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

(In thousands)
Current assets	$	68,710
Property, plant and equipment		28,711
Goodwill		52,805
Other intangible assets		48,516
Total Assets Acquired	$	198,742
Liabilities assumed		(67,070	)
Net Assets Acquired	$	131,672

The allocation of the purchase price is preliminary and subject to adjustment following completion of the valuation process. The $52.8 million of goodwill will be assigned to the various subsidiaries of the

9

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2005
(Unaudited)

illbruck Sealant Systems group upon finalization of the allocation of purchase price and will not be deductible for tax purposes.

NOTE F — ASBESTOS-RELATED LIABILITIES

Certain of our wholly owned subsidiaries, principally Bondex International, Inc. (Bondex), along with many other U.S. companies, are and have been involved in a large number of asbestos-related suits filed primarily in state courts during the past two decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products. The alleged claims relate primarily to products that Bondex sold through 1977. In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure or that injuries incurred resulted from exposure to Bondex products.

The rate at which plaintiffs filed asbestos-related suits against the Company’s subsidiaries, particularly Bondex, has increased since the fourth fiscal quarter of 2002, influenced by the bankruptcy filings of numerous other defendants in asbestos-related litigation. Based on the significant increase in asbestos claims activity, which in many cases disproportionately increased Bondex’s exposure in joint and several liability law states, our third-party insurance was depleted within the first fiscal quarter of 2004, as previously reported. Our third-party insurers historically had been responsible, under various cost-sharing arrangements, for the payment of approximately 90% of the indemnity and defense costs associated with our asbestos litigation. Prior to this sudden precipitous increase in loss rates, the combination of book loss reserves and insurance coverage was expected to adequately cover asbestos claims for the foreseeable future. We have reserved our rights with respect to several of our third-party insurers’ claims of exhaustion, and in late calendar 2002 commenced a review of our known insurance policies to determine whether other insurance limits may be available to cover our asbestos liabilities.

As a result of an examination of our subsidiaries’ historical insurance and as previously disclosed, certain of our subsidiaries filed a complaint for declaratory judgment, breach of contract and bad faith against various third-party insurers, challenging their assertion that their policies covering asbestos-related claims have been exhausted. The July 3, 2003 filing in Ohio (Case No. 1:03 CV1322), was combined with a related case and, pursuant to a case management order, the parties are to complete fact discovery by March 31, 2006, and dispositive motions and expert discovery by September 1, 2006. A trial date in January 2007 was originally set; however, it is possible that this and other dates may be modified as the case progresses.

We are unable at the present time to predict the timing or ultimate outcome of this insurance coverage litigation. Consequently, we are unable to predict whether, or to what extent, any additional insurance may be available to cover a portion of our subsidiaries’ asbestos liabilities. We have not included any potential benefits from this litigation either in our financial statements or in calculating our current asbestos reserve. Our wholly-owned captive insurance companies have not provided any insurance or reinsurance coverage for any of our subsidiaries’ asbestos-related claims.

10

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2005
(Unaudited)

During the last seven months of 2003, new state liability laws were enacted in three states (Mississippi, Ohio and Texas) where at that time more than 80% of the claims against Bondex were pending. Effective dates for the last two of the law changes were April 8, 2003 and July 1, 2003. The changes generally provided for liability to be determined on a “proportional cause” basis, thereby limiting Bondex’s responsibility to only its share of the alleged asbestos exposure. During the third and fourth fiscal quarters of 2004, two of the three previously mentioned states that adopted “proportional cause” liability in 2003 passed additional legislation impacting medical criteria and product identification in asbestos-related litigation. While there have been some changes in the type of claims filed in certain of these states, the ultimate influence these law changes may have on future claims activity and settlement values is not known at this time. Claim filings in these three subject states at the quarter ended November 30, 2005, coupled with the non-malignancy filings in Florida, currently comprise approximately 80% of the total aggregate claims filed against Bondex.

At the end of 2002 and through the third fiscal quarter of 2003, Bondex had concluded it was not possible to estimate the cost of disposing all of the asbestos-related claims that might be filed against Bondex in the future due to a number of reasons, including its lack of sufficient comparable loss history from which to assess either the number or value of any future asbestos-related claims. As previously disclosed, during the fourth fiscal quarter of 2003, Bondex retained a consulting firm to assist in analyzing its loss history data, to evaluate whether it would be possible to estimate the cost of disposing pending claims in light of both past and recent loss history, and to assist in determining whether future asbestos-related claims reasonably expected to be filed against Bondex were measurable, given recent changes in various state laws and the prospect of potential federal asbestos-related legislation. Bondex provided these consultants with all relevant data regarding asbestos-related claims filed against Bondex through May 31, 2003. At the time, management concluded, with the consultants’ input, that it was not possible to estimate the full range of the cost of resolving all future asbestos-related claims against Bondex because of the uncertainties associated with the litigation of those claims.

Estimating the future cost of asbestos related contingent liabilities was and continues to be subject to many uncertainties, including (i) the ultimate number of claims filed; (ii) the cost of resolving both current known and future unknown claims; (iii) the amount of insurance, if any, available to cover such claims, including the outcome of coverage litigation against the subsidiaries’ third party insurers; (iv) future earnings and cash flow of the Company’s subsidiaries; (v) the impact of bankruptcies of other companies whose share of liability may be imposed on the Company’s subsidiaries under certain state liability laws; (vi) the unpredictable aspects of the litigation process including a changing trial docket and the jurisdictions in which trials are scheduled; (vii) the outcome of any such trials including judgments or jury verdicts, as a result of our more aggressive defense posture which includes taking selective cases to verdict; (viii) the lack of specific information in many cases concerning exposure to the subsidiaries’ products and the claimants’ diseases; (ix) potential changes in applicable federal and/or state law; and (x) the potential impact of various proposed structured settlement transactions or subsidiary bankruptcies by other companies, some of which are the subject of federal appellate court review, the outcome of which could materially affect any future asbestos-related liability estimates. In addition to the foregoing, during both calendar years 2003 and 2005, passage by the United States Senate Judiciary Committee of a proposed bill to establish a trust fund to pay future asbestos related

11

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2005
(Unaudited)

claims and remove such cases from federal and state courts with industry and insurers funding the trust remains a significant, new variable that has made it increasingly difficult to predict with certainty the full exposure of future, unknown asbestos-related claims. The ongoing prospect of federal trust fund legislation is expected to continue to be a significant variable impacting our ability to assess our future asbestos-related liabilities. As previously reported, the Company has become aware of a pending federal criminal investigation into the conduct of at least three plaintiffs’ law firms (all of whom have filed claims against the Company’s Subsidiaries and many other defendants) with respect to their asbestos claim-filing practices. This federal investigation, coupled with recent judicial findings in Texas, calls into question from a medical and legal perspective the veracity of a significant number of asbestos claims for all defendants, including our Subsidiaries. We will continue to monitor these developments which, over time, could significantly impact the number of future claims filed; the value, if any, for such claims; and the adequacy of our asbestos reserve for any such future claims.

Based on the foregoing considerations, at May 31, 2003, we concluded that we could not fully estimate the liability that would result from all future asbestos claims. We established a reserve for those pending cases that had progressed to a stage where the cost to dispose of these cases could, at the time, reasonably be estimated, as well as a $51.2 million provision for future unasserted claims that were estimable at May 31, 2003. The estimation of even pending cases was and is always difficult due to the dynamic nature of asbestos litigation including the variables discussed above. As described below, the estimated range of potential loss covering measurable known asbestos claims and this provision for future claims that were estimable at May 31, 2003 was $140.0 million to $145.0 million. Accordingly, we established a reserve equal to the lower end of this range of potential loss by taking an asbestos charge to fiscal 2003 operations of $140.0 million. At the time of the reserve, we believed that this asbestos reserve would be sufficient to cover asbestos-related cash flow requirements over the estimated three-year life of the reserve. The $140.0 million charge also included $15.0 million in total projected defense costs over the estimated three-year life of the reserve. By comparison, Bondex’s share of costs (net of then-available third-party insurance) for asbestos-related product liability was $6.7 million and $2.8 million for the years ended May 31, 2003 and 2002, respectively.

Since May 31, 2003, we have reviewed and evaluated on a quarterly basis the adequacy of our asbestos reserve. The range of loss calculation for the $140 million reserve was based on an extensive analysis of the most critical factors that influence our asbestos-related costs including: (i) the gross number of open malignancy claims (principally mesothelioma claims) as these claims have the most significant impact on our asbestos settlement costs; (ii) historical and current settlement costs and dismissal rates by various categories; (iii) analysis of the jurisdiction and governing law of the states in which these claims are pending; and (iv) outside defense counsel’s opinions and recommendations with respect to the merits of such claims. Although the number of open malignancy claims has recently increased, our average settlement costs for malignancy claims have declined and dismissal rates have increased. Several defense verdicts during the second half of fiscal 2004 further contributed to lower settlement values and higher dismissal rates. Our defense costs, however, have increased significantly as a result of our more aggressive defense strategy, which includes taking selective cases to verdict.

12

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2005
(Unaudited)

As previously disclosed, based on our review of our asbestos reserve for the second quarter ending November 30, 2004, we concluded that an increase in our reserve was appropriate and recorded an asbestos reserve adjustment of $47.0 million for the quarter ended November 30, 2004, which we believed would be sufficient to cover any incremental cash flow requirements through fiscal 2006 not covered by the $140.0 million reserve, as well as the additional cash flow requirements for the balance of our then pending known claims and anticipated higher defense costs. Approximately $32.0 million of the $47.0 million reserve adjustment was allocated to anticipated higher future defense costs. Consistent with this methodology, additional asbestos reserves were taken for the third and fourth quarters of fiscal 2005.

During the second quarter ending November 30, 2005, an additional $15.0 million was added to the asbestos reserve based on management’s quarterly review of pending claims and defense costs. This reserve adjustment puts our total reserves at approximately $101.2 million, which we believe will be sufficient to cover the cash flow requirements for the balance of our pending known claims and defense costs. Our $15.0 million reserve increase is based on our most recent quarter’s experience and our valuation of our known existing claims and assumes that approximately $7.2 million will be allocated to anticipated higher future defense costs. As we review our asbestos reserve each quarter, we will make appropriate adjustments to the reserve based on our most recent experience to ensure that it is sufficient to cover the anticipated settlement and defense costs associated with our then pending, known claims. We will continue to evaluate the appropriateness of estimating the value of any potential future unknown asbestos claims and at such time as we are able to quantify such future exposure, we will establish a reserve for such unknown future claims.

We recognize that future facts, events and legislation, both state and/or federal, may alter our estimates of pending claims and our ability to estimate any future unasserted claims. We cannot estimate possible liabilities in excess of those accrued because we cannot predict the number of additional claims that may be filed in the future, the grounds for such claims, the potential settlement values associated with any such future claims, the ultimate resolution of such claims, the full impact of the state law changes enumerated above or the effect of pending federal trust fund legislation on future asbestos claims. Subject to the foregoing variables, including the timing and impact of such variables and the increase in the asbestos reserve, we believe that our asbestos reserves are sufficient to cover asbestos-related cash flow requirements for the current inventory of our known claims. It is, however, reasonably possible that our actual costs for claims could differ from current estimates but, based upon information presently available, such costs are not expected to have a material effect on our competitive or financial position or our ongoing operations. As previously disclosed, however, our existing reserve will not presently cover the costs of future unknown claims and therefore, additional reserves will be required in future periods for any such future claims. Any such future reserve increases, when taken, could have a material impact on our results in such period.

We will continue to evaluate our asbestos-related loss exposure each quarter, review the adequacy of our existing reserve and the related cash flow implications in light of our most recent actual claims experience, the impact of state law changes and the evolving nature of federal legislative efforts to address asbestos

13

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2005
(Unaudited)

litigation. We will continue to evaluate, with the assistance of outside advisors, whether we can reasonably estimate the value of any potential future unknown asbestos claims. At such time as we are able to quantify such future exposure, we will appropriately adjust our existing reserve for such unknown future claims. We will continue to explore all feasible alternatives available to resolve our asbestos-related exposure in a manner consistent with the best interests of our stockholders.

The following table illustrates the movement of current and long-term asbestos-related liabilities through November 30, 2005:

Asbestos Liability Movement
(Current and Long-Term)

	Balance at				Deductions			Balance at
	Beginning		Additions to		(Primarily			End of
(In thousands)	of Period		Asbestos Charge		Claims Paid)			Period
Six Months Ended November 30, 2005	$	101,172	$	30,000	$	29,928		$	101,244
Year Ended May 31, 2005		90,607		78,000		67,435			101,172
Year Ended May 31, 2004		144,583				53,976	(a)		90,607

^(a) Represents the Company’s portion of total claims paid during the fiscal year ended May 31, 2004 of $63.4 million, net of insurer contributions totaling $9.4 million. Insurance coverage was depleted in the first quarter of fiscal year 2004.

NOTE G — PENSION AND POSTRETIREMENT HEALTH CARE BENEFITS

We offer defined benefit pension plans, defined contribution pension plans, as well as several unfunded health care benefit plans primarily for certain of our retired employees. The following tables provide the retirement-related benefit plans’ impact on income before income taxes for the six and three month periods ended November 30, 2005 and 2004:

Pension Benefits	U.S. Plans						Non-U.S. Plans
(In thousands)	Six Months Ended						Six Months Ended
	November 30,			November 30,			November 30,			November 30,
	2005			2004			2005			2004
Service cost	$	6,635		$	5,615		$	1,237		$	1,077
Interest cost		4,122			3,741			2,370			2,180
Expected return on plan assets		(5,054	)		(4,880	)		(2,299	)		(2,059	)
Amortization of:
Prior service cost		97			147
Net gain on adoption of SFAS No. 87		(1	)		(1	)
Net actuarial (gains) losses recognized		1,187			750			755			665
Net Periodic Benefit Cost	$	6,986		$	5,372		$	2,063		$	1,863

14

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2005
(Unaudited)

Postretirement Benefits	U.S. Plans					Non-U.S. Plans
(In thousands)	Six Months Ended					Six Months Ended
	November 30,			November 30,		November 30,		November 30,
	2005			2004		2005		2004
Service cost	$	—		$	6	$	168	$	122
Interest cost		307			330		248		219
Prior service cost		(13	)				—
Net actuarial (gains) losses recognized		29			13		21		13
Net Periodic Benefit Cost	$	323		$	349	$	437	$	354

Pension Benefits	U.S. Plans						Non-U.S. Plans
(In thousands)	Three Months Ended						Three Months Ended
	November 30,			November 30,			November 30,			November 30,
	2005			2004			2005			2004
Service cost	$	3,318		$	2,808		$	619		$	539
Interest cost		2,061			1,870			1,185			1,088
Expected return on plan assets		(2,527	)		(2,440	)		(1,150	)		(1,029	)
Amortization of:
Prior service cost		48			74
Net gain on adoption of SFAS No. 87		(1	)		(1	)
Net actuarial (gains) losses recognized		594			375			378			333
Net Periodic Benefit Cost	$	3,493		$	2,686		$	1,032		$	931

Postretirement Benefits	U.S. Plans					Non-U.S. Plans
(In thousands)	Three Months Ended					Three Months Ended
	November 30,			November 30,		November 30,		November 30,
	2005			2004		2005		2004
Service cost	$	—		$	3	$	84	$	61
Interest cost		154			165		124		109
Prior service cost		(7	)		—		—		—
Net actuarial (gains) losses recognized		15			7		11		7
Net Periodic Benefit Cost	$	162		$	175	$	219	$	177

We previously disclosed in our financial statements for the fiscal year ended May 31, 2005, that we expected to contribute approximately $10.1 million to the Retirement Plan in the U.S. and approximately $2.1 million to plans outside the U.S. during the current fiscal year. As of November 30, 2005, we expect to contribute approximately $3.0 million to plans outside the U.S. The change in expected contributions reflects the results of the January 1, 2005 valuation performed for the Canada Registered Plan.

We have determined that our postretirement medical plan provides prescription drug benefits that will qualify for the federal subsidy provided by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). For our current retirees who are not subject to cost caps, we

15

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2005
(Unaudited)

have assumed that we will be eligible for the subsidy beginning in 2006 and for all future years. For our current and future retirees who are subject to cost caps, we have assumed that we will be eligible for the subsidy beginning in 2006 and ending on average in 2012.

We reflected the impact of the Act beginning with our fiscal year ended 2005 accumulated postretirement benefit obligation (“APBO”). The change in the APBO includes the change as an actuarial gain in accordance with FASB Staff Position No. FAS 106-2. The impact was reflected net of periodic expense beginning with our first fiscal quarter ended August 31, 2005.

NOTE H — EARNINGS PER SHARE

In October 2004, the Financial Accounting Standards Board ratified the consensus of the Emerging Issues Task Force (the “EITF”) with respect to EITF issue 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share.” The consensus required us to consider all instruments with contingent conversion features that include a market price trigger in our diluted earnings per share calculations, regardless of whether that market price trigger has been met. Therefore, our calculation of fully diluted earnings per share now includes the 8,034,355 contingent shares of our common stock related to our convertible debt, which includes a market price trigger, in our calculation of fully diluted earnings per share by applying the “if-converted” method. EITF 04-8 also required us to restate previously reported earnings per share for all prior periods presented.

NOTE I — SEGMENT INFORMATION

We operate a portfolio of businesses that manufacture and sell a variety of specialty paints, protective coatings and roofing systems, sealants and adhesives. We manage our portfolio by organizing our businesses into two reportable operating segments — industrial and consumer — based on the nature of business activities; products and services; the structure of management; and the structure of information as presented to the Board of Directors. Within each segment, individual operating companies or groups of companies generally address common markets, utilize similar technologies, and can share manufacturing or distribution capabilities.

In addition to the two reportable operating segments, there are certain business activities, referred to as corporate/other, that do not constitute an operating segment, including corporate headquarters and related administrative expenses, results of our captive insurance companies, gains or losses on the sales of certain assets, and other expenses, including asbestos-related charges, not directly associated with either reportable operating segment. Related assets consist primarily of investments, prepaid expenses, deferred pension assets, and headquarters’ property and equipment. These corporate and other expenses reconcile reportable operating segment data to total consolidated net sales, income before income taxes and identifiable assets. Comparative six month and second quarter results on this basis are illustrated in the following table.

16

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2005
(Unaudited)

	Six Months Ended						Quarter Ended
	November 30,			November 30,			November 30,			November 30,
(In thousands)	2005			2004			2005			2004
Net Sales
Industrial Segment	$	896,436		$	730,396		$	465,597		$	364,888
Consumer Segment		590,266			554,586			273,753			258,581
Consolidated	$	1,486,702		$	1,284,982		$	739,350		$	623,469
Income (Loss) Before Income Taxes
Industrial Segment	$	115,468		$	102,075		$	50,389		$	45,939
Consumer Segment		72,493			77,666			26,057			31,311
Corporate/Other		(82,680	)		(82,527	)		(48,849	)		(64,511	)
Consolidated	$	105,281		$	97,214		$	27,597		$	12,739

	November 30, 2005		May 31, 2005
Identifiable Assets
Industrial Segment	$	1,494,314	$	1,271,145
Consumer Segment		1,086,620		1,138,894
Corporate/Other		136,909		246,206
Consolidated	$	2,717,843	$	2,656,245

17

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our Consolidated Financial Statements include the accounts of RPM International Inc. and its majority-owned subsidiaries. Preparation of our financial statements requires the use of estimates and assumptions that affect the reported amounts of our assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We continually evaluate these estimates, including those related to allowances for doubtful accounts; inventories; allowances for recoverable taxes; useful lives of property, plant and equipment; goodwill; environmental and other contingent liabilities; income tax valuation allowances; pension plans; and the fair value of financial instruments. We base our estimates on historical experience and other assumptions, which we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying value of our assets and liabilities. Actual results may differ from these estimates under different assumptions and conditions.

We have identified below the accounting policies that are critical to our financial statements.

Revenue Recognition

Revenues are recognized when realized or realizable, and when earned. In general, this is when title and risk of loss pass to the customer. Further, revenues are realizable when we have persuasive evidence of a sales arrangement, the product has been shipped or the services have been provided to the customer, the sales price is fixed or determinable, and collectibility is reasonably assured. We reduce our revenues for estimated customer returns and allowances, certain rebates, sales incentives and promotions in the same period the related sales are recorded.

Translation of Foreign Currency Financial Statements and Foreign Currency Transactions

Our reporting currency is the U.S. dollar. However, the functional currency of all of our foreign subsidiaries is their local currency. We translate the amounts included in our consolidated statements of income from our foreign subsidiaries into U.S. dollars at weighted average exchange rates, which we believe are fairly representative of the actual exchange rates on the dates of the transactions. Our foreign subsidiaries’ assets and liabilities are translated into U.S. dollars from local currency at the actual exchange rates as of the end of each reporting date, and we record the resulting foreign exchange translation adjustments in our consolidated balance sheets as a component of accumulated other comprehensive income (loss). Translation adjustments will be included in net earnings in the event of a sale or liquidation of any of our underlying foreign investments, or in the event that we distribute the accumulated earnings of consolidated foreign subsidiaries. If we determined that the functional currency of any of our foreign subsidiaries should be the U.S. dollar, our financial statements would be affected. Should this occur, we would adjust our reporting to appropriately account for such change(s).

18

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

As appropriate, we use permanently invested intercompany loans as a source of capital to reduce exposure to foreign currency fluctuations at our foreign subsidiaries. These loans are treated as analogous to equity for accounting purposes. Therefore, foreign exchange gains or losses on these intercompany loans are recorded in accumulated other comprehensive income (loss). If we were to determine that the functional currency of any of our subsidiaries should be the U.S. dollar, we would no longer record foreign exchange gains or losses on such intercompany loans.

Goodwill

We apply the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” which addresses the initial recognition and measurement of goodwill and intangible assets acquired in a business combination. We also apply the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill be tested on an annual basis, or more frequently as impairment indicators arise. We have elected to perform the required impairment tests, which involve the use of estimates related to the fair market values of the business operations with which goodwill is associated, at the end of our first quarter. Calculating the fair market value of the reporting units requires significant estimates and assumptions by management. We estimate the fair value of our reporting units by applying third-party market value indicators to the respective reporting unit’s annual projected earnings before interest, taxes, depreciation and amortization. In applying this methodology, we rely on a number of factors, including future business plans, actual operating results and market data. In the event that our calculations indicate that goodwill is impaired, a fair value estimate of each tangible and intangible asset would be established. This process would require the application of discounted cash flows expected to be generated by each asset in addition to independent asset appraisals, as appropriate. Cash flow estimates are based on our historical experience and our internal business plans, and appropriate discount rates are applied. Losses, if any, resulting from goodwill impairment tests would be reflected in operating income in our income statement.

Other Long-Lived Assets

We assess identifiable non-goodwill intangibles and other long-lived assets for impairment whenever events or changes in facts and circumstances indicate the possibility that the carrying value may not be recoverable. Factors considered important, which might trigger an impairment evaluation, include the following:

n	significant under- performance relative to historical or projected future operating results;
n	significant changes in the manner of our use of the acquired assets;
n	significant changes in the strategy for our overall business; and
n	significant negative industry or economic trends.

Additionally, we test all indefinitely-lived intangible assets for impairment annually. Measuring a potential impairment of non-goodwill intangibles and other long-lived assets requires various estimates and assumptions, including determining which cash flows are directly related to the asset being evaluated, the useful life over which those cash flows will occur, their amount and the asset’s residual

19

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

value, if any. If we determine that the carrying value of these assets may not be recoverable based upon the existence of one or more of the above-described indicators, any impairment would be measured based on projected net cash flows expected from the asset(s), including eventual disposition. The determination of impairment loss would be based on the best information available, including internal discounted cash flows, quoted market prices when available and independent appraisals as appropriate to determine fair value. Cash flow estimates would be based on our historical experience and our internal business plans, with appropriate discount rates applied. We have not incurred any such impairment loss to date.

Deferred Income Taxes

The provision for income taxes is calculated in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” which requires the recognition of deferred income taxes using the liability method. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain changes in valuation allowances. We provide valuation allowances against deferred tax assets if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

In determining the adequacy of the valuation allowance management considers cumulative and anticipated amounts of domestic and international earnings or losses, anticipated amounts of foreign source income, as well as the anticipated taxable income resulting from the reversal of future taxable temporary differences.

We intend to maintain the recorded valuation allowances until sufficient positive evidence (for example, cumulative positive foreign earnings or additional foreign source income) exists to support a reversal of the tax valuation allowances.

Contingencies

We are party to claims and lawsuits arising in the normal course of business, including the various asbestos-related suits discussed herein and in Note H to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended May 31, 2005. Although we cannot precisely predict the amount of any liability that may ultimately arise with respect to any of these matters, we record provisions when we consider the liability probable and reasonably estimable. The provisions are based on historical experience and legal advice, are reviewed quarterly and are adjusted according to developments. Estimating probable losses requires analysis of multiple forecasted factors that often depend on judgments about potential actions by third parties such as regulators, courts and state and federal legislatures. Changes in the amount of the provisions affect our consolidated statements of income. Due to the inherent uncertainties in the loss reserve estimation process, we are unable to estimate an additional range of loss in excess of our accruals. We may incur asbestos costs in addition to any amounts reserved, which may have a material adverse effect on our financial condition, results of operations or cash flows.

20

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

Our environmental-related accruals are similarly established and/or adjusted as information becomes available upon which costs can be reasonably estimated. Here again, actual costs may vary from these estimates because of the inherent uncertainties involved, including the identification of new sites and the development of new information about contamination. Certain sites are still being investigated and, therefore, we have been unable to fully evaluate the ultimate cost for those sites. As a result, reserves have not been taken for certain of these sites and costs may ultimately exceed existing reserves for other sites. We have received indemnities for potential environmental issues from purchasers of certain of our properties and businesses and from sellers of some of the properties or businesses we have acquired. We have also purchased insurance to cover potential environmental liabilities at certain sites. If the indemnifying or insuring party fails to, or becomes unable to, fulfill its obligations under those agreements or policies, we may incur environmental costs in addition to any amounts reserved, which may have a material adverse effect on our financial condition, results of operations or cash flows.

REPORTABLE SEGMENT INFORMATION

We operate a portfolio of businesses that manufacture and sell a variety of specialty paints, protective coatings and roofing systems, sealants and adhesives. We manage our portfolio by organizing our businesses into two reportable operating segments — industrial and consumer — based on the nature of business activities; products and services; the structure of management; and the structure of information as presented to the Board of Directors. Within each segment, individual operating companies or groups of companies generally address common markets, utilize similar technologies, and can share manufacturing or distribution capabilities. We evaluate the profit performance of our segments based on income before income taxes, but also look to earnings before interest and taxes (“EBIT”) as a performance evaluation measure because interest expense is essentially related to corporate acquisitions, as opposed to segment operations.

In addition to the two reportable operating segments, there are certain business activities, referred to as corporate/other, that do not constitute an operating segment, including corporate headquarters and related administrative expenses, results of our captive insurance companies, gains or losses on the sales of certain assets, and other expenses, including asbestos-related charges, many of which are not directly associated with either operating segment. Related assets consist primarily of investments, prepaid expenses, deferred pension assets, and headquarters’ property and equipment. These corporate and other expenses reconcile reportable operating segment data to total consolidated net sales, income before income taxes and identifiable assets. Comparative six month and second quarter results on this basis are illustrated in the following table.

21

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

	Six Months Ended						Quarter Ended
	November 30,			November 30,			November 30,			November 30,
(In thousands)	2005			2004			2005			2004
Net Sales
Industrial Segment	$	896,436		$	730,396		$	465,597		$	364,888
Consumer Segment		590,266			554,586			273,753			258,581
Consolidated	$	1,486,702		$	1,284,982		$	739,350		$	623,469
Income (Loss) Before Income Taxes (a)
Industrial Segment
Income Before Income Taxes (a)	$	115,468		$	102,075		$	50,389		$	45,939
Interest (Expense), Net		(535	)		24			(504	)		13
EBIT (b)	$	116,003		$	102,051		$	50,893		$	45,926
Consumer Segment
Income Before Income Taxes (a)	$	72,493		$	77,666		$	26,057		$	31,311
Interest (Expense), Net		175			108			43			59
EBIT (b)	$	72,318		$	77,558		$	26,014		$	31,252
Corporate/Other
(Loss) Before Income Taxes (a)	$	(82,680	)	$	(82,527	)	$	(48,849	)	$	(64,511	)
Interest (Expense), Net		(18,069	)		(17,017	)		(9,393	)		(8,987	)
EBIT (b)	$	(64,611	)	$	(65,510	)	$	(39,456	)	$	(55,524	)
Consolidated
Income Before Income Taxes (a)	$	105,281		$	97,214		$	27,597			12,739
Interest (Expense), Net		(18,429	)		(16,885	)		(9,854	)		(8,915	)
EBIT (b)	$	123,710		$	114,099		$	37,451		$	21,654

(a)

The presentation includes a reconciliation of Income (Loss) Before Income Taxes, a measure defined by Generally Accepted Accounting Principles (“GAAP”) in the U.S., to EBIT.

(b)

EBIT is defined as earnings before interest and taxes. We evaluate the profit performance of our segments based on income before income taxes, but also look to EBIT as a performance evaluation measure because interest expense is essentially related to corporate acquisitions, as opposed to segment operations. We believe EBIT is useful to investors for this purpose as well, using EBIT as a metric in their investment decisions. EBIT should not be considered an alternative to, or more meaningful than, operating income as determined in accordance with GAAP, since EBIT omits the impact of interest and taxes in determining operating performance, which represent items necessary to our continued operations, given our level of indebtedness and ongoing tax obligations. Nonetheless, EBIT is a key measure expected by and useful to our fixed income investors, rating agencies and the banking community all of whom believe, and we concur, that this measure is critical to the capital markets’ analysis of our segments’ core operating performance. We also evaluate EBIT because it is clear that movements in EBIT impact our ability to attract financing. Our underwriters and bankers consistently require inclusion of this measure in offering memoranda in conjunction with any debt underwriting or bank financing. EBIT may not be indicative of our historical operating results, nor is it meant to be predictive of potential future results.

22

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

RESULTS OF OPERATIONS

Three Months Ended November 30, 2005

Net Sales

Consolidated net sales of $739.4 million for the second quarter of fiscal 2006 improved 18.6 percent, or $115.9 million, over last year’s second quarter net sales of $623.5 million. The recent acquisition of illbruck Sealant Systems (“illbruck”), in addition to 4 other small product line acquisitions, supplied 9.7 percent of the growth in sales, or $60.7 million, while the organic growth in sales of 8.7 percent, including 3.3 percent pricing, provided an additional $54.3 million. Net favorable foreign exchange rates, relating primarily to the Canadian and Latin American currencies, partly offset by the euro, provided the remaining 0.2 percent, or $0.9 million, of the growth in sales over last year’s second quarter.

Industrial segment net sales, which comprise 63.0 percent of the current quarter’s consolidated net sales for the second quarter, totaled $465.6 million; growing 27.6 percent from last year’s $364.9 million. This segment’s net sales growth comes from the acquisition of illbruck, plus 3 other small product line acquisitions, which contributed 16.5 percent, organic sales growth of 10.9 percent, including 3.2 percent pricing, and the remaining 0.2 percent from net favorable foreign exchange differences. There were significant organic sales improvements virtually throughout this segment, with much of this growth related to increased commercial construction, ongoing maintenance and improvement activities primarily in North America, but also in Europe, Latin America and other regions of the world. The demand for most of our industrial product lines has increased as the economy in general, and the industrial sector in particular, has improved. We continue to secure new business and grow market share among our industrial segment operations.

Consumer segment net sales, which comprise 37.0 percent of the current quarter’s consolidated net sales for the second quarter, grew 5.9 percent to $273.8 million from last year’s $258.6 million. Organic sales growth added 5.6 percent (3.4 percent pricing) to the consumer segment sales total, plus 0.1 percent from favorable foreign exchange differences, and approximately 0.2 percent from one small acquisition. Beginning in February 2006, our retail merchandising services arrangements were changed with certain customers, resulting in a year over year reduction in net sales and gross profit, with a related reduction in selling expenses; otherwise, organic sales growth in this segment this second quarter would have been 7.0 percent, or 1.4 percent stronger. This organic growth in this segment is the result of fairly steady retail demand by the consumer, coupled with continuous product development among our businesses, although temporarily weakened by hurricane activity during the most recent quarter.

Gross Profit Margin

Consolidated gross profit margin of 40.5 percent of net sales this second quarter declined from 43.4 percent a year ago. This margin decline of 2.9 percent of sales, or 290 basis points (“bps”), is the result of the higher costs of a number of our raw materials, particularly petrochemical-based, some of which experienced significant spikes during the quarter as a result of the recent hurricanes, net of higher

23

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

pricing initiatives (approximately 70 bps). Numerous price increases have been initiated throughout the operating segments and will continue phasing in to help compensate or recover these higher material costs, some of which are beginning to level off. The recent acquisitions, particularly illbruck, carry inherently lower gross margin structures and further impacted gross margin this quarter by approximately 90 bps. Additionally, the change in merchandising services arrangements (approximately 30 bps) and a comparatively lower-margin mix of sales accounted for the difference, including increased services sales which characteristically carry lower gross margins.

Industrial segment gross profit margin for the second quarter declined to 42.0 percent of net sales from 44.7 percent last year. The margin decline in this segment mainly relates to the recent acquisitions, particularly illbruck (190 bps), and the service-driven lower-margin mix of sales.

Consumer segment gross profit margin for this second quarter declined to 37.9 percent of net sales from 41.6 percent last year. The higher raw material costs, net of pricing initiatives, impacted this segment’s margin by approximately 210 bps, the change in merchandising services arrangements affected this margin by another approximately 80 bps, and the partly service-driven lower-margin mix of sales accounted for the difference.

Selling, General and Administrative Expenses (“SG&A”)

Consolidated SG&A expense levels increased 100 bps to 33.4 percent of net sales compared with 32.4 percent a year ago. While the leverage from organic sales growth, the change in merchandising services arrangements and the inherently lower SG&A cost structure of illbruck, and other acquisitions, favorably impacted this expense percent year over year, the combination of these items could not overcome the impact of several significant, non-recurring items this quarter. These one-time expenses were comprised of additional costs associated with the finalization of the Dryvit national residential class action settlement, the upcoming sale of a small non-core subsidiary, recent hurricane-related losses, and costs associated with a European pension plan (140 bps, total). Additionally, there were certain other higher expenditures year over year, including employee related costs, product warranties, uncompleted acquisitions, and fuel-related distribution costs, totaling approximately 160 bps.

Industrial segment SG&A improved by 100 bps to 31.1 percent of net sales this second quarter from 32.1 percent a year ago, reflecting principally illbruck, and the leverage of organic sales growth, partly offset by higher fuel-related distribution costs, warranties, increased compensation and other growth-related expenditures and investments.

Consumer segment SG&A improved by 110 bps to 28.4 percent of net sales this second quarter compared with 29.5 percent a year ago, reflecting the leverage of organic sales growth over last year and this segment’s change in merchandising services arrangements along with continued cost containment and other savings programs. Compensation changes and other growth-related expenditures and investments partly offset these benefits.

24

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

Corporate/Other SG&A expenses increased during this year’s second quarter to $24.5 million from $8.5 million during last year’s second quarter, principally reflecting the one-time costs outlined above, totaling $10.2 million, in addition to other higher, mainly employee-related, costs.

License fee and joint venture income of approximately $460 thousand and $230 thousand for the quarters ended November 30, 2005 and 2004, respectively, are reflected as reductions of consolidated SG&A expenses.

We recorded total net periodic pension and postretirement benefit cost of $4.9 million and $4.0 million for the quarters ended November 30, 2005 and 2004, respectively. This increased pension expense of $0.9 million was attributable to increased pension service and interest cost approximating $0.9 million, in combination with additional net actuarial losses incurred of $0.2 million, offset by a slight improvement in the expected return on plan assets of $0.2 million. We expect that pension expense will fluctuate on a year-to-year basis depending upon the investment performance of plan assets, but such changes are not expected to be material as a percentage of income before income taxes.

Asbestos Charges

Certain of our wholly owned subsidiaries, principally Bondex International, Inc. (Bondex), along with many other U.S. companies, are and have been involved in a large number of asbestos-related suits filed primarily in state courts during the past two decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products. The alleged claims relate primarily to products that Bondex sold through 1977. In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure or that injuries incurred resulted from exposure to Bondex products.

During the quarter ending November 30, 2005, an additional $15.0 million was expensed through corporate/other and was added to our reserve based on management’s quarterly review of pending claims and defense costs. This reserve adjustment puts our total reserves at approximately $101.2 million, which we believe will be sufficient to cover the cash flow requirements for the balance of our then-pending known claims and defense costs. Our $15.0 million reserve increase is based on our most recent quarter’s experience and our valuation of our known existing claims and assumes that approximately $7.2 million will be allocated to anticipated higher future defense costs. As we review our asbestos reserve each quarter, we will make appropriate adjustments to the reserve based on our most recent experience to ensure that it is sufficient to cover the anticipated settlement and defense costs associated with our then pending, known claims. We will continue to evaluate the appropriateness of estimating the value of any potential future unknown asbestos claims and at such time, as we are able to quantify such future exposure, we will establish a reserve for such unknown future claims. For additional information, refer to Note F to the Consolidated Financial Statements.

25

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

We will continue to evaluate our asbestos-related loss exposure each quarter and review the adequacy of our reserve and the related cash flow implications in light of our most recent actual claims experience, the impact of state law changes and the evolving nature of federal legislative efforts to address asbestos litigation. We will continue to explore all feasible alternatives available to resolve our asbestos-related exposure in a manner consistent with the best interests of our stockholders.

Net Interest Expense

Net interest expense was approximately $900 thousand higher this second quarter than a year ago. Interest rates averaged 4.9 percent during this second quarter, compared with 4.8 percent a year ago, accounting for nearly $600 thousand in increased interest expense. This average rate increase is directly related to the Federal Reserve Bank rate increases during the past year, which affected the interest cost on our variable interest rate indebtedness. Reductions of debt outstanding year over year reduced interest cost by approximately $1.0 million during the quarter. Additional borrowings associated with recent acquisitions, added approximately $1.7 million more interest cost, while investment income performance improved year-over-year, providing approximately $400 thousand of additional income.

Income Before Income Taxes (“IBT”)

Consolidated IBT for this year’s second quarter improved by $14.9 million, or 116.6 percent, to $27.6 million from $12.7 million during last year’s second quarter, with margin comparisons of 3.7 percent of net sales versus 2.0 percent a year ago. This improvement year over year reflect primarily the $15.0 million pre-tax asbestos charge taken during this year’s second quarter versus $47.0 million pre-tax asbestos charge taken during last year’s second quarter. Exclusion of the asbestos charge would have resulted in IBT decline of 28.7 percent on 6.0 percent organic sales growth, before higher pricing initiatives and the change in merchandising services arrangements, and adjusted margins of 5.8 percent compared with last year’s 9.6 percent. This 380 bps margin difference essentially reflects the impact of the one-time charges taken during the quarter, as outlined previously, in addition to temporary business disruptions and higher material costs caused by the hurricanes, plus initial acquisition-related costs from illbruck this quarter.

Industrial segment IBT grew by $4.5 million, or 9.7 percent, to $50.4 million from last year’s $45.9 million, from this segment’s organic sales growth. Consumer segment IBT declined to $26.1 million from $31.3 million last year, reflecting primarily the net impact of higher material costs.

Income Tax Rate

The effective income tax rate was 32.9% for the three months ended November 30, 2005 compared to an effective income tax rate of 28.5% for the three months ended November 30, 2004.

26

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

For the three months ended November 30, 2005 and to a greater extent for the three months ended November 30, 2004, the effective tax rate differed from the federal statutory rate due to decreases in the effective tax rate principally as a result of certain tax credits and by the U.S. federal tax impact of foreign operations. The decreases in the effective tax rate were partially offset by valuation allowances associated with losses incurred by certain of our foreign businesses, valuation allowances related to U.S. federal foreign tax credit carryforwards, state and local income taxes and other non-deductible business operating expenses.

As of November 30, 2005, we have determined, based on the available evidence, that it is uncertain whether we will be able to recognize certain deferred tax assets. Therefore, in accordance with the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” we intend to maintain the tax valuation allowances recorded at November 30, 2005 for certain deferred tax assets until sufficient positive evidence (for example, cumulative positive foreign earnings or additional foreign source income) exists to support the reversal of the tax valuation allowances.

The valuation allowances relate to U.S. federal foreign tax credit carryforwards, certain foreign net operating losses and net foreign deferred tax assets. The most significant portion of the valuation allowance is associated with deferred tax assets recorded in purchase accounting. Any reversal of the valuation allowance that was recorded in purchase accounting would reduce goodwill.

The effective income tax rate for the three months ended November 30, 2005 reflects the impact of the $15 million asbestos liability charge. Excluding the asbestos charge, the effective income tax rate for this year’s second quarter would have been adjusted to a pro-forma effective income tax rate of 33.5%. The effective income tax rate for the three months ended November 30, 2004 reflects the impact of the $47 million asbestos liability charge. Excluding the asbestos charge, the effective income tax rate for last year’s second quarter would have been adjusted to a pro-forma effective income tax rate of 35.6%.

Net Income

Net income of $18.5 million for the three months ended November 30, 2005 compares to net income of $9.1 million for the same period last year, reflecting the impact of the $9.8 million and $29.4 million after-tax asbestos charges taken during the second quarters of fiscal 2006 and 2005, respectively. Excluding the impact of the asbestos charges, this year’s second quarter net income would have been an adjusted $28.3 million, representing a decline of $10.2 million, or 26.4 percent, from last year’s $38.5 million. Margin on sales would have been an adjusted 3.8 percent this year compared with 6.2 percent of sales last year, with this 240 bps margin difference mostly the result of the previously outlined one-time charges incurred during this year’s second quarter, along with initial acquisition-related costs from illbruck.

Diluted earnings per common share for this year’s second quarter improved by 87.5 percent, to $0.15 from $0.08 a year ago. As a result of our adoption of EITF 04-8 during last fiscal year, as outlined in Note H, diluted earnings per common share for the quarter ended November 30, 2004 have been restated to include the 8,034,355 shares issuable upon conversion of our contingently convertible debt. Excluding the impact of the asbestos charges, diluted earnings per common share for this year’s second quarter of $0.23 declined 25.8% compared with last year’s $0.31.

27

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

Six Months Ended November 30, 2005

Net Sales

Net sales on a consolidated basis for the first six months of fiscal 2006 of $1.487 billion improved 15.7 percent, or $201.7 million, over last year’s first six months net sales of $1.285 billion. Contributing to this improvement over last year was primarily growth in organic sales of approximately $125.4 million, or 9.8 percent, including 3.3 percent pricing, plus 6 acquisitions supplying another 5.4 percent growth in sales, or $70.1 million. Net favorable foreign exchange rates, relating primarily to the Canadian and Latin American currencies, partly offset by the euro, provided the remaining 0.5 percent, or $6.2 million, of the growth in sales over last year’s first six months.

Industrial segment net sales for the first six months grew 22.7 percent to $896.4 million from last year’s $730.4 million, comprising 60.3 percent of the current quarter’s consolidated net sales. This segment’s net sales growth comes primarily from organic sales growth of 12.7 percent, including 3.2 percent pricing, plus 9.4 percent from illbruck and four smaller acquisitions, with the remaining 0.6 percent from net favorable foreign exchange differences.

Consumer segment net sales for the first six months grew 6.4 percent to $590.3 million from last year’s $554.6 million, comprising 39.7 percent of the current quarter’s consolidated net sales. Growth in organic sales added 5.9 percent (3.4 percent pricing) to the consumer segment sales total, plus 0.3 percent from favorable foreign exchange differences, and approximately 0.2 percent from one small acquisition. Beginning in February 2005, our retail merchandising services arrangements were changed with certain customers, resulting in a year over year reduction in net sales and gross profit, with a related reduction in selling expenses; otherwise, organic sales growth this first six months would have been 7.4 percent, or 1.5 percent stronger. This organic growth in this segment is the result of fairly steady retail demand by the consumer, coupled with continuous product development among our businesses.

Gross Profit Margin

Consolidated gross profit margin of 41.4 percent of net sales this first six months declined from 44.0 percent a year ago. This margin decline of 260 bps is primarily the result of the higher costs of a number of our raw materials, particularly petrochemical-based, net of higher pricing initiatives (100 bps). Numerous price increases have been initiated throughout the operating segments and will continue phasing in to help compensate or recover these higher material costs, some of which are beginning to level off. The acquisitions of illbruck and other product lines with inherently lower gross margin structures (40 bps), the change in merchandising services arrangements

28

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

(30 bps) and a comparatively lower-margin mix of sales including increased services sales which characteristically carry lower gross margins, accounted for the additional gross margin decline.

Industrial segment gross profit margin for the first six months declined to 42.9 percent of net sales from 45.3 percent last year. This margin decline is the result of higher raw material costs, net of pricing initiatives, and the lower-margin mix of sales, including increased services revenues and the acquisition of lower-margin illbruck.

Consumer segment gross profit margin for this first six months declined to 39.1 percent of net sales from 42.3 percent last year. The higher raw material costs, net of pricing initiatives, the change in merchandising services arrangements, and the partly service-driven lower-margin mix of sales drove the margin decline in this segment.

Selling, General and Administrative Expenses (“SG&A”)

Consolidated SG&A expense levels improved 40 bps to 31.1 percent of net sales compared with 31.5 percent a year ago. The higher pricing initiatives during the past year (80 bps), illbruck, and the change in merchandising services arrangements (30 bps) drove this margin improvement. This combination more than overcame the $10.2 million (70 bps) one-time costs during the most recent quarter, plus continued higher fuel-related distribution costs, and increased compensation, warranties and other growth-related expenditures and investments.

Industrial segment SG&A improved by 130 bps to 30.0 percent of net sales this first six months from 31.3 percent a year ago, reflecting principally the higher pricing, the favorable SG&A cost structure of illbruck and other acquisitions, the leverage of strong organic sales growth, and cost containment and other savings programs, partly offset by higher fuel-related distribution costs and other growth-related expenditures and investments.

Consumer segment SG&A improved by 150 bps to 26.8 percent of net sales this first six months compared with 28.3 percent a year ago, reflecting principally the higher pricing and this segment’s change in merchandising servicing arrangements, along with continued cost containment and other savings programs. Similarly, increased fuel-related distribution costs, warranties, and other growth-related expenditures and investments partly offset these benefits.

Corporate/Other SG&A expenses increased during this year’s first six months to $34.6 million from $18.5 million during last year’s first six months, reflecting the $10.2 million one-time costs incurred during this year’s second quarter, as outlined previously, in addition to higher year over year employee-related expenditures, including grants made under the October 2004 Omnibus Equity Incentive Plan.

29

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

License fee and joint venture income of approximately $900 thousand and $500 thousand for the six months ended November 30, 2005 and 2004, respectively, are reflected as reductions of consolidated SG&A expenses.

We recorded total net periodic pension and postretirement benefit cost of $9.8 million and $7.9 million for the six months ended November 30, 2005 and 2004, respectively. This increased pension expense of $1.9 million was largely attributable to increased pension service and interest cost approximating $1.8 million, in combination with additional net actuarial losses incurred of $0.5 million, partly offset by a slight improvement in the expected return on plan assets of $0.4 million. We expect that pension expense will fluctuate on a year-to-year basis depending upon the investment performance of plan assets, but such changes are not expected to be material as a percentage of income before income taxes.

Asbestos Charges

As described in Note F to the consolidated financial statements, as well as in Management’s Discussion and Analysis of Financial Condition and Results of Operations presented for the three month period ended November 30, 2005, and in Part II — Legal Proceedings section of this filing, we recorded asbestos charges of $30.0 million and $47.0 million during the six month periods ended November 30, 2005 and 2004, respectively. Please refer to the sections of this filing mentioned above for further information.

Net Interest Expense

Net interest expense was $1.5 million higher this first six months than a year ago. Interest rates averaged 4.9 percent during this first six months, compared with 4.7 percent a year ago, accounting for nearly $800 thousand in increased interest expense. This average rate increase is primarily related to the Federal Reserve Bank rate increases during the past year, which directly affected the interest cost on our variable interest rate indebtedness. Reductions of outstanding debt year over year reduced cost by approximately $600 thousand these first six months. Additional borrowings associated with recent acquisitions, amounting to approximately $68.2 million, added approximately $2.0 million more interest expense, while investment income performance improved year-over-year, providing approximately $700 thousand of additional income.

Income Before Income Taxes (“IBT”)

Consolidated IBT for this year’s first six months improved by $8.1 million, or 8.3 percent, to $105.3 million from $97.2 million during last year’s first six months, with margin comparisons of 7.1 percent of net sales versus 7.6 percent a year ago. This decline in margin year over year reflects primarily the one-time charges incurred during the second quarter, as previously discussed, in addition to higher pricing initiatives to address higher material costs. Exclusion of the asbestos charges would have resulted in IBT decline of 6.2 percent on 7.1 percent organic sales growth, before higher pricing initiatives and the change in merchandising services arrangements, and adjusted margins of 9.1 percent compared with last year’s 11.2 percent.

30

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

Industrial segment IBT grew by $13.4 million, or 13.1 percent, to $115.5 million from last year’s $102.1 million, mainly from the strength of this segment’s organic sales growth. Consumer segment IBT declined slightly to $72.5 million from $77.7 million last year, reflecting primarily the net impact of the higher material costs. Combined operating IBT improved by $8.2 million, or 4.6 percent, over last year.

Income Tax Rate

The effective income tax rate was 34.9% for the six months ended November 30, 2005 compared to an effective income tax rate of 34.6% for the six months ended November 30, 2004.

For the six months ended November 30, 2005 and, to a greater extent for the six months ended November 30, 2004, the effective tax rate differed from the federal statutory rate due to decreases in the effective tax rate principally as a result of certain tax credits and by the U.S. federal tax impact of foreign operations. Furthermore, during the six months ended November 30, 2005, a decrease in the effective tax rate resulted from a one-time state income tax benefit relating to changes in Ohio tax laws, including the effect of lower tax rates, enacted on June 30, 2005. The decreases in the effective tax rate were partially offset by valuation allowances associated with losses incurred by certain of our foreign businesses, valuation allowances related to U.S. federal foreign tax credit carryforwards, state and local income taxes and other non-deductible business operating expenses.

As described in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three month period ended November 30, 2005, there is uncertainty as to whether we will be able to recognize certain deferred tax assets. Refer to the section of this filing mentioned above for further information.

The effective income tax rate for the six months ended November 30, 2005 reflects the impact of the $30 million asbestos liability charges. Excluding the asbestos charges, the effective income tax rate for this year’s first six months would have been adjusted to a pro-forma effective income tax rate of 35.2%. The effective income tax rate for the six months ended November 30, 2004 reflects the impact of the $47 million asbestos liability charge. Excluding the asbestos charge, the effective income tax rate for the first six months of last year would have been adjusted to a pro-forma effective income tax rate of 35.5%.

Net Income

Net income of $68.5 million for the six months ended November 30, 2005 compares to net income of $63.6 million for the same period last year, reflecting the impact of the $19.1 million after-tax asbestos charges taken this year, versus $29.4 million last year. Excluding the impact of the asbestos charges, this year’s first six months net income would have been an adjusted $87.6 million, representing a decrease of $5.4 million, or 5.7 percent, from last year’s $93.0 million. Margin on sales would have been an

31

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

adjusted 5.9 percent this year compared with 7.2 percent of sales during last year’s first half, with this 130 bps margin difference mostly the result of the previously outlined one-time costs incurred during this year’s second quarter, along with initial acquisition-realated costs from illbruck.

Diluted earnings per common share for this year’s first six months improved by 5.8%, to $ 0.55 from $0.52 last year. Excluding the asbestos charges, adjusted 2006 first six months diluted earnings per common share would have decreased by 6.7 percent, to an adjusted $0.70 from $0.75 a year ago. As a result of our adoption of EITF 04-8 during last fiscal year, as outlined in Note H, diluted earnings per common share for the six months ended November 30, 2004 have been restated to include the 8,034,355 shares issuable upon conversion of our contingently convertible debt.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows From:

Operating Activities

There was $95.6 million of cash generated from operations during the first six months of fiscal 2006 compared with $90.5 million generated during the same period a year ago, or a net increase of $5.1 million, or 5.6 percent. Depreciation and amortization provided a period-over-period increase in cash generation of $2.3 million, while “Items not affecting cash and other” and “Changes in operating working capital” were a net provider of cash period-over-period of $5.4 million. More specifically, changes in trade accounts receivable generated a period-over-period increase in cash flow of $27.4 million, including foreign exchanges differences of $12.3 million, mostly due to a three day reduction of sales outstanding period-over-period. Inventories contributed a period-over-period generation of cash flow of $20.1 million, including foreign exchange differences of $6.9 million, as a result of a six day improvement in days inventory outstanding versus the prior period. Accounts payable had the most significant change period-over-period, which caused a decrease in cash flow of $42.9 million, including foreign exchange differences of $4.2 million, as a result of the comparative strength of business toward year-end 2005 versus a year ago, coupled with the timing of those related payments period-over-period. Accrued loss reserves contributed a year-over-year generation of cash flow of $9.8 million mostly as a result of setting up the reserves related to the finalization of the Dryvit national residential class action settlement, hurricane related losses and losses reserved for the disposal of a business(refer to “Results of Operations”). Prepaid and other current assets positively affected cash flow by $9.0 million period-over-period mostly as a result of timing of payments period-over-period and acquisition related items. Income taxes payable and deferred taxes negatively affected cash flow by $8.7 million as of the result of timing of payments and the change in tax accruals this period over the prior. Accrued other liabilities contributed a year-over-year use of cash flow of $7.9 million mostly as a result of changes in debt structure and interest expense and other non-income tax accruals. All other remaining balance sheet changes related to “Items not affecting cash and other” and “Changes in operating working capital” had a net negative impact of $1.4 million, mostly due to timing.

32

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

Cash flow changes in long-term and short-term asbestos liability reserves related to both the period’s expense accruals and payments, net of taxes, amounted to period over period cash use of approximately $7.5 million.

Cash provided from operations remains our primary source of financing internal growth, with limited use of short-term debt.

Investing Activities

Capital expenditures, other than for ordinary repairs and replacements, are made to accommodate our continued growth through improved production and distribution efficiencies and capacity, and to enhance administration. Capital expenditures during the first six months of fiscal 2006 of $20.4 million compare with depreciation of $27.0 million. We are not a capital intensive business and capital expenditures generally do not exceed depreciation in a given year. Capital spending is expected to slightly outpace our depreciation levels for the next several years as additional capacity is brought on-line to support our continued growth. With this additional minor plant expansion, we believe there will be adequate production capacity to meet our needs for the next several years at normal growth rates.

During the first six months of fiscal 2006, we invested a total of $135.8 million for the acquisitions of illbruck (refer to Note E) and a smaller business.

Our captive insurance companies invest in marketable securities in the ordinary course of conducting their operations, and this activity will continue. Differences in these activities between years are attributable to the timing and performance of their investments.

Financing Activities

On September 30, 2004, we issued and sold $200 million aggregated principal amount of 4.45% Senior Unsecured Notes due 2009 (“4.45% Senior Notes”), which we concurrently swapped back to floating interest debt (refer to interest rate risk below). The 4.45% Senior Notes were offered to qualified institutional buyers under Rule 144A. While the net proceeds were primarily earmarked to pre-fund the retirement of the 7% Senior Notes, which matured June 15, 2005, portions of the net proceeds had been used to retire the $15.0 million 6.12% Senior Notes which matured November 15, 2004, and to repay our then-outstanding $68.0 million commercial paper. On April 26, 2005, pursuant to a Registration Rights Agreement between the Company and the initial purchasers of the 4.45% notes, we completed an exchange offer to allow holders to exchange the 4.45% Senior Notes for the same principal amount of the notes registered under the Securities Act of 1933.

During November 2004, we refinanced our $500 million revolving credit facility, due July 14, 2005, with a $330 million 5-year credit facility (“Credit Agreement”), due November 19, 2009. This new facility will be used for general corporate purposes, including acquisitions and to provide back-up liquidity for the issuance of commercial paper. The facility provides for borrowings in U.S. dollars and

33

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

several foreign currencies in an aggregate amount of up to $25.0 million and a swing-line up to $20.0 million for short-term borrowings of less than 15 days. In addition, the size of the facility may be expanded upon our request by up to an additional $100.0 million, thus potentially expanding the facility to $430.0 million, subject to lender approval. As of November 30, 2005, we had $25.0 million outstanding under this facility.

On October 19, 2005, we issued and sold $150 million aggregated principal amount of 6.7% Senior Unsecured Notes due 2015 (“6.7% Senior Unsecured Notes”) of our indirect wholly owned subsidiary, RPM United Kingdom G.P. RPM International Inc. will fully and unconditionally guarantee the payment obligations under the Senior Unsecured Notes. The net proceeds of the offering of the Senior Unsecured Notes were used by RPM United Kingdom G.P. for refinancing $138 million of revolving credit facility borrowings associated with the August 31, 2005 acquisition of illbruck and for other general corporate purposes. Concurrent with the issuance of the 6.7% Senior Unsecured Notes, RPM United Kingdom G.P. entered into a cross currency swap, which fixed the interest and principal payments in euros for the life of Senior Unsecured notes and results in an effective euro fixed rate borrowing of 5.31%. The Senior Unsecured Notes were offered to qualified institutional buyers under Rule 144A of the Securities Act of 1933. The Notes have not been and will not be registered under the Securities Act of 1933 or any state securities laws.

We are exposed to market risk associated with interest rates. We do not use financial derivative instruments for trading purposes, nor do we engage in foreign currency, commodity or interest rate speculation. In addition to the hedge risk associated with our 6.7% Senior Unsecured Notes discussed above, our only other hedged risks are associated with certain fixed debt whereby we have a $200 million notional amount interest rate swap contract designated as a fair value hedge to pay floating rates of interest based on six-month LIBOR that matures in fiscal 2010. Because critical terms of the debt and interest rate swap match, the hedge is considered perfectly effective against changes in fair value of debt, and therefore, there is no need to periodically reassess the effectiveness during the term of the hedge.

Our debt-to-capital ratio was 44.1% at November 30, 2005 compared with 44.5% at May 31, 2005. Had we been able to reduce our total outstanding debt by all of our cash and short-term investments available as of November 30, 2005 and May 31, 2005, our adjusted net (of cash) debt-to-capital would have been 41.0% and 38.5%, respectively. This difference primarily reflects the additional indebtedness related to the August 31, 2005 illbruck acquisition (refer to Note E).

The following table summarizes our financial obligations and their expected maturities at November 30, 2005 and the effect such obligations are expected to have on our liquidity and cash flow in the periods indicated.

34

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

Contractual Obligations
(In thousands)

	Total
	Contractual
	Payment		Payments Due In
	Stream		2006		2007-08		2009-10		After 2010
Long-term debt obligations	$	866,436	$	18,422	$	280,184	$	217,813	$	350,017
Operating lease obligations(1)		79,560		23,765		32,482		12,429		10,884
Other long-term liabilities(2)		144,900		14,100		22,700		30,900		77,200
Total	$	1,090,896	$	56,287	$	335,366	$	261,142	$	438,101

(1)

We calculate non-cancelable operating lease obligations on an annual basis and consequently, such information is not available at November 30, 2005. The amounts shown above represent the obligations at May 31, 2005.

(2)

These amounts represent our estimated cash contributions to be made in the periods indicated for our pension and postretirement plans, assuming no actuarial gains or losses, assumption changes or plan changes occur in any period. The current year balance has been updated; amounts beyond the current year are only updated once a year, and therefore, reflect the balances as estimated at May 31, 2005.

We maintain excellent relations with our banks and other financial institutions to provide continual access to financing for future growth opportunities.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financings. We have no subsidiaries that are not included in our financial statements, nor do we have any interests in or relationships with any special purpose entities that are not reflected in our financial statements.

OTHER MATTERS

Environmental Matters

Environmental obligations continue to be appropriately addressed and, based upon the latest available information, it is not anticipated that the outcome of such matters will materially affect the Company’s results of operations or financial condition. Our critical accounting policies and estimates set forth above describe our method of establishing and adjusting environmental-related accruals and should be read in conjunction with this disclosure. (For additional information, refer to Note H to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended May 31, 2005.)

Income Tax Matters

On October 22, 2004 the American Jobs Creation Act of 2004 (the Act) was signed into law. Included in the Act is a provision allowing, in general, a new special tax deduction of up to 9% (once fully phased-in) of the lesser of 1) “qualified production activities income” as defined in the Act or 2) taxable income for the tax year, after deduction for the utilization of any net operating loss carryforwards.

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RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

As a result of the new special tax deduction provision included in the Act, the FASB issued FASB Staff Position No. FAS 109-1, “Application of FASB Statement No. 109 (SFAS 109), ‘Accounting for Income Taxes,’ to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (FSP 109-1) in December 2004. FSP 109-1 provides that the new special tax deduction created in the Act should be accounted for as a special deduction in accordance with SFAS 109 and not as a tax rate reduction.

The effective date of the new special tax deduction included in the Act is for tax years beginning after December 31, 2004. Accordingly, the new provision is first available to us for our fiscal year ending May 31, 2006. We have determined that the new special tax deduction associated with qualified production activities income will have a slightly favorable effect on our annual effective tax rate for the year ending May 31, 2006.

Also included in the Act is a provision allowing corporate taxpayers to claim a special one-time dividends received deduction of certain foreign earnings that are repatriated to the U.S. The new provision is applicable, given our fiscal year-end, for qualifying repatriations made prior to May 31, 2006. In general, a deduction of 85% of certain dividends, in excess of a base-period amount, received from certain controlled foreign subsidiaries is allowable. The repatriation provision is comprised of an intricate set of rules and is subject to limitations and reinvestment requirements.

In response to the new special one-time dividends received deduction, the FASB issued FASB Staff Position No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (FSP 109-2) in December 2004. FSP 109-2 provides accounting and disclosure guidance for the repatriation process.

We have not completed computing the potential tax effects of the repatriation provision at this time. An evaluation of the tax effect of the new special one-time dividends received deduction may have on our results will be completed during fiscal 2006.

FORWARD—LOOKING STATEMENTS

The foregoing discussion includes forward-looking statements relating to the business of the Company. These forward-looking statements, or other statements made by the Company, are made based on management’s expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors (including those specified below), which are difficult to predict and, in many instances, are beyond the control of the Company. As a result, actual results of the Company could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) general economic conditions; (b) the price, supply and capacity of raw materials, including assorted resins and solvents; packaging, including plastic containers; and transportation services, including fuel surcharges; (c) continued growth in demand for the Company’s products; (d) legal, environmental and litigation risks inherent in the Company’s construction and chemicals businesses and risks related to the adequacy of the Company’s insurance coverage for such matters; (e) the effect of changes in interest rates; (f) the effect of fluctuations in currency exchange rates upon the Company’s foreign operations; (g) the effect of non-

36

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2005

currency risks of investing in and conducting operations in foreign countries, including those relating to domestic and international political, social, economic and regulatory factors; (h) risks and uncertainties associated with the Company’s ongoing acquisition and divestiture activities; (i) risks related to the adequacy of its contingent liability reserves, including for asbestos-related claims; and (j) other risks detailed in the Company’s other reports and statements filed with the Securities and Exchange Commission, including the risk factors set forth in the Company’s prospectus and prospectus supplement included as part of the Company’s Registration Statement on Form S-4 (File No. 333-120536), as the same may be amended from time to time. The Company does not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the filing date of this document.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates and foreign exchange rates since we fund our operations through long- and short- term borrowings and denominate our business transactions in a variety of foreign currencies. There were no material changes in our exposure to market risk since May 31, 2005.

ITEM 4. CONTROLS AND PROCEDURES

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.

     The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of November 30, 2005 (the “Evaluation Date”), have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.

(b) CHANGES IN INTERNAL CONTROL.

     There were no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended November 30, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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ITEM 1. LEGAL PROCEEDINGS

EIFS Litigation

As previously reported, Dryvit is a defendant or co-defendant in numerous exterior insulated finish systems (“EIFS”) related lawsuits. As of November 30, 2005, Dryvit was a defendant or co-defendant in approximately 150 single family residential EIFS cases, the majority of which are pending in the southeastern region of the country. Dryvit is also defending EIFS lawsuits involving commercial structures, townhouses and condominiums. The vast majority of Dryvit’s EIFS lawsuits seek monetary relief for water intrusion related property damages, although some claims in certain lawsuits allege personal injuries from exposure to mold.

As previously reported, Dryvit is a defendant in an attempted state class action filed on November 14, 2000 in Jefferson County, Tennessee styledBobby R. Posey, et al. v. Dryvit Systems, Inc. (formerly styledWilliam J. Humphrey, et al. v. Dryvit Systems, Inc.) (Case No. 17,715-IV) (“Posey”). As previously reported, a preliminary approval order was entered on April 8, 2002 in thePoseycase for a proposed nationwide class action settlement covering, “All Persons who, as of June 5, 2002, own a one- or two-family residential dwelling or townhouse in any State other than North Carolina clad, in whole or in part, with Dryvit EIFS installed after January 1, 1989, except persons who (1) prior to June 5, 2002, have settled with Dryvit, providing a release of claims relating to Dryvit EIFS; or (2) have not obtained a judgment against Settling Defendant for a Dryvit EIFS claim, or had a judgment entered against them on such a claim in Settling Defendants’ favor; and (3) any employees of Dryvit.” The deadline for filing claims expired on June 5, 2004. On September 15, 2005, a final, non-appealable order was entered finally approving the nationwide class.

As of November 30, 2005, approximately 7,195 total claims had been filed as of the June 5, 2004 claim filing deadline. Of these 7,195 claims, approximately 4,409 claims have been rejected or closed for various reasons under the terms of the settlement. Approximately 1,767 of the remaining claims are at various stages of review and processing under the terms of the settlement and it is possible that some of these claims will be rejected or closed without payment. As of November 30, 2005, a total of 1,019 claims have been paid for a total of approximately $9.41 million. Additional payments have and will continue to be made under the terms of the settlement agreement which include inspection costs, third party warranties and class counsel attorneys’ fees.

Based upon the final court order approving thePoseynational class action settlement and Dryvit’s claims experience to date, Dryvit determined that a $10.0 million increase to its existing reserves was necessary and appropriate, which should be adequate to fully cover the anticipated costs of thePoseysettlement. It is anticipated that $5.0 million of this reserve increase will be recovered from insurance carriers and accordingly, insurance receivables were increased by that amount.

As previously reported, third party excess insurers have historically paid varying shares of Dryvit’s defense and settlement costs in the individual commercial and residential EIFS lawsuits

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under various cost-sharing agreements. During the past several fiscal quarters, Dryvit has assumed a greater share of the costs associated with its EIFS litigation as it seeks funding commitments from several of the Company’s third party excess insurers and will likely continue to do so pending the outcome of formal coverage litigation involving these same third party insurers. As previously reported, one of the Company’s excess insurers filed suit in the Northern District of Ohio (Case No. 1:05CV1903) seeking a declaration with respect to its rights and obligations for EIFS related claims under its applicable policies. During the quarter, Dryvit filed a motion to stay the federal filing based on a more complete state court complaint filed on November 23, 2005 against these same insurers and the Company’s insurance broker in Cuyahoga County Ohio Common Pleas Court (Case No. CV05 578004). Dryvit is vigorously pursuing its claims and anticipates that it will ultimately recover against the Company’s insurers and/or its broker for all or a significant portion of the costs associated with its EIFS related claims.

Asbestos Litigation

As previously reported, certain of the Company’s wholly-owned subsidiaries, principally Bondex International, Inc. (collectively referred to as “the Subsidiaries”), are defendants in various asbestos-related bodily injury lawsuits filed in various state courts with the vast majority of current claims pending in five states — Illinois, Ohio, Mississippi, Texas and Florida. These cases generally seek unspecified damages for asbestos-related diseases based on alleged exposures to asbestos-containing products previously manufactured by the Company’s Subsidiaries.

The Company’s Subsidiaries vigorously defend these asbestos-related lawsuits and in many cases, the plaintiffs are unable to demonstrate that any injuries they have incurred, in fact, resulted from exposure to one of our Subsidiaries’ products. In such cases, the Subsidiaries are generally dismissed without payment. With respect to those cases where compensable disease, exposure and causation are established with respect to one of our Subsidiaries’ products, the Subsidiaries generally settle for amounts that reflect the confirmed disease, the particular jurisdiction, applicable law, the number and solvency of other parties in the case and various other factors which may influence the settlement value each party assigns to a particular case at the time.

As of November 30, 2005, the Company’s Subsidiaries had a total of 9,501 active asbestos cases compared to a total of 7,523 cases as of November 30, 2004. For the quarter ended November 30, 2005, the Company’s Subsidiaries secured dismissals and/or settlements of 234 claims and made total payments of $13.4 million, which included defense costs paid during the current quarter of $5.4 million. For the comparable period ended November 30, 2004, dismissals and/or settlements covered 290 claims and total payments were $15.4 million, which included defense costs paid during the quarter of $5.2 million. In some jurisdictions, cases may involve more than one individual claimant. As a result, settlement or dismissal statistics on a per case basis are not necessarily reflective of the payment amounts on a per claimant basis and the amounts and rates can vary widely depending on a variety of factors including the mix of malignancy and non-malignancy claims and the amount of defense costs incurred during the period.

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The rate at which plaintiffs filed asbestos-related suits against the Company’s Subsidiaries, particularly Bondex, has increased since the fourth fiscal quarter of 2002, influenced by the bankruptcy filings of numerous other defendants in asbestos-related litigation. Based on the significant increase in asbestos claims activity which, in many cases disproportionately increased Bondex’s exposure in joint and several liability law states, our third-party insurance was depleted within the first fiscal quarter of 2004, as previously reported. Our third-party insurers historically had been responsible, under various cost-sharing arrangements, for the payment of approximately 90% of the indemnity and defense costs associated with our asbestos litigation. Prior to this sudden precipitous increase in loss rates, the combination of book loss reserves and insurance coverage was expected to adequately cover asbestos liabilities for the foreseeable future. We have reserved our rights with respect to several of our third-party insurers’ claims of exhaustion and in late calendar 2002, we commenced a review of our known insurance policies to determine whether other insurance limits may be available to cover our asbestos liabilities.

As a result of an examination of our Subsidiaries’ historical insurance and as previously disclosed, certain of our Subsidiaries filed a complaint for declaratory judgment, breach of contract and bad faith against various third party insurers challenging their assertion that their policies covering asbestos-related claims have been exhausted. The July 3, 2003 filing in Ohio (Case No. 1:03 CV1322), was combined with a related case and, pursuant to a case management order, the parties are to complete fact discovery by March 31, 2006, and dispositive motions and expert discovery by September 1, 2006. A trial date in January 2007 was originally set; however, it is possible that this and other dates may be modified as the case progresses.

We are unable at the present time to predict the timing or ultimate outcome of this insurance coverage litigation. Consequently, we are unable to predict whether, or to what extent, any additional insurance may be available to cover our Subsidiaries’ asbestos liabilities. We have not included any potential benefits from this litigation either in our financial statements or in calculating our current asbestos reserve. Our wholly-owned captive insurance companies have not provided any insurance or re-insurance coverage for any of our Subsidiaries’ asbestos-related claims.

During the last seven months of 2003, new state liability laws were enacted in three states (Mississippi, Ohio and Texas) where at that time more than 80% of the claims against Bondex were pending. Effective dates for the last two of the law changes were April 8, 2003 and July 1, 2003. The changes generally provided for liability to be determined on a “proportional cause” basis, thereby limiting Bondex’s responsibility to only its share of the alleged asbestos exposure. During the third and fourth fiscal quarters of 2004, two of the three previously-mentioned states that adopted “proportional cause” liability in 2003, passed additional legislation impacting medical criteria and product identification in asbestos-related litigation. While there have been some changes in the type of claims filed in certain of these states, the ultimate influence these law changes may have on future claims activity and settlement values is not fully known at this time. Claim filings in these three subject states at the quarter ended November 30, 2005, coupled

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with the non-malignancy filings in Florida, currently comprise approximately 80% of the total aggregate claims filed against Bondex.

At the end of 2002 and through the third fiscal quarter of 2003, Bondex had concluded it was not possible to estimate the cost of disposing all of the asbestos-related claims that might be filed against Bondex in the future due to a number of reasons, including its lack of sufficient comparable loss history from which to assess either the number or value of any future asbestos-related claims. As previously disclosed, during the fourth fiscal quarter of 2003, Bondex retained a consulting firm to assist in analyzing its loss history data, to evaluate whether it would be possible to estimate the cost of disposing pending claims in light of both past and recent loss history, and to assist in determining whether future asbestos-related claims reasonably expected to be filed against Bondex were measurable, given recent changes in various state laws and the prospect of potential federal asbestos-related legislation. Bondex provided these consultants with all relevant data regarding asbestos-related claims filed against Bondex through May 31, 2003. At the time, management concluded, with the consultants’ input, that it was not possible to estimate the full range of the cost of resolving future asbestos-related claims against Bondex because of the uncertainties associated with the litigation of those claims.

Estimating the future cost of asbestos related contingent liabilities was and continues to be subject to many uncertainties, including (i) the ultimate number of claims filed; (ii) the cost of resolving both current known and future unknown claims; (iii) the amount of insurance, if any, available to cover such claims, including the outcome of coverage litigation against the Subsidiaries’ third party insurers; (iv) future earnings and cash flow of the Company’s Subsidiaries; (v) the impact of bankruptcies of other companies whose share of liability may be imposed on the Company’s Subsidiaries under certain state liability laws; (vi) the unpredictable aspects of the litigation process including a changing trial docket and the jurisdictions in which trials are scheduled; (vii) the outcome of any such trials including judgments or jury verdicts, as a result of our more aggressive defense posture which includes taking selective cases to verdict; (viii) the lack of specific information in many cases concerning exposure to the Subsidiaries’ products and the claimants’ diseases; (ix) potential changes in applicable federal and/or state law; and (x) the potential impact of various proposed structured settlement transactions or subsidiary bankruptcies by other companies, some of which are the subject of federal appellate court review, the outcome of which could materially affect any future asbestos-related liability estimates. In addition to the foregoing, during both calendar years 2003 and 2005, passage by the United States Senate Judiciary Committee of a proposed bill to establish a trust fund to pay future asbestos related claims and remove such cases from federal and state courts with industry and insurers funding the trust remains a significant, new variable that has made it increasingly difficult to predict with certainty the full exposure of future, unknown asbestos-related claims. The ongoing prospect of federal trust fund legislation is expected to continue to be a significant variable impacting our ability to assess our future asbestos-related liabilities. As previously reported, the Company has become aware of a pending federal criminal investigation into the conduct of at least three plaintiffs’ law firms (all of whom have filed claims against the Company’s Subsidiaries and many other defendants) with respect to their claim-filing practices. This federal investigation, coupled with recent judicial findings in Texas, calls into question from a medical and legal perspective the veracity of a significant number of asbestos claims for

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all defendants, including our Subsidiaries. We will continue to monitor these developments which, over time, could significantly impact the number of future claims filed; the value, if any, for such claims; and the adequacy of our asbestos reserve for any such future claims.

Based on the foregoing considerations, at May 31, 2003, we concluded that we could not fully estimate the liability that would result from all future asbestos claims. We established a reserve for those pending cases that had progressed to a stage where the cost to dispose of these cases could, at the time, reasonably be estimated, as well as a $51.2 million provision for future unasserted claims that were estimable at May 31, 2003. The estimation of even pending cases was and is always difficult due to the dynamic nature of asbestos litigation including the variables discussed above. As described below, the estimated range of potential loss covering measurable known asbestos claims and this provision for future claims that were estimable at May 31, 2003 was $140.0 million to $145.0 million. Accordingly, we established a reserve equal to the lower end of this range of potential loss by taking an asbestos charge to fiscal 2003 operations of $140.0 million. At the time of the reserve, we believed that this asbestos reserve would be sufficient to cover our asbestos-related cash flow requirements over the estimated three-year life of the reserve. The $140.0 million charge also included $15.0 million in total projected defense costs over the estimated three-year life of the reserve. By comparison, Bondex’s share of costs (net of then-available third-party insurance) for asbestos-related product liability was $6.7 million and $2.8 million for the years ended May 31, 2003 and 2002, respectively.

Since May 31, 2003, we have reviewed and evaluated on a quarterly basis the adequacy of our asbestos reserve. The range of loss calculation for the $140 million reserve was based on an extensive analysis of the most critical factors that influence our asbestos-related costs including: (i) the gross number of open malignancy claims (principally mesothelioma claims) as these claims have the most significant impact on our asbestos settlement costs; (ii) historical and current settlement costs and dismissal rates by various categories; (iii) analysis of the jurisdiction and governing law of the states in which these claims are pending; and (iv) outside defense counsel’s opinions and recommendations with respect to the merits of such claims. Although the number of open malignancy claims has recently increased, our average settlement costs for malignancy claims have declined and dismissal rates have increased. Several defense verdicts during the second half of fiscal 2004 further contributed to lower settlement values and higher dismissal rates. Our defense costs, however, have increased significantly as a result of our more aggressive defense strategy, which includes taking selective cases to verdict.

As previously disclosed, based on our review of our asbestos reserve for the second quarter ending November 30, 2004, we concluded that an increase in our reserve was appropriate and recorded an asbestos reserve adjustment of $47.0 million for the quarter ended November 30, 2004, which we believed would be sufficient to cover any incremental cash flow requirements through fiscal 2006 not covered by the $140.0 million reserve, as well as the additional cash flow requirements for the balance of our then pending known claims and anticipated higher defense costs. Approximately $32.0 million of the $47.0 million reserve adjustment was allocated to anticipated higher future defense costs. Consistent with this methodology, additional asbestos reserves were taken for the third and fourth quarters of fiscal 2005.

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During the second quarter ending November 30, 2005, an additional $15.0 million was added to the asbestos reserve based on management’s quarterly review of pending claims and defense costs. This reserve adjustment puts our total reserves at approximately $101.2 million, which we believe will be sufficient to cover the cash flow requirements for the balance of our pending known claims and defense costs. Our $15.0 million reserve increase is based on our most recent quarter’s experience and our valuation of our known existing claims and assumes that approximately $7.2 million will be allocated to anticipated future defense costs. (For additional information, refer to Note F to the Consolidated Financial Statements). As we review our asbestos reserve each quarter, we will make appropriate adjustments to the reserve based on our most recent experience to ensure that it is sufficient to cover the anticipated settlement and defense costs associated with our then pending, known claims.

We recognize that future facts, events and legislation, both state and/or federal, may alter our estimates of pending claims and our ability to estimate any future unasserted claims. We cannot estimate possible liabilities in excess of those accrued because we cannot predict the number of additional claims that may be filed in the future, the grounds for such claims, the potential settlement values associated with any such future claims, the ultimate resolution of such claims, the full impact of the state law changes enumerated above or the effect of pending federal trust fund legislation on future asbestos claims. Subject to the foregoing variables, including the timing and impact of such variables and the increase in the asbestos reserve, we believe that our asbestos reserves are sufficient to cover the asbestos-related cash flow requirements for the current inventory of our known claims. It is, however, reasonably possible that our actual costs for such claims could differ from current estimates, but, based upon information presently available, such costs are not expected to have a material effect on our competitive or financial position or our ongoing operations. As previously disclosed, however, our existing reserve will not presently cover the costs of future unknown claims and therefore, additional reserves will be required in future periods for any such future claims. Any such future reserve increases, when taken, could have a material impact on our results in such period.

The Company will continue to evaluate our asbestos-related loss exposure each quarter, review the adequacy of our existing reserve and the related cash flow implications in light of our most recent actual claims experience, the impact of state law changes and the evolving nature of federal legislative efforts to address asbestos litigation. We continue to evaluate, with the assistance of outside advisors, whether we can reasonably estimate the value of any potential future unknown asbestos claims. At such time as we are able to quantify such future exposure, we will appropriately adjust our existing reserve for such unknown future claims. We will continue to explore all feasible alternatives available to resolve our asbestos-related exposure in a manner consistent with the best interests of our stockholders.

Environmental Proceedings

As previously reported, several of the Company’s subsidiaries are, from time to time, identified as a “potentially responsible party” under the Comprehensive Environmental Response, Compensation and Liability Act and similar state environmental statutes. In some cases, the

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Company’s Subsidiaries are participating in the cost of certain clean-up efforts or other remedial actions. The Company’s share of such costs, however, has not been material and management believes that these environmental proceedings will not have a material adverse effect on the Company’s consolidated financial condition or results of operations. See “Business-Environmental Matters,” in the Company’s Annual Report on Form 10-K for the year ended May 31, 2005.

ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Stockholders of RPM International Inc. was held on October 7, 2005. The following matter was voted on at the meeting.

Election of Dr. Max D. Amstutz, Charles A. Ratner, William B. Summers, Jr. and Dr. Jerry Sue Thornton as Directors of the Company. The nominees were elected as Directors with the following votes:

Dr. Max D. Amstutz
For	103,374,140
Withheld	1,361,929
Broker non-votes	0
Charles A. Ratner
For	103,890,515
Withheld	845,553
Broker non-votes	0
William B. Summers, Jr.
For	103,776,910
Withheld	959,159
Broker non-votes	0
Dr. Jerry Sue Thornton
For	103,926,033
Withheld	810,036
Broker non-votes	0

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RPM INTERNATIONAL INC. AND SUBSIDIARIES
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In addition to the Directors above, the following Directors’ terms of office continued after the Annual Meeting of Stockholders: Bruce A. Carbonari, James A. Karman, Donald K. Miller, Joseph P. Viviano, Edward B. Brandon, William A. Papenbrock, Frank C. Sullivan and Thomas C. Sullivan.

For information on how the votes for the above matter were tabulated, see the Company’s definitive Proxy Statement used in connection with the Annual Meeting of Stockholders on October 7, 2005.

ITEM 6 — EXHIBITS

Exhibit
No.	Exhibit Description
4.1	Indenture, dated as of October 24, 2005, among RPM United Kingdom G.P., by its general partners, RPM Canada and RPM Canada Investment Company, the Company, as guarantor, and The Bank of New York Trust Company, N.A., as trustee, which is incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8- K, as filed with the Commission on October 25, 2005 (File No. 001- 14187).
4.2	Form of 6.70% Senior Note due 2015, which is incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8- K, as filed with the Commission on October 25, 2005 (File No. 001- 14187).
4.3	Form of Guarantee, which is incorporated herein by reference to Exhibit 4.3 to the Company’s Current Report on Form 8- K, as filed with the Commission on October 25, 2005 (File No. 001- 14187).
10.1	Purchase Agreement, dated as of October 19, 2005, among RPM United Kingdom G.P., by its general partners, RPM Canada and RPM Canada Investment Company, the Company, Goldman, Sachs & Co. and each of the Initial Purchasers named in Schedule A to the Purchase Agreement, which is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8- K, as filed with the Commission on October 25, 2005 (File No. 001- 14187).
* 10.2	Form of Indemnification Agreement entered into by and between the Company and each of its Directors and Executive Officers, which is incorporated herein by reference to Exhibit 10.14 to the Company’s Quarterly Report on Form 10- Q for the quarter ended November 30, 2002 (File No. 001- 14187).
10.3	Amendment No. 5 to Receivables Purchase Agreement, among certain subsidiaries of the Company, RPM Funding Corporation and Bank One and Wachovia Bank, NA, as co- agents and administrative agents, dated August 26, 2005.(x)
10.4	Amendment No. 6 to Receivables Purchase Agreement, among certain subsidiaries of the

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RPM INTERNATIONAL INC. AND SUBSIDIARIES
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Exhibit
No.	Exhibit Description
	Company, RPM Funding Corporation and Bank One and Wachovia Bank, NA, as co- agents and administrative agents, dated October 31, 2005.(x)
11.1	Computation of Net Income per share of Common Stock. (x)
31.1	Rule 13a- 14(a) Certification of the Company’s Chief Executive Officer. (x)
31.2	Rule 13a- 14(a) Certification of the Company’s Chief Financial Officer. (x)
32.1	Section 1350 Certification of the Company’s Chief Executive Officer. (x)
32.2	Section 1350 Certification of the Company’s Chief Financial Officer. (x)

(x)	Filed herewith.
*	Management contract or compensatory plan or arrangement.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	RPM International Inc.
	By	/s/ Frank C. Sullivan
	Frank C. Sullivan
	President and Chief Executive Officer
	By	/s/ Robert L. Matejka
	Robert L. Matejka
	Vice President, Chief Financial Officer and Controller
Dated: January 9, 2006