RathGibson 10-Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

 ACT OF 1934

For the quarterly period ended October 31, 2007

or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the transition period from ___________________  to  _____________

Commission File Number 333-134875

RATHGIBSON, INC.

(Exact name of registrant as specified in its charter)

Delaware	22-3683283
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)
2505 Foster Avenue, Janesville, Wisconsin	53547
(Address of principal executive offices)	(Zip Code)
(800) 367-7284
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

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 such filing requirements for the past 90 days.   Yesý Noo

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 filero Accelerated filero   Non-accelerated filerý

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

YesoNoý

At December 12, 2007, 100 shares of Common Stock were outstanding.

RATHGIBSON, INC.

TABLE OF CONTENTS

FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2007

				Page
PART I - FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets at October 31, 2007 and January 31,
			2007 (Unaudited)	4
		Condensed Consolidated Statements of Operations for the Three Months
			Ended October 31, 2007 and 2006 (Unaudited)	5
		Condensed Consolidated Statements of Operations for the Period June 16,
			2007 through October 31, 2007, the Period February 1, 2007 through June 15,
			2007, the Period February 8, 2006 through October 31, 2006 and the Period
			February 1, 2006 through February 7, 2006 (Unaudited)	6
		Condensed Consolidated Statements of Cash Flows for the Period June 16,
			2007 through October 31, 2007, the Period February 1, 2007 through June 15,
			2007, the Period February 8, 2006 through October 31, 2006 and the Period
			February 1, 2006 through February 7, 2006 (Unaudited)	7
		Notes to Condensed Consolidated Financial Statements (Unaudited)		8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of
			Operations	34
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		47
	Item 4.	Controls and Procedures		48
	Item 4T	Controls and Procedures		48
PART II - OTHER INFORMATION
	Item 1.	Legal Proceedings		48
	Item 1A.	Risk Factors		48
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		49
	Item 3.	Defaults Upon Senior Securities		49
	Item 4.	Submission of Matters to a Vote of Securities Holders		49
	Item 5.	Other Information		49
	Item 6.	Exhibits		50

2

EXPLANATORY NOTE

On February 7, 2006, all of the outstanding equity interests in RathGibson, Inc. (“RathGibson” and together with its subsidiary, the “Company”) were acquired by RGCH Holdings Corp. (“RGCH Corp.”), a wholly-owned subsidiary of RGCH Holdings LLC (“RGCH LLC”) (referred to as the “CH Acquisition”).  Subsequently, on June 15, 2007, all of the equity interests in RGCH Corp. were sold to RG Tube Holdings LLC (“RG Tube”), an affiliate of DLJ Merchant Banking Partners IV, L.P. and affiliated investment funds, and certain members of RathGibson’s senior management who exchanged a portion of their equity interest in RGCH LLC for equity interest in RG Tube in lieu of cash (referred to as the “DLJ Acquisition”).  Each of the CH Acquisition and the DLJ Acquisition was accounted for using the purchase method of accounting, and accordingly, the Company’s financial condition and resul ts of operations for the periods after each of the CH Acquisition and the DLJ Acquisition will not necessarily be comparable to prior periods.  In this Quarterly Report: (i) the Company’s financial statements at and for the three months ended October 31, 2007 and 2006 are presented to show separately the results of operations of the Company for the period after the DLJ Acquisition (Successor) and for the period after the CH Acquisition until the DLJ Acquisition (Predecessor II); and (ii) the Company’s financial statements at and for the nine months ended October 31, 2007 and 2006 are presented to show separately the results of operations of the Company for the period after the DLJ Acquisition (Successor), for the period after the CH Acquisition until the DLJ Acquisition (Predecessor II) and for the period prior to the CH Acquisition (Predecessor I).  Additional information regarding the DLJ Acquisition and the CH Acquisition and the presentation of the Company’s financial statements in this Quarterly Report is contained in the notes to the financial statements included herein.  

3

PART I

Item 1. Financial Statements.

RATHGIBSON, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 (in thousands, except share and per share data)

 (Unaudited)

					Successor		Predecessor II
					October 31,		January 31,
					2007		2007
Assets
Current assets:
	Cash			$	1,696	$	5,631
	Accounts receivable, net				53,919		54,464
	Inventories				70,971		54,397
	Prepaid expenses and other				3,103		3,189
	Refundable income taxes				2,113		1,028
	Deferred income taxes				3,134		1,812
			Total current assets		134,936		120,521
Property, plant and equipment, net					48,832		44,150
Goodwill					241,592		134,823
Other intangible assets, net					150,310		103,324
Deferred financing costs and other					335		9,458
			Total assets	$	576,005	$	412,276
Liabilities and Stockholder’s Equity
Current liabilities:
	Accounts payable			$	26,068	$	22,832
	Accrued expenses				13,655		29,550
	Income taxes payable				292		2,684
			Total current liabilities		40,015		55,066
Long-term debt					257,987		228,295
Deferred income taxes					74,208		60,761
Stockholder’s equity:
	Common stock, $.01 par value; 260,000 shares authorized, 100 shares
		issued and outstanding			-		-
	Additional paid-in capital				208,853		68,287
	Accumulated deficit				(5,058)		(133)
			Total stockholder’s equity		203,795		68,154
			Total liabilities and stockholder’s equity	$	576,005	$	412,276

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

4

RATHGIBSON, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (in thousands)

(Unaudited)

				Successor		Predecessor II
				Three Months Ended
				October 31,
				2007		2006
Net sales			$	86,448	$	77,738
Cost of goods sold				74,756		60,347
		Gross profit		11,692		17,391
Operating expenses:
	Selling, general and administrative			6,660		5,301
	Amortization			2,991		1,783
				9,651		7,084
		Income from operations		2,041		10,307
Interest expense				6,187		6,801
		Income (loss) before income taxes		(4,146)		3,506
Income tax expense (benefit)				(2,356)		1,312
		Net income (loss)	$	(1,790)	$	2,194

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

5

RATHGIBSON, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (in thousands)

(Unaudited)

				Successor		Predecessor II				Predecessor I
				Period		Period		Period		Period
				June 16, 2007		February 1,		February 8,		February 1
				through		2007 through		2006 through		2006 through
				October 31,		June 15,		October 31,		February 7,
				2007		2007		2006		2006
Net sales			$	135,122	$	138,239	$	196,627	$	4,020
Cost of goods sold				116,713		106,422		155,751		3,067
		Gross profit		18,409		31,817		40,876		953
Operating expenses:
	Selling, general and administrative			9,684		21,044		13,619		7,346
	Amortization			7,311		2,363		5,712		11
				16,995		23,407		19,331		7,357
		Income (loss) from operations		1,414		8,410		21,545		(6,404)
Interest expense				9,540		9,991		18,767		336
		Income (loss) before income taxes		(8,126)		(1,581)		2,778		(6,740)
Income tax expense (benefit)				(3,068)		930		1,029		(2,663)
		Net income (loss)	$	(5,058)	$	(2,511)	$	1,749	$	(4,077)

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

6

RATHGIBSON, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

							Successor		Predecessor II				Predecessor I
							Period		Period		Period		Period
							June 16,		February 1,		February 8,		February 1,
							2007 through		2007 through		2006 through		2006 through
							October 31,		June 15,		October 31,		February 7,
							2007		2007		2006		2006
Cash flows from operating activities:
	Net income (loss)					$	(5,058)	$	(2,511)	$	1,749	$	(4,077)
	Adjustments to reconcile net income (loss) to net cash
		used in operating activities:
			Depreciation and amortization				9,445		4,551		9,434		110
			Amortization of deferred debt expenses and
				bond premium			(419)		576		1,090		-
			Extinguishment of deferred debt expenses				-		-		-		535
			Write-up of inventory				5,845		-		2,407		-
			Loss on disposal of property, plant and equipment				-		16		-		-
			Deferred income taxes				(4,183)		(1,846)		-		(2,313)
			Incentive unit expense				565		4,079		167		-
			Compensation expense - transaction cost				-		-		-		54
			Change in assets and liabilities:
				Accounts receivable			6,395		(5,850)		(12,554)		(1,403)
				Inventories			580		(17,014)		(23,333)		(385)
				Other current and non-current assets			883		598		597		(66)
				Accounts payable			(11,153)		14,371		12,074		2,088
				Accrued expenses			(3,173)		(7,767)		7,094		2,771
				Income taxes			(3,275)		(202)		733		(350)
					Net cash used in operating activities		(3,548)		(10,999)		(542)		(3,036)
Cash flows from investing activities:
	Acquisition of property, plant and equipment						(3,784)		(2,452)		(4,259)		(498)
	Cash paid for acquisition, net of cash acquired						-				(34,522)
					Net cash used in investing activities		(3,784)		(2,452)		(38,781)		(498)
Cash flows from financing activities:
	Net proceeds from new Revolving Credit Facility						6,571		12,324		37,337		6,980
	Net payments on old revolving credit facility						-		-		-		(30,919)
	Purchase price adjustment						-		-		2,608		-
	Dividend						(3,800)		-		-		-
	Proceeds from (payments to) parent company						1,962		-		-		(23,062)
	Proceeds from bonds payable						-		-		-		200,000
	Payments on long-term debt, bank						-		-		-		(139,500)
	Payments of financing fees						(159)		(50)		(504)		(9,579)
	Equity contributions						-		-		560		-
					Net cash provided by financing activities		4,574		12,274		40,001		3,920
					Net increase (decrease) in cash		(2,758)		(1,177)		678		386
Cash at beginning of period							4,454		5,631		3,228		2,842
Cash at end of period						$	1,696	$	4,454	$	3,906	$	3,228

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

7

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

(1)

ORGANIZATION AND FINANCIAL STATEMENT PRESENTATION

RathGibson, Inc. (“RathGibson”) and its subsidiary (together with RathGibson, the “Company”) is one of the world’s leading specialty manufacturers of highly engineered premium stainless steel and alloy welded tubular products.  The Company’s products are designed to meet customer specifications and are used in environments that require high-performance characteristics, such as exceptional strength and the ability to withstand highly corrosive materials, extreme temperatures or high-pressure.  The Company sells over 1,000 products globally to diverse end-markets, including (i) chemical/petrochemical processing and power generation; (ii) energy; (iii) food, beverage and pharmaceuticals; and (iv) general commercial.  The Company sells these products to value-added tubing distributors, original equipment manufacturers, or OEMs, and engineering firms that often recommend the Company’s products for projects on w hich they are engaged.  The Company’s primary trade brands, Rath^TM, Gibson Tube^® and GTC^®, are recognized as industry leaders and the Company’s products have won numerous awards for quality and reliability from customers.

On June 15, 2007, RGCH Holdings Corp. (“RGCH Corp.”), the direct parent of RathGibson, and RGCH Holdings LLC (“RGCH LLC”), an indirect parent of RathGibson, completed the sale of 100% of RGCH Corp. to RG Tube Holdings LLC (“RG Tube”), an affiliate of DLJ Merchant Banking Partners IV, L.P. and affiliated investment funds (“DLJMBP”) and certain members of RathGibson’s senior management who exchanged a portion of their equity interest in RGCH LLC for equity interest in RG Tube in lieu of cash (referred to as the “DLJ Acquisition”).  The aggregate purchase price was $212,088, including a contingent payment of $3,376 made by RG Tube in the second quarter of fiscal 2008.  The contingent payment was equal to Adjusted Net Income (as defined in the stock purchase agreement) for the period May 1, 2007 through June 15, 2007, up to a maximum contingent payment of $4,000.  The DLJ Acquisition was fi nanced through a combination of debt and equity.  In connection with the DLJ Acquisition, RGCH Corp. issued $115,000 of 13.5% pay-in-kind notes (“PIK Notes”) due on June 15, 2015.  The Company, however, is not a party to any agreement related to the PIK Notes and does not have any obligations (including any guarantee obligations) in respect of the PIK Notes and accordingly, the debt and related interest are not recognized in the accompanying financial statements.  In addition, the Company entered into a second amendment to its senior secured revolving credit facility (“Revolving Credit Facility”) for which the borrowing capacity was increased by $20,000 to $80,000, subject to borrowing base availability.  The contingent payment of $3,376 made by RG Tube was financed by a dividend of $3,800 from RathGibson in the second quarter of fiscal 2008.  In connection with the DLJ Acquisition, the Company recorded (i) $4,844 of fees and related charges for the termination of its management agreement with Castle Harlan, Inc. (“Castle Harlan”), a private equity investment firm, which was settled at closing (Note 13); (ii) $2,973 of compensation expense relating to employee bonuses, of which $2,000 and $973 was settled at closing and in the third quarter of fiscal 2008, respectively; and (iii) $3,989 of non-cash incentive unit expense (Note 12).  

The DLJ Acquisition was accounted for under the purchase method of accounting and in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.”  The Company allocated the purchase price on a preliminary basis to the tangible assets, liabilities and identifiable intangible assets.  Each was recorded at their respective estimated fair values based on information currently available.  The excess of cost over the currently estimated aggregate fair values was recorded to goodwill.  The following table summarizes the preliminary purchase price allocation in the DLJ Acquisition:  

8

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

Current assets		$	153,527
Property, plant and equipment			47,182
Goodwill			241,592
Other intangible assets			153,000
Other assets			342
	Total assets acquired		595,643
Current liabilities			(57,479)
Long-term debt			(251,868)
Deferred income tax liability			(74,208)
	Total liabilities assumed		(383,555)
	Purchase price paid	$	212,088

Approximately $32,600 of the goodwill recorded as part of the DLJ Acquisition will be deductible for income tax purposes.  At October 31, 2007, the allocation of the purchase price has been made on a preliminary basis and is awaiting finalization of valuations of the estimated fair value of the assets acquired, including related business segments, and liabilities assumed, including debt outstanding.  These valuations are expected to be completed during fiscal 2008.  The ultimate value assigned to the tangible and intangible assets and liabilities may vary significantly from the preliminary estimates.  Significant judgments involved in the final valuation of the tangible and intangible assets and liabilities will include estimates of market values, future cash flows and useful lives.  

On February 7, 2006, RathGibson completed the sale of all of its outstanding equity interests, options and phantom rights to RGCH Corp, a wholly-owned subsidiary of RCGH LLC, an affiliate of Castle Harlan Partners IV, L.P. (“CHP IV”), a private equity investment fund managed by Castle Harlan, and certain members of RathGibson’s senior management who exchanged a portion of their equity in RathGibson for equity in RGCH LLC in lieu of cash (referred to as the “CH Acquisition”).  The aggregate purchase price was $66,920, including an earnout payment of $2,028 made by the Company in the second quarter of fiscal 2008.  The earnout payment was equal to 3.0 times the excess of Adjusted Consolidated EBITDA (as defined in the stock purchase agreement) for fiscal 2007 over $45,000, up to a maximum earnout payment of $30,000.  The CH Acquisition was financed through a combination of debt and equity.  RathGibson issued new 11.25% senior notes due in 2014 (“Senior Notes”) in the amount of $200,000 in connection with the CH Acquisition.  In addition, RathGibson entered into a new five-year, $50,000 Revolving Credit Facility, which was partially drawn on the closing date.  All outstanding revolving and long-term debt at the time of the CH Acquisition was paid in full in conjunction with the CH Acquisition.  In addition, all stock options and phantom rights outstanding at the time of the CH Acquisition were surrendered in accordance with the stock option plan and the phantom rights plan pursuant to which they were issued and together with other compensatory payments were settled for $6,616 at closing and recorded as selling, general and administrative expenses within the condensed consolidated statement of operations for the period February 1, 2006 through February 7, 2006.  The foregoing financing and equity transactions herein are collectively referred to as the “CH Transactions.”

9

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

The following table summarizes the purchase price allocation in the CH Acquisition:  

Current assets		$	87,191
Property, plant and equipment			43,691
Goodwill			119,946
Other intangible assets			92,800
Other assets			10,334
	Total assets acquired		353,962
Current liabilities			(25,789)
Long-term debt			(206,980)
Deferred income tax liability			(54,273)
	Total liabilities assumed		(287,042)
	Purchase price paid	$	66,920

Approximately $33,300 of the goodwill recorded as part of the CH Acquisition has been or will be deductible for income tax purposes.    

The results for the nine months ended October 31, 2007 include the Company’s results through June 15, 2007 (Predecessor II) and after the DLJ Acquisition (Successor).  The results for the nine months ended October 31, 2006 include the Company’s results through February 7, 2006 (Predecessor I) and after the CH Acquisition (Predecessor II).  As part of the DLJ Acquisition and the CH Acquisition, the Company entered into various financing arrangements and each acquisition was accounted for using the purchase method of accounting and accordingly, the results of operations for periods subsequent to the consummation of each of the acquisitions will not necessarily be comparable to prior periods.  

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, the condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. ��In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented have been made.  Interim results are not necessarily indicative of results that may be expected for any other interim period or for the fiscal year ending January 31, 2008.  For further information, refer to the audited consolidated financial statements and not es included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2007.

The balance sheet at January 31, 2007 has been derived from the audited financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements.

(2)

PRINCIPLES OF CONSOLIDATION

All significant intercompany balances and transactions have been eliminated in consolidation.

10

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

(3)

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”(“SFAS 159”).  SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities.  SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007.  The Company is assessing the impact the adoption of SFAS 159 will have on the Company’s consolidated financial position and results of operations for fiscal 2009.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS 157”).  SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures related to the use of fair value measurements.  The Statement applies under other accounting pronouncements that require or permit fair value measurement.  SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007.  The Company is assessing the impact the adoption of SFAS 157 will have on the Company’s consolidated financial position and results of operations for fiscal 2009.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.”  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company adopted FIN 48 on February 1, 2007.  See Note 11 for the impact of the adoption on the Company’s financial statements.

(4)

BUSINESS COMBINATIONS

On August 15, 2006, RathGibson acquired all of the outstanding equity interests of Greenville Tube Company (“Greenville”) for $37,316 in cash.  The foregoing transaction is referred to as the “Greenville Acquisition.”  Greenville is a manufacturer of specialty stainless steel and nickel alloy tubular products for use in various end-markets already served by RathGibson.  Greenville is strategically focused on serving non-commodity niche tubing markets by providing tubing in custom sizes, small lots and non-traditional grades, and delivering orders with short lead times as compared to the industry.  This transaction was financed with the funds available from the amended Revolving Credit Facility (Note 10), which was increased to $60,000 in connection with the Greenville Acquisition.  The results of Greenville’s operations have been included in the consolidated financial statements since the date of such acquisition.  

11

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

The following table summarizes the purchase price allocation in the Greenville Acquisition:  

Current assets		$	12,004
Machinery and equipment			4,482
Goodwill			14,744
Other intangible assets			16,300
	Total assets acquired		47,530
Current liabilities			(4,547)
Deferred income tax liability			(8,403)
	Total liabilities assumed		(12,950)
	Purchase price paid, net of cash acquired	$	34,580

Approximately $4,600 of the goodwill recorded as part of the Greenville Acquisition has been or will be deductible for income tax purposes.    

The unaudited pro forma financial information for the three and nine months ended October 31, 2006 in the table below summarizes the combined results of operations of RathGibson (both Predecessor I and Predecessor II periods) and Greenville, on a pro forma basis, as though the companies had been combined as of February 1, 2006.  The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the Greenville Acquisition had taken place at February 1, 2006.  The unaudited pro forma financial information includes the purchase accounting adjustments on historical Greenville inventory, adjustments to depreciation on acquired machinery and equipment, amortization of acquired intangible assets, adjustments to interest expense and related tax effects.

		Three		Nine
		Months		Months
		Ended		Ended
		October 31,		October 31,
		2006		2006
Net sales	$	79,307	$	218,477
Net income (loss)		2,096		(942)

12

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

(5)

INVENTORIES

Inventories consist of the following:

			Successor		Predecessor II
			October 31,		January 31,
			2007		2007
Raw materials		$	47,951	$	34,326
Work in process			9,902		3,157
Finished goods			13,118		16,914
	Total inventories	$	70,971	$	54,397

(6)

PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consist of the following:

			Successor		Predecessor II
			October 31,		January 31,
			2007		2007
Leasehold improvements		$	1,597	$	1,817
Machinery and equipment			42,891		43,559
Office equipment, furniture and other			936		1,101
Construction in progress			5,542		2,788
			50,966		49,265
Less accumulated depreciation			(2,134)		(5,115)
	Total property, plant and equipment, net	$	48,832	$	44,150

Depreciation expense for the three months ended October 31, 2007 and 2006 was $1,424 and $956, respectively.  Depreciation expense for the period June 16, 2007 through October 31, 2007 and the period February 1, 2007 through June 15, 2007 was $2,134 and $2,188, respectively.  Depreciation expense for the period February 8, 2006 through October 31, 2006 and the period February 1, 2006 through February 7, 2006 was $3,722 and $99, respectively.

(7)

GOODWILL AND OTHER INTANGIBLE ASSETS

In connection with each of the DLJ Acquisition, Greenville Acquisition and CH Acquisition, the Company recorded the excess purchase price over their respective fair values of the identifiable assets and liabilities to goodwill (Notes 1 and 4).

13

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

The gross carrying amount and accumulated amortization of the Company’s intangible assets, other than goodwill, are as follows:

			Successor						Predecessor II
			October 31, 2007						January 31, 2007
			Gross				Net		Gross				Net
			Carrying		Accumulated		Book		Carrying		Accumulated		Book
			Amount		Amortization		Value		Amount		Amortization		Value
Customer lists		$	124,000	$	2,690	$	121,310	$	94,500	$	5,776	$	88,724
Tradenames			29,000		-		29,000		14,600		-		14,600
	Total intangibles	$	153,000	$	2,690	$	150,310	$	109,100	$	5,776	$	103,324

Amortizable intangible assets consist primarily of customer lists.  Subsequent to the DLJ Acquisition, amortizable intangible assets are amortizedprincipally by an accelerated method over their estimated useful lives of 15 years.  Prior to the DLJ Acquisition, amortizable intangible assets were amortized principally by the straight-line method over their estimated useful lives of 15 years.

The Company recorded backlog of $5,200, $7,330 and $300 in connection with the DLJ Acquisition, CH Acquisition and Greenville Acquisition, respectively.  The DLJ Acquisition backlog is amortized principally by an accelerated method over their estimated useful lives ranging from one to eight months.  The CH Acquisition and Greenville Acquisition backlog was fully amortized in the fiscal year ended January 31, 2007.

Amortization expense consists of the following:

			Successor		Predecessor II
			Three Months Ended
			October 31,
			2007		2006
Intangibles		$	1,932	$	1,298
Backlog			1,059		485
	Total amortization expense	$	2,991	$	1,783

14

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

			Successor		Predecessor II				Predecessor I
			Period		Period		Period		Period
			June 16, 2007		February 1,		February 8,		February 1
			through		2007 through		2006 through		2006 through
			October 31,		June 15,		October 31,		February 7,
			2007		2007		2006		2006
Intangibles		$	2,690	$	2,363	$	3,822	$	11
Backlog			4,621		-		1,890		-
	Total amortization expense	$	7,311	$	2,363	$	5,712	$	11

The estimated future amortization expense of intangible assets at October 31, 2007 is as follows:

Fiscal years ending January 31,
	2008 (remaining three months)	$	2,372
	2009		10,602
	2010		10,267
	2011		9,892
	2012		9,550

(8)

DEFERRED FINANCING COSTS

In connection with the DLJ Acquisition, $8,638 of the existing deferred financing costs were eliminated in purchase accounting.  

(9)

ACCRUED EXPENSES

Accrued expenses consist of the following:

			Successor		Predecessor II
			October 31,		January 31,
			2007		2007
Accrued compensation		$	5,551	$	6,041
Interest payable			4,834		10,626
Due to seller			-		7,512
Other			3,270		5,371
	Total accrued expenses	$	13,655	$	29,550

15

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

(10)

LONG-TERM DEBT

A summary of the Company’s long-term debt is as follows:

			Successor		Predecessor II
			October 31,		January 31,
			2007		2007
Revolving Credit Facility		$	47,190	$	28,295
Senior Notes			210,797		200,000
	Total long-term debt	$	257,987	$	228,295

Concurrently with the closing of the CH Transactions, and as a condition thereof, RathGibson entered into the five-year, $50,000 senior secured Revolving Credit Facility and repaid in full the revolving credit facility then outstanding.  Concurrently with the closing of the Greenville Acquisition and the DLJ Acquisition, RathGibson entered into amendments to the Revolving Credit Facility for which the borrowing capacity was increased by $10,000 and $20,000, respectively, to a total of $80,000, subject to borrowing base availability.  There were no material changes to the covenants as a result of these amendments.  Borrowings under the Revolving Credit Facility bear interest payable at various dates with floating rates of either (i) prime plus 1% (8.75% at October 31, 2007) or (ii) LIBOR plus 2% (7.00% at October 31, 2007).  At October 31, 2007, the Company had $30,873 available under the Revolving Credit Facility after giving effect to its borrowing base requirements.  Borrowings under the Revolving Credit Facility are collateralized by all assets of the Company.  The Revolving Credit Facility contains various covenants customary to similar credit facilities.  The Company was in compliance with all such covenants at October 31, 2007.  

In connection with the CH Acquisition, RathGibson issued $200,000 aggregate principal amount of Senior Notes due February 15, 2014.  These notes bear interest at 11.25% per annum payable in semi-annual installments on February 15 and August 15 each year commencing August 15, 2006.  The indenture governing the Senior Notes contains covenants that, among other things, restrict the Company’s ability to incur or guarantee additional debt, pay dividends and make distributions, make certain investments, repurchase stock, incur liens, enter into certain transactions with affiliates, enter into certain sale and leaseback transactions, merge or consolidate, and transfer or sell assets.  The Company was in compliance with all such covenants at October 31, 2007.  

In connection with the DLJ Acquisition, the Company has preliminarily adjusted the fair value of its Senior Notes to $211,250.  The bond premium associated with this adjustment is amortized into interest expense over the remaining term of the Senior Notes using the interest method.  Amortization of this bond premium amounted to $304 and $453 for the three months ended October 31, 2007 and the period June 16, 2007 through October 31, 2007, respectively.  The unamortized bond premium included in the Senior Notes was $10,797 at October 31, 2007.

16

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

(11)

INCOME TAXES

The effective tax rates and resulting income tax expense (benefit) used in interim periods are based on the Company’s projections for the remainder of fiscal 2008.  To the extent that actual results differ from those projections, the effective income tax rate and resulting income tax expense (benefit) may change.

On February 1, 2007, the Company adopted FIN 48.  The Company does not have any material uncertain income tax positions or unrecognized tax benefits at the date of adoption and, as such, the adoption did not have a material impact on the Company’s financial position or results of operations.  The Company records interest and penalties in interest expense and selling, general and administrative expense, respectively, within its condensed consolidated statements of operations.  

For all periods subsequent to the CH Acquisition and Greenville Acquisition, RathGibson and Greenville, respectively, are included in the Federal income tax return and certain state income tax returns of RGCH Corp.  RGCH Corp’s Federal tax returns for fiscal 2007 remain subject to examination by tax authorities.  The Company’s, RGCH Corp.’s or Greenville’s state tax returns for fiscal 2001 and thereafter generally remain subject to examination by taxing authorities.  Additionally, the Company has indemnification agreements with the sellers of RathGibson in the CH Acquisition and the sellers of Greenville in the Greenville Acquisition which provide for reimbursement to the Company for payments made in satisfaction of tax liabilities relating to pre-acquisition periods.

(12)

EQUITY BASED COMPENSATION

Successor - RG Tube has allocated certain of its Class B units for incentive based grants primarily to executives and key employees of the Company.   The incentive units primarily vest based on the following:  (i) 33% vest on certain specified periods of continuing employment; and (ii) 67% vest on the achievement of certain performance-based targets.  Vesting of units may be accelerated upon a change of control.

No incentive units were granted during the three months ended October 31, 2007.  152,982 incentive units were granted during the period June 16, 2007 through October 31, 2007.  20,011 incentive units were vested at October 31, 2007.

Although the incentive units are issued by RG Tube, the incentive units relate to the employment of executives and key employees of the Company; accordingly, the expense is recognized in the Company’s financial statements.  Incentive unit expense recognized within the condensed consolidated statements of operations amounted to $399 and $565 for the three months ended October 31, 2007 and the period June 16, 2007 through October 31, 2007, respectively.  At October 31, 2007, total unrecognized incentive unit cost was approximately $2,174, which is expected to be recognized over a weighted-average remaining period of approximately 3 years.

Predecessor II – Prior to the DLJ Acquisition, RGCH LLC had allocated certain of its Class B units for incentive based grants to executives and key employees of the Company.   The incentive units vested based on the following:  (i) 25% vested on certain specified periods of continuing employment; (ii) 35% vested on the achievement of certain performance-based targets to be established annually by the board of directors; and (iii) 40% vested upon the occurrence of a change of control or a public equity offering given the achievement of specified target internal rates of return by CHP IV and its affiliates.  Vesting of units may be accelerated upon a change of control.

17

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

No incentive units were granted during the period February 1, 2007 through June 15, 2007.  5,532 and 79,295 incentive units were granted during the three months ended October 31, 2006 and the period February 8, 2006 through October 31, 2006, respectively.  In connection with the DLJ Acquisition, 70,278 nonvested incentive units became vested.  Accordingly, the Company recognized incentive unit expense of $3,989 during the period February 1, 2007 through June 15, 2007.  79,295 incentive units were purchased in connection with the DLJ Acquisition.

Although the incentive units were issued by RGCH LLC, the incentive units related to the employment of executives and key employees of the Company; accordingly, the expense was recognized in the Company’s financial statements.  Incentive unit expense recognized within the condensed consolidated statements of operations amounted to $4,079 for the period February 1, 2007 through June 15, 2007.  Incentive unit expense for the three months ended October 31, 2006 and the period February 8, 2006 to October 31, 2006 amounted to $50 and $167, respectively.

(13)

ADVISORY AND MANAGEMENT FEES

The Company entered into an advisory services agreement with DLJ Merchant Banking, Inc. (“DLJ”), an affiliate of DLJMBP, under which DLJ acts as a financial advisor with respect to the following services: (i) assisting in analyzing operations and historical performance; (ii) analyzing future prospects; (iii) assisting with respect to future proposals for tender offers, acquisitions, sales, mergers, financings, exchange offers, recapitalizations, restructurings or other similar transactions; and (iv) assisting in strategic planning.  The advisory services agreement is for an initial term expiring June 15, 2012 and is subject to renewal for consecutive one-year terms unless terminated by DLJ or the Company, RGCH Corp. or RG Tube with 30 days notice prior to the expiration of the initial term or any annual renewal.  During the three months ended October 31, 2007 and the period June 16, 2007 through October 31, 2007, the Company recorded a n expense of $250 and $375, respectively, to selling, general and administrative expenses within the condensed consolidated statements of operations.  

The Company entered into a management agreement with Castle Harlan, as manager, under which Castle Harlan provided business and organizational strategy, financial and investment management, advisory, merchant and investment banking services to the Company, RGCH Corp. or RGCH LLC.  The management agreement was terminated as a result of the DLJ Acquisition.  During the period February 1, 2007 through June 15, 2007, the Company recorded an expense of $5,577 (including $4,844 of fees and charges related to the termination of the management agreement) to selling, general and administrative expenses within the condensed consolidated statements of operations.  During the three months ended October 31, 2006 and the period February 8, 2006 through October 31, 2006, the Company recorded an expense of $491 and $1,474, respectively, to selling, general and administrative expenses within the condensed consolidated statements of operations.  

18

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

(14)

SUPPLEMENTAL CASH FLOW INFORMATION

The following table presents supplemental cash flow information for the respective periods:

			Successor		Predecessor II				Predecessor I
			Period		Period		Period		Period
			June 16,		February 1,		February 8,		February 1,
			2007 through		2007 through		2006 through		2006 through
			October 31,		June 15,		October 31,		February 7,
			2007		2007		2006		2006
Cash paid during the period for:
	Interest	$	12,922	$	12,281	$	12,577	$	501
	Income taxes		4,390		2,978		287		-

(15)

SEGMENT REPORTING

The Company operates in primarily one business, which is the manufacturing of highly engineered premium stainless steel and alloy welded tubular products.  However, the Company has determined it has three reportable segments, Wisconsin, New Jersey and Arkansas, due to the historical economic characteristics of each business.  The accounting practices for each segment is the same as those described in the Critical Accounting Policies.  Straight tubing products are manufactured primarily in the Wisconsin (welded) and Arkansas (seamless) plants and coiled tubing products are manufactured primarily in the New Jersey plant.  The Wisconsin segment includes corporate expenses and assets such as certain general and administrative expenses, depreciation and interest expense.

Information about each segment (after elimination of intercompany sales) is summarized as follows:

			Successor
			Wisconsin		New Jersey		Arkansas		Total
Three months ended October 31, 2007:
Chemical/petrochemical processing and power
	generation products	$	31,933	$	2,107	$	3,107	$	37,147
Energy products			-		14,851		526		15,377
Food, beverage and pharmaceutical products			8,638		777		229		9,644
General commercial products			10,880		5,170		8,230		24,280
	Total net sales		51,451		22,905		12,092		86,448
Income (loss) from operations			(810)		(124)		2,975		2,041
Interest expense (income)			6,262		-		(75)		6,187
Income tax expense (benefit)			(3,688)		-		1,332		(2,356)
Net income (loss)			(3,384)		(124)		1,718		(1,790)
Depreciation and amortization			1,795		1,736		884		4,415
Capital expenditures			1,470		813		772		3,055

19

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

			Predecessor II
			Wisconsin		New Jersey		Arkansas		Total
Three months ended October 31, 2006:
Chemical/petrochemical processing and power
	generation products	$	23,956	$	1,131	$	2,042	$	27,129
Energy products			-		12,300		540		12,840
Food, beverage and pharmaceutical products			10,837		845		327		12,009
General commercial products			12,465		8,220		5,075		25,760
	Total net sales		47,258		22,496		7,984		77,738
Income from operations			6,021		2,776		1,510		10,307
Interest expense (income)			6,810		-		(9)		6,801
Income tax expense			731		-		581		1,312
Net income (loss)			(1,520)		2,776		938		2,194
Depreciation and amortization			1,544		569		626		2,739
Capital expenditures			1,064		851		72		1,987

			Successor
			Wisconsin		New Jersey		Arkansas		Total
Period June 16, 2007 through October 31, 2007:
Chemical/petrochemical processing and power
	generation products	$	53,122	$	3,241	$	4,524	$	60,887
Energy products			-		21,511		891		22,402
Food, beverage and pharmaceutical products			13,684		1,289		305		15,278
General commercial products			15,875		8,312		12,368		36,555
	Total net sales		82,681		34,353		18,088		135,122
Income (loss) from operations			(2,068)		(24)		3,506		1,414
Interest expense (income)			9,653		-		(113)		9,540
Income tax expense (benefit)			(4,611)		-		1,543		(3,068)
Net income (loss)			(7,110)		(24)		2,076		(5,058)
Depreciation and amortization			5,098		2,707		1,640		9,445
Capital expenditures			1,900		1,098		786		3,784

20

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

			Predecessor II
			Wisconsin		New Jersey		Arkansas		Total
Period February 1, 2007 through June 15, 2007:
Chemical/petrochemical processing and power
	generation products	$	50,655	$	3,059	$	4,813	$	58,527
Energy products			-		21,332		1,118		22,450
Food, beverage and pharmaceutical products			14,481		1,709		418		16,608
General commercial products			19,821		8,067		12,766		40,654
	Total net sales		84,957		34,167		19,115		138,239
Income (loss) from operations			(927)		3,163		6,174		8,410
Interest expense (income)			10,062		-		(71)		9,991
Income tax expense (benefit)			(1,276)		-		2,206		930
Net income (loss)			(9,713)		3,163		4,039		(2,511)
Depreciation and amortization			2,165		1,832		554		4,551
Capital expenditures			757		1,055		640		2,452

			Predecessor II
			Wisconsin		New Jersey		Arkansas		Total
Period February 8, 2006 through October 31, 2006:
Chemical/petrochemical processing and power
	generation products	$	68,062	$	6,877	$	2,042	$	76,981
Energy products			-		38,648		540		39,188
Food, beverage and pharmaceutical products			25,628		2,812		327		28,767
General commercial products			30,875		15,741		5,075		51,691
	Total net sales		124,565		64,078		7,984		196,627
Income from operations			14,450		5,585		1,510		21,545
Interest expense (income)			18,776		-		(9)		18,767
Income tax expense			448		-		581		1,029
Net income (loss)			(4,774)		5,585		938		1,749
Depreciation and amortization			6,663		2,145		626		9,434
Capital expenditures			2,554		1,633		72		4,259

21

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

			Predecessor I
			Wisconsin		New Jersey		Arkansas		Total
Period February 1, 2006 through February 7, 2006:
Chemical/petrochemical processing and power
	generation products	$	1,653	$	-	$	-	$	1,653
Energy products			-		515		-		515
Food, beverage and pharmaceutical products			671		5		-		676
General commercial products			999		177		-		1,176
	Total net sales		3,323		697		-		4,020
Income (loss) from operations			(6,708)		304		-		(6,404)
Interest expense			197		139		-		336
Income tax benefit			(2,663)		-		-		(2,663)
Net income (loss)			(4,242)		165		-		(4,077)
Depreciation and amortization			48		62		-		110
Capital expenditures			483		15		-		498

The following table presents segment identifiable asset information:

				Successor		Predecessor II
				October 31,		January 31,
				2007		2007
Total assets:
	Wisconsin		$	547,834	$	387,129
	New Jersey			107,206		127,529
	Intercompany eliminations			(94,508)		(112,995)
				560,532		401,663
	Arkansas			112,664		54,203
	Intercompany eliminations			(97,191)		(43,590)
		Total assets	$	576,005	$	412,276

The following table presents segment goodwill information:

				Successor		Predecessor II
				October 31,		January 31,
				2007		2007
Goodwill:
	Wisconsin		$	181,761	$	77,529
	New Jersey			11,235		42,550
	Arkansas			48,596		14,744
		Total goodwill	$	241,592	$	134,823

22

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

Goodwill recorded in connection with the DLJ Acquisition is a preliminary balance and is expected to change once the Company obtains third party appraisals and valuation studies on inventories, property, plant and equipment and intangible assets.  

(16)

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

On February 7, 2006, RathGibson issued its Senior Notes.  Upon the Greenville Acquisition and pursuant to the terms of the Senior Notes, Greenville, a wholly-owned subsidiary of RathGibson, has fully and unconditionally guaranteed on a joint and several basis RathGibson’s obligations to pay principal, premium and interest relative to the Senior Notes.  

The following supplemental guarantor financial information presents:  (i) a condensed consolidating balance sheet at October 31, 2007 and January 31, 2007; (ii) a condensed consolidating statement of operations for the three months ended October 31, 2007 and 2006, the period June 16, 2007 through October 31, 2007, the period February 1, 2007 through June 15, 2007 and the period February 8, 2006 through October 31, 2006; and (iii) a condensed consolidating statement of cash flows for the period June 16, 2007 through October 31, 2007, the period February 1, 2007 through June 15, 2007 and the period February 8, 2006 through October 31, 2006.  

23

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

Condensed Consolidating Balance Sheet

At October 31, 2007

				RathGibson		Greenville		Eliminations		Consolidated
Assets
Current assets:
	Cash		$	1,303	$	393	$	-	$	1,696
	Accounts receivable, net			48,032		5,887		-		53,919
	Intercompany account and note receivable			86		3,001		(3,087)		-
	Inventories			54,310		16,661		-		70,971
	Prepaid expenses and other			2,672		431		-		3,103
	Refundable income taxes			4,999		-		(2,886)		2,113
	Deferred income taxes			3,014		120		-		3,134
		Total current assets		114,416		26,493		(5,973)		134,936
Property, plant and equipment, net				43,501		5,331		-		48,832
Goodwill				192,996		48,596		-		241,592
Other intangible assets, net				118,066		32,244		-		150,310
Deferred financing costs and other				335		-		-		335
Investment in subsidiary				91,218		-		(91,218)		-
		Total assets	$	560,532	$	112,664	$	(97,191)	$	576,005
Liabilities and Stockholder’s Equity
Current liabilities:
	Accounts payable		$	24,590	$	1,478	$	-	$	26,068
	Intercompany account and note payable			3,001		86		(3,087)		-
	Accrued expenses			11,798		1,857		-		13,655
	Income taxes payable			-		3,178		(2,886)		292
		Total current liabilities		39,389		6,599		(5,973)		40,015
Long-term debt				257,987		-		-		257,987
Deferred income taxes				59,361		14,847		-		74,208
Mandatorily redeemable preferred stock				-		2,100		(2,100)		-
Stockholder’s equity:
	Common stock			-		1		(1)		-
	Additional paid-in capital			208,853		87,041		(87,041)		208,853
	Retained earnings (accumulated deficit)			(5,058)		2,076		(2,076)		(5,058)
		Total stockholder’s equity		203,795		89,118		(89,118)		203,795
		Total liabilities and stockholder’s equity	$	560,532	$	112,664	$	(97,191)	$	576,005

24

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

Condensed Consolidating Balance Sheet

At January 31, 2007

				RathGibson		Greenville		Eliminations		Consolidated
Assets
Current assets:
	Cash		$	5,426	$	205	$	-	$	5,631
	Accounts receivable, net			49,657		4,807		-		54,464
	Intercompany account and note receivable			26		3,884		(3,910)		-
	Inventories			44,882		9,515		-		54,397
	Prepaid expenses and other			2,455		734		-		3,189
	Refundable income taxes			584		-		444		1,028
	Deferred income taxes			1,665		147		-		1,812
		Total current assets		104,695		19,292		(3,466)		120,521
Property, plant and equipment, net				39,840		4,310		-		44,150
Goodwill				120,079		14,744		-		134,823
Other intangible assets, net				87,467		15,857		-		103,324
Deferred financing costs and other				9,458		-		-		9,458
Investment in subsidiary				40,124		-		(40,124)		-
		Total assets	$	401,663	$	54,203	$	(43,590)	$	412,276
Liabilities and Stockholder’s Equity
Current liabilities:
	Accounts payable		$	20,768	$	2,064	$	-	$	22,832
	Intercompany account and note payable			3,884		26		(3,910)		-
	Accrued expenses			27,482		2,068		-		29,550
	Income taxes payable			449		1,791		444		2,684
		Total current liabilities		52,583		5,949		(3,466)		55,066
Long-term debt				228,295		-		-		228,295
Deferred income taxes				52,631		8,130		-		60,761
Mandatorily redeemable preferred stock				-		2,100		(2,100)		-
Stockholder’s equity:
	Common stock			-		1		(1)		-
	Additional paid-in capital			68,287		35,215		(35,215)		68,287
	Retained earnings (accumulated deficit)			(133)		2,808		(2,808)		(133)
		Total stockholder’s equity		68,154		38,024		(38,024)		68,154
		Total liabilities and stockholder’s equity	$	401,663	$	54,203	$	(43,590)	$	412,276

25

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

Condensed Consolidating Statement of Operations

For the Three Months Ended October 31, 2007

					RathGibson		Greenville		Eliminations		Consolidated
Net sales				$	77,082	$	12,356	$	(2,990)	$	86,448
Cost of goods sold					69,984		7,762		(2,990)		74,756
		Gross profit			7,098		4,594		-		11,692
Operating expenses:
	Selling, general and administrative				5,801		859		-		6,660
	Amortization				2,231		760		-		2,991
					8,032		1,619		-		9,651
		Income (loss) from operations			(934)		2,975		-		2,041
Interest expense (income)					6,262		(75)		-		6,187
		Income (loss) before equity in earnings of
			subsidiary and income taxes		(7,196)		3,050		-		(4,146)
Equity in earnings of subsidiary					(1,718)		-		1,718		-
		Income (loss) before income taxes			(5,478)		3,050		(1,718)		(4,146)
Income tax expense (benefit)					(3,688)		1,332		-		(2,356)
		Net income (loss)		$	(1,790)	$	1,718	$	(1,718)	$	(1,790)

26

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

Condensed Consolidating Statement of Operations

For the Three Months Ended October 31, 2006

					RathGibson		Greenville		Eliminations		Consolidated
Net sales				$	69,831	$	7,984	$	(77)	$	77,738
Cost of goods sold					55,344		5,080		(77)		60,347
		Gross profit			14,487		2,904		-		17,391
Operating expenses:
	Selling, general and administrative				4,431		870		-		5,301
	Amortization				1,259		524		-		1,783
					5,690		1,394		-		7,084
		Income from operations			8,797		1,510		-		10,307
Interest expense (income)					6,810		(9)		-		6,801
		Income before equity in earnings of
			subsidiary and income taxes		1,987		1,519		-		3,506
Equity in earnings of subsidiary					(938)		-		938		-
		Income before income taxes			2,925		1,519		(938)		3,506
Income tax expense					731		581		-		1,312
		Net income		$	2,194	$	938	$	(938)	$	2,194

27

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

Condensed Consolidating Statement of Operations

For the Period June 16, 2007 through October 31, 2007

					RathGibson		Greenville		Eliminations		Consolidated
Net sales				$	120,495	$	18,352	$	(3,725)	$	135,122
Cost of goods sold					108,364		12,074		(3,725)		116,713
		Gross profit			12,131		6,278		-		18,409
Operating expenses:
	Selling, general and administrative				8,367		1,317		-		9,684
	Amortization				5,856		1,455		-		7,311
					14,223		2,772		-		16,995
		Income (loss) from operations			(2,092)		3,506		-		1,414
Interest expense (income)					9,653		(113)		-		9,540
		Income (loss) before equity in earnings of
			subsidiary and income taxes		(11,745)		3,619		-		(8,126)
Equity in earnings of subsidiary					(2,076)		-		2,076		-
		Income (loss) before income taxes			(9,669)		3,619		(2,076)		(8,126)
Income tax expense (benefit)					(4,611)		1,543		-		(3,068)
		Net income (loss)		$	(5,058)	$	2,076	$	(2,076)	$	(5,058)

28

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

Condensed Consolidating Statement of Operations

For the Period February 1, 2007 through June 15, 2007

					RathGibson		Greenville		Eliminations		Consolidated
Net sales				$	119,245	$	19,115	$	(121)	$	138,239
Cost of goods sold					95,384		11,159		(121)		106,422
		Gross profit			23,861		7,956		-		31,817
Operating expenses:
	Selling, general and administrative				19,625		1,419		-		21,044
	Amortization				2,000		363		-		2,363
					21,625		1,782		-		23,407
		Income from operations			2,236		6,174		-		8,410
Interest expense (income)					10,062		(71)		-		9,991
		Income (loss) before equity in earnings of
			subsidiary and income taxes		(7,826)		6,245		-		(1,581)
Equity in earnings of subsidiary					(4,039)		-		4,039		-
		Income (loss) before income taxes			(3,787)		6,245		(4,039)		(1,581)
Income tax expense (benefit)					(1,276)		2,206		-		930
		Net income (loss)		$	(2,511)	$	4,039	$	(4,039)	$	(2,511)

29

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

Condensed Consolidating Statement of Operations

For the Period February 8, 2006 through October 31, 2006

					RathGibson		Greenville		Eliminations		Consolidated
Net sales				$	188,720	$	7,984	$	(77)	$	196,627
Cost of goods sold					150,748		5,080		(77)		155,751
		Gross profit			37,972		2,904		-		40,876
Operating expenses:
	Selling, general and administrative				12,749		870		-		13,619
	Amortization				5,188		524		-		5,712
					17,937		1,394		-		19,331
		Income from operations			20,035		1,510		-		21,545
Interest expense (income)					18,776		(9)		-		18,767
		Income before equity in earnings of
			subsidiary and income taxes		1,259		1,519		-		2,778
Equity in earnings of subsidiary					(938)		-		938		-
		Income before income taxes			2,197		1,519		(938)		2,778
Income tax expense					448		581		-		1,029
		Net income		$	1,749	$	938	$	(938)	$	1,749

30

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

Condensed Consolidating Statement of Cash Flows

For the Period June 16, 2007 through October 31, 2007

									RathGibson		Greenville		Eliminations		Consolidated
Cash flows from operating activities:
	Net income (loss)							$	(5,058)	$	2,076	$	(2,076)	$	(5,058)
	Adjustments to reconcile net income (loss) to net cash
		used in operating activities:
			Depreciation and amortization						7,805		1,640		-		9,445
			Amortization of deferred debt expenses and
				bond premium					(419)		-		-		(419)
			Write-up of inventory						5,491		354		-		5,845
			Deferred income taxes						(3,813)		(370)		-		(4,183)
			Incentive unit expense						565		-		-		565
			Equity in earnings of subsidiary						(2,076)		-		2,076		-
			Change in assets and liabilities:
					Accounts receivable				5,291		1,104		-		6,395
					Intercompany account receivable and payable				(52)		52		-		-
					Inventories				8,558		(7,978)		-		580
					Other current and non-current assets				862		21		-		883
					Accounts payable				(11,926)		773		-		(11,153)
					Accrued expenses				(3,480)		307		-		(3,173)
					Income taxes				(3,461)		186		-		(3,275)
						Net cash used in operating activities			(1,713)		(1,835)		-		(3,548)
Cash flows from investing activities:
	Acquisition of property, plant and equipment								(2,998)		(786)		-		(3,784)
	Intercompany note receivable								-		2,408		(2,408)		-
						Net cash provided by
							(used in) investing activities		(2,998)		1,622		(2,408)		(3,784)
Cash flows from financing activities:
	Net proceeds from new Revolving Credit Facility								6,571		-		-		6,571
	Dividend								(3,800)		-		-		(3,800)
	Proceeds from parent company								1,962		-		-		1,962
	Intercompany note payable								(2,408)		-		2,408		-
	Payments of financing fees								(159)		-		-		(159)
						Net cash provided by financing activities			2,166		-		2,408		4,574
						Net decrease in cash			(2,545)		(213)		-		(2,758)
Cash at beginning of period									3,848		606		-		4,454
Cash at end of period								$	1,303	$	393	$	-	$	1,696

31

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

Condensed Consolidating Statement of Cash Flows

For the Period February 1, 2007 through June 15, 2007

								RathGibson		Greenville		Eliminations		Consolidated
Cash flows from operating activities:
	Net income (loss)						$	(2,511)	$	4,039	$	(4,039)	$	(2,511)
	Adjustments to reconcile net income (loss) to net cash
		provided by (used in) operating activities:
			Depreciation and amortization					3,997		554		-		4,551
			Amortization of deferred debt expenses					576		-		-		576
			Loss on disposal of property, plant and equipment					-		16		-		16
			Deferred income taxes					(1,541)		(305)		-		(1,846)
			Incentive unit expense					4,079		-		-		4,079
			Equity in earnings of subsidiary					(4,039)		-		4,039		-
			Change in assets and liabilities:
				Accounts receivable				(3,666)		(2,184)		-		(5,850)
				Intercompany account receivable and payable				(8)		8		-		-
				Inventories				(17,846)		832		-		(17,014)
				Other current and non-current assets				316		282		-		598
				Accounts payable				15,730		(1,359)		-		14,371
				Accrued expenses				(7,249)		(518)		-		(7,767)
				Income taxes				(1,403)		1,201		-		(202)
					Net cash provided by (used in)
						operating activities		(13,565)		2,566		-		(10,999)
Cash flows from investing activities:
	Acquisition of property, plant and equipment							(1,812)		(640)		-		(2,452)
	Intercompany note receivable							-		(1,525)		1,525		-
					Net cash used in investing activities			(1,812)		(2,165)		1,525		(2,452)
Cash flows from financing activities:
	Net proceeds from new Revolving Credit Facility							12,324		-		-		12,324
	Intercompany note payable							1,525		-		(1,525)		-
	Payments of financing fees							(50)		-		-		(50)
					Net cash provided by financing activities			13,799		-		(1,525)		12,274
					Net increase (decrease) in cash			(1,578)		401		-		(1,177)
Cash at beginning of period								5,426		205		-		5,631
Cash at end of period							$	3,848	$	606	$	-	$	4,454

32

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2007

 (Unaudited)

(Dollars in Thousands)

Condensed Consolidating Statement of Cash Flows

For the Period February 8, 2006 through October 31, 2006

									RathGibson		Greenville		Eliminations		Consolidated
Cash flows from operating activities:
	Net income							$	1,749	$	938	$	(938)	$	1,749
	Adjustments to reconcile net income to net cash
		provided by (used in) operating activities:
			Depreciation and amortization						8,808		626		-		9,434
			Amortization of deferred debt expenses
				and debt discount					1,090		-		-		1,090
			Write-up of inventory						2,288		119		-		2,407
			Incentive unit expense						167		-		-		167
			Equity in earnings of subsidiary						(938)		-		938		-
			Change in assets and liabilities:
					Accounts receivable				(12,206)		(348)		-		(12,554)
					Intercompany account receivable and payable				(77)		77		-		-
					Inventories				(22,629)		(704)		-		(23,333)
					Other current and non-current assets				650		(53)		-		597
					Accounts payable				11,958		116		-		12,074
					Accrued expenses				7,611		(517)		-		7,094
					Income taxes				340		393		-		733
						Net cash provided by (used in)
							operating activities		(1,189)		647		-		(542)
Cash flows from investing activities:
	Acquisition of property, plant and equipment								(4,187)		(72)		-		(4,259)
	Intercompany note receivable								-		(2,111)		2,111		-
	Cash paid for acquisition, net of cash acquired								(37,258)		-		2,736		(34,522)
						Net cash used in investing activities			(41,445)		(2,183)		4,847		(38,781)
Cash flows from financing activities:
	Net proceeds from new Revolving Credit Facility								37,337		-		-		37,337
	Purchase price adjustment								2,608		-		-		2,608
	Intercompany note payable								2,111		-		(2,111)		-
	Payments of financing fees								(504)		-		-		(504)
	Equity contributions								560		-		-		560
						Net cash provided by financing activities			42,112		-		(2,111)		40,001
						Net increase (decrease) in cash			(522)		(1,536)		2,736		678
Cash at beginning of period									3,228		2,736		(2,736)		3,228
Cash at end of period								$	2,706	$	1,200	$	-	$	3,906

33

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of financial condition and results of operations has been derived from, and should be read in conjunction with, the unaudited condensed consolidated financial statements, including the notes thereto, contained herein and in the Company’sAnnual Report on Form 10-K for the fiscal year ended January 31, 2007.  See the discussion of Successor and Predecessor I and II under Note 1 to the unaudited condensed consolidated financial statements.  Future results could differ materially from those discussed below.  See the discussion under “Forward Looking Statements.”

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995.  These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” or “should,” or the negative thereof or other variations thereon or comparable terminology.  

The Company has based these forward-looking statements on current expectations, assumptions, estimates and projections.  While the Company believes these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond the Company’s control.  These and other important factors may cause actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements.  Some of the key factors that could cause actual results, performance or achievements to differ from the Company’s expectations include:

§

competitive pressures and trends in the industry;

§

liquidity and capital resources;

§

fluctuations in the price and/or supply of steel and other raw materials;

§

general economic conditions;

§

legal proceedings and regulatory matters;

§

ability to identify acquisition opportunities and effectively and cost efficiently integrate acquisitions that the Company consummates;

§

technological changes; and

§

those other risks and uncertainties discussed under Item 1A to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2007 and under ‘‘Risk Factors’’ in the Company’s prospectus filed with the Securities and Exchange Commission (“SEC”) on November 2, 2006 pursuant to Rule 424(b)(3) under the Securities Act of 1933, as amended (“Securities Act”).

Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.  The forward-looking statements included in this quarterly report are made only as of the date hereof.

Executive Summary

The Company is one of the world’s leading specialty manufacturers of highly engineered premium stainless steel and alloy welded tubular products.  The Company’s products are designed to meet customer specifications and are used in environments that require high-performance characteristics, such as exceptional strength and the ability to withstand highly corrosive materials, extreme temperatures or high-pressure.  The Company sells over 1,000 products globally to diverse end-markets, including (i) chemical/petrochemical processing and power generation; (ii) energy; (iii) food, beverage and pharmaceuticals; and (iv) general commercial.  

34

The Company’s highlights for the three and nine months ended October 31, 2007 included the following:

§

the sale of 100% of RGCH Corp., the Company’s direct parent, to RG Tube for an aggregate purchase price of $212.1 million; concurrently, the amendment of the Revolving Credit Facility to increase the borrowing capacity by $20.0 million to $80.0 million;

§

increase in net sales of 36.2% to $273.3 million in total for the periods February 1, 2007 through June 15, 2007 ($138.2 million) and June 16, 2007 through October 31, 2007 ($135.1 million), as compared to $200.6 million in total for the periods February 1, 2006 through February 7, 2006 ($4.0 million) and February 8, 2006 through October 31, 2006 ($196.6 million);

§

increase in gross profit of 20.1% to $50.2 million in total for the periods February 1, 2007 through June 15, 2007 ($31.8 million) and June 16, 2007 through October 31, 2007 ($18.4 million), as compared to $41.8 million in total for the periods February 1, 2006 through February 7, 2006 ($.9 million) and February 8, 2006 through October 31, 2006 ($40.9 million); and

§

Adjusted EBITDAincrease of 21.1% to $41.4 million in total for the periods February 1, 2007 through June 15, 2007 ($24.7 million) and June 16, 2007 through October 31, 2007 ($16.7 million), as compared to $34.3 millionin total for the periods February 1, 2006 through February 7, 2006 ($.9 million) and February 8, 2006 through October 31, 2006 ($33.4 million).

(1)

As used herein, ‘‘Adjusted EBITDA’’ represents net (loss) income plus (i) income tax expense (benefit); (ii) interest expense; (iii) depreciation and amortization; and (iv) other expenses associated with the DLJ Acquisition and CH Acquisition as shown below (in thousands):

			Successor		Predecessor II
			Three Months Ended
			October 31,
			2007		2006
Net income (loss)		$	(1,790)	$	2,194
	Income tax expense (benefit)		(2,356)		1,312
	Interest expense		6,187		6,801
	Depreciation and amortization		4,415		2,739
EBITDA			6,456		13,046
	Write-up of inventory		2,981		119
Adjusted EBITDA		$	9,437	$	13,165

35

					Successor		Predecessor II				Predecessor I
					Period		Period		Period		Period
					June 16, 2007		February 1,		February 8,		February 1
					through		2007 through		2006 through		2006 through
					October 31,		June 15,		October 31,		February 7,
					2007		2007		2006		2006
Net income (loss)				$	(5,058)	$	(2,511)	$	1,749	$	(4,077)
	Income tax expense (benefit)				(3,068)		930		1,029		(2,663)
	Interest expense				9,540		9,991		18,767		336
	Depreciation and amortization				9,445		4,551		9,434		110
EBITDA					10,859		12,961		30,979		(6,294)
		Extinguishment of deferred debt expenses			-		-		-		535
		Write-up of inventory			5,845		-		2,407		-
		Equity compensation expense			-		3,989		-		-
		Fees and charges-termination of
			management agreement		-		4,844		-		-
		Compensation expense			-		2,962		-		6,616
Adjusted EBITDA				$	16,704	$	24,756	$	33,386	$	857

The Company has included information concerning Adjusted EBITDA in this quarterly report because the Company believes that such information is used by certain investors, securities analysts and others as one measure of performance and historical ability to service debt.  In addition, the Company uses Adjusted EBITDA when interpreting operating trends and results of operations of the business.  Executive compensation is based, in part, on the Company’s Adjusted EBITDA performance measured against targets.  Adjusted EBITDA is also used by the Company and others in the industry to evaluate proposed capital expenditures and to evaluate and to price potential acquisition candidates.  Adjusted EBITDA is a non-GAAP financial measure and should not be considered as an alternative to, or more meaningful than, income from operations, cash flows from operations or other traditional indications of a company’s operating performance or liq uidity.

The use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this measure in isolation, or as a substitute for analysis of the Company’s results as reported under GAAP.  Some of these limitations are:

§

Adjusted EBITDA does not reflect the Company’s current cash expenditure requirements, or future requirements, for capital expenditures or contractual commitments;

§

Adjusted EBITDA does not reflect changes in, or cash requirements for, the Company’s working capital needs;

§

Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on the Company’s debt; and

§

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacement.

Because of these limitations, Adjusted EBITDA should not be considered as discretionary cash available to the Company to reinvest in the growth of its business or as a measure of cash that will be available to the Company to meet its obligations.  You should compensate for these limitations by relying primarily on the Company’s GAAP results and using Adjusted EBITDA only supplementally.

36

The following tables set forth selected financial data (i) as a percentage of net sales; and (ii) the percentage change in dollars in those reported items from the comparable period:

			Successor		Predecessor II
			Three Months Ended
			October 31,
							%
			2007		2006		Change
Net sales			100.0	%	100.0	%	11.2	%
Cost of good sold			86.5		77.6		23.9
		Gross profit	13.5		22.4		(32.8)
Operating expenses:
	Selling, general and administrative		7.7		6.8		25.6
	Amortization		3.5		2.3		67.8
			11.2		9.1		36.2
		Income from operations	2.3		13.3		(80.2)
Interest expense			7.2		8.7		(9.0)
		Income (loss) before income taxes	(4.9)		4.6		(218.3)
Income tax expense (benefit)			(2.7)		1.7		(279.6)
		Net income (loss)	(2.2)	%	2.9	%	(181.6)

			Successor		Predecessor II		Total*		Predecessor II		Predecessor I		Total*
			Period		Period		Nine		Period		Period		Nine
			June 16,		February 1,		Months		February 8,		February 1,		Months
			2007 through		2007 through		Ended		2006 through		2006 through		Ended
			October 31,		June 15,		October 31,		October 31,		February 7,		October 31,		%
			2007		2007		2007		2006		2006		2006		Change
Net sales			100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	36.2	%
Cost of good sold			86.4		77.0		81.6		79.2		76.3		79.2		40.5
		Gross profit	13.6		23.0		18.4		20.8		23.7		20.8		20.1
Operating expenses:
	Selling, general and administrative		7.2		15.2		11.2		6.9		182.7		10.4		46.6
	Amortization		5.4		1.7		3.5		2.9		.3		2.9		69.0
			12.6		16.9		14.7		9.8		183.0		13.3		51.4
		Income (loss) from operations	1.0		6.1		3.7		11.0		(159.3)		7.5		(35.1)
Interest expense			7.1		7.2		7.1		9.5	��	8.4		9.5		2.2
		Income (loss) before income taxes	(6.1)		(1.1)		(3.4)		1.5		(167.7)		(2.0)		145.0
Income tax expense (benefit)			(2.3)		.7		(.8)		.5		(66.2)		(.8)		30.8
		Net income (loss)	(3.8)	%	(1.8)	%	(2.6)	%	1.0	%	(101.5)	%	(1.2)	%	225.1

*

Used for comparative purposes

37

Selected Factors that Affect Operating Results

The Company’s business, financial condition and results of operations are significantly influenced by (i) overall demand for the Company’s products; (ii) costs of stainless steel and other raw materials; and (iii) oil and gas exploration.

Overall demand for stainless steel, specialty alloy and titanium tubing products has been robust for the last several years.  Driven by continued growth in general economic conditions and strong demand for high performance materials for chemical/petrochemical processing, power generation, energy and other applications, the Company has experienced growth in volume of sales.  The following table presents volume of sales and market pricing information for the respective periods:

	Three Months Ended		Nine Months Ended
	October 31,		October 31,
	2007	2006	2007	2006
Feet shipped (millions)	34.3	38.8	108.9	105.7
Stainless steel price index*	199.69	182.2	224.8	151.9

* Source CRU International

Stainless steel prices have historically been dependent on supply and demand and costs of raw materials such as chrome, nickel, molybdenum and titanium. While the Company is able to pass through changes in the cost of raw materials to its customers, significant and sudden changes can lead customers to reduce or delay purchases, substitute materials and/or cancel capital projects.  The specialty steel industry has experienced significant changes in the cost of raw materials such as nickel, chrome, molybdenum and titanium over the last several years.  

In products containing nickel and titanium, the Company has experienced softness, particularly in the first half of fiscal 2007, which the Company believes is attributable to customers depleting existing inventories and assessing whether the rapid rise in price levels will continue.  

During the third quarter of fiscal 2008, sharply declining prices encouraged customers to delay purchases which the Company believes caused volume of shipments to decline.  Furthermore, demand for tubing used in the installation of ethanol plants has declined significantly and contributed to increased competitive pressures for heat exchanger and general commercial products.

Fluctuations in Quarterly Results of Operations

Quarterly results may be materially affected by the timing of acquisitions, the timing and magnitude of costs related to such acquisitions, variations in costs of products sold, the mix of products sold and general economic conditions.  Results for any quarter may not be indicative of the results for any subsequent fiscal quarter or for a full fiscal year. There is generally no significant seasonality in demand for the Company’s products or operations as a whole.

Results of Operations – Three Months Ended October 31, 2007 as Compared to the Three Months Ended October 31, 2006

Net Sales

Overall - For the third quarter of fiscal 2008, net sales increased $8.7 million, or 11.2%, to $86.4 million, as compared to $77.7 million in the same period in fiscal 2007.  This increase in overall sales was primarily due to (i) the acquisition of Greenville on August 15, 2006 ($4.1 million); (ii) an increase in the sales volume of nickel products ($12.1 million), offset by decreases in the sales volume of heat exchanger, high purity/electropolished and general commercial products ($21.0 million); and (iii) increases in the average selling price of substantially all of the Company’s products ($12.3 million) due to improved alloy and/or size mix and increased raw material market values.   

Total feet shipped during the third quarter of fiscal 2008 decreased by 11.7% to 34.3 million feet, as compared to 38.8 million feet in the same period in fiscal 2007.  This decrease in total feet shipped was primarily due to decreases in the sales volume of heat exchanger, encapsulated wire and general commercial products, offset by increases in the sales volume of nickel and Greenville products.

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Chemical/Petrochemical Processing and Power Generation Products -For the third quarter of fiscal 2008, net sales of chemical/petrochemical processing and power generation products increased $10.1 million, or 36.9%, to $37.2 million, as compared to $27.1 million in the same period in fiscal 2007.  This increase in sales was primarily due to (i) the acquisition of Greenville ($1.1 million); (ii) an increase in the sales volume of nickel and titanium products ($13.4 million), offset by a decrease in the sales volume of heat exchanger products ($4.4 million); and (iii) an increase in the average selling price of heat exchanger products ($3.4 million), offset by a decrease in the average selling price of nickel products ($3.2 million).  

Feet shipped of chemical/petrochemical processing and power generation products during the third quarter of fiscal 2008 increased by 22.2% to 10.9 million feet, as compared to 8.9 million feet in the same period in fiscal 2007.  This increase was primarily due to an increase in sales volume of nickel products.        

Energy Products -  For the third quarter of fiscal 2008, net sales of energy products increased $2.5 million, or 19.8%, to $15.3 million, as compared to $12.8 million in the same period in fiscal 2007.  This increase in sales was primarily due to (i) an increase in the sales volume of sub-sea umbilical ($2.6 million), offset by decreases in the sales volume of pressure coil and encapsulated wire products ($2.3 million); and (ii) an increase in the average selling price of pressure coil products ($2.0 million).  

Feet shipped of energy products during the third quarter of fiscal 2008 decreased by 8.7% to 8.9 million feet, as compared to 9.7 million feet in the same period in fiscal 2007.  This decrease was primarily due to a decrease in the sales volume of encapsulated wire products.        

Food, Beverage and Pharmaceutical Products - For the third quarter of fiscal 2008, net sales of food, beverage and pharmaceutical products decreased $2.4 million, or 19.7%, to $9.6 million, as compared to $12.0 million in the same period in fiscal 2007.  This decrease in sales was primarily due to a decrease in the sales volume of high purity/electropolished products, offset by an increase in the average selling price of these products.  

Feet shipped of food, beverage and pharmaceuticals products during the third quarter of fiscal 2008 decreased by 34.4% to 3.2 million feet, as compared to 4.8 million feet in the same period in fiscal 2007.  This decrease in feet shipped was primarily due to a decrease in the sales volume of substantially all of the food, beverage and pharmaceutical products.

General Commercial Products -  For the third quarter of fiscal 2008, net sales of general commercial products decreased $1.5 million, or 5.7%, to $24.3 million, as compared to $25.8 million in the same period in fiscal 2007.  This decrease in sales was primarily due to a decrease in sales volume ($10.9 million), offset by an increase in the average selling price of these products ($6.3 million) and the acquisition of Greenville ($3.2 million).  

Feet shipped of general commercial products during the third quarter of fiscal 2008 decreased by 26.2% to 11.3 million feet, as compared to 15.4 million feet in the same period in fiscal 2007.  This decrease in feet shipped was primarily due to decreases in the sales volume of RathGibson’s existing products, offset by an increase in sales volume due to the acquisition of Greenville.

Gross Profit

Cost of goods sold consists of manufacturing costs (primarily material, labor, consumables, utilities, maintenance, occupancy and depreciation), inbound freight charges, shipping and handling costs, certain purchasing costs, receiving costs and warehousing costs (which include internal transfer costs).  The Company’s gross profit margins may not be comparable to the gross profit margins of other entities due to the classification of certain costs.  

Gross profit for the third quarter of fiscal 2008 was $11.7 million, a decrease of $5.7 million, or 32.8%, as compared to $17.4 million in the same period in fiscal 2007.  The decrease in gross profit was primarily due to (i) a reduction in selling prices due to the steep decline in the market value of nickel and the lagging effect of replacement inventory cost; and (ii) a $2.9 million increase in non-recurring, non-cash purchase accounting adjustments to $3.0 million in the third quarter of fiscal 2008, as compared to $.1 million in the same period in fiscal 2007.  In accordance with the purchase method of accounting under GAAP, certain inventories were valued at fair value in connection with the DLJ Acquisition and CH Acquisition, which were $6.0 million and $2.4 million, respectively, greater than their historical cost.  $3.0 million and $.1 million of the purchase accounting adjustment was expensed in cost of goods sold within the conde nsed consolidated statements of operations during the third quarter of fiscal 2008 and 2007, respectively, as the associated inventories were sold.  

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Gross profit margin for the third quarter of fiscal 2008 decreased to 13.5% from 22.4% in the same period in fiscal 2007.   The decrease in gross profit margin was primarily due to (i) a reduction in selling prices due to the steep decline in the market value of nickel and the lagging effect of replacement inventory cost; and (ii) a $2.9 million increase in non-recurring, non-cash purchase accounting adjustments to $3.0 million in the third quarter of fiscal 2008, as compared to $.1 million in the same period in fiscal 2007.  

Gross profit per foot shipped for the third quarter of fiscal 2008 amounted to $.34/foot ($.43/foot excluding non-recurring, non-cash purchase accounting adjustments amounting to $.09/foot), as compared to $.45/foot in the same period in fiscal 2007.

Operating Expenses

Selling, general and administrative expense consists primarily of management, administrative and sales compensation, benefits, travel, communications, occupancy and insurance expenses, legal and professional fees.  

Selling, general and administrative expenses increased $1.4 million, or 25.6%, to $6.7 million in the third quarter of fiscal 2008, as compared to $5.3 million in the same period in fiscal 2007.  This increase in selling, general and administrative expense was primarily due to (i) an increase in salaries and wages amounting to $.5 million as a result of increases in annual employee compensation and the number of employees; and (ii) increases in employee benefits, professional fee and advertising amounting to $.8 million.  These increases were offset by a decrease in annual advisory and management fees of $.2 million.

Amortization expense increased $1.2 million, or 67.8%, to $3.0 million in the third quarter of fiscal 2008, as compared to $1.8 million in the same period in fiscal 2007.  The increase in amortization expense was primarily due to preliminary estimated allocations of DLJ Acquisition purchase price to intangible assets and the corresponding higher amount of amortization expense for the period.  

Interest Expense

Interest expense for the third quarter of fiscal 2008 decreased $.6 million, or 9.0%, to $6.2 million, as compared to $6.8 million in the same period in fiscal 2007.  The decrease in interest expense was primarily due to (i) the elimination of $8.6 million of deferred financing costs in connection with the purchase accounting for the DLJ Acquisition and the corresponding decrease in amortization recorded to interest expense for the period; and (ii) amortization of the bond premium recorded in connection with the purchase accounting for the DLJ Acquisition.  

The Company’s credit agreements assessed interest at a weighted average rate of 10.5% and 10.8% at October 31, 2007 and January 31, 2007, respectively.

Income Tax Expense

Income tax benefit amounted to $2.3 million in the third quarter of fiscal 2008, as compared to an income tax expense of $1.3 million in the same period in fiscal 2007.  These tax provisions reflect effective tax rates of 56.8% and 37.4% for the third quarters of fiscal 2008 and 2007, respectively.  The increase in the effective tax rate is primarily due to the income tax true-ups recorded in the third quarter of fiscal 2008 related to the filing of the Company’s income tax returns for the period February 8, 2007 through January 31, 2007.  The difference between the actual effective tax rates and the U.S. federal statutory rate (35% and 34% for fiscal 2008 and 2007, respectively) is principally due to (i) state income tax provisions; (ii) deductions for extra territorial income and domestic production activity; and (iii) non-deductible incentive unit expense.

40

Results of Operations – Periods February 1, 2007 through June 15, 2007 and June 16, 2007 through October 31, 2007 as Compared to the Periods February 1, 2006 through February 7, 2006 and February 8, 2006 through October 31, 2006

Net Sales

Overall - Net sales increased $72.7 million, or 36.2%, to $273.3 million in total for the periods February 1, 2007 through June 15, 2007 ($138.2 million) and June 16, 2007 through October 31, 2007 ($135.1 million), as compared to $200.6 million in total for the periods February 1, 2006 through February 7, 2006 ($4.0 million) and February 8, 2006 through October 31, 2006 ($196.6 million).  This increase in overall sales was primarily due to (i) the acquisition of Greenville on August 15, 2006 ($29.2 million); (ii) an increase in the sales volume of nickel products ($30.1 million), offset by decreases in the sales volume of heat exchanger, high purity/electropolished and general commercial products ($40.1 million); and (iii) increases in the average selling price of substantially all of the Company’s products ($53.2 million) due to improved alloy and/or size mix and increased raw material market values.  

Total feet shipped increased by 3.0% to 108.9 million feet in total for the periods February 1, 2007 through June 15, 2007 (57.0 million feet) and June 16, 2007 through October 31, 2007 (51.9 million feet), as compared to 105.7 million feet in total for the periods February 1, 2006 through February 7, 2006 (2.3 million feet) and February 8, 2006 through October 31, 2006 (103.4 million feet).  This increase in total feet shipped was primarily due to (i) the acquisition of Greenville; and (ii) increases in the sales volume of nickel and pressure coil products, offset by decreases in the sales volume of heat exchanger, encapsulated wire, food, beverage and pharmaceutical and general commercial products.

Chemical/Petrochemical Processing and Power Generation Products -Net sales of chemical/petrochemical processing and power generation products increased $40.8 million, or 51.9%, to $119.4 million in total for the periods February 1, 2007 through June 15, 2007 ($58.5 million) and June 16, 2007 through October 31, 2007 ($60.9 million), as compared to $78.6 million in total for the periods February 1, 2006 through February 7, 2006 ($1.6 million) and February 8, 2006 through October 31, 2006 ($77.0 million).  This increase in sales was primarily due to (i) the acquisition of Greenville ($7.3 million); (ii) an increase in the sales volume of nickel products ($30.1 million), offset by a decrease in the sales volume of heat exchanger products ($5.5 million); and (iii) an increase in the average selling price of heat exchanger products ($11.8 million).  

Feet shipped of chemical/petrochemical processing and power generation products increased by 17.6% to 31.7 million feet in total for the periods February 1, 2007 through June 15, 2007 (15.2 million feet) and June 16, 2007 through October 31, 2007 (16.5 million feet), as compared to 26.9 million feet in total for the periods February 1, 2006 through February 7, 2006 (1.1 million feet) and February 8, 2006 through October 31, 2006 (25.8 million feet).  This increase in feet shipped was primarily due to an increase in the sales volume of nickel products, offset by a decrease in the sales volume of heat exchanger products.          

Energy Products - Net sales of energy products increased $5.1 million, or 13.0%, to $44.8 million in total for the periods February 1, 2007 through June 15, 2007 ($22.5 million) and June 16, 2007 through October 31, 2007 ($22.3 million), as compared to $39.7 million in total for the periods February 1, 2006 through February 7, 2006 ($.5 million) and February 8, 2006 through October 31, 2006 ($39.2 million).  This increase in sales was primarily due to (i) the acquisition of Greenville ($1.5 million); and (ii) an increase in the average selling price of substantially all of the energy products ($3.7 million).    

Feet shipped of energy products increased by 2.6% to 29.6 million feet in total for the periods February 1, 2007 through June 15, 2007 (16.0 million feet) and June 16, 2007 through October 31, 2007 (13.6 million feet), as compared to 28.9 million feet in total for the periods February 1, 2006 through February 7, 2006 (.3 million feet) and February 8, 2006 through October 31, 2006 (28.6 million feet).  This increase in feet shipped was primarily due to a increase in the sales volume of pressure coil products, offset by a decrease in the sales volume of encapsulated wire products.          

Food, Beverage and Pharmaceutical Products - Net sales of food, beverage and pharmaceutical products increased $2.4 million, or 8.3%, to $31.9 million in total for the periods February 1, 2007 through June 15, 2007 ($16.6 million) and June 16, 2007 through October 31, 2007 ($15.3 million), as compared to $29.5 million in total for the periods February 1, 2006 through February 7, 2006 ($.7 million) and February 8, 2006 through October 31, 2006 ($28.8 million).  This increase in sales was primarily due to an increase in the average selling price of high purity/electropolished products, offset by a decrease in the sales volume of these products.  

41

Feet shipped of food, beverage and pharmaceuticals products decreased by 18.2% to 12.2 million feet in total for the periods February 1, 2007 through June 15, 2007 (7.0 million feet) and June 16, 2007 through October 31, 2007 (5.2 million feet), as compared to 14.8 million feet in total for the periods February 1, 2006 through February 7, 2006 (.1 million feet) and February 8, 2006 through October 31, 2006 (14.7 million feet).  This decrease in feet shipped was primarily due to a decrease in the sales volume of substantially all of the food, beverage and pharmaceutical products.

General Commercial Products - Net sales of general commercial products increased $24.4 million, or 46.0%, to $77.2 million in total for the periods February 1, 2007 through June 15, 2007 ($40.6 million) and June 16, 2007 through October 31, 2007 ($36.6 million), as compared to $52.8 million in total for the periods February 1, 2006 through February 7, 2006 ($1.2 million) and February 8, 2006 through October 31, 2006 ($51.6 million).  This increase in sales was primarily due to (i) the acquisition of Greenville ($20.1 million); and (ii) an increase in average selling price of general commercial products ($29.7 million), offset by a decrease in sales volume of these products ($25.4 million).

Feet shipped of general commercial products increased by 1.1% to 35.4 million feet in total for the periods February 1, 2007 through June 15, 2007 (18.8 million feet) and June 16, 2007 through October 31, 2007 (16.6 million feet), as compared to 35.1 million feet in total for the periods February 1, 2006 through February 7, 2006 (.8 million feet) and February 8, 2006 through October 31, 2006 (34.3 million feet).  This increase in feet shipped was primarily due to the acquisition of Greenville, offset by decreases in the sales volume of RathGibson’s existing products.

Gross Profit

Gross profit was $50.2 million in total for the periods February 1, 2007 through June 15, 2007 ($31.8 million) and June 16, 2007 through October 31, 2007 ($18.4 million), an increase of $8.4 million, or 20.1%, as compared to $41.8 million in total for the periods February 1, 2006 through February 7, 2006 ($.9 million) and February 8, 2006 through October 31, 2006 ($40.9 million).  The increase in gross profit was primarily due to the acquisition of Greenville ($11.3 million) and organic growth of net sales, offset by a $3.4 million increase in non-recurring, non-cash purchase accounting adjustments to $5.8 million in the period June 16, 2007 through October 31, 2007, as compared to $2.4 million in the period February 8, 2006 through October 31, 2006.  In accordance with the purchase method of accounting under GAAP, certain inventories were valued at fair value in connection with the DLJ Acquisition and CH Acquisition, which were $6.0 million and $2.4 million, respectively, greater than their historical cost.  $5.8 million and $2.4 million of the purchase accounting adjustment was expensed in cost of goods sold within the condensed consolidated statements of operations during the period June 16, 2007 through October 31, 2007 and the period February 8, 2006 through October 31, 2006, respectively, as the associated inventories were sold.  

Gross profit margin decreased to 18.4% in total for the periods February 1, 2007 through June 15, 2007 (23.0%) and June 16, 2007 through October 31, 2007 (13.6%), as compared to 20.8% in total for the periods February 1, 2006 through February 7, 2006 (23.7%) and February 8, 2006 through October 31, 2006 (20.8%).  The decrease in gross profit margin was primarily due to (i) a $3.4 million increase in non-recurring, non-cash purchase accounting adjustments to $5.8 million, as compared to $2.4 million in the same period in fiscal 2007; and (ii) a reduction in selling prices due to the steep decline in the market value of nickel and the lagging effect of replacement inventory cost during the third quarter of fiscal 2008.  This decrease in gross profit margin was offset by (i) the acquisition of Greenville which contributed a gross profit margin of 38.9% (excluding non-recurring, non-cash purchase accounting adjustments) on increased net sales in the current period; and (ii) lower sales volumes of pressure coil products and high costs of production relating to heavy wall sub-sea umbilical products in the periods February 1, 2006 through February 7, 2006 and February 8, 2006 through October 31, 2006.    

Gross profit per foot shipped amounted to $.46/foot ($.51/foot excluding non-recurring, non-cash purchase accounting adjustments amounting to $.05/foot) in total for the periods February 1, 2007 through June 15, 2007 ($.56/foot) and June 16, 2007 through October 31, 2007 ($.36/foot), as compared to $.40/foot ($0.42/foot excluding non-recurring, non-cash purchase accounting adjustments amounting to $.02/foot) in total for the periods February 1, 2006 through February 7, 2006 ($.42/foot) and February 8, 2006 through October 31, 2006 ($.40/foot).

42

Operating Expenses

Selling, general and administrative expenses increased $9.7 million, or 46.6%, to $30.7 million in total for the periods February 1, 2007 through June 15, 2007 ($21.0 million) and June 16, 2007 through October 31, 2007 ($9.7 million), as compared to $21.0 million in total for the periods February 1, 2006 through February 7, 2006 ($7.3 million) and February 8, 2006 through October 31, 2006 ($13.7 million).  This increase in selling, general and administrative expense was primarily due to (i) the acquisition of Greenville ($1.9 million); and (ii) $11.8 million in non-recurring expenses recorded during the period February 1, 2007 through June 15, 2007 in connection with the DLJ Acquisition, as compared to $7.1 million in non-recurring expenses recorded during the period February 1, 2006 through February 7, 2006 in connection with the CH Acquisition.  During the period February 1, 2007 through June 15, 2007, the Company recorded the following acquis ition related expenses:  (i) $4.8 million of fees and related charges for the termination of the Company’s management agreement with Castle Harlan; (ii) $3.0 million of compensation expense relating to employee bonuses; and (iii) $4.0 million of non-cash incentive unit expense.  During the period February 1, 2006 through February 7, 2006, the Company recorded the following acquisition related expenses:  (i) the extinguishment of deferred debt expenses of $.5 million; and (ii) the recognition of compensation expense of $6.6 million relating to settlement of outstanding stock options, phantom rights and management bonuses.

Amortization expense increased $4.0 million, or 69.0%, to $9.7 million in total for the periods February 1, 2007 through June 15, 2007 ($2.4 million) and June 16, 2007 through October 31, 2007 ($7.3 million), as compared to $5.7 million in total for the periods February 1, 2006 through February 7, 2006 (less than $.1 million) and February 8, 2006 through October 31, 2006 ($5.7 million).  The increase in amortization expense was primarily due to preliminary estimated allocations of DLJ Acquisition purchase price to intangible assets and the corresponding higher amount of amortization expense for the period.  

Interest Expense

Interest expense increased $.4 million, or 2.2%, to $19.5 million in total for the periods February 1, 2007 through June 15, 2007 ($10.0 million) and June 16, 2007 through October 31, 2007 ($9.5 million), as compared to $19.1 million in total for the periods February 1, 2006 through February 7, 2006 ($.3 million) and February 8, 2006 through October 31, 2006 ($18.8 million).  The increase in interest expense was primarily due to an increased principal amount of indebtedness, offset by (i) the elimination of $8.6 million of deferred financing costs in connection with the purchase accounting for the DLJ Acquisition and the corresponding decrease in amortization recorded to interest expense for the period; and (ii) amortization of the bond premium recorded in connection with the purchase accounting for the DLJ Acquisition.  

The Company’s credit agreements assessed interest at a weighted average rate of 10.5% and 10.8% at October 31, 2007 and January 31, 2007, respectively.

Income Tax Expense

Income tax benefit amounted to $2.1 million in total for the periods February 1, 2007 through June 15, 2007 ($.9 million of income tax expense) and June 16, 2007 through October 31, 2007 ($3.0 million of income tax benefit), as compared to $1.6 million in total for the periods February 1, 2006 through February 7, 2006 ($2.6 million of income tax benefit) and February 8, 2006 through October 31, 2006 ($1.0 million of income tax expense).  These tax provisions reflect effective tax rates of 22.0% in total for the periods February 1, 2007 through June 15, 2007 (-58.8%) and June 16, 2007 through October 31, 2007 (37.7%), as compared to 41.2% in total for the periods February 1, 2006 through February 7, 2006 (39.5%) and February 8, 2006 through October 31, 2006 (37.0%).  The decrease in the effective tax rate is primarily due to (i) the income tax true-ups recorded in the period June 16, 2007 through October 31, 2007 related to the filing of the Comp any’s income tax returns for the period February 8, 2007 through January 31, 2007; (ii) the non-deductibility of incentive unit expense amounting to $4.0 million and $.4 million recorded in the period February 1, 2007 through June 15, 2007 and June 16, 2007 through October 31, 2007, respectively; and (iii) the relationship between the amount of permanent income tax differences and the projected loss before income taxes for fiscal 2008.  The difference between the actual effective tax rates and the U.S. federal statutory rate (35% and 34% for fiscal 2008 and 2007, respectively) is principally due to (i) state income tax provisions; (ii) deductions for extra territorial income and domestic production activity; and (iii) non-deductible incentive unit expense.

Sales Order Backlog

The Company’s sales order backlog was $60.4 million at October 31, 2007 compared to $70.5 million at January 31, 2007.  Management estimates that approximately 80% of the sales order backlog will be fulfilled during the remainder of the current fiscal year.  There is no seasonality with respect to the Company’s sales order backlog.

43

Liquidity and Capital Resources

Overview

The Company’s principal liquidity requirements are to service debt and meet working capital and capital expenditure needs.

The Company expects that cash generated from operating activities and availability under its Revolving Credit Facility will be the principal sources of liquidity.  The Company’s ability to make payments on and to refinance its indebtedness, including the Revolving Credit Facility and Senior Notes, and to fund working capital needs, planned capital expenditures and future acquisitions, will depend on the Company’s ability to generate cash in the future.  This, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond the Company’s control.  Based on the current level of operations, the Company believes the cash flow from operations and available borrowings under the Revolving Credit Facility will be adequate to meet liquidity needs for at least the next twelve months.  Additionally, the Company does not expect to pay dividends to RGCH Corp. for the foreseeable future to service the interest requirements on RGCH Corp.’s PIK Notes.  

Debt and Other Obligations

Concurrently with the closing of the CH Transactions, and as a condition thereof, the Company entered into a $50.0 million Revolving Credit Facility that matures on February 7, 2011.  Concurrently with the closings of the Greenville Acquisition and the DLJ Acquisition, the Company entered into amendments to the Revolving Credit Facility for which the borrowing capacity was increased by $10.0 million and $20.0 million, respectively, to a total of $80.0 million, subject to borrowing base availability.  Borrowings under the Revolving Credit Facility bear interest payable at various dates with floating rates of either (i) prime plus 1% (8.75% at October 31, 2007) or (ii) LIBOR plus 2% (7.00% at October 31, 2007).  At October 31, 2007, the Company had $47.2 million outstanding and $30.9 million available under the Revolving Credit Facility after giving effect to its borrowing base requirements.  The Revolving Credit Facility contains variou s covenants that, among other things, restrict the Company’s ability to incur or guarantee debt, pay dividends, make certain investments, repurchase stocks, incur liens, enter into certain transactions with affiliates, enter into certain sales and leaseback transactions and transfer or sell assets.  The Company was in compliance with all such covenants at October 31, 2007.

In connection with the CH Acquisition, the Company issued $200.0 million aggregate principal amount of Senior Notes due February 15, 2014.  These notes bear interest at 11.25% per annum payable in semi-annual installments on February 15 and August 15 each year commencing August 15, 2006.  The indenture governing the Senior Notes contains covenants that, among other things, restrict the Company’s ability to incur or guarantee additional debt, pay dividends and make distributions, make certain investments, repurchase stock, incur liens, enter into certain transactions with affiliates, enter into certain sale and leaseback transactions, merge or consolidate, and transfer or sell assets.  The Company was in compliance with all such covenants at October 31, 2007.  

On June 15, 2007, the Company, together with RGCH Corp. and RG Tube, entered into an advisory services agreement with DLJ, an affiliate of DLJMBP, under which DLJ acts as a financial advisor with respect to the following services: (i) assisting in analyzing operations and historical performance; (ii) analyzing future prospects; (iii) assisting with respect to future proposals for tender offers, acquisitions, sales, mergers, financings, exchange offers, recapitalizations, restructurings or other similar transactions; and (iv) assisting in strategic planning.  The advisory services agreement is for an initial term expiring June 15, 2012 and is subject to renewal for consecutive one-year terms unless terminated by DLJ or the Company, RGCH Corp. or RG Tube with 30 days notice prior to the expiration of the initial term or any annual renewal.  For services rendered for the remainder of fiscal 2008 and thereafter, an annual advisory fee of $1.0 millio n is payable in equal quarterly installments on the first business day of each calendar quarter.   For any debt or equity financing or refinancing consummated during the term of this agreement, the Company has an obligation to pay an advisory fee not to exceed the greater of $.5 million or one percent of the aggregate transaction value.  During the third quarter of fiscal 2008 and the period June 16, 2007 through October 31, 2007, $.3 million and $.4 million of annual advisory fees, respectively, was amortized to selling, general and administrative expenses within the condensed consolidated statements of operations.  

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On February 7, 2006, the Company entered into a management agreement with Castle Harlan, as manager, under which Castle Harlan provided business and organizational strategy, financial and investment management, advisory, merchant and investment banking services to the Company, RGCH Corp. or RGCH LLC.  The management agreement was terminated as a result of the DLJ Acquisition on June 15, 2007.  Accordingly, the Company recorded $4.8 million of termination fees and related charges to selling, general and administrative expenses within the condensed consolidated statements of operations.  As compensation for the services performed by Castle Harlan for fiscal 2007, the Company paid $2.0 million to Castle Harlan on the date of the closing of the CH Acquisition.  In addition, the Company paid Castle Harlan $.8 million on the date of the closing of the CH Acquisition for services rendered in connection with the CH Transact ions.  For services rendered after fiscal 2007, an annual management fee is payable quarterly in advance and equal to 3% of the aggregate equity contributions made by CHP IV and its affiliates (including their limited partners).  For any additional equity contributions made by CHP IV or its affiliates (including their limited partners) to any of the Company, RGCH Corp. or RGCH LLC, the Company was obligated to pay Castle Harlan an annual management fee equal to 3% of each such equity contribution.  During the third quarter of fiscal 2007, $.5 million of management fees was amortized to selling, general and administrative expenses within the condensed consolidated statements of operations.  During the periods February 1, 2007 through June 15, 2007 and February 8, 2006 through October 31, 2006, $.8 million and $1.5 million, respectively, of management fees was amortized to selling, general and administrative expenses within the condensed consolidated statements of operations.  

Working Capital

At October 31, 2007, the Company had working capital of $95.2 million, increasing from $65.5 million at January 31, 2007.

Cash Flows

Cash decreased $3.9 million in total for the periods February 1, 2007 through June 15, 2007 ($1.2 million) and June 16, 2007 through October 31, 2007 ($2.7 million), ending the period at $1.7 million.  Cash increased $1.1 million in total for the periods February 1, 2006 through February 7, 2006 ($.4 million) and February 8, 2006 through October 31, 2006 ($.7 million), ending the period at $3.9 million.  The increase in the use of cash in total for the periods February 1, 2007 through June 15, 2007 and June 16, 2007 through October 31, 2007, as compared to the total for the periods February 1, 2006 through February 7, 2006 and February 8, 2006 through October 31, 2006, is primarily due to the following:

Operating Activities - The Company used cash for operating activities of $14.5 million in total for the periods February 1, 2007 through June 15, 2007 ($11.0 million) and June 16, 2007 through October July 31, 2007 ($3.5 million), as compared to $3.5 million in total for the periods February 1, 2006 through February 7, 2006 ($3.0 million) and February 8, 2006 through October 31, 2006 ($.5 million).  The increase in the use of cash flows from operating activities was primarily due to increases in working capital needs due to higher levels of sales and inventories driven, in part, by increased market value of raw materials.

Investing Activities - The Company used cash for investing activities of $6.2 million in total for the periods February 1, 2007 through June 15, 2007 ($2.5 million) and June 16, 2007 through October 31, 2007 ($3.7 million), as compared to $39.3 million in total for the periods February 1, 2006 through February 7, 2006 ($.5 million) and February 8, 2006 through October 31, 2006 ($38.8 million).  Capital expenditures to replace and upgrade existing equipment and install new equipment to provide additional operating efficiencies amounted $6.2 million in total for the periods February 1, 2007 through June 15, 2007 ($2.5 million) and June 16, 2007 through October 31, 2007 ($3.7 million), as compared $4.8 million in total for the periods February 1, 2006 through February 7, 2006 ($.5 million) and February 8, 2006 through October 31, 2006 ($4.3 million).  The Company expects capital expenditures for the remainder of fiscal 2008 to be approximate ly $4.7 million, primarily relating to the purchase of new equipment for the purpose of reducing manufacturing costs, increasing productive capacity and maintenance. In the period February 8, 2006 through October 31, 2006, the Company used cash of $34.5 million, net of cash acquired, to purchase all of the outstanding equity interests of Greenville.  

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Financing Activities - Financing activities provided cash of $16.8 million in total for the periods February 1, 2007 through June 15, 2007 ($12.3 million) and June 16, 2007 through October 31, 2007 ($4.5 million), as compared to $43.9 million in total for the periods February 1, 2006 through February 7, 2006 ($3.9 million) and February 8, 2006 through October 31, 2006 ($40.0 million).  Net principal proceeds from the Revolving Credit Facility of $18.9 million in total for the periods February 1, 2007 through June 15, 2007 ($12.3 million) and June 16, 2007 through October 31, 2007 ($6.6 million) were used primarily to fund working capital requirements.  In the period February 8, 2006 through October 31, 2006, the net principal proceeds from the Revolving Credit Facility of $37.3 million were used primarily to fund the Greenville Acquisition and working capital requirements.  In the period February 1, 2006 th rough February 7, 2006, the Company issued $200.0 million in Senior Notes and borrowed $7.0 million under the Revolving Credit Facility in connection with the CH Acquisition, which was used for the following corporate purposes: (i) repay existing indebtedness of approximately $170.4 million; (ii) fund the CH Acquisition through the payment of $23.1 million to RGCH Corp.; and (iii) payment of financing costs of $9.6 million.  In the period June 16, 2007 through October 31, 2007, the Company paid a dividend of $3.8 million, which was used to finance the contingent payment of $3.4 million made by RG Tube in connection with the DLJ Acquisition.  In the period February 8, 2006 through October 31, 2006, the Company received $2.6 million related to the working capital adjustment in connection with the CH Acquisition.

Off-balance Sheet Arrangements

At October 31, 2007, the Company did not have any off-balance sheet arrangements.

Critical Accounting Policies

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect: (i) the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements; (ii) the disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements; and (iii) the reported amounts of revenues and expenses during the reporting period.  The Company bases its estimates on historical experience and other assumptions that are believed to be reasonable under circumstances, the results of which form the basis for the Company’s judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  The Company’s actual results may differ from these estimates under different circumstances or conditions.  If actual amounts are ultimately different from these estimates, the revisions are included in the Company’s results of operations for the period in which the actual amounts become known.

The Company believes the following critical accounting policies represent the more significant judgments and estimates used in preparing the condensed consolidated financial statements.  There have been no material changes made to the Company’s critical accounting policies and estimates during the periods presented in the condensed consolidated financial statements.

Accounts Receivable

Accounts receivables consist of amounts billed and currently due from customers.  The Company extends credit to customers in the normal course of business and generally does not require collateral to support its accounts receivable balances.  The Company maintains a reserve for estimated losses resulting from the inability or unwillingness of customers to make required payments.  The reserve for estimated losses is based on the Company’s historical experience, existing economic conditions and any specific customer collection issues the Company has identified.

Long-Lived Assets

The Company accounts for the impairment or disposal of long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires long-lived assets, such as property, plant and equipment and amortizable intangible assets other than goodwill and indefinite-lived intangible assets, which are tested separately for impairment, to be evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  When evaluating long-lived and amortizable assets for potential impairment, the Company first compares the carrying value of the asset to the asset’s estimated future cash flows (undiscounted and without interest charges).  If the estimated future cash flows are less than the carrying value of the asset, the Company calculates an impairment loss.  The impairment loss calculation compares the carrying value of the asset t o the asset’s estimated fair value, which may be based on estimated future cash flows (discounted and with interest charges).  The Company recognizes an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value.  If the Company recognizes an impairment loss, the adjusted carrying amount becomes its new cost basis.  

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Goodwill and Other Intangible Assets

The Company evaluates goodwill for impairment at least annually, or more frequently if events or circumstances indicate that the assets may be impaired, by applying a fair value based test and, if impairment occurs, the amount of impaired goodwill is written off immediately.  The provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” require that a two-step impairment test be performed annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.  The first step of the test for impairment compares the book value of the Company’s reporting unit to its estimated fair value.  The second step of the goodwill impairment test, which is only required when the net book value of the reporting unit exceeds the fair value, compares the implied fair value of goodwill to its book value to determine the amount of the impairment required.  The Company evaluated its goodwill at January 31, 2007, and determined that there was no impairment of goodwill.

The Company evaluates tradenames for impairment at least annually, or more frequently if events or circumstances indicate that the assets may be impaired, by applying a fair value based test and, if impairment occurs, the amount of impaired tradenames is written off immediately.  The Company evaluated its tradenames at January 31, 2007 and determined that there were no impairment of tradenames.   

Amortizable intangible assets consist primarily of customer lists.  Subsequent to the DLJ Acquisition, amortizable intangible assets are amortized principally by an accelerated method over their estimated useful lives of 15 years.  Prior to the DLJ Acquisition, amortizable intangible assets were amortized principally by the straight-line method over their estimated useful lives of 15 years.  The Company may evaluate customer lists for impairment if events or circumstances indicate that the assets may be impaired, by applying a fair value based test and, if impairment occurs, the amount of impaired customer lists is written off immediately.

Goodwill and other intangible assets recorded in connection with the DLJ Acquisition are preliminary balances and are expected to change once the Company obtains third party appraisals and valuation studies on inventories, property, plant and equipment and intangible assets.  These appraisals and valuation studies are expected to be completed during fiscal 2008.

Income Taxes

Deferred income taxes are provided using the asset and liability method, whereby deferred income taxes are recognized for temporary differences between the reported amounts of assets and liabilities herein and their income tax basis and for net operating loss and tax credit carryforwards. Deferred income tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized.  Deferred income tax assets and liabilities are computed using the income tax rates in effect in the years in which the temporary differences are expected to reverse.

Revenue Recognition

Revenues are generally recognized when persuasive evidence of a selling arrangement exists, delivery has occurred, the Company’s price to the customer is fixed or determinable and collectibility is reasonably assured.  These criteria are generally satisfied upon shipment of product.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Credit Risk

The Company provides credit in the normal course of business to its customers, which are primarily value-added tubing distributors, OEMs, and engineering firms.  The Company performs ongoing credit evaluations of its customers, maintains reserves for potential credit losses and generally does not require collateral to support its accounts receivable balances.  

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Commodity Price Risk

The Company purchases certain raw materials such as stainless steel, nickel alloys, titanium, argon and hydrogen that are subject to price volatility caused by unpredictable factors.  Stainless steel, principally 304L grade and 316L grade, is the primary raw material the Company uses to manufacture products.  Stainless steel prices have historically been dependent on supply and demand and costs of raw materials such as chrome, nickel, molybdenum and titanium.  Where possible, the Company employs fixed price raw material purchase contracts.  Historically, the Company has been able to pass along increases in raw material costs to its customers, and the Company expects to continue to pass along such costs to customers.  While the Company is able to pass through changes in the cost of raw materials to its customers, significant and sudden changes can lead customers to reduce or delay purchases, substitute materials and/or cancel capit al projects, which may have an adverse effect on the Company’s results of operations and financial condition due to changes in sales volume and the lagging effect of replacement inventory cost.  The Company has not, in the past, used derivatives to manage commodity price risk.

Interest Rate Risk

Changes in interest rates can potentially impact the Company’s profitability and its ability to realize assets and satisfy liabilities.  Interest rate risk is resident primarily in the Company’s Revolving Credit Facility, which typically has variable interest rates based on Prime or LIBOR rates.  Assuming no other change in financial structure, an increase of 100 basis points in the Company’s variable interest rate would decrease pre-tax earnings for fiscal 2008 by approximately $.4 million.  This amount is determined by considering the impact of a 1% increase in interest rates on the average debt estimated to be outstanding in fiscal 2008.

Item 4. Controls and Procedures.

Not applicable.

Item 4T. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of management, including the Company’s principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e)  under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report, and based on their evaluation, the principal executive officer and principal financial officer have concluded that these controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the third quarter of fiscal 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

Item 1. Legal Proceedings.

During the third quarter of fiscal 2008, there were no material changes to the Company’s previously disclosed legal proceedings.  In addition, the Company is involved in various claims and legal actions that arise in the ordinary course of business.  The Company does not believe that the ultimate resolution of any of these actions will have a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources.

Item 1A. Risk Factors.

There have been no material changes from the risk factors previously disclosed under Item 1A to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2007.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Submission of Matters to a Vote of Security Holders.

None

Item 5. Other Information.

None

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Item 6. Exhibits.

ExhibitNumber	Description
31.1*	Rule 13a-14(a)/15d-14(a) Certifications.
31.2*	Rule 13a-14(a)/15d-14(a) Certifications.
32.1*	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

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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.

Date:  December 12, 2007
/s/ Barry C. Nuss
Barry C. Nuss
Chief Financial Officer
(Authorized Signatory and
	Principal Financial and Accounting Officer)

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