10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

 ACT OF 1934

For the fiscal year ended January 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)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  

Yes o No ý

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.   Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

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 filer o Accelerated filer o   Non-accelerated filer ý

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

Yes o No ý

At April 25, 2007, 100 shares of Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None

TABLE OF CONTENTS

				Page
PART I
	Item 1.	Business		4
	Item 1A.	Risk Factors		14
	Item 1B.	Unresolved Staff Comments		19
	Item 2.	Properties		19
	Item 3.	Legal Proceedings		20
	Item 4.	Submission of Matters to a Vote of Security Holders		20
PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and
			Issuer Purchases of Equity Securities	20
	Item 6.	Selected Financial Data		20
	Item 7.	Management’s Discussion and Analysis of Financial Condition and
			Results of Operations	23
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		34
	Item 8.	Financial Statements and Supplementary Data		34
	Item 9.	Changes in and Disagreements With Accountants on Accounting and
			Financial Disclosure	65
	Item 9A.	Controls and Procedures		65
	Item 9B.	Other Information		65
PART III
	Item 10.	Directors, Executive Officers and Corporate Governance		65
	Item 11.	Executive Compensation		68
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and
			Related Stockholder Matters	76
	Item 13.	Certain Relationships and Related Transactions, and Director Independence		78
	Item 14.	Principal Accounting Fees and Services		79
PART IV
	Item 15.	Exhibits, Financial Statement Schedules		79

3

PART I

Forward-Looking Statements

This Annual Report on Form 10-K 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 to differ from the Company’s expectations include:

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competitive pressures and trends in the industry;

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liquidity and capital resources;

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

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general economic conditions;

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legal proceedings and regulatory matters;

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

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technological changes; and

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those other risks and uncertainties discussed under “Risk Factors” herein and 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 (the “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 Annual Report are made only as of the date hereof.

Item 1. Business.

Company Overview

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.

In 1999, Rath Manufacturing Company Holdings, Inc. (“Rath”), with operations in Janesville, Wisconsin, was combined with Gibson Tube Company (“Gibson”) with operations in North Branch, New Jersey to form RathGibson.  In 2003, the Company hired a new executive team that implemented a comprehensive set of operational initiatives at its Janesville, Wisconsin facility, which enhanced the Company’s efficiency and profitability.  These included improved purchasing activities, the reduction of scrap generation and the upgrading of equipment to increase throughput and reduce labor costs.  In October 2004, the Company integrated the management, business strategy, marketing and operations of its Janesville, Wisconsin and North Branch, New Jersey facilities and implemented the sharing of best practices between facilities.

4

Transactions

On February 7, 2006, RathGibson completed the sale of all of its outstanding equity interests, options and phantom rights to RGCH Holdings Corp. (“RGCH Corp.”), a wholly-owned subsidiary of RGCH Holdings LLC (“RCGH LLC”), an affiliate of Castle Harlan Partners IV, L.P. (“CHP IV”), a private equity investment fund managed by Castle Harlan, Inc. (“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 “Acquisition”).  The aggregate purchase price was $67.0 million, including an estimated earnout payment of approximately $2.1 million to be made by the Company in the second quarter of fiscal 2008.  The earnout payment is equal to 3.0 times the excess of Adjusted Consolidated EBITDA (as defined in the Stock Purchase Agreement) for fiscal 2007 over $45.0 million, up to a maximum earnout payment of $30.0 million.  The Company’s estimate of the amount of the earnout payment is subject to a mechanism by which the representative of the Company’s former stockholders may dispute the estimate.  This transaction was financed through a combination of debt and equity.  New 11.25% senior notes due in 2014 (“Senior Notes”) in the amount of $200.0 million were issued in connection with the Acquisition.  In addition, a new five-year, $50.0 million senior secured revolving credit facility (“Revolving Credit Facility”) was established and partially drawn on the closing date.  All outstanding revolving and long-term debt at the time of the Acquisition was paid in full in conjunction with the Acquisition.  In addition, all stock options and phantom rights outstanding at the time of the Acquisition were surrendered in accordance with the Stock Option Plan and the Phantom Rights Plan and together with other compensatory payments were settled for $6.6 million at closing and recorded as selling, general and administrative expenses within the 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 “Transactions.”

Acquisition

On August 15, 2006, RathGibson acquired all of the outstanding equity interests of Greenville Tube Company (“Greenville”) for $37.3 million 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, while delivering orders with short lead times as compared to the industry.  This transaction was financed with funds available from our amended Revolving Credit Facility, which was increased to $60.0 million 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 acqu isition.  

Description and Financial Information of Business Segments

The Company operates in primarily one business, which is the manufacturing of stainless, nickel and duplex alloy custom tubing.  However, the Company has determined it has three reportable segments, Wisconsin, New Jersey and Arkansas, due to the historical economic characteristics of each business.  Straight tubing products are manufactured primarily in our Wisconsin (welded) and Arkansas (seamless) plants and coiled tubing products are manufactured primarily in our New Jersey plant.  The contribution of each business segment to net sales, income (loss) from operations and net income (loss), and the identifiable assets attributable to each business segment are set forth in Note 17 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

Products

The Company manufactures premium full-finished, welded stainless steel straight and coiled tubing products ranging from 1/16 of an inch to 4 inches in outside diameter.  Approximately 70% of the Company’s products are designed to meet customer specifications and are cut to specific lengths (up to 80,000 feet for coiled tube and 80 feet for straight tube) based on customer demands.  The Company sells its products to value-added tubing distributors, original equipment manufacturers, or OEMs, and engineering firms that often recommend the Company’s products for projects on which they are engaged.  The Company’s primary trade brands, Rath^™, Gibson Tube^® and GTC^®, are recognized as industry leaders and the Company’s products have won numerous awards for quality and reliability from its customers.

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The Company operates state-of-the-art production facilities using internally developed proprietary manufacturing and welding techniques and sophisticated finishing processes.  The Company has the capability to manufacture products from 37 different high-performance alloys, enabling it to satisfy product specifications for use in mission-critical applications.  The Company believes that its unique technology and ability to work with a large number of alloys differentiate it from its competitors and provide significant flexibility to the Company’s customers.  In addition, the Company believes that its expertise in manufacturing and welding techniques, quality control process, high level of customer service and relationships with suppliers enable it to meet the demands of customers within higher margin end-markets.

The majority of the Company’s products are manufactured to order based on an agreed customer specification.  The Company does not warranty its products for intended use, but rather to meet the agreed specifications and to be free of manufacturing defects.  As customers’ delivery requirements are often shorter than suppliers lead times, the company carries significant inventories of raw materials.

The table below lists the alloys the Company uses to manufacture its products.

	Duplex				Super
Stainless	Stainless	Nickel		Super	Ferritics/
Steel	Steel	Alloys	Titanium	Austenitic	Ferritics
304/ 304L/ 304H	Duplex 2205	20	Grade 2	825	AL 29-4C®
316/316L	Nitronic 19D®	200/201		G-31 Plus	E-Brite®
317/317L	Super Duplex 2507	C-276		904L	439HP®
309S/309H	Lean Duplex 2003	Monel® 400		27-7 MO®	444
310S/310H	Lean Duplex 2101	600		800/ 800H/ 800HT®
321/321H	Lean Duplex 2304	C22®		6XN
347/347H	Zeron®100	625		25-6
		686CPT®		254
		59

Industry Overview

The Company primarily operates within certain niche sub-segments of the global welded and seamless stainless steel tube industry.  The Company focuses on stainless steel tubing products, which are premium products and offer higher margins than those products manufactured from carbon steel.  Furthermore, the Company focuses exclusively on tubing products, which are higher value-added products than standard length, heavier-walled pipe products.

Within the tubing industry, the Company selectively targets certain end-markets that it believes offer attractive margins.  Welded stainless steel and specialty alloy tubular products, if manufactured properly, are desirable in applications that require exceptional strength, resistance to corrosion and the ability to withstand intense heat and pressure, such as energy applications.  Furthermore, the easy cleaning, tolerance of sterilizing cycles and non-contaminating characteristics of stainless steel tubing make it the first choice for hygienic environments, such as pharmaceutical and food processing facilities, hospitals and kitchens.  In addition, the short customer lead times and custom lengths that characterize the Company’s products further distinguish the Company from lower quality, standardized steel tubing and pipe products.

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Stainless steel tubing is typically either welded or seamless.  Welded tubing, which is the Company’s primary product, has become increasingly popular globally for most applications due to its higher quality, including dimensional and wall thickness consistency and concentricity, increased corrosion resistance and mechanical strength, and lower cost relative to seamless tubing, primarily attributable to steadily improving process technology.  Welded tubes are manufactured by using consecutively smaller precision dies to roll strips of material into tubular shapes, while various welding technologies connect the edges to form a longitudinal seam.  The tubes are then heat treated and tested for product integrity during the manufacturing process.  This operation is more cost effective than seamless tubing because it is continuous, with the rolling, welding and testing taking place on the same mill.  In many st ainless steel tubing applications, specifically those that require extremely long lengths of tubes, labor intensive orbital welds are required to combine lengths of tubes.  Seamless tubing requires orbital welds every 80 to 100 feet.  In contrast, welded tubing requires orbital welds every 2,500 to 10,000 feet, depending on diameter and wall thickness, which contributes to the price advantage that welded tubing enjoys over seamless tubing.

End-Markets Overview

The Company sells its products primarily to the following end-markets: (i) chemical/petrochemical processing and power generation; (ii) energy; (iii) food, beverage and pharmaceuticals; and (iv) general commercial.  

The following table presents certain information about the Company’s sales to each of these end-markets:

	End Markets
	Chemical/
	Petrochemical		Food,
	and Power		Beverage &	General
	Generation	Energy	Pharma	Commercial
	(dollars and feet shipped in millions)
Net Sales(1)	$125.3	$52.4	$39.5	$76.7
Feet Shipped(1)	40.2	38.5	18.4	47.5
Product Type	Straight Length	Coiled	Straight Length/	Straight Length
			Coiled
Key Product Categories	• Heat Exchanger	• Encapsulated Wire	• High Purity/	• Commercial
	• Nickel Alloy	• Pressure Coils	Electropolished	Quality
	• Titanium	• Subsea Umbilical	• Beverage Coils
Representative
Customers/End Users	• Celanese	• Chevron	• Amgen	• Chicago Tube &
	• Dow Chemical	• ExxonMobil	• Bayer	Iron
	• DuPont	• Forest Oil	• Coca-Cola	• Earle M.
	• ExxonMobil	• Murphy Oil	• Kraft	Jorgensen
	• Monsanto	• Shell Oil	• Merck	• Marmon
	• Shell Oil			Keystone
				• TW Metals

(1)

Data is for fiscal 2007.

7

Chemical/Petrochemical Processing and Power Generation

The Company’s chemical/petrochemical processing and power generation products include stainless steel tubing used in heat exchangers and condensers as well as nickel alloy and titanium tubing.  Heat exchangers are equipment that transfers heat from one fluid or gas to another using various media such as air, gas, water, steam, oil, refrigerant, heat transfer fluids, glycol or polymers and are used for many manufacturing processes.  The Company’s tubing is primarily utilized in shell and tube heat exchangers, which consist of a bundle of tubes, 30,000 feet on average, enclosed in a cylindrical shell.  Shell and tube heat exchangers comprise approximately 30% of the market for heat exchangers.  Demand in this market is primarily driven by both new and refurbishment capital spending by the Company’s chemical and petrochemical customers such as ExxonMobil, Shell Oil, DuPont and Monsanto.

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Heat Exchanger Tubing.The Company manufactures high-performance straight austenitic stainless steel tubing in sizes ranging from ½ inch to 4 inches in outside diameter and wall thicknesses ranging from 25 to 8 gauge for use in various types of heat exchangers where strength, corrosion and temperature resistance are integral.  In fiscal 2007, sales of heat exchanger tubing generated net sales of $62.3 million.

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Nickel Alloy Tubing.  The Company manufactures nickel alloy tubing, including super austenitic, duplex and nickel alloys.  Nickel alloy tubing is used for high temperature environments in applications requiring extra strength and corrosion oxidation resistance.  The Company manufactures its nickel alloy tubing in sizes ranging from ½ inch to 4 inches in outside diameter and from 22 to 8 gauge wall thicknesses and, upon special request, produce nickel alloy pipe in sizes ranging from ½ inch to 3½ inches in inside diameter and in wall thickness ranging from .060 to .250 inches.  In fiscal 2007, sales of nickel alloy products generated net sales of $53.6 million.

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Titanium Tubing.Titanium tubing is used in various heat exchanger and condenser applications.  It exhibits a very high strength to density ratio, and has proven to be a cost effective solution for many end-use installations where weight and longevity are critical.  While titanium is more costly than standard commercial grade stainless steel and is often only available in limited supply, its unique chemical tolerance characteristics often make it the alloy of choice.  The Company manufactures titanium tubing in sizes ranging from ½ inch to 1 inch in outside diameter and from 22 to 14 gauge wall thickness.  Primary end-users of titanium tubing include the power generation and heat exchanger industries, but these products are also utilized in swimming pool components and desalination applications due to superior resistance to corrosion.  In fiscal 2007, sales of titanium tubing generated net sales of $9.4 million.

Energy

The Company’s energy products include pressure coils, encapsulated wires and subsea umbilical tubing.  Demand for these products is primarily driven by oil and gas production.  One typical indicator of domestic demand is the average number of drilling rigs operating in the United States.  According to the Baker Hughes rig count, the most commonly cited indicator of the level of domestic drilling activity, the average United States rig count rose to 1,648 in 2006 compared to 1,380 rigs in 2005, 1,190 in 2004, 1,032 in 2003 and 831 in 2002.  The Company believes this trend of increasing drilling activity will continue to positively impact demand for the Company’s energy products.

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Pressure Coils.The Company manufactures pressure coil tubing for use in a broad array of oil and gas production applications as well as other industrial applications requiring premium pressure resistant tubing.  The Company has been a key supplier to the energy industry for over three decades and the Company believes that its ability to produce pressure coils of up to 80,000 feet in length while minimizing the number of girth welds has made us an important supplier to energy customers around the world.  The Company’s coil tubing comes in sizes ranging from 1/16 of an inch to 1½ inches in outside diameter and wall thicknesses ranging from 25 to 12 gauge.  In fiscal 2007, sales of pressure coils generated net sales of $29.8 million.

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Encapsulated Wire Tubing.The Company manufactures encapsulated wire tubing for use in subterranean and subsea energy applications.  Encapsulated wire tubing is similar to the Company’s pressure coils, but the tubing is continuously manufactured around a wire or fiber optic cable and is typically manufactured using a thinner wall thickness than pressure coils.  These products are used in the energy industry to deliver various testing and technical functionality to subterranean and subsea oil wells.  The Company manufactures this type of tubing in sizes ranging from 1/16 to ⅜ of an inch in outside diameter and typically a 25 gauge wall thickness.  In fiscal 2007, sales of encapsulated wire tubing generated net sales of $9.6 million.

8

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Subsea Umbilical Tubing. Subsea umbilical tubing also is used in subsea energy applications.  Subsea umbilical tubing is subject to much more stringent quality and testing requirements than other coiled tubing products.  Subsea umbilical tubing is made of various lean duplex alloys which are typically zinc clad, which adds significant corrosion resistance to the product.  Subsea umbilical tubing is made in sizes ranging from ⅜ of an inch to 1½ inches in outside diameter and wall thicknesses ranging from 20 to 12 gauge.  In fiscal 2007, sales of subsea umbilical tubing generated net sales of $12.8 million.

Food, Beverage and Pharmaceuticals

The Company’s food, beverage and pharmaceutical products include high purity/electropolished and beverage coil tubing.  High purity tubing is popular in the food and beverage equipment market because it meets stringent standards due to its surface finish and ease of cleaning.  The internal and external surfaces of high purity tubes have enhanced smoothness which reduces the risk of contaminants adhering to the inside of the tubes.  Demand for these products is driven by new pharmaceutical development and increased international demand for high purity products.

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High Purity/Electropolished Tubing.This type of tubing is typically polished on both the outside and inside of the tube, eliminating irregularities on the surface where bacteria might otherwise accumulate.  High purity tubing is also designed to withstand the high temperatures and caustic chemicals typical of cleansing operations in large processing plants.  The Company markets electropolished tubing in sizes ranging from ½ inch to 4 inches in outside diameter and in 16 and 14 gauge wall thicknesses.  The electro-polishing process produces tubing with a mirror-like finish that is suitable for the high standards required for use in biotechnology, semi-conductor, pharmaceutical and research applications where smooth surfaces allow thorough cleaning and reduce bacterial content.  In fiscal 2007, sales of high purity/electropolished tubing generated net sales of $35.9 million.

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Beverage Coils.  The Company manufactures beverage coil tubing for use in a broad array of beverage processing and dispensing equipment in sizes ranging ¼ of an inch to ½ inch in outside diameter and wall thicknesses ranging from 25 to 22 gauge.  The Company’s beverage coil products typically are manufactured in 500 foot lengths using a chromium-nickel austenitic stainless steel alloy for use in beverage dispensing equipment commonly found in retail food service establishments.  The tubes are coiled repeatedly and inserted in the bottom of an ice receptacle to maintain low temperatures for the dispensed beverages.  In fiscal 2007, sales of beverage coils generated net sales of $3.6 million.

General Commercial

The Company’s commercial quality tubing products are used by a variety of customers in various markets either for their pressure retention, mechanical properties or corrosion resistance.  The Company produces tubing to perform in a wide variety of applications, including sprinkler systems and misting systems, thus reducing stocking requirements for the distributor and increasing their ability to satisfy end-users’ requirements.  As a result of their broad range of end-users, the Company believes demand for these products is driven by overall economic conditions.

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Commercial Quality Tubing. The Company manufactures high-performance straight austenitic stainless steel tubing in sizes ranging from ½ inch to 4 inches in outside diameter and wall thicknesses ranging from 25 to 8 gauge.  The Company’s commercial quality tubing is primarily used by various end-users either for its pressure retention, mechanical properties or corrosion resistance.  Corrosion resistant applications can most often be found in chemical plants, pulp and paper plants and power generation applications.  Those customers using commercial tubing for its pressure retention qualities use it for the transmission of corrosives such as acids, solvents, caustic chemicals and various other solutions, often at high temperatures and pressures.  Customers that use commercial tubing for its mechanical properties use it for structural purposes where stren gth is important and low internal pressure exists, such as conveyor belt rollers, corrosive fluid drain systems, car wash equipment and filling machines.  In fiscal 2007, sales of commercial quality tubing generated net sales of $76.7 million.

9

Competitive Strengths

Leading Market Position and Brand Recognition.  The Company believes that it is the market leader for the majority of the products it manufactures.  Having been in business for over 50 years, the Company believes that its Rath^™, Gibson Tube^® and GTC^® names have come to be recognized as industry standards for innovation, quality and service.  The Company attributes its market leadership primarily to the breadth, quality and reliability of product offerings, as well as to the Company’s ability to provide customized products for customers on a short time frame.  As such, the Company believes that it is well positioned to capitalize on domestic and international opportunities and continue to grow its business.

Significant Barriers to Entry.  The Company believes that there are significant barriers to entry into the highly specialized sub-segments of the global welded stainless steel tube industry.  In order to compete effectively, a new market entrant would need to develop technological capabilities and brand recognition for their products, make substantial investments in manufacturing and welding equipment, and develop expertise at manufacturing products from a large number of alloys to satisfy customer product specifications.  New market entrants also would have to develop a network of customers and distributors.  The quality and longevity of the Company’s products is substantiated by over 20 years of corrosion data, and the Company believes that its customer base would be hesitant to purchase products that have not been rigorously tested due to the mission critical end use of many of the Company’s products.  In addit ion, the Company believes that the lack of availability of specialty alloys and technology, the inability to satisfy short lead times and shipping costs present a barrier to foreign manufacturers seeking to compete in the United States in the Company’s industry sub-segments.

Diverse Customer Base and End-Markets.  The Company has long-standing relationships with a diverse group of the largest national and regional distributors, which serve large end-users of stainless steel and specialty alloy tubular products, such as Bayer, Celanese, Coca-Cola, DuPont, ExxonMobil, Halliburton, Monsanto and Shell Oil.  In addition, the Company sells its products to OEMs and engineering firms in a variety of geographic locations and industries.  During fiscal 2007, the Company shipped products to over 800 customers and its largest two customers accounted for only 19% of net sales.  The Company’s five largest customers have been customers for an average of 23 years.

Profitability Not Significantly Impacted by Changes in Raw Material Costs.  During recent history, raw material price increases and decreases have not significantly impacted the Company’s profitability.  For example, during recent periods of significant raw material price increases, the Company has successfully passed along material price increases to its customers.  Additionally, as a large and growing consumer of stainless steel and specialty alloys, the Company has strong relationships with its raw material suppliers that have enabled the Company to negotiate favorable raw material pricing for long-dated customer orders, often many months before the orders are manufactured and shipped.  The Company also has improved its profitability by reducing costs, increasing production efficiencies and shifting to the production of higher margin products.

Experienced Management Team.  The Company has an experienced management team with over 100 years of industry experience.  Led by Harley B. Kaplan, president and chief executive officer, and Barry C. Nuss, chief financial officer, and a staff of experienced sales, operations and engineering professionals, the Company’s management team has implemented a series of initiatives since 2003 to grow its business and increase profitability.  The Company’s management team has focused its efforts on increasing operational efficiencies, enhancing product lines and expanding business globally.

Business Strategy

Capitalize on Growing High Margin End-Markets.  The Company intends to continue to invest in highly engineered welded tubular products specifically targeting growing high margin end-markets, such as energy and power generation.  The Company believes that it will continue to increase shipments in these markets through increased capacity and leading technology.  The Company expects demand for its subsea umbilical and other energy-related products to continue to increase due to positive trends in the energy sector, including greater worldwide demand for oil and high commodity prices.  As a result of continued investment in high growth subsea umbilical products, the Company believes it’s a world leader in state-of-the-art zinc-cladding technology and is well-positioned to capitalize on the growing energy end-market.  In addition, the Company believes that the demand backlog for new power plants, particularly in Asia, and t he refurbishment of existing facilities is also creating attractive growth opportunities for the Company’s power generation products.

10

Focus on New High Margin Products.  The Company intends to grow in part through a targeted effort to develop new products with attractive margins and focusing its sales efforts of new high margin products on existing end-market users of the Company’s products.  The Company believes that it can strengthen its relationships with these end-market users by working with them to develop innovative products to satisfy their emerging demands.  For example, in fiscal 2004, the Company began offering welded titanium tubing to customers demanding tubing that is resistant to oxidizing chloride solutions (including seawater).  The Company sold 2.0 million feet of titanium tubing in fiscal 2007 for net sales of $9.4 million, as compared to over 500,000 feet of titanium tubing in fiscal 2004.  For fiscal 2007, the Company generated approximately 7.6% of its net sales from newly developed products that the C ompany began selling during the previous three fiscal years.

Expand International Presence.  The international welded tube market is substantially larger than the domestic market and provides a significant potential growth opportunity.  The Company ships its products to approximately 30 countries across the globe.  Many of the Company’s existing customers have operations in Asia, where there is a limited availability of high quality stainless steel and specialty alloy welded tubular products.  The Company is taking advantage of these attractive fundamentals by increasing local sales and marketing organizations.  The Company’s brand names are recognizable in international markets, especially China, which the Company believes strongly positions it for increased international growth.  For fiscal 2007, the Company’s sales to international customers grew by 50.1% to $21.4 million, as compared to $14.3 million for fiscal 2006.  

Continue to Improve Productivity and Reduce Operating Costs. The Company continually seeks to improve productivity and reduce its operating costs.  The Company believes that it has pioneered laser welded tubing for pressure tubing applications, which enables the Company to produce a superior product at four times the speed of tungsten inert gas mills.  The Company currently has nine laser welded tubing mills among its facilities.  The management team has focused on production improvements and cost reductions at each of the Company’s manufacturing facilities, resulting in increased gross profit per foot through improved purchasing practices, scrap reduction and labor cost reductions.

Maintain Reputation as a Quality Manufacturer. The Company believes that it has a reputation in the stainless steel industry as a high quality manufacturer.  The Company has won numerous supplier awards, such as Chicago Tube and Iron's ''Gold Vendor of the Year Award'' every year since 2001 and Marmon Keystone's ''Stainless Vendor of the Year Award'' in each year since 2004.  The Company uses proprietary manufacturing and welding techniques and sophisticated finishing processes to manufacture all of its tubing to comply with major industry standards, such as those of the American Society of Mechanical Engineers and the American Society for Testing Materials.  The Company also seeks to ensure high quality products by employing multiple non-destructive testing techniques, such as film based x-ray, digital radiography, ultrasonic testing, dual frequency eddy current testing, hydrostatic testing, air underwater testing and metallog raphic examination.

Sales and Marketing

The Company primarily sells its products to tubing distributors that resell the products to end-users, bundle the Company’s products with complementary products or further form and/or reconfigure the products to resell complete tubing solutions.  The Company also sells its products to a number of OEMs and engineering firms in the United States and internationally.  The Company’s chemical/petrochemical processing and power generation products are sold directly to end-users as well as through distributors.  The Company’s pressure coils are sold primarily through specialty distribution channels, encapsulated wire tubing products are sold to OEMs and subsea umbilical products are sold directly to umbilical bundlers.  The Company’s high purity/electropolished products are primarily sold through distributors and beverage coils are sold directly to beverage dispensing equipment manufacturers.  The Company’s comme rcial quality tubing products are primarily sold through distributors.

The Company markets its products through a sales team that includes direct sales representatives, application engineers, administrative personnel and customer support personnel, as well as outside sales representatives.  Outside of North America, the Company utilizes a combination of sales strategies, including domestically-based sales professionals and regional sales managers responsible for developing key relationships with distributors and end-users throughout Asia and the Middle East.  The Company’s sales team works closely with distributors and end-users to assess customers’ product needs, recommend appropriate solutions and ensure that customer product specifications are satisfied.  The Company focuses on building long-term professional relationships with the largest and fastest growing distributors and end-users in certain targeted industries.

11

The Company’s principal marketing strategies include advertisements in relevant trade publications, product pamphlets and technical literature, company brochures, industry trade show exhibits and presentations and maintenance of corporate web sites.

Customers

Net sales to individual customers representing 10% or more of the Company’s net sales are set forth in Note 17 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

Sales Order Backlog

The Company’s sales order backlog was $70.5 million at January 31, 2007 compared to $56.3 million at January 31, 2006.  The increase in the Company’s sales order backlog was primarily due to (i) increased domestic demand for capital projects, particularly heat exchangers and general commercial products; and (ii) strong sales for international applications, including desalination and other process equipment projects.  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.

Manufacturing

Straight tubing products are manufactured primarily in the Company’s Janesville, Wisconsin and Clarksville, Arkansas facilities and coiled tubing products are manufactured in the Company’s North Branch, New Jersey facility.  The Company operates 47 tube mills and 7 benches at its three production facilities.  The manufacturing process is highly automated.

Of the 16 tube mills within the Janesville, Wisconsin facility, 11 are designated for small straight length tube production between ½ inch and 2 inches in outside diameter, and 5 are designated for larger straight length tube sizes up to 4 inches in outside diameter.  Within the North Branch, New Jersey facility, 3 mills are designed for subsea umbilical products, 8 mills are designated for the pressure coil products, 5 mills are dedicated to the encapsulated wire products, 10 mills are dedicated to the manufacturing of beverage and commercial tubing and 2 mills are dedicated to titanium products.  At the Clarksville, Arkansas facility, the Company has 7 benches and 3 tube mills designated for its seamless and welded and drawn products.

The Company believes that it pioneered laser welded tubing for pressure tubing applications and produces a product that the Company believes is superior in the marketplace.  The nine technologically advanced laser welding tube mills are capable of processing product up to four times faster than the tungsten inert gas mills.

The Company also believes that it has pioneered a significant development in the manufacturing of tube by implementing an on-line annealing process allowing more than 80% of the manufacturing process to occur on the mill, which significantly reduces material handling.  Annealing, the process of heating and slow cooling a material in order to reduce brittleness, is a critical production step and, if performed properly, can provide superior resistance for metal surfaces against staining, pitting, cracking and corrosion.  Tube surfaces must be clean and free of foreign matter for annealing to be effective.  In addition, the annealing atmosphere must be relatively free of oxygen, which is achieved by removing nearly all gas or by displacement of oxygen and nitrogen with dry-hydrogen or argon.  The Company believes that its successful integration of this process into the tube mill is a competitive advantage.

Stainless steel coils cut to specified widths arrive daily at each of the Wisconsin and New Jersey plants from the Company’s outside slitter or primary steel supplier.  The slit material is passed through a series of consecutively smaller rolls that form it into a circular shape tube.  The tube is then continuously welded using our Micro-Weld^® tungsten inert gas or laser welding process.  Following the welding process, the tube is cold worked or forged which reduces the weld bead.  The Company’s forging technique is an important element of total product quality and renders the weld virtually indistinguishable from the rest of the tube surface.  The tube continues through the mill where it is annealed, straightened, and eddy current tested.  The tube is then stenciled with pertinent information including size, wall thickness, American Society of Mechanical Engineers and American Society of Testing Mat erials specifications, stainless steel type, heat number, initials of the mill operator and the date of manufacture.  The tube is then automatically cut and deburred, and then packaged for shipping.  The Company’s high purity/electropolished, specialty alloy, and zinc clad umbilical products require additional finishing prior to packaging and shipment to the customer.

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At the Arkansas plant, seamless tubes are manufactured from larger tube hollows, which are reduced to the required length, outside diameter and wall thickness through a drawing process.  In the drawing process, tubes are cleaned and annealed before being cold-drawn over mandrels.  Depending on the product, the same tube may be drawn several times to achieve the customer’s desired specifications.  The cold-drawing process creates a uniform, precision product with substantially improved tolerances, surface finish and tensile strength as well as increased hardness and good machinability.  

Quality Control

An important factor in retaining and obtaining customers is the quality of the product the Company delivers.  Quality assurance is integrated into every step of the Company’s manufacturing process in order to ensure consistency in production.  The Company develops specific process plans for larger projects such as subsea umbilical systems, downhole oil and gas control lines or steam condenser projects.  Complex projects receive a “high profile project” designation in order to provide the customer the highest level of quality assurance.  As part of the quality assurance process, the Company also employs multiple non-destructive testing techniques, such as film based x-ray, digital radiography, ultrasonic testing, dual frequency eddy current testing, hydrostatic testing, air underwater testing and metallographic examination.

Suppliers

The principal raw material inputs for the Company’s products include stainless steel, specialty alloys, titanium and industrial gases, such as hydrogen and argon.  In fiscal 2007, the Company purchased approximately 78% of its raw materials, principally stainless steel and specialty alloys, from Allegheny Ludlum (“Allegheny”).  The Company has multiple suppliers available for all key raw materials.  The Company’s large volume of stainless steel purchases enables it to negotiate favorable purchasing terms from suppliers of stainless steel.

The Company maintains a plan to reduce the risk of a disruption in supply of raw materials and pass through price increases to its customers, which include (i) the coordination of purchases between the Company’s facilities to achieve greater purchasing power; (ii) adjusting product pricing to effectively reflect the current pricing of raw materials; and (iii) adjusting manufacturing operations to accommodate various grades and sizes of stainless steel.

Competition

The Company primarily operates in certain niche sub-segments of the global welded stainless steel tube and pipe industry.  Global production of welded stainless steel tube and pipe products in the Company’s industry sub-segments is largely concentrated in the United States.  However, the Company also competes with a limited number of European and Asian manufacturers, primarily with respect to the Company’s foreign sales.  Domestically, the Company faces limited competition from foreign manufacturers due to shipping costs, longer lead times and the limited experience of most foreign manufacturers working with specialty alloys and producing the fully finished tubular products that customers for the Company’s industry sub-segments demand.

The Company competes primarily on the basis of price, quality, service and ability to fill orders on a timely basis.  The Company faces competition in the markets for each of the products it manufactures.  The Company’s primary competitors are specialty manufacturers of tubular products that are believed to have annual net sales in the Company’s product lines that are significantly less than the Company’s.  These specialty manufacturers typically manufacture one or two products with which the Company’s products compete, and the Company therefore often has different competitors in the markets for each of its products.  

In some cases, the Company competes with divisions of larger domestic steel manufacturers that operate within one or more of the Company’s industry sub-segments, including Webco Industries, Inc. and Tenaris S.A.  The Company believes that these larger steel manufacturers derive a small portion of their annual net sales from sales of products with which the Company’s products compete, and that the Company’s sales volume is significantly greater than the volume of comparable products sold by these manufacturers.

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Intellectual Property

The Company believes that its trademarks and service marks, which include marks relating to the RathGibson name, especially the marks Rath^™, Gibson Tube^®, Micro-Weld^® and GTC^®, are of economic importance to the Company’s business.  Certain of these marks are registered in the U.S. Patent and Trademark Office.  The Company does not have any patents or registered copyrights.

In addition, the Company relies on trade secrets, proprietary know-how and concepts related to the manufacturing process.  The Company believes that it has taken reasonable measures consistent with industry practice to protect the secrecy, confidentiality and value of all trade secrets used in the Company’s business.

Government Regulation

The Company’s manufacturing facilities are subject to many federal, state and local environmental laws, ordinances and regulations that limit discharges into the environment, establish standards for the handling, generation, emission, release, discharge, treatment, storage and disposal of hazardous materials, substances and waste, and require cleanup of contaminated soil and groundwater.  These laws, ordinances and regulations are complex, change frequently and have tended to become more stringent over time.  Many of them provide for substantial fines and penalties, orders (including orders to cease operations) and criminal sanctions for violations.  They may also impose liability for property damage and personal injury stemming from the presence of, or exposure to, hazardous substances.

Certain of these laws may require the investigation and cleanup of an entity’s or its predecessor’s current or former properties, even if the associated contamination was caused by the operations of a third party.  These laws also may require the investigation and cleanup of third-party sites at which an entity or its predecessor sent hazardous wastes for disposal, notwithstanding that the original disposal activity was in accord with all applicable requirements.  Liability under such laws may be imposed jointly and severally, and regardless of fault.  See “Risk Factors” herein.

The Company continually examines ways to reduce emissions and waste and reduce costs related to environmental compliance.  The Company believes that it is in material compliance with all environmental laws, does not anticipate any material expenditure to meet current or pending environmental requirements and generally believes that its processes and products do not present any unusual environmental concerns.  The Company is unaware of any existing, pending, or threatened contingent liability that may have a material adverse effect on its ongoing business operations.

The Company’s operations are also governed by laws and regulations relating to workplace safety and worker health and regulations which, among other requirements, establish lifting, noise and dust standards.  The Company believes it is in material compliance with these laws and regulations and does not believe that future compliance with such laws and regulations will have a material adverse effect on its results of operations or financial condition.  The Company also believes that it is in material compliance with all applicable labor regulations.

Employees

As of January 31, 2007, the Company employed approximately 550 people.  None of the Company’s employees are represented by a union.  The Company believes that its relations with employees are generally good.

Item 1A. Risk Factors.

In addition to the other information set forth in this Form 10-K, you should carefully consider the following factors which could materially affect the Company’s business, financial condition or future results.  The risks described below are not the only risks facing the Company.  Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect its business, financial condition and/or operating results.

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General economic and business conditions may produce significant fluctuations in demand for the Company’s products.

The Company manufactures stainless steel and specialty alloy welded tubing products that are used by a variety of specialty industrial and commercial end-users.  Demand for the Company’s products is driven by demand for products manufactured or sold by these specialty end-users.  The demand for the Company’s end-users' products fluctuates based on economic conditions or other matters beyond its control, including macroeconomic policies, geopolitical developments and the strength of the U.S. dollar.  Accordingly, general economic and business conditions may have a material adverse impact on the demand for the Company’s products, which would have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company’s industry is highly competitive.

The Company operates in the highly competitive stainless steel tubing industry.  The Company competes primarily with other domestic manufacturers of stainless steel and specialty alloy tubing products.  The Company competes on the basis of price, quality, service and ability to fill orders on a timely basis.  Some of the Company’s competitors have lower raw material costs and costs of production than the Company and have greater financial, technological and other resources than the Company.  In addition, sales of a majority of the Company’s products represent a high percentage of the market demand for these products, and could be targeted by competitors.  Furthermore, the Company may face additional competition if steel producers convert, expand or upgrade their existing facilities to manufacture products that compete with its products.  New competitors may be more effective and efficient integrating new technologie s.  There can be no assurance that the Company will be able to maintain its current market share with respect to any of its products.  A loss of market share to competitors could have a material adverse effect on the Company’s business, financial condition and results of operations.

Volatility in energy prices and/or the prices of energy products could reduce demand for the Company’s stainless steel and specialty alloy tubular products, which could cause its sales to decrease.

Proceeds from the sale of stainless steel and specialty alloy tubular products to the chemical/petrochemical, power generation and energy end-markets constitute a significant portion of the Company’s net sales.  As a result, the Company depends upon these related industries and their ability and willingness to make capital expenditures to explore for, develop and produce energy products.  If these expenditures decline, the Company’s business will suffer.  The willingness to explore, develop and produce energy products depends largely upon the availability of attractive drilling prospects and the prevailing view of future energy product prices.  Many factors beyond the Company’s control affect the supply of and demand for energy.  Volatility in the energy markets could cause demand for the Company’s products to decrease, which would adversely affect the Company’s business, financial condition and results of operations.

Raw material costs can affect the Company’s profitability.

The largest component of the Company’s cost of sales is raw materials.  Raw materials, principally 304L grade and 316L grade stainless steel strip, comprised approximately 77% of the Company’s cost of goods sold in fiscal 2007.  The cost of these raw materials is, in turn, dependent on the cost of steel, nickel and molybdenum.  Historically, the Company has been able to pass along to its customers the increased costs for its products due to increased raw materials costs.  However, there can be no assurance that the Company’s customers will continue to agree to bear such cost increases without a reduction in their volume of business.  As a result, increases in the price of raw materials could adversely affect the Company’s operating margins.  In addition, if increased raw material costs result in a substantial increase in the cost of products, the Company’s customers may substitute lower cost stainless steel and specialty alloy tubing products.

The Company’s ability to remain current with changes in manufacturing technology can affect its business.

Over the past 10 years, there have been significant advances in the technology relating to the manufacture of tubing products.  These advances have increased the speed at which tubing can be manufactured, the quality of the tubing and the types and densities of materials that can be welded into tubes for advanced manufacturing processes.  The Company’s ability to remain current with manufacturing technologies is necessary if it is to compete with other producers.  The Company’s competitors may be more effective and efficient at integrating new technologies.  In addition, maintaining current manufacturing technologies and capabilities requires investment of capital.  There can be no assurance that the Company’s products will remain competitive in the future or that the Company will continue to be able to implement innovative manufacturing technologies.

15

A material percentage of the Company’s sales are to foreign customers, which presents additional risks.

Sales of products to foreign customers accounted for 7.3% of the Company’s total sales in fiscal 2007 and are expected to continue to increase in future years.  The Company’s sales efforts outside of the United States may be affected by changes in trade protection laws, regulatory requirements affecting trade, social, political or economic conditions in a specific country or region, the strength of the U.S. dollar and difficulties in staffing and managing foreign operations.  These factors may reduce the Company’s operating margins with respect to foreign sales and may reduce volume of foreign sales.  A decrease in foreign sales could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company depends on a few suppliers for a significant portion of its steel, specialty alloys, titanium, hydrogen and argon, and a loss of one or more significant suppliers could adversely affect the Company’s ability to obtain basic raw materials.

Historically, the Company has purchased a significant portion of its steel, specialty alloys, titanium, hydrogen and argon from a small number of suppliers.  In fiscal 2007, the Company purchased approximately 78% of its stainless steel and specialty alloys for operations from one supplier, Allegheny, and approximately 15% of its steel and specialty alloys for operations from the Company’s remaining top four suppliers.  The Company does not have any long-term agreements to purchase raw materials from these suppliers and, accordingly, purchases are subject to product availability at the time of each purchase.  The loss of the Company’s largest supplier or interruption of production at this supplier would adversely affect the Company’s ability to obtain basic raw materials, and the loss of any other suppliers or interruption of production at one or more of these suppliers could adversely affect the Company’s ability to obtain basic raw materials.  In either case, the Company’s cost of purchasing steel, specialty alloys, titanium, hydrogen and argon from alternate sources could be higher and could temporarily affect the Company’s ability to produce sufficient quantities of its products.

In addition, certain of the Company’s suppliers rely, in turn, on sole or limited sources of supply for raw materials included in their products.  Failure of the Company’s suppliers to adjust to meet increases or decreases in demand may prevent them from continuing to supply raw materials in the quantities or quality and at the times required, or at all.

Energy resources markets are subject to conditions that create uncertainty in the prices and availability of energy resources the Company relies upon.

The Company’s facilities and operations consume large amounts of electricity and natural gas.  The prices for and availability of these resources are unpredictable and fluctuate based on events beyond the Company’s control, including geopolitical developments, supply and demand, actions by The Organization of the Petroleum Exporting Countries (“OPEC”) and other oil and gas producers, war and unrest in oil and gas producing countries and environmental concerns.  Disruptions in the supply of energy resources could temporarily impair the Company’s ability to manufacture products for its customers.  Historically, the Company has been able to pass along certain increases in energy costs to its customers.  However, there can be no assurance that customers will continue to agree to bear such cost increases.  In addition, the Company has not been able to pass along all of its increased energy costs to customers. & nbsp;Accordingly, an increase in the price of electricity and natural gas could adversely affect the Company’s operating margins.

Loss of significant customers and customer work stoppages can adversely affect the Company’s business.

The Company’s largest customer, a domestic heat exchanger tubing distributor, accounted for approximately 10.9%, the top five customers accounted for 30.8%, and the top ten customers generated 41.7% of fiscal 2007 net sales.  In addition, many customers are distributors who re-sell the Company’s products to end-market users.  A reduction in purchases from these customers as a result of an inventory buildup or other factors could materially impact the Company’s net sales.  Furthermore, the loss of any significant customer, or a work stoppage at a significant customer or in an important end-use sector, could have a material adverse effect on the Company’s business, financial condition and results of operations, as could significant customer disputes regarding shipments, price, quality or other matters.

Furthermore, the Company extends trade credit to certain of its customers to facilitate the purchase of products, and rely on their creditworthiness.  Accordingly, a bankruptcy or a significant deterioration in the financial condition of any of these significant customers could have a material adverse effect on the Company’s business, financial condition and results of operations, due to a reduction in purchases, a longer collection cycle or an inability to collect accounts receivable.

16

The Company’s operations are subject to business interruptions and casualty losses.

Specialty tube manufacturing is subject to numerous inherent risks, particularly unplanned events such as inclement weather, explosions, fires, other accidents, equipment failures and transportation interruptions.  While the Company’s insurance coverage could offset losses relating to some of these types of events, the Company’s business, financial condition and results of operations could be materially adversely impacted to the extent any such losses are not covered by insurance.

The Company may be subject to litigation, including product liability claims, that could have a material adverse effect on its business.

The Company’s business exposes it to potential litigation risks.  From time to time, various suits and claims have been brought against the Company, including claims that the Company sold defective products and claims seeking damages for injuries caused by the Company or its products.  Although the Company generally seeks to insure against these risks, there can be no assurance that insurance coverage is adequate, and the Company may not be able to maintain insurance on acceptable terms.  Any such claims, whether with or without merit, could be time-consuming and expensive to defend and could divert management’s attention and resources.  A successful product liability claim in excess of insurance coverage could have a material adverse effect on the Company and could prevent the Company from obtaining adequate product liability insurance in the future on commercially reasonable terms, or at all.  Moreover, any adverse pub licity arising from product liability claims made against the Company could adversely affect the reputation and sales of its products.

Compliance with and changes in environmental, health and safety laws regulating the operation of the Company’s business could increase the costs of producing  products and expose the Company to environmental claims.

The Company’s business is subject to numerous state and federal laws and regulations concerning environmental, health and safety matters, including those relating to air emissions, wastewater discharges and the generation, handling, storage, transportation, treatment and disposal of hazardous wastes.  Violations of such laws and regulations can lead to substantial fines and penalties.  Also, there are costs associated with compliance with these laws and regulations and risks of additional costs and liabilities relating to the investigation and remediation of past or present contamination, at current as well as former properties utilized by the Company and at third-party disposal sites, regardless of fault or the legality of the original activities that led to such contamination.  For example, the Company’s leased Clarksville, Arkansas facility is contaminated as a result of historical industrial operations at such facility and is the subject of a Consent Order from the Arkansas Department of Environmental Quality.  The Company may be subject to liability, including liability for remediation costs, relating to the contamination of this facility.  The owners of this facility have agreed to indemnify the Company for certain environmental liabilities relating to this facility.  There can be no assurance that the owners will perform under this environmental indemnity obligation, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

Moreover, future developments, such as changes in laws and regulations or the enforcement thereof, more stringent enforcement or interpretation thereof and claims for property damage or personal injury could cause the Company to incur substantial losses or expenditures.  Although the Company believes it is materially compliant with all applicable current laws and regulations, any new or modified laws or regulations, or the discovery of any currently unknown non-compliance or contamination, could increase the cost of producing products, thereby adversely impacting the Company’s business, financial condition and results of operations.

Labor shortages and increased labor costs could negatively impact the Company’s business.

A shortage of skilled labor or experienced sales personnel could pose a risk to achieving optimal labor productivity and competitive costs, which could adversely affect the Company’s operating margins.  In the event that the Company experiences a shortage of experienced labor or qualified sales personnel or are unable to train the necessary amount of skilled laborers, there could be an adverse impact on the Company’s labor productivity and costs and its ability to expand production and therefore have a material adverse effect on the Company’s business, financial condition and results of operations.

In addition, if any part of the Company’s work force becomes unionized, its business, financial condition and results of operations could be materially adversely affected.

17

The Company relies on information technology systems to manage numerous aspects of its business and a disruption of these systems could adversely affect the Company’s business.

The Company’s information technology systems is an integral part of its business and a serious disruption to information technology systems could significantly limit the Company’s ability to manage and operate its business efficiently, which in turn could materially adversely impact the Company’s business, financial condition and results of operations.  The Company depends on information technology systems for scheduling, sales order entry, purchasing, materials management, accounting and production functions.  The Company’s information technology systems also allow it to ship products to customers on a timely basis, maintain cost-effective operations and provide a high level of customer service.  Some of the information technology systems are not fully redundant, and the Company’s disaster recovery planning does not account for all eventualities.

Loss of third-party transportation providers upon whom the Company depends or conditions negatively affecting the transportation industry could increase costs or cause a disruption in operations.

The Company depends upon third-party transportation providers for delivery of products to customers.  Strikes, slowdowns, transportation disruptions or other conditions in the transportation industry, including, but not limited to, shortages of truck drivers, disruptions in rail service, increases in fuel prices and weather conditions, could increase the Company’s costs and disrupt operations and the ability to service customers on a timely basis.

The failure to enforce and maintain the Company’s intellectual property rights could adversely affect the ability to maintain brand awareness.

The Company has registered the names Rath Micro Weld^®, Gibson Tube^®, Micro-Weld^® and GTC^® with the United States Patent and Trademark Office.  However, the trademarks could be imitated in ways that the Company cannot prevent.  In addition, the Company relies on trade secrets, proprietary know-how and concepts.  Methods of protecting this information may not be adequate, however, and others could independently develop similar know-how or obtain access to the Company’s trade secrets, know-how and concepts.

Moreover, the Company may face claims of misappropriation or infringement of third parties’ rights that could interfere with its use of proprietary know-how, concepts, or trade secrets.  Defending these claims may be costly and, if unsuccessful, may prevent the Company from continuing to use this proprietary information in the future and may result in a judgment for monetary damages.

The Company may make acquisitions, which present additional risks.

Part of the Company’s growth strategy includes pursuing acquisitions.  On August 15, 2006, the Company acquired all of the outstanding equity interests of Greenville.  The Company cannot assure you that it will be able to consummate acquisitions in the future on acceptable terms, if at all.  In addition, the Company cannot assure you that the integration any future acquisitions will be successful or that the anticipated strategic benefits of any future acquisitions will be realized.  Acquisitions may involve a number of special risks, including, but not limited to:

§

adverse short-term effects on the Company’s reported operating results;

§

diversion of management’s attention;

§

difficulties assimilating and integrating the operations of the acquired company with the Company; and

§

unanticipated liabilities or contingencies relating to the acquired company.

The Company depends on the services of key executives, the loss of whom could materially harm its business.

Some of the Company’s senior executives are important to the Company’s success because they have been instrumental in setting strategic direction, operating the business, identifying, recruiting and training key personnel, and identifying expansion opportunities.  Losing the services of any of these individuals could adversely affect the Company’s business, until a suitable replacement could be found.  The Company does not maintain key-man life insurance on any of its senior executives.

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Our controlling stockholder may take actions that conflict with your interests.

Affiliates of Castle Harlan control the power to elect the Company’s directors, to appoint members of management and to approve all actions requiring the approval of the holders of the Company’s common stock, including adopting amendments to the certificate of incorporation and approving mergers, acquisitions or sales of all or substantially all of the Company’s assets.  The interests of the Company’s controlling stockholder could conflict with your interests.  For example, if the Company encounters financial difficulties or are unable to pay its debts as they mature, the interests of the Company’s controlling stockholder as a holder of equity might conflict with your interests as a holder of the Senior Notes.  The Company’s controlling stockholder also may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in its judgment, could enhance its equity investment, even t hough such transactions might involve risks to you, as holders of the Senior Notes.

The requirements of complying with Section 404 of the Sarbanes-Oxley Act may strain the Company’s resources and distract management.

The Sarbanes-Oxley Act will require that the Company maintain and certify that it has effective disclosure controls and procedures and internal control over financial reporting.  Pursuant to Section 404 of the Sarbanes-Oxley Act, management will be required to deliver the following: (i) a report that assesses the effectiveness of the Company’s internal control over financial reporting starting with the fiscal 2008 Annual Report on Form 10-K and (ii) an attestation report from the auditors on management's assessment of and operating effectiveness of such internal control starting with the fiscal 2009 Annual Report on Form 10-K.  In order to maintain and improve the effectiveness of the Company’s disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required as the Company may need to devote additional time and personnel to legal, financial and accounting activities to ensure ongoing compliance with Section 404 of the Sarbanes-Oxley Act.  The costs associated therewith could be significant.  In addition, the effort to prepare for these obligations and maintain effective internal controls may divert management’s attention from other business concerns, which could adversely affect the Company’s business, financial condition and results of operations.  The Company might not be able to complete the documentation and management assessment required by Section 404 of the Sarbanes-Oxley Act when it becomes applicable.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

The Company manufactures its products at the Janesville, Wisconsin; North Branch, New Jersey; and Clarksville, Arkansas facilities.  The following table sets forth additional information concerning these facilities:

		Approximate
		Square			Annual		Owned/	Lease
Location	Purpose	Footage	Acres		Rent		Leased	Expiration
Janesville,	Manufacturing/	277,000	6	$	878,900	(1)	Leased	December 31,
Wisconsin	Distribution/Executive							2026
	Offices
North	Manufacturing/	255,000	20		1,122,000		Leased	October 31,
Branch,	Distribution/Executive							2009
New Jersey	Offices
Clarksville,	Manufacturing/	110,000	36.9		110,000		Leased	June 30, 2011
Arkansas	Distribution

(1)

On December 22, 2006, the Company completed the sale and leaseback of its Janesville, Wisconsin manufacturing/ distribution and executive office facility to AGNL RathGibson, L.L.C. (“AGNL”), an unaffiliated third party.  The Company received net proceeds of $4.9 million for this facility and agreed to lease this facility from AGNL, as described below.  The foregoing transaction is referred to as the “Sale-Leaseback Transaction.”  

19

Concurrently with the Sale-Leaseback Transaction, the Company’s leased warehouse facility, also located in Janesville, Wisconsin, was acquired by AGNL.  The existing lease on the warehouse facility was terminated and the Company and AGNL entered into a lease relating to both of the Company’s Janesville, Wisconsin facilities.  This lease has an initial 20-year term with quarterly rent payments of $219,725, adjusted annually to reflect increases in a consumer price index agreed upon by the parties to be used for such purpose.  This lease contains two, 10-year renewal options.  This lease also requires the Company to pay property taxes, insurance and maintenance costs in addition to the rent payments described above.

Item 3. Legal Proceedings.

The Company’s leased Clarksville, Arkansas facility is contaminated as a result of historical industrial operations at such facility and is the subject of a Consent Order from the Arkansas Department of Environmental Quality.  The Company may be subject to liability, including liability for remediation costs, relating to the contamination of this facility.  The owners of this facility have agreed to indemnify the Company for certain environmental liabilities relating to this facility.  The Company does not believe that the ultimate resolution of this matter will have a material adverse effect on its financial position, results of operations, liquidity or capital resources.

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 its financial position, results of operations, liquidity or capital resources.

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

None

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

There is no established public trading market for the Company’s common stock.  All of the 100 outstanding shares of common stock are held by RGCH Corp.  The Company has not declared a dividend on its common stock.  The Company is generally restricted from paying dividends by certain of the Revolving Credit Facility covenants and the indenture pursuant to which the Senior Notes were issued.  However, the Company may pay dividends in the future if it is permitted to do so under these debt covenants.

Item 6. Selected Financial Data

The selected consolidated financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this report.  

Due to the acquisition of the Company by RGCH Corp. on February 7, 2006, as mentioned in the “Transactions” section included under Item 1 of this Annual Report on Form 10-K, and the related effects of the various financing transactions and different capital structure, the consolidated financial data for periods prior to February 7, 2006 will not necessarily be comparable to periods subsequent to such date.  The Company’s consolidated financial data is separated between “Successor” and “Predecessor” to reflect its results and consolidated financial position before and after the Acquisition.  The results for fiscal 2007 include the Company’s results through February 7, 2006 (Predecessor) and after the Acquisition (Successor).  

20

Selected Consolidated Financial Data

(Dollars and feet shipped in thousands)

					Successor		Predecessor
					Period		Period
					February 8,		February 1,
					2006 through		2006 through		Fiscal Years Ended January 31,
					January 31,		February 7,
					2007		2006		2006		2005		2004		2003
Statement of Operations Data:
Net sales				$	289,842	$	4,020	$	209,409	$	164,915	$	109,357	$	102,887
Cost of goods sold					231,463		3,067		161,186		123,949		81,571		78,121
		Gross profit			58,379		953		48,223		40,966		27,786		24,766
Operating expenses:
	Selling, general and administrative				19,859		7,346		14,882		14,571		12,553		10,596
	Amortization				13,406		11		577		552		520		521
					33,265		7,357		15,459		15,123		13,073		11,117
		Income (loss) from operations			25,114		(6,404)		32,764		25,843		14,713		13,649
Interest expense					25,580		336		16,838		13,882		14,551		15,226
		Income (loss) before income taxes,
			minority interest in loss of
			subsidiary and cumulative effect
			of change in accounting principle		(466)		(6,740)		15,926		11,961		162		(1,577)
Income tax expense (benefit)					(333)		(2,663)		7,629		4,164		545		391
		Income (loss) before minority
			interest in loss of subsidiary and
			cumulative effect of change in
			accounting principle		(133)		(4,077)		8,297		7,797		(383)		(1,968)
Minority interest in loss of subsidiary					-		-		-		-		-		(144)
Cumulative effect of change in accounting
	principle - goodwill transitional
	impairment charge (1)				-		-		-		-		-		56,100
		Net income (loss)		$	(133)	$	(4,077)	$	8,297	$	7,797	$	(383)	$	(57,924)

Balance Sheet Data:
Cash	$	5,631	$	3,228	$	2,842	$	1,415	$	1,188	$	488
Property, plant and equipment, net		44,150		27,116		26,717		27,026		25,199		25,944
Total assets		412,276		216,888		179,491		164,421		145,077		142,761
Total long-term debt		228,295		206,980		169,419		171,443		154,453		164,277
Stockholders’ equity (deficiency)		68,154		(33,419)		(29,342)		(42,533)		(50,329)		(49,946)

Statement of Cash Flow Data:
Cash provided by (used in) operating
	activities	$	14,396	$	(3,036)	$	8,947	$	(8,668)	$	15,038	$	(13,504)
Cash used in investing activities			(35,914)		(498)		(6,486)		(7,169)		(4,239)		(5,097)
Cash provided by (used in) financing
	activities		23,921		3,920		(1,034)		16,064		(10,100)		15,686

Financial and Other Data:
Adjusted EBITDA(2)	$	47,920	$	857	$	38,630	$	31,466	$	20,044	$	18,353
Capital expenditures		6,273		498		4,680		7,169		4,239		5,097
Depreciation and amortization		18,658		110		5,866		5,624		5,331		4,704
Ratio of earnings to fixed charges(3)		0.98		(17.32)		1.92		1.82		1.01		0.90

Industry Specific Performance Data:
Feet shipped		142,299		2,290		124,959		113,738		101,594		93,904
Gross profit/feet shipped	$	0.41	$	0.42	$	0.39	$	0.36	$	0.27	$	0.26
Adjusted EBITDA(2)/feet shipped		0.34		0.37		0.31		0.28		0.20		0.20

21

(1)

Represents goodwill impairment charge recorded in connection with the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”) in fiscal 2003.

(2)

As used herein, “Adjusted EBITDA” represents net income (loss) plus (i) income tax expense (benefit); (ii) interest expense; (iii) depreciation and amortization; (iv) minority interest; (v) change in accounting principle; and (vi) other expenses associated with the Acquisition and Greenville Acquisition as shown below (in thousands):

			Successor		Predecessor
			Period		Period
			February 8,		February 1,
			2006 through		2006 through		Fiscal Years Ended January 31,
			January 31,		February 7,
			2007		2006		2006		2005		2004		2003
Net income (loss)		$	(133)	$	(4,077)	$	8,297	$	7,796	$	(383)	$	(57,924)
Income tax expense (benefit)			(333)		(2,663)		7,629		4,164		545		391
Interest expense			25,580		336		16,838		13,882		14,551		15,226
Depreciation and amortization			18,658		110		5,866		5,624		5,331		4,704
Minority interest			-		-		-		-		-		(144)
Change in accounting principle			-		-		-		-		-		56,100
EBITDA			43,772		(6,294)		38,630		31,466		20,044		18,353
Extinguishment of deferred
	debt expenses		-		535		-		-		-		-
Write-up of inventory			4,148		-		-		-		-		-
Compensation expense			-		6,616		-		-		-		-
Adjusted EBITDA		$	47,920	$	857	$	38,630	$	31,466	$	20,044	$	18,353

The Company has included information concerning Adjusted EBITDA in this Annual Report on Form 10-K 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 widely 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-Generally Accepted Accounting Principle (“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 liquidity.

The use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider these measures 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.

(3)

In calculating the ratio of earnings to fixed charges, earnings consist of income before taxes plus fixed charges.  Fixed charges consist of interest expense including the amortization of deferred financing costs, amortization of discounts and one-third of rent expense that the Company believes to be representative of the interest factored in those rentals.  Fixed charges exceeded earnings by $6,740 and $1,577 in the period February 1, 2006 through February 7, 2006 and fiscal 2003, respectively.

22

Item 7. 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 consolidated financial statements, including the notes thereto, contained herein and the Company’s prospectus filed with the SEC on November 2, 2006 pursuant to Rule 424(b)(3) under the Securities Act.  See the discussion of Successor and Predecessor under “Selected Financial Data”.  Future results could differ materially from those discussed below.  See the discussion under “Forward Looking Statements.”

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.  

The Company’s highlights for fiscal 2007 include the following:

§

the consummation of the Transactions, consisting of the sale of all of the Company’s outstanding equity interests, options and phantom rights on February 7, 2006; concurrently, the issuance of $200.0 million of Senior Notes and the establishment of a new, five-year, $50.0 million Revolving Credit Facility;

§

the Greenville Acquisition on August 15, 2006; concurrently, the amendment of the Revolving Credit Facility to $60.0 million to finance this acquisition;

§

increase in net sales of 40.3% to $293.9 million in total for the periods February 1, 2006 through February 7, 2006 and February 8, 2006 through January 31, 2007, as compared to $209.4 million in fiscal 2006;

§

increase in cash flows from operations of 27.0% to $11.4 million in total for the periods February 1, 2006 through February 7, 2006 and February 8, 2006 through January 31, 2007, as compared to $8.9 million in fiscal 2006; and

§

Adjusted EBITDA increase of 26.3% to $48.8 million in total for the periods February 1, 2006 through February 7, 2006 and February 8, 2006 through January 31, 2007, as compared to $38.6 million in fiscal 2006.

23

The following table sets 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:

				Total*		Successor		Predecessor				Predecessor				Predecessor
						Period		Period
						February 8,		February 1,
						2006 through		2006 through
				Fiscal		January 31,		February 7,		%		Fiscal		%		Fiscal
				2007		2007		2006		Change		2006		Change		2005
															< /P>
Net sales				100.0	%	100.0	%	100.0	%	40.3	%	100.0	%	27.0	%	100.0	%
Cost of goods sold				79.8		79.9		76.3		45.5		77.0		30.0		75.2
		Gross profit		20.2		20.1		23.7		23.0		23.0		17.7		24.8
															< /P>
Operating expenses:
	Selling, general and														< /P>
		administrative		9.3		6.9		182.7		82.8		7.1		2.1		8.8
	Amortization			4.6		4.6		0.3		**		0.3		4.5		0.3
				13.9		11.5		183.0		162.8		7.4		2.2		9.1
		Income (loss) from													< /P>
			operations	6.3		8.6		(159.3)		(42.9)		15.6		26.8		15.7
															< /P>
Interest expense				8.8		8.8		8.4		53.9		8.0		21.3		8.4
															< /P>
		Income (loss) before
			income taxes	(2.5)		(0.2)		(167.7)		(145.2)		7.6		33.1		7.3
Income tax expense															< /P>
	(benefit)			(1.0)		(0.1)		(66.2)		(139.3)		3.6		83.2		2.5
		Net income (loss)		(1.5)	%	(0.1)	%	(101.5)	%	(150.7)		4.0	%	6.4		4.8	%

*

Used for comparative purposes.

**

Not meaningful.

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 as follows:

	Fiscal Years Ended January 31,
	2007	2006	2005
Feet shipped (millions)	144.6	125.0	113.7
Stainless steel price index*	167.9	126.4	131.3

* Source CRU International

24

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 increases in the cost of raw materials to customers, significant increases can lead customers to temporarily delay purchases, substitute materials and/or cancel capital projects.  The specialty steel industry has experienced significant increases in the cost of raw materials such as nickel, 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, as customers depleted existing inventories and assessed whether the rapid rise in price levels will continue.

In the fall of fiscal 2006, storms in the U.S. gulf coast area damaged oil industry assets and disrupted a very strong first half of fiscal 2006 pressure coil products market.  Shipments of these products slowed through the first quarter of fiscal 2007 and have only returned to historical levels in recent months.

Demand for high-purity products, serving food, beverage and pharmaceutical applications, declined in fiscal 2005 as end-market customers reduced capital spending plans.  Shipments in the first half of fiscal 2006 were flat and sales order inquiries have improved in fiscal 2007 as a number of major capital projects were released.

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.

Restatement of Previously Issued Consolidated Financial Statements

During August 2005, the Company determined that the recorded values of certain inventories at one of its manufacturing facilities was overstated at January 31, 2002, 2003, 2004 and 2005 by $1.0 million, $1.0 million, $0.9 million and $2.5 million, respectively.  Such overstatement of inventories was the result of capitalizing inappropriate amounts of labor and overhead costs into inventories at January 31, 2002, 2003, 2004 and 2005 and an inadequate lower of cost or market reserve at January 31, 2005 for on hand inventories scrapped in fiscal 2006.  The restatements had no impact on net sales or cash flow.  Subsequent to the restatement and reissuance of the Company’s consolidated financial statements, management determined that certain state income tax returns for fiscal 2003, 2004 and 2005 were improperly prepared.  As a result, income tax expense originally reported was increased an additional $0.3 million, $0.3 million and $0. 4 million in fiscal 2003, 2004 and 2005, respectively.  Interest expense was also increased by $0.1 million in fiscal 2005 from amount originally reported.  The financial data contained in this Annual Report reflect the restatement and reissuance of the fiscal 2004 and 2005 consolidated financial statements and the adjustment of income tax expense.

Periods from February 1, 2006 through February 7, 2006 and February 8, 2006 through January 31, 2007 as Compared to Fiscal 2006

Net Sales

Overall - Net sales for the period February 1, 2006 through February 7, 2006 amounted to $4.0 million and net sales for the period February 8, 2006 through January 31, 2007 amounted to $289.9 million, and in total for both periods increased $84.5 million, or 40.3%, as compared to $209.4 in fiscal 2006.  This increase in overall sales was primarily due to (i) the acquisition of Greenville on August 15, 2006 ($18.1 million); (ii) increases in the sales volume of heat exchanger, nickel, high purity/electropolished and general commercial products ($38.6 million), offset by decreases in the sales volume of titanium products ($3.7 million); and (iii) increases in the average selling price of substantially all of the Company’s products ($31.6 million).  

Total feet shipped during the period February 1, 2006 through February 7, 2006 amounted to 2.3 million feet and total feet shipped during the period February 8, 2006 through January 31, 2007 amounted to 142.3 million feet, and in total for both periods increased by 15.7%, as compared to 125.0 million feet in fiscal 2006.  The increase in total feet shipped in total for fiscal 2007 from fiscal 2006 is primarily due to the acquisition of Greenville and increased sales of chemical/petrochemical processing and general commercial products, partially driven by increased international sales.  

25

Chemical/Petrochemical Processing and Power Generation Products - Sales of chemical/petrochemical processing and power generation products for the period February 1, 2006 through February 7, 2006 amounted to $1.6 million and sales of chemical/petrochemical processing and power generation products for the period February 8, 2006 through January 31, 2007 amounted to $123.7 million, and in total for both periods increased $34.7 million, or 38.4%, as compared to $90.6 million in fiscal 2006.  This increase in sales was primarily due to (i) the acquisition of Greenville ($5.5 million); (ii) an increase in the sales volume of heat exchanger and nickel products ($20.8 million), offset by a decrease in the sales volume of titanium products ($3.7 million); and (iii) an increase in the average selling price of heat exchanger and titanium products ($10.8 million).  The increased sales of these products were primarily drive n by improved domestic market demand following a period of de-stocking during the second half of fiscal 2006, strong demand for ethanol plant construction and increased international sales.  During periods of high commodity price levels, customers may substitute lighter wall or less sophisticated alloys having shorter useful lives for heavier wall or more sophisticated alloys having longer useful lives.  This substitution has reduced demand for the Company’s specialty alloy products.

Feet shipped of chemical/petrochemical processing and power generation products during the period February 1, 2006 through February 7, 2006 amounted to 1.1 million feet and feet shipped of chemical/petrochemical processing and power generation products during the period February 8, 2006 through January 31, 2007 amounted to 39.1 million feet, and in total for both periods increased by 26.4%, as compared to 31.8 million feet in fiscal 2006.

Energy Products- Sales of energy products for the period February 1, 2006 through February 7, 2006 amounted to $0.5 million and sales of energy products for the period February 8, 2006 through January 31, 2007 amounted to $51.9 million, and in total for both periods increased $9.1 million, or 20.9%, as compared to $43.3 million in fiscal 2006.  This increase in sales was primarily due to (i) an increase in the sales volume of subsea umbilical products ($2.2 million), offset by a decrease in the sales volume of encapsulated wire products ($1.1 million); and (ii) an increase in the average selling price of substantially all of the Company’s energy products ($7.9 million).  The increase in energy products is primarily due to a shift towards higher valued, heavier wall subsea umbilical products and general increases in raw material costs, which are substantially passed through to customers.

Feet shipped of energy products during the period February 1, 2006 through February 7, 2006 amounted to 0.3 million feet and feet shipped of energy products during the period February 8, 2006 through January 31, 2007 amounted to 38.2 million feet, and in total for both periods remained consistent with the 38.6 million feet shipped in fiscal 2006.

Food, Beverage and Pharmaceutical Products- Sales of food, beverage and pharmaceutical products for the period February 1, 2006 through February 7, 2006 amounted to $0.7 million and sales of food, beverage and pharmaceutical products for the period February 8, 2006 through January 31, 2007 amounted to $38.8 million, and in total for both periods increased $10.0 million, or 33.7%, as compared to $29.5 million in fiscal 2006.  This increase in sales was primarily due to (i) the continuing strong demand for higher value, high purity/electropolished products resulting from significant capital project requirements and improved capability to satisfy market demand for short lead times and competitive prices ($7.4 million); and (ii) an increase in the average selling price of high purity/electropolished products ($2.7 million).

Feet shipped of food, beverage and pharmaceuticals products during the period February 1, 2006 through February 7, 2006 amounted to 0.1 million feet and feet shipped of food, beverage and pharmaceuticals products during the period February 8, 2006 through January 31, 2007 amounted to 18.3 million feet, and in total for both periods increased by 3.1%, as compared to 17.8 million feet in fiscal 2006.

General Commercial Products-Sales of general commercial products for the period February 1, 2006 through February 7, 2006 amounted to $1.2 million and sales of general commercial products for the period February 8, 2006 through January 31, 2007 amounted to $75.5 million, and in total for both periods increased $30.7 million, or 66.7%, as compared to $46.0 million in fiscal 2006.  This increase in sales was primarily due to (i) the acquisition of Greenville ($10.9 million); (ii) an increase in sales volume due to strong demand for general commercial applications and the Company’s improved capability to satisfy such demand as a result of investments in plant equipment and raw materials ($10.9 million); and (iii) an increase in average selling price ($8.9 million).

26

Feet shipped of general commercial products during the period February 1, 2006 through February 7, 2006 amounted to 0.8 million feet and feet shipped of general commercial products during the period February 8, 2006 through January 31, 2007 amounted to 46.7 million feet, and in total for both periods increased by 29.2%, as compared to 36.8 million feet in fiscal 2006.

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 certain other entities due to the classification of certain costs.  Gross profit for the period February 1, 2006 through February 7, 2006 amounted to $0.9 million and gross profit for the period February 8, 2006 through January 31, 2007 amounted to $58.4 million, and in total increased $11.1 million, or 23.0%, as compared to $48.2 million for fiscal 2006.  Gross profit margin for the period February 1, 2006 through February 7, 2006 amounted to 23.7% and gross profit margin for the period February 8, 2006 through January 31, 2007 amounted to 20.1%, an d for both periods amounted to 20.2%, as compared to 23.0% in fiscal 2006.  The decrease in gross profit margin was due to (i) high costs of production relating to heavy wall subsea umbilical products during the first half of fiscal 2007; (ii) the pass through of higher raw material costs to customers on a dollar basis has the effect of reducing gross profit margins; and (iii) a non-recurring, non-cash purchase accounting adjustment of $4.1 million recorded in the period February 8, 2006 through January 31, 2007.  In connection with the Acquisition and Greenville Acquisition and in accordance with the purchase method of accounting under GAAP, certain inventories were valued at fair value on the acquisition dates, which were $4.1 million greater than their historical cost.  This purchase accounting adjustment was expensed in cost of goods sold within the consolidated statements of operations during the period February 8, 2006 through January 31, 2007 as the associated inventories were sold. &nb sp;

Gross profit per foot shipped for the period February 1, 2006 through February 7, 2006 amounted to $.42/foot and gross profit per foot shipped for the period February 8, 2006 through January 31, 2007 amounted to $0.40/foot ($0.44/foot excluding one-time purchase accounting adjustments), and in total for both periods amounted to $0.41/foot ($0.44/foot excluding one-time purchase accounting adjustments), as compared to $0.39/foot for fiscal 2006.

Operating Expenses

Selling, general and administrative expense consists primarily of management, administrative and sales compensation, benefits, travel, professional fees, communications, occupancy and insurance expense, legal and professional fees.  Selling, general and administrative expenses for the period February 1, 2006 through February 7, 2006 amounted to $7.3 million and selling, general and administrative expenses for the period February 8, 2006 through January 31, 2007 amounted to $19.9 million, and in total for both periods increased approximately $12.3 million, or 82.8%, as compared to $14.9 million for fiscal 2006.  This increase in selling, general and administrative expense was primarily due to (i) the acquisition of Greenville ($1.9 million); (ii) the extinguishment of deferred debt expenses of $0.5 million in the period February 1, 2006 through February 7, 2006; (iii) an increase in management fees paid to affiliated entities of $1.6 million; and (iv) the recognition of compensation expense of $6.6 million during the period February 1, 2006 through February 7, 2006 relating to settlement of outstanding stock options, phantom rights and management bonuses recorded in connection with the Acquisition.

Amortization expense for the period February 1, 2006 through February 7, 2006 amounted to less than $0.1 million and amortization expense for the period February 8, 2006 through January 31, 2007 amounted to $13.4 million, and in total for both periods increased by $12.8 million, as compared to $0.6 million for fiscal 2006.  The increase in amortization expense results from the allocations of the Acquisition and Greenville Acquisition purchase prices to intangible assets and the corresponding higher amount of amortization expense for the period.

Interest Expense

Interest expense for the period February 1, 2006 through February 7, 2006 amounted to $0.3 million and interest expense for the period February 8, 2006 through January 31, 2007 amounted to $25.6 million, and in total for both periods increased $9.1 million, or 53.9%, as compared to $16.8 million for fiscal 2006.  The increase in interest expense was due to an increased principal amount of indebtedness and related interest rates established in connection with the Transactions and Greenville Acquisition.

27

The Company’s credit agreements assessed interest at a weighted average rate of 10.8% and 10.2% at January 31, 2007 and January 31, 2006, respectively.

Income Tax Expense (Benefit)

Income tax benefit for the period February 1, 2006 through February 7, 2006 amounted to $2.6 million and income tax benefit for the period February 8, 2006 through January 31, 2007 amounted to $0.4 million, and in total for both periods amounted to an income tax benefit of $3.0 million, compared to an income tax expense of $7.6 million for fiscal 2006.  These tax provisions for the period February 1, 2006 through February 7, 2006 and the period February 8, 2006 through January 31, 2007 reflect effective tax rates of 39.5% and 71.5%, respectively, and for both periods amounted to 41.6%, as compared to 47.9% for fiscal 2006.  The decrease in the effective tax rate was primarily due to settlement of state income tax claims of $0.9 million recorded in fiscal 2006.  The difference between the actual effective tax rates and the U.S. federal statutory rate of 34% is principally due to state income tax provisions and deductions for extra territoria l income and domestic production activity.

Fiscal 2006 Compared to Fiscal 2005

Net Sales

Overall - For fiscal 2006, net sales increased $44.5 million, or 27.0%, to $209.4 million as compared to $164.9 million in fiscal 2005.  This increase in net sales was primarily the result of increased unit sales volume and a shift to higher value nickel alloy products.  The net sales increase was also due to rising stainless steel prices, which the Company largely passed through to its customers, and a continued strong market for titanium and other higher margin products.

Feet shipped during fiscal 2006 increased by 9.9% to 125.0 million feet from 113.7 million feet in fiscal 2005, due primarily to increased sales of chemical/petrochemical processing and energy products to existing customers, partially driven by increased international sales.

Chemical/Petrochemical Processing and Power Generation Products - For fiscal 2006, sales of chemical/petrochemical processing and power generation products increased $32.0 million, or 54.6%, to $90.6 million as compared to $58.6 million in fiscal 2005.  This increase was primarily the result of increased sales of heat exchanger products ($8.8 million), nickel alloy products ($19.2 million) and titanium products ($4.0 million).  The increase resulted mostly from (i) increased nickel alloy and titanium prices; (ii) increased international sales; and (iii) increased domestic demand for the Company’s products.  

Feet shipped of chemical/petrochemical processing and power generation products increased by 20.0% to 31.8 million feet from 26.5 million feet in fiscal 2005.

Energy Products - For fiscal 2006, sales of energy products increased $11.3 million, or 35.3%, to $43.3 million as compared to $32.0 million during fiscal 2005.  This increase was primarily the result of increased shipments of pressure coils ($6.8 million), subsea umbilical products ($2.1 million) and encapsulated wire products ($2.4 million) for use by the energy industry.  The increased sales of these products was primarily driven by increased exploration in the energy industry and increased sales in international markets through specialty distributors.

Feet shipped of energy products increased by 36.9% to 38.6 million feet from 28.2 million feet in fiscal 2005.

Food, Beverage and Pharmaceutical Products - For fiscal 2006, sales of food, beverage and pharmaceutical products decreased $1.1 million, or 3.6%, to $29.5 million as compared to $30.6 million in fiscal 2005.  This decrease was primarily the result of a decrease in sales of high purity and electropolished products ($0.9 million), which was attributable to decreased capital spending by end-market users of these products.  

Feet shipped of food, beverage and pharmaceuticals products decreased by 11.9% to 17.8 million feet from 20.2 million feet in fiscal 2005.

General Commercial Products - For fiscal 2006, sales of general commercial products increased $2.3 million, or 5.3%, to $46.0 million as compared to $43.7 million during fiscal 2005.  This increase was primarily the result of increased stainless steel prices and sales of automotive high-performance exhaust products.  These increases were partially offset by decreased sales volumes.  

28

Feet shipped of general commercial products decreased by 5.4% to 36.8 million feet from 38.9 million feet in fiscal 2005.  The decrease in feet shipped was primarily due to the Company’s shift of certain production assets toward its higher margin products.

Gross Profit

Gross profit for fiscal 2006 was $48.2 million, an increase of $7.2 million, or 17.7%, as compared to $41.0 million during fiscal 2005. Overall gross profit margin for fiscal 2006 decreased to 23.0% as compared to 24.8% in fiscal 2005.  The decrease in gross profit margin was due to an increase in raw material costs, partially offset by a mix shift to more energy, titanium and other higher margin products and cost savings from operational improvements, including improved purchasing practices and labor cost reductions.  

Gross profit per foot shipped for fiscal 2006 increased to $0.39/foot as compared to $0.36/foot in fiscal 2005.

Operating Expenses

Selling, general and administrative expenses increased approximately $0.3 million, or 2.1%, to $14.9 million in fiscal 2006 from $14.6 million in fiscal 2005.  This increase was primarily due to higher compensation expenses.

Interest Expense

Interest expense increased $2.9 million, or 21.3%, to $16.8 million for fiscal 2006 from $13.9 million for fiscal 2005.  The increase in interest expense was due to increased interest rates related to the Company’s pre-Acquisition revolving credit facility and higher levels of debt outstanding.

Income Tax Expense

Income tax expense increased to $7.6 million (47.9% effective rate) for fiscal 2006 from $4.2 million (34.8% effective rate) for fiscal 2005.  The increase was primarily due to the settlement of prior years state income tax claims ($0.9 million), the absence of reversal of valuation allowances recognized in fiscal 2005 ($0.5 million) and an increase in pre-tax income.

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 Senior Notes, and to fund working capital needs, planned capital expenditures, any earn-out payments pursuant to the Acquisition and to make 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.

Debt and Other Obligations

Concurrently with the closing of the Transactions, and as a condition thereof, the Company entered into the $50.0 million Revolving Credit Facility that matures on February 7, 2011.  Concurrently with the closing of the Greenville Acquisition, the Company entered into an amendment to the Revolving Credit Facility for which the borrowing capacity was increased by $10.0 million to $60.0 million, subject to borrowing base availability.  Borrowings under the agreement bear interest payable at various dates with floating rates of either (i) prime plus 1% (9.25% at January 31, 2007) or (ii) LIBOR plus 2% (7.39% at January 31, 2007).  At January 31, 2007, the Company had $28.3 million outstanding and $31.7 million available under the Revolving Credit Facility.  The senior secured credit facility contains various covenants that, among other things, restrict the Company’s ability to incur or guarantee debt, pay dividends, make certain inve stments, 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 January 31, 2007.

29

In connection with the 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 January 31, 2007.

The Company has entered into a management agreement with Castle Harlan, as manager, under which Castle Harlan provides 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 is for an initial term expiring December 31, 2013 and is subject to renewal for consecutive one-year terms unless terminated by Castle Harlan or the Company, RGCH Corp. or RGCH LLC with 90 days notice prior to the expiration of the initial term or any annual renewal.  As compensation for these services to be performed by Castle Harlan for fiscal 2007, the Company paid $2.0 million to Castle Harlan on the date of the closing of the Acquisition.  In addition, the Company paid Castle Harlan $0.8 million on the date of the closing of the Acquisition for services rendered in connection with the Transactions.  During the period February 8, 2006 through January 31, 2007, $2.0 million was amortized to selling, general and administrative expenses within the consolidated statements of operations.  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 will pay Castle Harlan an annual management fee equal to 3% of each such equity contribution.

The Stock Purchase Agreement entered into in connection with the Acquisition provides for an earnout payment equal to 3.0 times the excess of Adjusted Consolidated EBITDA (as defined in the Stock Purchase Agreement) for fiscal 2007 over $45.0 million, up to a maximum earnout payment of $30.0 million.  The Company has accrued at January 31, 2007 an earnout  payment of approximately $2.1 million to be made by the Company in the second quarter of fiscal 2008, which increased goodwill in the accounting for the Acquisition.  

Working Capital

At January 31, 2007, the Company had working capital of $65.5 million, increasing from $51.3 million at January 31, 2006.

Cash Flows

Cash increased $0.4 million in the period February 1, 2006 through February 7, 2006 and increased $2.4 million in the period February 8, 2006 through January 31, 2007, and in total for both periods increased $2.8 million, ending the period at $5.6 million.  Cash increased $1.4 million in fiscal 2006, ending the period at $2.8 million.  The increase in the generation of cash during the periods February 1, 2006 through February 7, 2006 and February 8, 2006 through January 31, 2007, as compared to fiscal 2006, is primarily due to the following:

Operating Activities - The Company used cash for operating activities of $3.0 million for the period February 1, 2006 through February 7, 2006 and generated cash from operating activities of $14.4 million for the period February 8, 2006 through January 31, 2007, and in total for both periods generated cash from operating activities of $11.4 million, as compared to $8.9 million of cash generated from operating activities for fiscal 2006.  The increase in cash flows from operating activities was primarily due to changes in working capital which resulted in a decrease in the use of cash of $3.7 million, net of a $1.2 million decrease in net income adjusted for depreciation and amortization, write-up of inventory, loss on disposal of property, plant and equipment, deferred income taxes and other non-cash operating activities.  

The Company generated net cash from operating activities of $8.9 million for fiscal 2006 compared with cash used for operating activities of $8.7 million for fiscal 2005.  The increase in cash flows from operating activities for fiscal 2006 was primarily attributable to increased net income during the period and reduction in interest payable on affiliate debt in fiscal 2005 as a result of a modification of the terms of a promissory note, partially offset by increased working capital needs.

30

Investing Activities - The Company used cash for investing activities of $0.5 million for the period February 1, 2006 through February 7, 2006 and used cash for investing activities of $35.9 million for the period February 8, 2006 through January 31, 2007, and in total for both periods used cash for investing activities of $36.4 million, as compared to $6.5 million for fiscal 2006.  Capital expenditures to replace and upgrade existing equipment and install new equipment to provide additional operating efficiencies amounted to $0.5 million for the period February 1, 2006 through February 7, 2006 and $6.2 million for the period February 8, 2006 through January 31, 2007, and in total for both periods amounted to $6.7 million, as compared to $4.7 million for fiscal 2006.  The Company expects capital expenditures for fiscal 2008 to be approximately $5.5 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 January 31, 2007, the Company used cash of $34.6 million, net of cash acquired, to purchase all of the outstanding equity interests of Greenville and received net proceeds of $4.9 million from the Sale-Leaseback Transaction.

The Company used cash for investing activities of $6.5 million for fiscal 2006, compared with $7.2 million for fiscal 2005.  Cash used for investing activities of approximately $1.5 million in each period were primarily due to capital expenditures related to new products and margin enhancement programs and maintenance capital expenditures.  In fiscal 2006, the Company used cash of $1.8 million to purchase certain of the Company’s minority equity interests.

Financing Activities - Financing activities provided cash of $3.9 million in the period February 1, 2006 through February 7, 2006 and provided cash of $23.9 million in the period February 8, 2006 through January 31, 2007, and in total for both periods provided cash of $27.8 million, as compared to a use of cash of $1.0 million for fiscal 2006.  In the period February 1, 2006 through 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 Acquisition, which was used for the following corporate purposes: (i) repay existing indebtedness of approximately $170.4 million; (ii) fund the Acquisition through the payment of $23.1 million to RGCH Corp.; and (iii) payment of financing costs of $9.6 million.  In the period February 8, 2006 through January 31, 2007,  net principal proceeds from the Revolving Credit Facility of $21.3 million were used p rimarily to fund the Greenville Acquisition and working capital requirements.  In fiscal 2006, the Company used cash of $1.0 million to repay long-term debt.  In the period February 8, 2006 through January 31, 2007, the Company received $2.6 million related to the working capital adjustment in connection with the Acquisition.

Cash used in financing activities for fiscal 2006 was $1.0 million while cash provided by financing activities for fiscal 2005 was $16.1 million.  These cash flows are due primarily to increases and decreases to our pre-Acquisition revolving credit facility and the repayment of long-term debt.

Contractual Obligations

The following table represents contractual commitments associated with the Company’s debt and other obligations as of January 31, 2007 (in thousands):

			Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Revolving Credit Facility(1)		$	36,800	$	2,116	$	4,232	$	30,452	$	-
Senior Notes(1)			368,750		22,500		45,000		45,000		256,250
Operating leases			21,832		2,417		4,537		1,914		12,964
Management fee(2)			11,524		1,955		3,909		3,909		1,751
Raw materials(3)			51,443		51,443		-		-		-
Capital expenditures(3)			984		984		-		-		-
	Total contractual obligations	$	491,333	$	81,415	$	57,678	$	81,275	$	270,965

(1)

Includes interest payments for the Revolving Credit Facility and Senior Notes calculated using an interest rate of 7.48% and 11.25%, respectively.

(2)

The Company has entered into a management agreement with Castle Harlan, as manager, under which Castle Harlan provides business and organizational strategy, financial and investment management, advisory, merchant and investment banking services to the Company, RGCH Corp. or RGCH LLC, and under what the Company pays Castle Harlan compensation for those services.  See “Liquidity and Capital Resources - Debt and Other Obligations.”

(3)

Represents ordinary course purchase orders.

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Off-balance Sheet Arrangements

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

Inflation

Inflation has not had a material impact on the Company’s results of operations or financial condition during the preceding three years.

Critical Accounting Policies

The preparation of the 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  consolidated financial statements; (ii) the disclosures of contingent assets and liabilities at the date of the 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, th e 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 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 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 do 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.  

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 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 2006, and det ermined that there was no impairment of goodwill.

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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.  No tradenames existed at January 31, 2006.

Amortizable intangible assets, consisting primarily of customer lists are amortized principally by the straight-line method over their estimated useful lives of 15 years.  Prior to the Acquisition, customer lists were amortized principally over 40 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.

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.

Recent 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 2008.

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 2008.

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 is assessing the impact the adoption of FIN 48 will have on the Company’s consolidated financial position and results of operations for fiscal 2008.

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Item 7A. 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, original equipment manufacturers, or 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.  

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.  Where possible, the Company employs fixed rate raw material purchase contracts, customer price adjustments and surcharges at the time of delivery to help manage this risk.  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.  Currently, the Company does not use 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 $0.4 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 8. Financial Statements and Supplementary Data.

The consolidated financial statements of the Company, together with the related notes and report of the independent registered public accounting firm are set forth below.

34

Index to Consolidated Financial Statements

	Page
Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP	36
Report of Independent Registered Public Accounting Firm – Deloitte & Touche LLP	37
Consolidated Balance Sheets	38
Consolidated Statements of Operations	39
Consolidated Statements of Stockholders’ Equity (Deficiency)	40
Consolidated Statements of Cash Flows	41
Notes to Consolidated Financial Statements	42

35

Report of Independent Registered Public Accounting Firm

To the Stockholder and Board Member of
RathGibson, Inc.

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholders’ equity (deficiency) and of cash flows, present fairly, in all material respects, the financial position of RathGibson, Inc. and subsidiary, (formerly Gibson Tube, Inc.), at January 31, 2005, and the results of their operations and their cash flows for the period then ended in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule for 2005 listed in the accompanying index at Item 15(a), presents fairly, in all material respects, the information therein when read in conjunction with the related consolidated financial statements.  These financial statements and financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and financi al statement schedule based on our audit.  We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

As discussed in Note 3 (not presented herein), the consolidated statements for the year ended January 31, 2005, have been restated.

/s/ PricewaterhouseCoopers LLP

Milwaukee, Wisconsin

April 4, 2005, except for information
in Note 3 (not presented herein) and

Note 10 which is as of January 9, 2006

36

Report of Independent Registered Public Accounting Firm

To the Stockholder and Board Member of
RathGibson, Inc.

We have audited the accompanying consolidated balance sheets of RathGibson, Inc. and subsidiary (the “Company”) as of January 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity (deficiency), and cash flows for the period February 8, 2006 through January 31, 2007, the period February 1, 2006 through February 7, 2006, and the year ended January 31, 2006.  Our audits also included the financial statement schedule listed in the Index at Item 15 for such periods.  These financial statements and financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of RathGibson, Inc. and subsidiary at January 31, 2007 and 2006, and the results of their operations and their cash flows for the period February 8, 2006 through January 31, 2007, the period February 1, 2006 through February 7, 2006, and the year ended January 31, 2006, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedule for such periods, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP

Milwaukee, WI
April 24, 2007

37

RATHGIBSON, INC. AND SUBSIDIARY

Consolidated Balance Sheets

January 31, 2007 and 2006

 (in thousands, except share and per share data)

						Successor		Predecessor
						2007		2006
Assets
Current assets:
	Cash				$	5,631	$	2,842
	Accounts receivable, net of reserves of $496 and $650 at January
		31, 2007 and 2006, respectively				54,464		33,996
	Inventories, net of reserves of $920 and $910 at January
		31, 2007 and 2006, respectively				54,397		30,421
	Prepaid expenses and other					3,189		1,004
	Refundable income taxes					1,028		3,818
	Deferred income taxes					1,812		1,618
				Total current assets		120,521		73,699
Property, plant and equipment, net						44,150		26,717
Goodwill						134,823		64,217
Other intangible assets, net						103,324		13,952
Deferred financing costs						9,458		906
				Total assets	$	412,276	$	179,491
Liabilities and Stockholders’ Equity (Deficiency)
Current liabilities:
	Current installments of long-term debt				$	-	$	1,000
	Accounts payable					22,832		12,354
	Accrued expenses					29,550		7,876
	Income taxes payable					2,684		1,136
				Total current liabilities		55,066		22,366
Long-term debt, less current installments						228,295		169,419
Deferred income taxes						60,761		17,048
Stockholders’ equity (deficiency):
	Common stock, $.01 par value; 260,000 shares authorized, 100 and
			215,462 shares issued and outstanding at January 31, 2007 and
			2006, respectively			-		2
	Additional paid-in capital					68,287		13,247
	Accumulated deficit					(133)		(42,591)
				Total stockholders’ equity (deficiency)		68,154		(29,342)
				Total liabilities and stockholders’ equity (deficiency)	$	412,276	$	179,491

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

38

RATHGIBSON, INC. AND SUBSIDIARY

Consolidated Statements of Operations

For the Period February 8, 2006 through January 31, 2007, Period February 1, 2006

through February 7, 2006 and Fiscal Years Ended January 31, 2006 and 2005

 (in thousands)

					Successor		Predecessor
					Period		Period
					February 8,		February 1,		Fiscal Years Ended
					2006 through		2006 through		January 31,
					January 31,		February 7,
					2007		2006		2006		2005
Net sales				$	289,842	$	4,020	$	209,409	$	164,915
Cost of goods sold					231,463		3,067		161,186		123,949
		Gross profit			58,379		953		48,223		40,966
Operating expenses:
	Selling, general and administrative				19,859		7,346		14,882		14,571
	Amortization				13,406		11		577		552
					33,265		7,357		15,459		15,123
		Income (loss) from operations			25,114		(6,404)		32,764		25,843
Interest expense					25,580		336		16,838		13,882
		Income (loss) before income
			taxes		(466)		(6,740)		15,926		11,961
Income tax expense (benefit)					(333)		(2,663)		7,629		4,164
		Net income (loss)		$	(133)	$	(4,077)	$	8,297	$	7,797

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

39

RATHGIBSON, INC. AND SUBSIDIARY

Consolidated Statements of Stockholders’ Equity (Deficiency)

For the Period February 8, 2006 through January 31, 2007, Period February 1, 2006

through February 7, 2006 and Fiscal Years Ended January 31, 2006 and 2005

 (in thousands, except share data)

			Common Stock				Additional				Stockholders’
			Shares				Paid-in		Accumulated		Equity
			Outstanding		Amount		Capital		Deficit		(Deficiency)
Predecessor
Balances, January 31, 2004		$	1,000	$	-	$	8,355	$	(58,685)	$	(50,330)
Net income			-		-		-		7,797		7,797
Balances, January 31, 2005			1,000		-		8,355		(50,888)		(42,533)
Net income			-		-		-		8,297		8,297
Majority stockholder RMCHI
	common stock exchanged		77,777		1		(1)		-		-
Minority interest RMCHI
	common stock exchanged		17,579		-		4,894		-		4,894
Issuance of common stock
	to majority stockholder		119,106		1		(1)		-		-
Balances, January 31, 2006			215,462		2		13,247		(42,591)		(29,342)
Net loss			-		-		-		(4,077)		(4,077)
Balances, February 7, 2006			215,462		2		13,247		(46,668)		(33,419)
Successor
Net loss			-		-		-		(133)		(133)
Acquisition by RGCH Corp.			(215,362)		(2)		54,253		46,668		100,919
Equity contributions			-		-		560		-		560
Incentive unit expense			-		-		227		-		227
Balances, January 31, 2007		$	100	$	-	$	68,287	$	(133)	$	68,154

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

40

RATHGIBSON, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

For the Period February 8, 2006 through January 31, 2007, Period February 1, 2006

through February 7, 2006 and Fiscal Years Ended January 31, 2006 and 2005

(in thousands)

							Successor		Predecessor
							Period		Period
							February 8,		February 1,		Fiscal Years Ended
							2006 through		2006 through		January 31,
							January 31,		February 7,
							2007		2006		2006		2005
Cash flows from operating activities:
	Net income (loss)					$	(133)	$	(4,077)	$	8,297	$	7,797
	Adjustments to reconcile net income (loss) to net
		cash provided by (used in) operating activities:
			Depreciation and amortization				18,658		110		5,866		5,624
			Amortization of deferred debt expenses and debt discount				1,489		-		168		521
			Extinguishment of deferred debt expenses				-		535		-		-
			Write-up of inventory				4,148		-		-		-
			Loss on disposal of property, plant and equipment				105				-		270
			Deferred income taxes				(4,146)		(2,313)		1,626		2,271
			Incentive unit expense				227		-		-		-
			Compensation expense – transaction cost				-		54		-		-
			Change in assets and liabilities:
				Accounts receivable			(14,963)		(1,403)		(2,756)		(8,195)
				Inventories			(17,206)		(385)		(3,050)		(9,074)
				Other current and non-current assets			509		(66)		(527)		(130)
				Accounts payable			6,014		2,088		1,052		6,420
				Accrued expenses			15,199		2,771		276		(13,007)
				Income taxes			4,495		(350)		(2,005)		(1,165)
					Net cash provided by (used in) operating activities		14,396		(3,036)		8,947		(8,668)
Cash flows from investing activities:
	Acquisition of property, plant and equipment						(6,273)		(498)		(4,680)		(7,169)
	Proceeds from sale of property, plant and equipment						4,939		-		-		-
	Acquisition of minority interest common stock						-		-		(1,806)		-
	Cash paid for acquisition, net of cash acquired						(34,580)		-		-		-
					Net cash used in investing activities		(35,914)		(498)		(6,486)		(7,169)
Cash flows from financing activities:
	Proceeds from new Revolving Credit Facility						21,315		6,980		-		-
	Proceeds from (payments on) old revolving credit facility						-		(30,919)		(34)		12,353
	Purchase price adjustment						2,608		-		-		-
	Payments to parent company						-		(23,062)		-		-
	Proceeds from bonds payable						-		200,000		-		-
	Proceeds from long-term debt						-		-		-		5,000
	Payments on long-term debt						-		(139,500)		(1,000)		(500)
	Payments of financing fees						(562)		(9,579)		-		(789)
	Equity contributions						560		-		-		-
					Net cash provided by (used in) financing activities		23,921		3,920		(1,034)		16,064
					Net increase in cash		2,403		386		1,427		227
Cash at beginning of period							3,228		2,842		1,415		1,188
Cash at end of period						$	5,631	$	3,228	$	2,842	$	1,415

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

41

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

(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 February 7, 2006, RathGibson completed the sale of all of its outstanding equity interests, options and phantom rights to RGCH Holdings Corp. (“RGCH Corp.”), a wholly-owned subsidiary of RGCH Holdings LLC (“RCGH LLC”), an affiliate of Castle Harlan Partners IV, L.P. (“CHP IV”), a private equity investment fund managed by Castle Harlan, Inc. (“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 “Acquisition”).  The aggregate purchase price was $67,004, including an estimated earnout payment of approximately $2,100 to be made by the Company in the second quarter of fiscal 2008.  The earnout payment is 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 p ayment of $30,000.  This transaction was financed through a combination of debt and equity.  New 11.25% senior notes due in 2014 (“Senior Notes”) in the amount of $200,000 were issued in connection with the Acquisition.  In addition, a new five-year, $50,000 senior secured revolving credit facility (“Revolving Credit Facility”) was established and partially drawn on the closing date.  All outstanding revolving and long-term debt at the time of the Acquisition was paid in full in conjunction with the Acquisition.  In addition, all stock options and phantom rights outstanding at the time of the Acquisition were surrendered in accordance with the Stock Option Plan and the Phantom Rights Plan and together with other compensatory payments were settled for $6,616 at closing and recorded as selling, general and administrative expenses within the Consolidated Statement of Operations for the period February 1, 2006 through February 7, 2006.  The foregoing financing an d equity transactions herein are collectively referred to as the “Transactions.”

The results for the fiscal year ended January 31, 2007 include the Company’s results through February 7, 2006 (“Predecessor”) and after the Acquisition (“Successor”).  As part of the Acquisition, the Company entered into the various financing arrangements described above and, as a result, the Company now has a different capital structure.  Accordingly, the results of operations for periods subsequent to the consummation of the Transactions will not necessarily be comparable to prior periods.  

42

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

The following table summarizes the purchase price allocation:  

Current assets		$	87,191
Property, plant and equipment			43,691
Goodwill			120,079
Other intangible assets			92,800
Other assets			10,334
	Total assets acquired		354,095
Current liabilities			(25,838)
Long-term debt			(206,980)
Deferred income tax liability			(54,273)
	Total liabilities assumed		(287,091)
	Purchase price paid	$	67,004

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

Prior to the Acquisition, the consolidated financial statements reflected the accounts of RathGibson, formerly Gibson Tube, Inc. (“Gibson”), and its subsidiary RMC Holding, Inc. and subsidiary (“RMCHI” or “Rath”).  At January 31, 2005, Gibson owned 74.9% of RMCHI.  RMCHI was merged into RathGibson in September 2005.  The Company was wholly owned by Liberty Partners Holding 10, LLC (“Liberty”) at January 31, 2006.

(2)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period.  Actual results could differ from those estimates.

Consolidation - All significant intercompany accounts and transactions have been eliminated.

Concentration of Risk - The Company provides credit in the normal course of business to its customers. The Company performs periodic evaluations of its customers and maintains allowances for potential credit losses and generally does not require collateral to support the accounts receivable balances.  A significant amount of the Company’s purchases of production materials are concentrated with five suppliers.  The Company’s primary raw material used in production is steel which is subject to market price fluctuations.  The Company attempts to limit its exposure to price fluctuations by adjusting its selling prices to the Company’s customers on a periodic basis.

The Company has cash deposited in financial institutions in which the balances occasionally exceed the federal government agency (“FDIC”) insured limit of $100,000.  The Company has not experienced any losses on such accounts and management believes it is not exposed to any significant risk.

Fair Value of Financial Instruments - The carrying amounts reported in the Consolidated Balance Sheets for accounts receivable and accounts payable approximate fair value because of the short-term maturity of these financial instruments.

43

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

The carrying value of the Company’s Revolving Credit Facility approximates fair value because the underlying rate of interest is variable based upon Prime or LIBOR rates and as such, the effective interest rates on the obligations approximate the Company’s current cost of borrowing of similar amounts on similar terms.At January 31, 2007, the fair value of the Senior Notes approximates $213,000 versus their carrying value of $200,000.

Cash - The Company utilizes controlled disbursement cash accounts which are funded when outstanding checks are presented for payment.  The Company accounts for such outstanding check amounts by reporting them as accounts payable in its Consolidated Balance Sheets and including the change in such amounts in cash flows from operating activities in its Consolidated Statements of Cash Flows.

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 maintains an allowance for estimated losses resulting from the inability or unwillingness of customers to make required payments.  The accrual for estimated losses is based on its historical experience, existing economic conditions and any specific customer collection issues the Company has identified.

Inventories - Inventories are valued at the lower of cost or market.  Cost is determined using standard costs which approximate actual costs based on the first-in, first-out (FIFO) method.

Property, Plant and Equipment - Property, plant and equipment are stated at cost, less accumulated depreciation.  Depreciation is provided using the straight-line method over the estimated useful lives of the assets (37-40 years for buildings and structures, 3-12 years for machinery and equipment and office equipment, furniture and other).  Leasehold improvements are amortized using the straight-line method over the terms of the respective leases.  Maintenance and repairs are charged to expense, while major renewals and improvements are capitalized.  Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in current operations.

Impairment of Long-Lived Assets - The Company accounts for the impairment or disposal of long-lived assets in accordance with Statement of Financial Accounting Standards (“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 calcu lates an impairment loss.  The impairment loss calculation compares the carrying value of the asset to 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.  The Company recognized no impairment losses during the period February 8, 2006 through January 31, 2007, period February 1, 2006 through February 7, 2006, and fiscal years ended January 31, 2006 and 2005.

44

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

Goodwill and Other Intangible Assets - Goodwill is not amortized.  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 2006, and determined that there was no impairment of goodwill.

Tradenames are not amortized.  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.  No tradenames existed at January 31, 2006.

Amortizable intangible assets, consisting primarily of customer lists are amortized principally by the straight-line method over their estimated useful lives of 15 years.  Prior to the Acquisition, customer lists were amortized principally over 40 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.

Deferred Financing Costs - Deferred financing costs are amortized on a straight-line basis over the expected term of the related debt agreement.  Amortization of deferred financing costs is classified as interest expense in the Consolidated Statements of Operations.

Income Taxes - RathGibson and its qualifying subsidiary are included in the Federal income tax return and certain state income tax returns of RGCH Corp.  The provision for income taxes for the Company is determined on a separate return basis in accordance with the terms of a tax sharing agreement with RGCH Corp., and payments for Federal and certain state income taxes are made to RGCH Corp.  Deferred income taxes are provided using the 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 is 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.

Shipping and Handling Costs - Shipping and handling fees billed are reflected in net sales and shipping and handling costs are reflected in cost of goods sold.

Cost of Goods Sold - 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).

45

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

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

Stock-Based Compensation - On February 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”) using the modified prospective method.  SFAS 123R requires a company to measure the cost of employee services received in exchange for an award of equity instruments, such as stock options, based on the grant-date fair value of the award and to recognize these awards as an expense in the statement of operations over the requisite service period.  The grant-date fair value of employee stock options and similar instruments will be estimated using option-pricing models adjusted for unique characteristics of those instruments unless observable market prices for the same or similar instruments are available.  SFAS 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), which was issued in October 1995.  Under SFAS 123R, the Company recognizes the fair value of stock options granted as an expense within its Consolidated Statements of Operations using the straight-line method.  

Prior to February 1, 2006, the Company accounted for its stock-based compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related Interpretations.  Historically, awards granted have not been material.  The expense under APB 25 was not materially different from the SFAS 123 calculation.  

Comprehensive Income - Comprehensive income (loss) in all years herein is equal to the net income (loss) for the same year.

Reclassifications - Certain prior year amounts have been reclassified to conform to the current year presentation.

(3)

RECENT 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 2008.

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 2008.

46

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

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 is assessing the impact the adoption of FIN 48 will have on the Company’s consolidated financial position and results of operations for fiscal 2008.

(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, while 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 9), 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.  

The following table summarizes the purchase price allocation:  

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 will be deductible for income tax purposes.  

The unaudited pro forma financial information in the table below summarizes the combined results of operations of RathGibson and Greenville, on a pro forma basis, as though the companies had been combined at February 1, 2005.  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 the beginning of each of the periods presented.  The unaudited pro forma financial information for all periods presented 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.

47

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

The unaudited pro forma financial information for the fiscal year ended January 31, 2007 combines the Predecessor and Successor results for RathGibson for the respective period, which includes the results of Greenville subsequent to the Greenville Acquisition date, and the historical results for Greenville for the six month and fifteen day period ended August 15, 2006.  The unaudited pro forma financial information for the fiscal year ended January 31, 2006 combines the historical results for RathGibson and Greenville for those respective periods.  The following table summarizes the unaudited pro forma financial information for the fiscal years ended January 31:

		2007		2006
Net sales	$	311,692	$	243,220
Net income (loss)		(3,108)		10,335

(5)

INVENTORIES

Inventories consist of the following at January 31:

			Successor		Predecessor
			2007		2006
Raw materials		$	34,326	$	15,344
Work in process			3,157		2,674
Finished goods			16,914		12,403
	Total inventories	$	54,397	$	30,421

(6)

PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consist of the following at January 31:

			Successor		Predecessor
			2007		2006
Land and land improvements		$	-	$	998
Buildings and structures			-		3,357
Leasehold improvements			1,817		3,350
Machinery and equipment			43,559		52,347
Office equipment, furniture and other			1,101		2,897
Construction in progress			2,788		112
			49,265		63,061
Less accumulated depreciation			(5,115)		(36,344)
	Total property, plant and equipment, net	$	44,150	$	26,717

Depreciation expense for the period February 8, 2006 through January 31, 2007, period February 1, 2006 through February 7, 2006 and fiscal years ended January 31, 2006 and 2005 amounted to $5,252, $99, $5,289 and $5,072, respectively.

48

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

On December 22, 2006, the Company completed the sale and leaseback of its Janesville, Wisconsin manufacturing/ distribution and executive office facility to AGNL RathGibson, L.L.C. (“AGNL”), an unaffiliated third party.  The Company received net proceeds of $4,939 million for this facility and agreed to lease this facility from AGNL, as described below.  The Company recognized a loss on sale of this facility amounting to $105.  The foregoing transaction is referred to as the “Sale-Leaseback Transaction.”  

(7)

GOODWILL AND OTHER INTANGIBLE ASSETS

The Company recorded the excess purchase prices of the Acquisition and Greenville Acquisition over their respective fair values of the identifiable assets and liabilities to goodwill (Notes 1 and 4).  Goodwill of $120,079 and $14,744 has been recorded in connection with the Acquisition and Greenville Acquisition, respectively.  Additional goodwill of $5,297 was recorded during the fiscal year ended January 31, 2006 as a result of the purchase price allocation related to the minority interest “step” purchase transactions (Note 11).  There were no changes in the carrying amount of goodwill during the fiscal year ended January 31, 2005.  

The gross carrying amount and accumulated amortization of the Company’s intangible assets, other than goodwill, at January 31 are as follows:

			Successor						Predecessor
			2007						2006
			Gross				Net		Gross				Net
			Carrying		Accumulated		Book		Carrying		Accumulated		Book
			Amount		Amortization		Value		Amount		Amortization		Value
Customer lists		$	94,500	$	5,776	$	88,724	$	18,602	$	4,929	$	13,673
Tradenames			14,600		-		14,600		-		-		-
Other			-		-		-		1,017		738		279
	Total intangibles	$	109,100	$	5,776	$	103,324	$	19,619	$	5,667	$	13,952

The Company recorded intangible assets, other than goodwill, of $92,800 and $16,300 in connection with the Acquisition and Greenville Acquisition, respectively (Notes 1 and 4).  The gross carrying value of customer lists was increased by $2,000 during the fiscal year ended January 31, 2006 as a result of the minority interest “step” purchase transaction (Note 11).  

The Company also recorded backlog of $7,330 and $300 in connection with the Acquisition and Greenville Acquisition, respectively.  These amounts were fully amortized in the fiscal year ended January 31, 2007.  

49

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

Amortization expense consists of the following:

			Successor		Predecessor
			Period		Period
			February 8,		February 1,		Fiscal Years Ended
			2006 through		2006 through		January 31,
			January 31,		February 7,
			2007		2006		2006		2005
Intangibles		$	5,776	$	11	$	577	$	552
Backlog			7,630		-		-		-
	Total amortization expense	$	13,406	$	11	$	577	$	552

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

Fiscal years ending January 31,
	2008	$	6,300
	2009		6,300
	2010		6,300
	2011		6,300
	2012		6,300

(8)

ACCRUED EXPENSES

Accrued expenses consist of the following at January 31:

			Successor		Predecessor
			2007		2006
Accrued compensation		$	6,041	$	4,151
Interest payable			10,626		365
Due to seller			7,512		-
Other			5,371		3,360
	Total accrued expenses	$	29,550	$	7,876

At January 31, 2007, amounts due to seller primarily represent estimated federal and state income taxes and associated professional fees related to periods prior to the Acquisition of $5,412 and an earnout payment of approximately $2,100 (Note 1).

50

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

(9)

LONG-TERM DEBT

A summary of the Company’s long-term debt is as follows at January 31:

			Successor		Predecessor
			2007		2006
Revolving Credit Facility		$	28,295	$	30,919
Senior Notes			200,000		-
Term loan payable			-		3,500
Notes payable to related party			-		136,000
	Long-term debt		228,295		170,419
Less current installments			-		(1,000)
	Long-term debt, less current installments	$	228,295	$	169,419

Concurrently with the closing of the Transactions, and as a condition thereof, RathGibson entered into the five-year, $50,000 senior secured Revolving Credit Facility and paid the existing revolving debt outstanding.  Concurrently with the closing of the Greenville Acquisition, RathGibson entered into an amendment to the Revolving Credit Facility for which the borrowing capacity was increased by $10,000 to $60,000, subject to borrowing base availability.  There were no material changes to the covenants as a result of the amendment.  Borrowings under the agreement bear interest payable at various dates with floating rates of either (i) prime plus 1% (9.25% at January 31, 2007) or (ii) LIBOR plus 2% (7.39% at January 31, 2007).  At January 31, 2007, the Company had $31,705 available under the Revolving Credit Facility.  Borrowings under the Revolving Credit Facility are collateralized by all assets of the Company.  The Revolvin g Credit Facility contains various covenants customary to similar credit facilities.  The Company was in compliance with all such covenants at January 31, 2007.  

In connection with the 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 January 31, 2007.

The old revolving credit facility, term loan payable and notes payable to related party were paid in full on February 7, 2006 in connection with the Acquisition (Note 1).

51

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

Aggregate scheduled maturities of long-term debt at January 31, 2007 are as follows:

Fiscal Years Ending January 31,
	2008	$	-
	2009		-
	2010		-
	2011		-
	2012		28,295
	Thereafter		200,000
		$	228,295

(10)

INCOME TAXES

Income tax expense (benefit) is comprised of the following:

			Successor		Predecessor
			Period		Period
			February 8,		February 1,		Fiscal Years Ended
			2006 through		2006 through		January 31,
			January 31,		February 7,
			2007		2006		2006		2005
Current		$	3,813	$	(350)	$	6,003	$	1,893
Deferred			(4,146)		(2,313)		1,626		2,271
	Total income tax expense (benefit)	$	(333)	$	(2,663)	$	7,629	$	4,164

52

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

Income tax expense (benefit) differs from that which would be obtained by applying the statutory federal income tax rate to income (loss) before income taxes as follows:

				Successor		Predecessor
				Period		Period
				February 8,		February 1,		Fiscal Years Ended
				2006 through		2006 through		January 31,
				January 31,		February 7,
				2007		2006		2006		2005
Income taxes at U.S. statutory rate			$	(158)	$	(2,292)	$	5,415	$	4,067
Change in valuation allowance				-				-		(550)
State income taxes, net of federal tax benefit				(134)		(549)		1,099		975
Prior year state income tax settlement				-		-		954		-
Extra territorial income deduction and
	domestic production activity deduction			(245)		-		(309)		(233)
Prior year change in estimate for extra
	territorial income deduction and other
	adjustments			-		-		382		-
Non-deductible incentive unit expense				77		-		-		-
Non deductible expenses and other				127		178		88		(95)
		Total income tax expense (benefit)	$	(333)	$	(2,663)	$	7,629	$	4,164

The valuation allowance was eliminated in the fiscal year ended January 31, 2005 due to the expected utilization of certain state tax credits for which a valuation reserve was previously recorded.  During the fiscal year ended January 31, 2006, the Company paid $954 in state income tax to settle a state income tax claim for a prior year adjustment.  

Significant components of the Company’s net deferred income taxes are as follows at January 31:

				Successor		Predecessor
				2007		2006
Deferred income tax assets:
	Inventories		$	147	$	1,053
	Accrued expenses and reserves			926		564
	Net operating tax loss carryforwards			288		1
		Total gross deferred income tax assets		1,361		1,618
Deferred income tax liabilities:
	Property, plant and equipment			(10,393)		(3,750)
	Intangibles			(49,917)		(13,298)
		Total gross deferred income tax liabilities		(60,310)		(17,048)
Net deferred income tax liability			$	(58,949)	$	(15,430)
Classification of net deferred income tax liability in Consolidated Balance Sheets:
	Current net deferred income tax asset		$	1,812	$	1,618
	Non-current net deferred income tax liability			(60,761)		(17,048)
			$	(58,949)	$	(15,430)

53

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

The Company has not recorded a valuation allowance as of January 31, 2007 and 2006.  The Company has approximately $3,600 of state net operating tax loss carryforwards generated in a separate filing state which will expire in fiscal 2021.

(11)

STOCKHOLDERS’ EQUITY

In September 2005, all outstanding shares of RMCHI common stock (95,356.25 shares) were exchanged on a one-for-one basis for shares of RathGibson common stock.  Shares of common stock owned by the minority stockholders of RMCHI (17,579 shares), which were exchanged for RathGibson common stock were valued at $4,894, which value was allocated to property, plant and equipment, goodwill and other intangible assets.  The purchase price for the acquisition of minority interest has been allocated as follows:

Property, plant and equipment	$	300
Goodwill		5,297
Other intangible assets		2,000
Deferred income tax liability		(897)
		6,700
Cash paid		1,806
Minority interest	$	4,894

In February 2005, RMCHI purchased a total of 8,491.5 shares of its common stock for $1,806 from two former executives.  This transaction is considered a “step” purchase transaction and accordingly the $1,806 has been recorded as a fair value adjustment (increase) in the value of the property, plant and equipment, intangible assets, and goodwill in the fiscal year ended January 31, 2006.

(12)

EQUITY BASED COMPENSATION

Successor - RGCH LLC has allocated certain of its Class B units for incentive based grants to executives and key employees of the Company.   The incentive units vest based on the following:  (i) 25% vest on certain specified periods of continuing employment; (ii) 35% vest on the achievement of certain performance-based targets to be established annually by the board of directors; and (iii) 40% vest 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.  Vesting of units may be accelerated upon a change of control.

79,295 incentive units were granted during the period February 8, 2006 through January 31, 2007.  No incentive units were granted during the period February 1, 2006 through February 7, 2006 and the fiscal years ended January 31, 2006 and 2005.  No incentive units were vested at January 31, 2007.

Incentive unit expense recognized within the Consolidated Statements of Operations amounted to $227 for the period February 8, 2006 through January 31, 2007.  No incentive unit expense was recognized during the period February 1, 2006 through February 7, 2006 and the fiscal years ended January 31, 2006 and 2005.  At January 31, 2007, total unrecognized incentive unit cost was approximately $404, which is expected to be recognized over a weighted-average remaining period of approximately 3 years.

54

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

Predecessor - In connection with the Acquisition, all stock options and phantom rights were surrendered in accordance with the Stock Option Plan and the Phantom Rights Plan.  Compensation expense related to the stock options, phantom rights and management bonuses totaled $6,616 and was recorded as selling, general and administrative expense in the period February 1, 2006 through February 7, 2006 and paid on February 7, 2006.  No compensation expense related to stock options and phantom rights were recorded in the fiscal year ended January 31, 2006.  Compensation expense related to stock options and phantom rights for the fiscal year ended January 31, 2005 was $178.

(13)

COMMITMENTS AND CONTINGENCIES

Leases - The Company leases certain facilities and equipment under various non-cancelable operating lease agreements.  Certain leases contain renewal options for periods of up to ten years, exercisable at the Company’s option; require payment of property taxes, insurance and maintenance costs in addition to the rent payments; and contain either scheduled rent increases or increases based on a cost of living index.  Minimum lease payments are recognized on a straight-line basis over the minimum lease term.  The difference between rent expense calculated using the straight-line method and minimum rent paid is recorded as a deferred rent liability, which is included in other accrued expenses in the Consolidated Balance Sheets.  It is anticipated that expiring leases will be renewed or replaced.

Concurrently with the Sale-Leaseback Transaction described in Note 6, the Company’s leased warehouse facility, also located in Janesville, Wisconsin, was acquired by AGNL.  The existing lease on the warehouse facility was terminated and the Company and AGNL entered into a lease relating to both of the Company’s Janesville, Wisconsin facilities.  This lease has an initial 20-year term with quarterly rent payments of $220, adjusted annually to reflect increases in a consumer price index agreed upon by the parties to be used for such purpose.  This lease contains two, 10-year renewal options.  This lease also requires the Company to pay property taxes, insurance and maintenance costs in addition to the rent payments described above.

Rental expense, which relates principally to the facility leases, for all operating leases was approximately $1,788, $95, $1,650 and $1,553 for the period February 8, 2006 through January 31, 2007, period February 1, 2006 through February 7, 2006 and the fiscal years ended January 31, 2006 and 2005, respectively.

Future minimum lease payments required under long-term non-cancelable operating leases in effect at January 31, 2007 is as follows:

Fiscal Years Ending January 31,
	2008	$	2,417
	2009		2,419
	2010		2,118
	2011		989
	2012		925
	Thereafter		12,964
		$	21,832

Litigation - The Company is a party to litigation matters and claims, which are normal in the course of its operations.  While the results of such litigation and claims cannot be predicted with certainty, management believes that the final outcome of such matters will not have a materially adverse effect on the Company’s Consolidated Balance Sheet, Statements of Operations and Statements of Cash Flows.

55

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

(14)

RETIREMENT PLANS

The Company sponsors 401(k) profit sharing plans that cover substantially all employees.  Eligibility for participation in the plans is based on an employee meeting certain minimum age and service requirements.  Participants may make voluntary, pre-tax contributions through salary deferrals to the plans.  The Company may make discretionary contributions to such plans.  The Company recorded expense of $1,137, $907 and $832 for the period February 8, 2006 through January 31, 2007,  and the fiscal years ended January 31, 2006 and 2005, respectively.  No expenses was recorded for the period February 1, 2006 through February 7, 2006.

(15)

MANAGEMENT FEES

The Company has entered into a management agreement with Castle Harlan, as manager, under which Castle Harlan provides 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 is for an initial term expiring December 31, 2013 and is subject to renewal for consecutive one-year terms unless terminated by Castle Harlan or the Company, RGCH Corp. or RGCH LLC with 90 days notice prior to the expiration of the initial term or any annual renewal.  In the period February 8, 2006 through January 31, 2007, the Company recorded an expense of $1,965 under this management agreement, which is reported as a component of selling, general and administrative expense.

In fiscal 2006 and 2005, the Company recorded an expense of $325 to a company affiliated with certain of its stockholders and $50 to certain stockholders for advisory services provided throughout each year.  Management fees are reported as a component of selling, general and administrative expense.

(16)

SUPPLEMENTAL CASH FLOW INFORMATION

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

					Successor		Predecessor
					Period		Period
					February 8,		February 1,		Fiscal Years Ended
					2006 through		2006 through		January 31,
					January 31,		February 7,
					2007		2006		2006		2005
Cash paid (refunded) during the period for:
		Interest		$	13,830	$	501	$	17,622	$	28,724
		Income taxes			(680)		-		8,149		3,066
Non-cash financing activities:
	Exchange of minority shares for common
			stock of the Company		-		-		4,894		-

56

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

(17)

SEGMENT REPORTING

Business Segments - The Company operates in primarily one business, which is the manufacturing of stainless, nickel and duplex alloy custom tubing.  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 Summary of Significant Accounting Policies (Note 2).  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.

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

			Successor
			Wisconsin		New Jersey		Arkansas		Total
Period February 8, 2006 through January 31, 2007:
Chemical/petrochemical processing and power
	generation products	$	108,767	$	9,420	$	5,514	$	123,701
Energy products			-		50,746		1,095		51,841
Food, beverage and pharmaceutical products			34,757		3,555		510		38,822
General commercial products			41,034		23,502		10,942		75,478
	Total net sales		184,558		87,223		18,061		289,842
Income from operations			19,228		1,593		4,293		25,114
Interest expense (income)			25,627		-		(47)		25,580
Income tax expense (benefit)			(1,865)		-		1,532		(333)
Net income (loss)			(4,534)		1,593		2,808		(133)
Depreciation and amortization			9,562		8,101		995		18,658
Capital expenditures			3,628		2,565		80		6,273

			Predecessor
			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

57

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

			Predecessor
			Wisconsin		New Jersey		Arkansas		Total
Fiscal Year Ended January 31, 2006:
Chemical/petrochemical processing and power
	generation products	$	81,859	$	8,715	$	-	$	90,574
Energy products			-		43,299		-		43,299
Food, beverage and pharmaceutical products			25,823		3,727		-		29,550
General commercial products			30,826		15,160		-		45,986
	Total net sales		138,508		70,901		-		209,409
Income from operations			20,019		12,745		-		32,764
Interest expense			10,521		6,317		-		16,838
Income tax expense			4,455		3,174		-		7,629
Net income			5,043		3,254		-		8,297
Depreciation and amortization			2,392		3,474		-		5,866
Capital expenditures			650		4,030		-		4,680

			Predecessor
			Wisconsin		New Jersey		Arkansas		Total
Fiscal Year Ended January 31, 2005:
Chemical/petrochemical processing and power
	generation products	$	53,943	$	4,650	$	-	$	58,593
Energy products			-		31,984		-		31,984
Food, beverage and pharmaceutical products			26,734		3,900		-		30,634
General commercial products			25,974		17,730		-		43,704
	Total net sales		106,651		58,264		-		164,915
Income from operations			19,169		6,674		-		25,843
Interest expense			8,937		4,945		-		13,882
Income tax expense			2,168		1,996		-		4,164
Net income			6,456		1,341		-		7,797
Depreciation and amortization			3,265		2,359		-		5,624
Capital expenditures			4,544		2,625		-		7,169

58

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

The following table presents segment identifiable asset information at January 31:

				Successor		Predecessor
				2007		2006
Total assets:
	Wisconsin		$	387,129	$	83,528
	New Jersey			127,529		107,665
	Intercompany eliminations			(112,995)		(11,702)
				401,663		179,491
	Arkansas			54,203		-
	Intercompany eliminations			(43,590)		-
		Total assets	$	412,276	$	179,491

The following table presents segment goodwill information at January 31:

				Successor		Predecessor
				2007		2006
Goodwill:
	Wisconsin		$	77,529	$	14,552
	New Jersey			42,550		49,665
	Arkansas			14,744		-
		Total assets	$	134,823	$	64,217

Geographic Segments - Geographic information about the Company’s net sales is summarized as follows:

			Successor		Predecessor
			Period		Period
			February 8,		February 1,		Fiscal Years Ended
			2006 through		2006 through		January 31,
			January 31,		February 7,
			2007		2006		2006		2005
United States		$	268,452	$	3,974	$	195,128	$	154,470
Other countries			21,390		46		14,281		10,445
	Total net sales	$	289,842	$	4,020	$	209,409	$	164,915

All assets of the Company are located within the United States.

59

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

Major Customers - Net sales to individual customers representing 10% or more of the Company’s net sales are summarized as follows:

	Successor		Predecessor
	Period		Period
	February 8,		February 1,		Fiscal Years Ended
	2006 through		2006 through		January 31,
	January 31,		February 7,
	2007		2006		2006		2005
Customer A	11	%	4	%	15	%	13	%
Customer B	9		1		10		8
	20	%	5	%	25	%	21	%

(18)

QUARTERLY DATA (UNAUDITED)

The following is a summary of the quarterly results of operations for the fiscal years ended January 31:

			Predecessor		Successor
			2007
			Period		Period
			February 1,		February 8,
			2006 through		2006 through
			February 7,		April 30,		2nd		3rd		4th
			2006		2006		Quarter		Quarter		Quarter (1)		Total
Net sales		$	4,020	$	54,701	$	64,188	$	77,738	$	93,215	$	293,862
Gross profit			953		9,354		14,131		17,391		17,503		59,332
Income (loss) from										& nbsp;
	operations		(6,404)		3,180		8,058		10,307		3,569		18,710
Net income (loss)			(4,077)		(1,457)		1,012		2,194		(1,882)		(4,210)

60

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

		Predecessor
		2006
		1st		2nd		3rd		4th
		Quarter		Quarter		Quarter		Quarter (2)		Total
Net sales	$	54,634	$	54,699	$	51,413	$	48,663	$	209,409
Gross profit		14,152		13,943		13,860		6,268		48,223
Income from operations		10,153		9,977		8,654		3,980		32,764
Net income (loss)		3,821		3,880		1,792		(1,196)		8,297

(1)

The fourth quarter of fiscal 2007 was negatively impacted by $7,439 due to the finalization of the purchase accounting related to both the Acquisition and Greenville Acquisition.   The Company made the following adjustments in the fourth quarter of fiscal 2007:

a.

Increase in write-up of inventory - $1,741; and

b.

Increase in amortization of backlog - $5,740.

(2)

The fourth quarter of fiscal 2006 includes an increase to depreciation for $752 due to a change in the estimated useful life of leasehold improvements.

(19)

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 consolidating balance sheet at January 31, 2007; (ii) a consolidating statement of operations for the period February 8, 2006 through January 31, 2007; and (iii) a consolidating statement of cash flows for the period February 8, 2006 through January 31, 2007.  

61

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

 Consolidating Balance Sheet

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				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, less current installments				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

62

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

Consolidating Statement of Operations

For the Period February 8, 2006 through January 31, 2007

					RathGibson		Greenville		Eliminations		Consolidated
Net sales				$	271,926	$	18,061	$	(145)	$	289,842
Cost of goods sold					220,485		11,123		(145)		231,463
		Gross profit			51,441		6,938		-		58,379
Operating expenses:
	Selling, general and administrative				17,957		1,902		-		19,859
	Amortization				12,663		743		-		13,406
					30,620		2,645		-		33,265
		Income from operations			20,821		4,293		-		25,114
Interest expense (income)					25,627		(47)		-		25,580
		Income (loss) before equity in earnings of
			subsidiary and income taxes		(4,806)		4,340		-		(466)
Equity in earnings of subsidiary					(2,808)		-		2,808		-
		Income (loss) before income taxes			(1,998)		4,340		2,808		(466)
Income tax expense (benefit)					(1,865)		1,532		-		(333)
Net income (loss)				$	(133)	$	2,808	$	2,808	$	(133)

63

RATHGIBSON, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2007, 2006 and 2005

 (in thousands, except share data)

 Consolidating Statement of Cash Flows

For the Period February 8, 2006 through January 31, 2007

							RathGibson		Greenville		Eliminations		Consolidated
Cash flows from operating activities:
	Net income (loss)					$	(133)	$	2,808	$	(2,808)	$	(133)
	Adjustments to reconcile net income (loss) to net cash
		provided by operating activities:
			Depreciation and amortization				17,663		995		-		18,658
			Amortization of deferred debt expenses and debt discount				1,489		-		-		1,489
			Write-up of inventory				3,934		214		-		4,148
			Loss on disposal of property, plant and equipment				105		-		-		105
			Deferred income taxes				(3,597)		(549)		-		(4,146)
			Incentive unit expense				227		-		-		227
			Equity in earnings of subsidiary				(2,808)		-		2,808		-
			Change in assets and liabilities:
				Accounts receivable			(14,258)		(705)		-		(14,963)
				Intercompany account receivable and payable			(26)		26		-		-
				Inventories			(14,516)		(2,690)		-		(17,206)
				Other current and non-current assets			551		(42)		-		509
				Accounts payable			5,875		139		-		6,014
				Accrued expenses			15,560		(361)		-		15,199
				Income taxes			2,897		1,598		-		4,495
					Net cash provided by operating activities		12,963		1,433		-		14,396
Cash flows from investing activities:
	Acquisition of property, plant and equipment						(6,193)		(80)		-		(6,273)
	Proceeds from sale of property, plant and equipment						4,939		-		-		4,939
	Intercompany note receivable						-		(3,884)		3,884		-
	Cash paid for acquisition, net of cash acquired						(37,316)		-		2,736		(34,580)
					Net cash used in investing activities		(38,570)		(3,964)		6,620		(35,914)
Cash flows from financing activities:
	Proceeds from new Revolving Credit Facility						21,315		-		-		21,315
	Purchase price adjustment						2,608		-		-		2,608
	Intercompany note payable						3,884		-		(3,884)		-
	Payments of financing fees						(562)		-		-		(562)
	Equity contributions						560		-		-		560
					Net cash provided by financing activities		27,805		-		(3,884)		23,921
					Net increase (decrease) in cash		2,198		(2,531)		2,736		2,403
Cash at beginning of period							3,228		2,736		(2,736)		3,228
Cash at end of period						$	5,426	$	205	$	-	$	5,631

64

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None

Item 9A. 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 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.  There have not been any changes in the Company’s internal controls over financial reporting during the fiscal quarter ended January 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Item 9B. Other Information.

None

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Directors

The following table sets forth certain information regarding the Company’s board of directors, the board of directors of RGCH Corp. and the board of directors of RGCH LLC.  Each of the individuals has served as a member of the applicable board of directors since the dates indicated below in their biographical data.

Name	Age	Position
Harley B. Kaplan	53	President and Chief Executive Officer of RathGibson and of
		Greenville; Member of Company’s board of directors, the board of
		directors of Greenville, the board of directors of RGCH Corp.
		and the board of directors of RGCH LLC
John K. Castle	66	Member of the board of directors of RGCH LLC
William M. Pruellage	33	Member of the board of directors of RGCH Corp. and the board of
		directors of RGCH LLC
John Morningstar	30	Member of the board of directors of RGCH Corp. and the board of
		directors of RGCH LLC
Samuel Urcis	72	Member of the board of directors of RGCH LLC
Frank Spinola	62	Member of the board of directors of RGCH LLC

Harley B. Kaplan joined the Company in September 2003 as President of Rath and was promoted to President and Chief Executive Officer of RathGibson in 2005.  Mr. Kaplan has been a member of the Company’s board of directors since September 2004, became a member of the board of directors of RGCH Corp. and RGCH LLC upon the consummation of the Acquisition and became President and Chief Executive Officer and a director of Greenville upon the consummation of the Greenville Acquisition.  Mr. Kaplan was a Group Executive at IDEX Corporation from March 2002 through April 2003, and served as President and CEO of Wells Lamont Corporation from April 2001 through March 2002. Mr. Kaplan’s prior experience also includes President of Koehler-Bright Star, Inc. and President of Lighting Systems Division at Goodrich.  In addition, Mr. Kaplan worked for Berkshire Hathaway Corporation’s Scott Fetzer Manufacturing Group for nine year s.  Mr. Kaplan received a B.S. in Engineering and a B.A. in Accounting from the University of Cincinnati.

65

John K. Castle is a member of RGCH LLC’s board of directors. Mr. Castle is Chairman and Chief Executive Officer of Castle Harlan.  Prior to forming Castle Harlan in 1987, Mr. Castle was President and Chief Executive Officer of Donaldson, Lufkin & Jenrette, Inc., one of the nation’s leading investment banking firms.  He also served as a director of the Equitable Life Assurance Society of the U.S.  Mr. Castle is a board member of CHAAS Holdings LLC (the parent of Advanced Accessory Holdings Corporation, which is a parent of CHAAS Acquisitions LLC), CHATT Holdings LLC (an indirect parent of ATT Holding Co., which is the parent of Ames True Temper, Inc.), Morton’s Restaurant Group, Inc., Horizon Lines, Inc. and P&MC’s Holding LLC, an indirect parent of Perkins & Marie Callender’s Inc.  Mr. Castle has also been elected to serve as a Life Member of the Corporation of the Massachusetts Institute of Technology.  He has served for 22 years as a Trustee of New York Medical College, including 11 of those years as Chairman of the Board.  He is a member of the Board of the Whitehead Institute for Biomedical Research, and was Founding Chairman of the Whitehead Board of Associates.  He is also a member of The New York Presbyterian Hospital Board of Trustees.  Mr. Castle received his bachelors degree from the Massachusetts Institute of Technology, his M.B.A. as a Baker Scholar with High Distinction from Harvard and two Honorary Doctorate degrees of Humane Letters.

William M. Pruellage is a member of the board of directors of RGCH Corp. and RGCH LLC.  Mr. Pruellage is a Managing Director of Castle Harlan.  Mr. Pruellage is also a board member of Universal Compression, Inc., CHAAS Holdings LLC (the parent of Advanced Accessory Holdings Corporation, which is a parent of CHAAS Acquisitions LLC), CHATT Holdings LLC (an indirect parent of ATT Holding Co., which is the parent of Ames True Temper, Inc.) and P&MC’s Holding LLC, an indirect parent of Perkins & Marie Callender’s Inc.  Prior to joining Castle Harlan in July 1997, Mr. Pruellage worked in the Mergers & Acquisitions group of Merrill Lynch & Co., where he assisted clients in strategic planning and corporate mergers.  Mr. Pruellage is a Summa Cum Laude graduate of Georgetown University.

John Morningstar is a member of the board of directors of RGCH Corp. and RGCH LLC.  Mr. Morningstar is a Managing Director of Castle Harlan.  Mr. Morningstar is also a board member of APEI Holding Corporation (the indirect parent of Associated Packaging Technologies, Inc), CHATT Holdings LLC (an indirect parent of ATT Holding Co., which is the parent of Ames True Temper, Inc.) and Polypipe Building Products Ltd.  Prior to joining Castle Harlan in July 2000, Mr. Morningstar worked in the Retail Investment Banking department of Merrill Lynch & Co., where he assisted clients with corporate finance matters and strategic mergers.  Mr. Morningstar graduated from the University of Virginia with a major in Finance and holds an M.B.A. from the Wharton School of the University of Pennsylvania.

Samuel Urcis is a member of RGCH LLC’s board of directors.  Mr. Urcis is an investor and advisor in the energy field.  From 1982 to 2000 he was a General Partner of Alpha Partners, a venture capital firm which he co-founded.  From 1979 to 1982, and since 1997, Mr. Urcis has been an investor and advisor in the energy field, primarily in the oilfield services and equipment sector.  From 1972 to 1979, Mr. Urcis was with Geosource Inc., a diversified services and equipment company, which he conceptualized and co-founded.  Mr. Urcis served in the capacity of Chief Operating Officer and Vice President of Corporate Development for Geosource, Inc.  From 1955 to 1972, Mr. Urcis served in various technical and management capacities at Rockwell International, Hughes Aircraft, Aerolab Development Company and Sandberg-Serrell Corporation.  Mr. Urcis has served as a Director of the Glaucoma Research Foundation, as a Trustee of the Monterey Institute of International Studies and currently is on the Board of Governors and Audit Committee of the Cedars-Sinai Health Center.  Mr. Urcis served on the board of directors of Universal Compression Holdings, Inc. from February 1998 to April 2006.

Frank M. Spinola is a member of the RGCH LLC’s board of directors.  Mr. Spinola’s prior experience includes serving as President and Chief Executive Officer of INDSPEC Chemical Corp., a specialty chemicals producer, from 1988 to 1999. Mr. Spinola worked for Occidental Chemical Corp. as an Executive Vice President from 1996 to 1999 and for Koppers Co. in various production and management roles from 1966 to 1988.  He has served on the Boards of INDSPEC Chemical Corp., Three Rivers Medical Corp. and Castle Rubber Co.  At the present time, Mr. Spinola provides consulting services to the chemical industry and financial investment community.  He received a B.S. in Chemical Engineering from the University of Massachusetts and an M.B.A. from the University of Chicago.

66

Executive Officers

The following table sets forth certain information regarding the Company’s senior management.  Each of the individuals has served as an employee of the Company since the dates indicated below in their biographical data.

Name	Age	Position
Barry C. Nuss	54	Chief Financial Officer of RathGibson and Greenville
C. Michel Griffith, Jr.	59	Vice President Sales, RathGibson
David G. Pudelsky	59	Vice President, Sales and Market Development of RathGibson
Nicholas K. Cray	49	Vice President and General Manager - Janesville
Jeffrey J. Nelb	49	Vice President and General Manager - North Branch
Harry R. Holstead	56	Vice President and General Manager - Greenville

Barry Nuss joined the Company in April 2006 as Chief Financial Officer of RathGibson and became Chief Financial Officer of Greenville upon the consummation of the Greenville Acquisition.  Mr. Nuss’ prior experience includes Senior Vice President and Chief Financial Officer of Metallurg, Inc. from 2002 to 2006 and Vice President Finance and Chief Financial Officer from 1994 to 2002, Vice President Finance of Shieldalloy Metallurgical Corporation (a subsidiary of Metallurg, Inc.) from 1988 to 1993 and Controller, North American Operations, for Metallurg, Inc. from 1983 to 1987.  Prior to this, Mr. Nuss served as Divisional Controller for Cabot Mineral Resources from 1981 to 1983 and Senior Auditor at Deloitte, Haskins & Sells (now Deloitte & Touche LLP) from 1976 to 1981.  Mr. Nuss received a B.S. in Accounting at Farleigh Dickinson University.

C. Michel Griffith, Jr. joined the Company in 1987 as a National Sales Manager and was promoted to Vice President, Marketing in 1991.  In January 2005, Mr. Griffith became the Vice President Sales, responsible for straight length products.  Prior to joining the Company, Mr. Griffith was Marketing Director for Allegheny Ludlum Corporation.  Mr. Griffith received a B.A. from Pennsylvania State University.

David G. Pudelsky joined the Company in 2001 as the Vice President, Sales and Marketing for the North Branch, New Jersey facility.  In May 2005, Mr. Pudelsky became Vice President, Sales and Market Development.  Mr. Pudelsky’s prior experience includes Vice President of Commercial Products at J&L Specialty Steel Corporation, Marketing Director of Sheet Products at Allegheny Ludlum Corporation and Stainless Steel and Strip Product Manager at the Crucible Stainless Division of Colt Industries.  Mr. Pudelsky received a B.S. in Marketing and an M.B.A in Marketing and Finance from Bradley University.

Nicholas K. Cray joined the Company in 2004 as the Vice President of Operations for the Janesville, Wisconsin facility and became Vice President and General Manager - Janesville in December 2005.  From 2002 to 2004, Mr. Cray was Vice President of Operations at R.S. Owens & Company and from 2001 to 2002, Mr. Cray was Director of Technology of Reinforced Plastics at Werner Company.  Mr. Cray received a B.S. and M.S. in Mechanical Engineering from the Illinois Institute of Technology and an M.B.A. from Northwestern University.

Jeffrey J.  Nelb joined the Company in September 2006 as Vice President and General Manager - North Branch.  From 2003 to 2006, Mr. Nelb was Vice President, North American Operations for Dyno Nobel Inc, from 1997 to 2003, Mr. Nelb was Commercial Products Manager at The Ensign-Bickford Company and from 1993 to 1997, Mr. Nelb was Corporate Controller for The Ensign-Bickford Company.  Mr. Nelb received an A.B. in Economics from Dartmouth College and M.B.A. from the University of Michigan.

Harry R. (“Reggie”) Holstead joined the Company as Vice President and General Manager - Greenville upon the consummation of the Greenville Acquisition.  He has been Greenville’s plant manager for more than 15 years.  Additionally, Mr. Hostead has a background in human resources.  Prior to joining Greenville, he held various management positions at Coca-Cola, Litton Industries and Sherwin-Williams.

67

Audit Committee

The audit committee of RGCH LLC functions as the Company’s audit committee.  The audit committee consists of Messrs. Morningstar (Chairman), Pruellage and Spinola.  

Audit Committee Financial Expert

Neither the Company’s board of directors nor the board of directors of RGCH LLC has determined that any of the members of the RGCH audit committee is a financial expert.

Code of Ethics

The Company does not have a code of ethics, but will consider in fiscal 2008, whether adopting a code of ethics is appropriate.

Item 11. Executive Compensation.

Compensation Discussion and Analysis

Overview

RGCH LLC’s compensation committee has the responsibility for establishing, monitoring and implementing the Company’s compensation program.  The Company’s compensation program for the executives officers named in the Summary Compensation Table (“Executives”), is specifically designed to attract, retain, motivate and appropriately reward talented executives who can contribute significantly to the Company’s financial growth and success.  Base salary and incentive bonus payments are determined and paid annually and are designed to award current performance.  Incentive unit awards in RGCH LLC are designed to reward longer term performance.  The goal of the compensation committee is to motivate Executives through the Company’s compensation program to build value for stockholders over the long term.  

Objectives of Compensation Program

The compensation program’s primary objective is to increase stockholder value.  The compensation program attempts to achieve this goal by compensating Executives in a way to reinforce decisions and actions that will drive long-term sustainable growth.  

What the Company’s Compensation Program is Designed to Reward

The compensation committee focuses on long-term goals of the business and designs reward programs that recognize business achievements it believes are likely to promote sustainable growth.  The compensation committee believes compensation programs should reward Executives who take actions that are best for the long-term performance of the Company while delivering annual operating results.

The compensation committee combines this approach with an integrated performance management process that includes strategies, business planning, metrics, management routines, individual performance and rewards in order to closely link rewards to the interests of stockholders.  The compensation committee does take into consideration external market practices.

Management provides recommendations to the compensation committee regarding most compensation matters, including executive and director compensation.  However, the compensation committee does not delegate any of its functions to others in setting compensation.  The Company does not currently engage any consultant related to executive and/or director compensation matters.  

Executive Compensation Components

The principal components of compensation for the Executives are:

§

base salary;

§

performance-based cash incentive compensation; and

§

long-term equity incentive compensation;

68

Base Salary

Base salaries are important in attracting Executives and provide a secure base of cash compensation.  Increases are not preset and take into account the individual’s performance, responsibilities of the position, experience and the methods used to achieve results, as well as external market practices.  

Salary planning begins with a percentage guideline for increases, based on the rate of increase in the Consumer Price Index for Urban Wage earners and Clerical Workers, as complied by the U.S. Bureau of Labor Statistics for the preceding year, which is adjusted up or down for individual performance based on recommendations from the Mr. Kaplan, the Company’s President and Chief Executive Officer.  The guidelines are set after considering competitive market data, affordability and current salary levels, as appropriate.  At the end of the year, Mr. Kaplan evaluates each Executive’s performance in light of the individual objectives.  Base salary compensates each Executive for the primary responsibilities of his/her position and is set at levels the Company believes enables it to attract and retain talent.  The compensation committee relies to a large extent on Mr. Kaplan’s evaluations of each Executive’s performance. &n bsp;

Performance-Based Cash Incentive Compensation

The annual incentive bonus payments are paid in cash.  Actual awards are based on financial and individual performance.  

Financial Performance - Financial performance is determined at the end of the year based on business results versus preset annual financial performance goals and the Company’s strategic performance initiatives.  Depending on the Executive’s responsibilities, performance is set and measured at the corporate level or a combination of corporate or operating level, as appropriate.  

Individual Performance - Individual performance is determined based on his or her preset objectives.  The compensation committee may also take into account additional considerations that it deems fundamental.

Using these guidelines, the compensation committee evaluates the performance of each of the Company’s Executives.  Based on such evaluations, the compensation committee determines the annual incentive bonus payment for Mr. Kaplan and approves the recommendations of Mr. Kaplan regarding bonus awards for other Executives, in each case based on individual performance consistent with the Company’s general compensation philosophy.  

Long-term Equity Incentive Compensation

The long-term equity incentive that the compensation committee employs is the equity incentive plan consisting of common equity interests of RGCH LLC, in the form of Class B units, for issuance to members of the management, consultants and members of the board of directors of the Company, RGCH Corp. and RGCH LLC.  The Class B units are subject to vesting based on a combination of specified periods of continuing employment, performance-based targets established by the compensation committee or RGCH LLC’s board of directors and upon the occurrence of a change of control or a public equity offering given the achievement of certain target internal rates of return on CHP IV’s investment in the Company.  The long-term equity incentive compensation is intended to motivate the Executives to make stronger business decisions, improve financial performance, focus on both short-term and long-term objectives and encourage behavior that protects and enhances the long-term interests of the stockholders.  This is a significant portion of the total compensation package of the Executives and is an important retention tool.

Compensation for the Named Executives Officers

During fiscal 2007, the Executives were party to employment agreements with the Company governing the terms of their compensation.  Pursuant to the agreement, annual bonus award amounts are the responsibility of the compensation committee under a plan established by the Company and approved by the board of directors.  The targets for the bonus awards are based on EBITDA, Working Capital and Personal Objectives.  

In early fiscal 2006, the compensation committee and board of directors reviewed Mr. Kaplan’s goals for fiscal 2007.  In February 2007, the compensation committee reviewed Mr. Kaplan’s performance against those goals using actual fiscal 2007 results and the other criteria in the employment agreement and decided on Mr. Kaplan’s performance-based incentive.

The compensation committee reviewed and approved Mr. Kaplan’s recommendations for the other Executives’ performance-based incentive.

69

Compensation Committee Report

The compensation committee oversees the Company’s executive compensation program on behalf of the board of directors.  In fulfilling its oversight responsibilities, the compensation committee reviewed and discussed with Company management the Compensation Discussion and Analysis set forth in this Annual Report on Form 10-K.  Based on such review and discussions, the compensation committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.  

COMPENSATION COMMITTEE

John K. Castle

John Morningstar

Samuel Urcis

Summary Compensation Table

The following table sets forth the Company’s information regarding compensation for the last three fiscal years awarded to, earned by, or paid to the Company’s chief executive officer and its five other most highly compensated executive officers (“Named Executive Officers”) at the end of fiscal 2007, excluding any pre-acquisition equity based compensation and bonuses payable upon the consummation of the Acquisition:

									All
									Other
Name and Principal Position			Year		Salary		Bonus(1)		Compensation			Total
Harley B. Kaplan			2007	$	424,000	$	451,000	$	62,407	(2)	$	937,407
Chief Executive Officer and President			2006		400,000		440,000		75,984	(2)		915,984
	(Principal Executive Officer)		2005		338,462		358,333		52,524	(2)		749,319
Barry C. Nuss(3)			2007		216,827		250,000		130,455	(4)		597,282
Chief Financial Officer
	(Principal Financial Officer)
C. Michel Griffith, Jr.			2007		241,500		241,500		18,058	(5)		501,058
Vice President Sales			2006		230,000		236,500		14,883	(5)		481,383
			2005		215,000		215,000		12,832	(5)		442,832
David G. Pudelsky			2007		236,087		150,000		29,900	(6)		415,987
Vice President, Sales and Market Development			2006		219,270		236,500		27,338	(6)		483,108
			2005		189,540		135,195		30,314	(6)		355,049
Nicholas K. Cray			2007		215,000		200,000		10,224	(7)		425,224
Vice President and General Manager  - Janesville			2006		168,846		186,083		11,873	(7)		366,802
			2005		160,668		150,000		104,699	(7)		415,367
Jeffrey J. Nelb(8)			2007		98,769		100,000		86,182	(9)		284,951
Vice President and General Manager - North
		Branch

(1)

Bonus amounts presented are reported for the fiscal year in which they are earned, though they may have been paid in the following fiscal year.

(2)

All other compensation for Mr. Kaplan is comprised of the following: in fiscal 2007,  $10,224 of contributions made by the Company under a 401(k) profit sharing plan, $43,420 for a housing allowance and $8,763 in compensation for eligible dependents participating in the Company’s college reimbursement scholarship program; in fiscal 2006, $9,674 of contributions made by the Company under a 401(k) profit sharing plan, $38,813 for relocation costs and a housing allowance, $22,288 for eligible dependents participating in the Company’s college reimbursement scholarship program and $5,209 for country club membership dues; and in fiscal 2005, $33,700 for relocation costs and a housing allowance, $13,624 for eligible dependents participating in the Company’s college reimbursement scholarship program and $5,200 for country club membership dues.

(3)

Mr. Nuss joined the Company in April 2006 at a base annual salary of $275,000.

70

(4)

All other compensation for Mr. Nuss in fiscal 2007 is comprised of relocation costs.

(5)

All other compensation for Mr. Griffith is comprised of the following: in fiscal 2007, $10,224 of contributions made by the Company under a 401(k) profit sharing plan and $7,834 for country club membership dues; in fiscal 2006, $9,674 of contributions made by the Company under a 401(k) profit sharing plan and $5,209 for country club membership dues; and in fiscal 2005, $7,632 of contributions made by the Company under a 401(k) profit sharing plan and $5,200 for country club membership due.

(6)

All other compensation for Mr. Pudelsky is comprised of the following: in fiscal 2007, $11,000 of contributions made by the Company under a 401(k) profit sharing plan and $18,900 for country club membership dues; in fiscal 2006, $10,500 of contributions made by the Company under a 401(k) profit sharing plan and $16,838 for country club membership dues; and in fiscal 2005, $10,250 of contributions made by the Company under a 401(k) profit sharing plan and $20,064 for country club membership due.

(7)

All other compensation for Mr. Cray is comprised of the following: in fiscal 2007, $10,224 of contributions made by the Company under a 401(k) profit sharing plan; in fiscal 2006, $9,674 of contributions made by the Company under a 401(k) profit sharing plan and $2,199 of relocation costs; and in fiscal 2005, $104,699 of relocation costs.

(8)

Mr. Nelb joined the Company in September 2006 at a base annual salary of $240,000.

(9)

All other compensation for Mr. Nelb in fiscal 2007 is comprised of a signing bonus.

Grants of Plan-Based Awards

The following table provides information concerning grants of equity incentive awards to the Company’s Named Executive Officers in fiscal 2007.

		Estimated Future Payouts Under
		Equity Incentive Plan Awards (1)
						Grant Date
						Fair Value
	Grant					of Stock
Name	Date	Threshold	Target	Maximum		Awards(2)
Harley B. Kaplan	February 7, 2006	6,454	25,817	25,817	$	199,762
Barry C. Nuss	April 17, 2006	1,844	7,376	7,376		61,418
C. Michael Griffith, Jr.	February 7, 2006	1,844	7,376	7,376		57,075
David G. Pudelsky	March 3, 2006	1,844	7,376	7,376		56,438
Nicholas K. Cray	March 3, 2006	1,844	7,376	7,376		56,438
Jeffrey J. Nelb	September 28, 2006	1,383	5,532	5,532		50,157

(1)

The threshold amount represents the number of units that vest based on specified periods of continuing employment, generally 5 years.  The remaining units vest if annual performance targets, established by the compensation committee or RGCH LLC’s board of directors, are achieved or if a change in control or a public equity offering occurs given the achievement of certain target internal rates of return on CHP IV’s investment in the Company.

(2)

The grant date fair value was determined in accordance with SFAS No. 123R, “Share-Based Payments.”

71

Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table

The following is a discussion of material factors necessary to an understanding of the information disclosed in the Summary Compensation Table and the Grants of Plan-Based Awards Table.

Employment Agreements

On February 7, 2006, the Company entered into an employment agreement with Mr. Kaplan to serve as the president and chief executive officer of the Company, RGCH Corp. and RGCH LLC.  The initial term of Mr. Kaplan’s employment agreement is three years, unless earlier terminated, and will renew for successive one-year terms after that, unless either party provides notice of non-renewal in accordance with the agreement.  Mr. Kaplan receives an initial base salary of $424,000, subject to increase, as determined by the board of directors of the RGCH LLC, and an annual bonus, as determined by the compensation committee of the board of directors of RGCH LLC.  The annual bonus opportunity is expected to be no less favorable than the bonus opportunity provided to Mr. Kaplan under the Company’s pre-Acquisition bonus plan.  Mr. Kaplan is entitled, to the extent eligible, to participate in all of the Company’s benefit plans which ma y be available to other senior executives, receive the same perquisites as he was entitled to receive as of the date of the Stock Purchase Agreement and receive a gross up payment to account for any incremental tax liability incurred by him with respect to the perquisites.

Upon a termination of Mr. Kaplan’s employment by the Company without “cause,” as defined in the employment agreement, or a termination by Mr. Kaplan for “good reason,” as defined in the employment agreement, Mr. Kaplan will be entitled to the following: his accrued but unpaid base salary and benefits to the date of termination; accrued and unpaid vacation, if any, to the date of termination; continued base salary for 24 months after the date of termination, payable in monthly installments, a prorated bonus for the year of his termination, and continued medical and dental coverage for 24 months after the date of termination.  In the event of a termination of Mr. Kaplan’s employment by the Company for “cause,” by Mr. Kaplan without “good reason,” or due to Mr. Kaplan’s death or disability or election not to renew the term of his employment, Mr. Kaplan would only be entitled to accrued amounts owed to him as of the date of the termination.  In the event of a termination of Mr. Kaplan’s employment due to the Company’s election not to renew the term of his employment, Mr. Kaplan would, additionally, be entitled to receive continued base salary for 12 months after the date of termination, payable in monthly installments.

The agreement contains customary confidentiality, nondisparagement, non-solicitation and no-hire provisions and requires Mr. Kaplan, for 24 months after the date of his termination for any reason, to adhere to non-competition and non-solicitation restrictions.

On April 17, 2006, the Company entered into an employment agreement with Mr. Nuss to serve as the chief financial officer of the Company, RGCH Corp. and RGCH LLC.  The initial term of Mr. Nuss’ employment agreement is two years, unless earlier terminated, and will renew for additional two-year periods unless either party provides notice of non-renewal in accordance with the agreement.  Mr. Nuss receives an initial base salary of $275,000 and an annual bonus of up to 100% of the base salary under a plan established by the Company or the board of directors of RGCH LLC or a committee thereof.  Mr. Nuss is entitled, to the extent eligible, to participate in all of the Company’s benefit plans which may be available to other senior executives.

Upon a termination of Mr. Nuss’ employment by the Company without “cause,” as defined in the employment agreement, or a termination by Mr. Nuss for “good reason,” as defined in the employment agreement, Mr. Nuss will be entitled to the following: continued base salary for 12 months after the date of termination, payable in monthly installments; continued medical and dental coverage for 12 months after the date of termination; his accrued but unpaid base salary and benefits to the date of termination; and accrued and unpaid vacation if any, to the date of termination.  In the event of a termination of Mr. Nuss’ employment by the Company for “cause,” by Mr. Nuss without “good reason,” or due to Mr. Nuss’ death or disability, Mr. Nuss would be entitled to receive his accrued but unpaid base salary and benefits to the date of termination.

Mr. Nuss is also subject to certain nondisparagement, confidentiality, non-solicitation, no-hire and non-competition covenants pursuant to the employment agreement.

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On February 7, 2006, the Company entered into an employment agreement with Mr. Griffith to serve as the vice president sales of the Company, RGCH Corp. and RGCH LLC.  The initial term of Mr. Griffith’s employment agreement is two years, unless earlier terminated, and will renew for successive two-year terms unless either party provides notice of non-renewal in accordance with the agreement.  Mr. Griffith receives an initial base salary of $241,500, and an annual bonus, as determined by the compensation committee of the board of directors of RGCH LLC.  Mr. Griffith is entitled, to the extent eligible, to participate in all of the Company’s benefit plans which may be available to other senior executives, receive the same perquisites as he was entitled to receive as of the date of the Stock Purchase Agreement.

Upon a termination of Mr. Griffith’s employment by the Company without “cause,” as defined in the employment agreement, or a termination by Mr. Griffith for “good reason,” as defined in the employment agreement, Mr. Griffith will be entitled to the following: his accrued but unpaid base salary and benefits to the date of termination; accrued and unpaid vacation if any, to the date of termination; continued base salary for 12 months after the date of termination, payable in monthly installments; and continued medical and dental coverage for 12 months after the date of termination.  In the event of a termination of Mr. Griffith’s employment by the Company for “cause,” by Mr. Griffith without “good reason,” or due to Mr. Griffith’s death or disability, Mr. Griffith would only be entitled to accrued but unpaid base salary and benefits to the date of the termination.

Mr. Griffith is also subject to certain nondisparagement, confidentiality, non-solicitation, no-hire and non-competition covenants pursuant to the employment agreement.

Each of Messrs. Pudelsky, Cray and Nelb is party to an employment agreement under which each is entitled to an initial base salary and an annual bonus of up to 100% of the base salary under a plan established by the Company or the board of directors of RGCH LLC or a committee thereof.  The initial term of these employment agreements is for one year, unless earlier terminated, and will renew for additional one-year periods unless either party provides notice of non-renewal in accordance with the agreement.  Messrs. Pudelsky, Cray and Nelb is entitled, to the extent eligible, to participate in all of the Company’s benefit plans which may be available to other senior executives.

Upon a termination of employment by the Company without “cause,” as defined in the employment agreement, or a termination by the employee for “good reason,” as defined in the employment agreement, the employee will be entitled to the following: continued base salary for 12 months after the date of termination, payable in monthly installments; continued medical and dental coverage for 12 months after the date of termination; his accrued but unpaid base salary and benefits to the date of termination; and accrued and unpaid vacation if any, to the date of termination.  In the event of a termination of employment by the Company for “cause,” by the employee without “good reason,” or due to an employee’s death or disability, the employee would be entitled to receive his accrued but unpaid base salary and benefits to the date of termination.

Each of Messrs. Pudelsky, Cray and Nelb is also subject to certain nondisparagement, confidentiality, non-solicitation, no-hire and non-competition covenants pursuant to the employment agreement.

Equity Incentive Units

RGCH LLC has allocated approximately 10% of the common equity interests of RGCH LLC, in the form of Class B Units, as incentive based grants for issuance to members of the Company’s management, consultants and members of the board of directors.

The Class B units are subject to vesting based on a combination of specified periods of continuing employment, performance-based targets established by the compensation committee or RGCH LLC’s board of directors and upon the occurrence of a change of control or a public equity offering given the achievement of certain target internal rates of return on CHP IV’s investment in the Company.  The Class B Units are also subject to a right of repurchase in the event of an employee’s termination of employment with us.

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Outstanding Equity Awards at Fiscal Year End

The following table provides information concerning equity incentive awards for the Company’s Named Executive Officers as of January 31, 2007.

			Equity
	Equity		Incentive
	Incentive		Plan Awards:
	Plan Awards:		Market or
	Number of		Payout Value
	Unearned		of Unearned
	Shares, Units		Shares, Units
	or Other Rights		or Other Rights
	That Have		That Have
Name	Not Vested(1)		Not Vested(2)
Harley B. Kaplan	25,817	$	2,490,317
Barry C. Nuss	7,376		711,518
C. Michael Griffith, Jr.	7,376		711,518
David G. Pudelsky	7,376		711,518
Nicholas K. Cray	7,376		711,518
Jeffrey J. Nelb	5,532		533,639

(1)

Units are subject to vesting based on a combination of specified periods of continuing employment, performance-based targets established by the compensation committee or RGCH LLC’s board of directors and upon the occurrence of a change of control or a public equity offering given the achievement of certain target internal rates of return on CHP IV’s investment in the Company.

(2)

Market value for the units was determined based on the estimated fair value of the Company (assuming achievement of certain target internal rates of return on CHP IV’s investment in the Company) as of January 31, 2007.

Potential Payments Upon Termination or Change in Control

The table and discussion below discloses the amount of compensation and/or other benefits due to each of the Named Executive Officers: (a) in the event of a change in control, and (b) upon the termination of the Named Executive Officer’s employment, including in connection with a change in control or death or disability.  The amounts shown assume that such change in control occurred on, or that such termination was effective as of, January 31, 2007.  Thus, the amounts shown below include amounts earned through such time and are estimates of the amounts that would be paid out to the Named Executive Officers upon the occurrence of a change in control or their termination, as applicable.  The actual amounts to be paid out can only be determined at the time of a change in control or the Named Executive Officer’s separation from the Company.

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			Termination						Election
			Without		Termination				Not to
			Cause or		for Cause				Renew the
			for Good		or Without		Death or		Term of		Change in
Name			Reason		Good Reason		Disability		Employment		Control
Harley B. Kaplan											< /P>
	Salary and vacation	$	848,000	$	-	$	-	$	424,000	$	-
	Medical and dental benefits		17,900		-		-		-		-
	Purchase of units(1)(2)(3)		311,515		258		155,887		311,515		2,490,317
	Total	$	1,177,415	$	258	$	155,887	$	735,515	$	2,490,317
Barry C. Nuss
	Salary and vacation	$	275,000	$	-	$	-	$	-	$	-
	Medical and dental benefits		8,950		-		-		-		-
	Purchase of units(1)(2)(3)		89,004		74		44,539		89,004		711,518
	Total	$	372,954	$	74	$	44,539	$	89,004	$	711,518
C. Michael Griffith, Jr.
	Salary and vacation	$	260,077	$	-	$	-	$	-	$	-
	Medical and dental benefits		8,950		-		-		-		-
	Purchase of units(1)(2)(3)		89,004		74		44,539		89,004		711,518
	Total	$	358,031	$	74	$	44,539	$	89,004	$	711,518
David G. Pudelsky
	Salary and vacation	$	231,393	$	-	$	-	$	-	$	-
	Medical and dental benefits		3,014		-		-		-		-
	Purchase of units(1)(2)(3)		89,004		74		44,539		89,004		711,518
	Total	$	323,411	$	74	$	44,539	$	89,004	$	711,518
Nicholas K. Cray
	Salary and vacation	$	227,404	$	-	$	-	$	-	$	-
	Medical and dental benefits		8,950		-		-		-		-
	Purchase of units(1)(2)(3)		89,004		74		44,539		89,004		711,518
	Total	$	325,358	$	74	$	44,539	$	89,004	$	711,518
Jeffrey J. Nelb
	Salary and vacation	$	240,000	$	-	$	-	$	-	$	-
	Medical and dental benefits		8,197		-		-		-		-
	Purchase of units(1)(2)(3)		66,753		55		33,404		66,753		533,639
	Total	$	314,950	$	55	$	33,404	$	66,753	$	533,639

(1)

For a termination of employment without cause or by the employee with good reason, 50% of the nonvested units that are subject to specified periods of continuing employment will immediately vest.  For a termination of employment due to death or disability, 25% of the nonvested units that are subject to specified periods of continuing employment will immediately vest.

(2)

For a termination of employment without cause, the purchase price of the vested units shall be the market value as determined in good faith by RGCH LLC’s board of directors.  For a termination of employment for cause, the purchase price of the vested units shall be the lesser of the original purchase price by the Named Executive Officer or market value as determined in good faith by RGCH LLC’s board of directors.  For a termination of employment for any reason, the purchase price of the nonvested units will be the original purchase price paid by the Named Executive Officer.  No units were vested at January 31, 2007.  The original purchase price for all units was $0.01 per unit.  

(3)

Market value for the units was determined based on the estimated fair value of the Company (assuming achievement of certain target internal rates of return on CHP IV’s investment in the Company) as of January 31, 2007.

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Compensation of Directors

Members of RGCH LLC’s board of directors who are not employees of the Company or Castle Harlan receive a fee of $7,500 for each meeting they attend.  In addition, all members of the Company’s, RGCH Corp.’s and RGCH LLC’s board of directors are reimbursed for actual expenses incurred in connection with attendance at meetings of the respective boards on which they serve and of committees thereof.

The following table sets forth the Company’s information regarding compensation for fiscal 2007 awarded to, earned by, or paid to RGCH LLC’s board of directors at the end of fiscal 2007:

		Fees
		Earned
		or
		Paid in
Name		Cash
Samuel Urcis	$	22,500
Frank Spinola		22,500

Each of Messrs. Urcis and Spinola hold equity interests in RGCH LLC.  See Item 12 of this Form 10-K.

Compensation Committee Interlocks and Insider Participation

None of the Company’s executive officers has a relationship that would constitute an interlocking relationship with executive officers or directors of another entity or insider participation in compensation decisions.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

All of the Company’s issued and outstanding capital stock is held by RGCH Corp.  RGCH Corp. is a direct, wholly- owned subsidiary of RGCH LLC and approximately 96% and 3%, respectively, of the equity interests of RGCH LLC are owned by CHP IV and its affiliates, and certain members of management.

The following table sets forth information with respect to the beneficial ownership of RGCH LLC’s equity interests by:

§

each person who is known by the Company to beneficially own 5% or more of RGCH LLC’s outstanding equity;

§

each member of RGCH LLC’s board of directors;

§

each of the Company’s executive officers named in the table under “Summary Compensation Table;” and

§

all members of the RGCH LLC’s board of directors and the Company’s executive officers as a group.

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Beneficial ownership is determined in accordance with the rules of the SEC.  Accordingly, the following table does not reflect certain Class B management incentive units that are subject to vesting.  To the Company’s knowledge, each of the holders of units of ownership interests listed below has sole voting and investment power as to the units owned unless otherwise noted.  The holders of Class A units will not ordinarily have the right to vote on matters to be voted on by unitholders.  Holders of Class A and Class B units will also have different rights with respect to distributions.

			Percentage
		Number of	of Total		Number of	Percentage of
		Class A	Class A		Class B	Total Class B
Name and Address of Beneficial Owner		Units	Units (%)		Units	Units (%)
Castle Harlan Partners IV, LP (1)(2)		651,484	95.7	%	651,484	95.5	%
John K. Castle(1)(3)		651,484	95.7		651,484	95.5
Harley B. Kaplan(1)		8,999	1.3		8,999	1.3
Barry C. Nuss(1)		999	*		999	*
C. Michel Griffith, Jr (1)		4,499	*		4,499	*
David G. Pudelsky (1)		999	*		999	*
Nicholas K. Cray (1)		299	*		299	*
Jeffrey J. Nelb(1)		1,499	*		1,499	*
William M. Pruellage(1)		-	-		-	-
John Morningstar(1)		-	-		-	-
Samuel Urcis(1)		2,499	*		3,999	*
Frank Spinola(1)		499	*		999	*
All directors and executive officers as a group (including
	those listed above)	671,776	98.7	%	673,776	98.7	%

*

Denotes beneficial ownership of less than 1% of the class of units.

(1)

The address for CHP IV and Messrs. Castle, Pruellage and Morningstar is c/o Castle Harlan, Inc., 150 East 58th Street, New York, New York 10155.  The address for Mr. Kaplan, the Company’s other executive officers named in the table and Messrs. Urcis and Spinola is 2505 Foster Avenue, Janesville, Wisconsin 53547.

(2)

Includes units of ownership interests held by related entities and persons, all of which may be deemed to be beneficially owned by CHP IV.  CHP IV disclaims beneficial ownership of these units.

(3)

John K. Castle, a member of RGCH LLC’s board of directors, is the controlling stockholder of Castle Harlan Partners IV, G.P., Inc., the general partner of the general partner of CHP IV, the direct parent of RGCH LLC, and as such may be deemed a beneficial owner of the units of the buyer parent owned by CHP IV and its affiliates.  Mr. Castle disclaims beneficial ownership of all units in excess of his proportionate partnership share of CHP IV.

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Item 13. Certain Relationships and Related Transactions, and Director Independence.

Management Agreement

The Company has entered into a management agreement with Castle Harlan, as manager, under which Castle Harlan provides business and organizational strategy, financial and investment management, advisory, merchant and investment banking services to the Company, RGCH Corp. or RGCH LLC.  As compensation for those services, the Company pays to Castle Harlan (i) for services rendered during the first year of the term of the agreement, a management fee equal to 3% of the aggregate equity contributions made upon closing of the Acquisition by CHP IV and its affiliates (including their limited partners), which was paid in the amount of approximately $2.0 million on the date of the closing of the Acquisition and was amortized to selling, general and administrative expenses within the fiscal 2007 consolidated statements of operations; and (ii) for services rendered after the first full year of the agreement, an annual management fee equal to 3% of the aggregate equity contributions made by CHP IV and its affiliates (including their limited partners), or $2.0 million payable quarterly in advance.  Under the management agreement, the Company paid Castle Harlan, for services rendered in connection with the Transactions, a one-time transaction fee on the date of the closing of the Acquisition equal to 1% of the aggregate equity contributions made on the closing of the Acquisition by CHP IV and its affiliates (including their limited partners) in the amount of approximately $0.8 million.  In addition, if at any time after the closing of the Acquisition, CHP IV or its affiliates (including their limited partners) make any additional equity contributions to any of the Company, RGCH Corp. or RGCH LLC, the Company will pay Castle Harlan an annual management fee equal to 3% of each such equity contribution.  The Company will also pay or reimburse Castle Harlan for all out-of-pocket fees and expenses incurred by Castle Harlan and any advisors, consultants, leg al counsel and other professionals engaged by Castle Harlan to assist in the provision of services under the management agreement.

The management agreement is for an initial term expiring December 31, 2013 and is subject to renewal for consecutive one-year terms unless terminated by Castle Harlan or the Company upon 90 days notice prior to the expiration of the initial term or any annual renewal.  The Company also indemnifies the manager, its officers, directors and affiliates from any losses or claims suffered by them as a result of services they provide the Company, RGCH Corp. or RGCH LLC.  The right to receive such management fees will not be subordinated to the notes in the event of a bankruptcy, insolvency or reorganization and will not be subject to blockage if there is a default under the indenture governing the notes.

Management Equity

In connection with the acquisition, certain members of management, including the Company’s executive officers, made an equity investment in the aggregate amount of approximately $1.6 million in RGCH LLC, through the exchange of shares of the Company’s capital stock held by management.  After the Acquisition, new or promoted members of the Company management purchased equity units of RGCH LLC.

RGCH LLC has allocated approximately 10% of the common equity interests of the RGCH LLC for issuance to members of the Company’s management, consultants and members of the board of directors.  See “Executive Compensation - Equity Incentive Units.”

Related Party Transaction Approval Policy

The Company does not have a policy for the approval of related party transactions, but will consider in fiscal 2008, whether adopting such a policy is appropriate.

Reimbursement and Cooperation Agreement

The Company, RGCH Corp. and CHP IV entered into a reimbursement and cooperation agreement which provides for the Company and RGCH Corp., jointly and severally, to reimburse CHP IV for any payments made by CHP IV pursuant to the earnout, plus interest accruing at a rate of 10% per annum, compounded annually, until payment is due.  The agreement also grants participation and consent rights to CHP IV with respect to the process for determining, and resolving any disputes with the sellers’ representative, with respect to the amount of any earnout payment that may be due under the Stock Purchase Agreement and with respect to any waivers or amendments of, or claims under, the Stock Purchase Agreement relating to such determination.

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Item 14. Principal Accounting Fees and Services.

The audit committee of the board of directors appointed the firm of Deloitte & Touch LLP (“D&T”), independent registered public accounting firm, to audit the Company’s books, records and accounts for the fiscal years ended January 31, 2007 and 2006.

The following table presents aggregate fees for professional services billed by D&T to the Company for the fiscal years ended January 31:

			2007		2006
Audit fees(1)		$	383,551	$	214,939
Audit-related fees(2)			971,475		-
Tax fees			-		-
All other fees			-		-
	Total fees	$	1,355,026	$	214,939

(1)

For fiscal 2007, audit fees consist of fees billed to the Company by D&T for professional services for the audit of the Company’s financial statements filed with the Company’s Annual Report on Form 10-K, review of the financial statements included in the Company’s Quarterly Reports on Form 10-Q and review of the Company’s registration statement on Form S-4.  For fiscal 2006, audit fees consist of fees billed to the Company by D&T for professional services for the audit of the Company’s financial statements.

(2)

Audit related fees consist of fees billed to the Company by D&T for professional services for assurance and related services that are reasonably related to the audit or review of the Company’s financial statements for fiscal 2007.  These services include due diligence procedures in connection with the Acquisition and Greenville Acquisition.    

Pre-Approval Policies and Procedures

The Audit Committee approves all services rendered by D&T to the Company and approves all fees paid to D&T.  The audit committee requires that management obtain the prior approval of the audit committee for all audit and permissible non-audit services to be provided by D&T.  The audit committee considers and approves anticipated audit and permissible non-audit services to be provided by D&T during the year and estimated fees.  The audit committee will not approve non-audit engagements that would violate rules of the SEC or impair the independence of D&T.  In fiscal year 2007, the audit committee pre-approved 100% of the services performed by D&T relating to “audit-related fees,” “tax fees” and “all other fees.”

.PART IV

Item 15. Exhibits.

(a)

The following documents are filed as part of this Annual Report on Form 10-K:

(1)

Financial Statements

A list of the consolidated financial statements, related notes and report of independent registered public accounting firm is set forth in Item 8 of this Annual Report on Form 10-K.

(2)

Financial Statement Schedules

Schedule II - Valuation and Qualifying Accounts, filed as exhibit 99.1.

(3)

Exhibit Index

EXHIBIT
NUMBER	DESCRIPTION
1.1**	Purchase Agreement, dated as of February 1, 2006, by and among RathGibson, Inc., Bear, Stearns & Co. Inc. and Wachovia Capital Markets, LLC.
3.1**	Certificate of Incorporation of RathGibson, Inc.

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3.2**	Bylaws of RathGibson, Inc.
3.3**	Certificate of Incorporation of Greenville Tube Company.
3.4**	Bylaws of Greenville Tube Company.
4.1**	Indenture dated February 7, 2006 by and among RathGibson, Inc. and The Bank of New York, as Trustee.
4.2**	Form of 11.25% Senior Notes due 2014 (included in Exhibit 4.1).
4.3**	Registration Rights Agreement, dated as of February 7, 2006, by and among RathGibson, Inc., Bear, Stearns & Co. Inc. and Wachovia Capital Markets, LLC.
4.4**	Form of Guarantee (included in Exhibit 4.1).
4.5**	First Supplemental Indenture dated August 15, 2006 by and among RathGibson, Inc., Greenville Tube Company and The Bank of New York, as Trustee.
10.1**	Stock Purchase Agreement, dated as of December 6, 2005, by and among RathGibson, Inc., the individuals and entities listed as ‘‘Sellers’’ on the signature pages attached thereto and RGCH Holdings Corp., as successor to RCCH Holdings LLC.
10.2**	Credit Agreement, dated as of February 7, 2006, by and among RathGibson, Inc., the other persons designated as ‘‘Credit Parties’’ on the signature pages thereof, the financial institutions who are or thereafter become parties to the Agreement as Lenders, and General Electric Capital Corporation, as the initial L/C Issuer and as Agent.
10.3**	Security Agreement, dated as of February 7, 2006, among RathGibson, Inc. and RGCH Holdings Corp. and General Electric Capital Corporation, individually and in its capacity as Agents for Lenders.
10.4**	Pledge Agreement, dated as of February 7, 2006, between RGCH Holdings Corp. and General Electric Capital Corporation in its capacity as Agent for Lenders.
10.5**	Trademark Security Agreement, dated as of February 7, 2006, by RathGibson, Inc., RGCH Holdings Corp., in favor of General Electric Capital Corporation, in its capacity as Agents for Lenders.
10.6**	Employment Agreement, dated as of February 7, 2006, by and among RathGibson, Inc., RGCH Holdings Corp. and RGCH Holdings LLC and Harley B. Kaplan.
10.7**	Employment Agreement, dated as of February 7, 2006, by and among RathGibson, Inc., RGCH Holdings Corp. and RGCH Holdings LLC and C. Michel Griffith.
10.8**	Management Agreement, dated as of February 7, 2006, by and among Castle Harlan, Inc., RathGibson, Inc., RGCH Holdings Corp. and RGCH Holdings LLC.
10.9**	Employment Agreement, dated as of April 17, 2006, by and among RathGibson, Inc., RGCH Holdings Corp. and RGCH Holdings LLC and Barry Nuss.
10.10**	Reimbursement and Cooperation Agreement dated as of February 6, 2006, by and among RGCH Holdings Corp., RathGibson, Inc. and Castle Harlan Partners IV, L.P.
10.11**	Amendment No. 1 to Credit Agreement, dated as of August 15, 2006, by and among RathGibson, Inc., the other persons designated as "Credit Parties" on the signature pages thereof, the financial institutions who are or thereafter become parties to the Agreement as Lenders, and General Electric Capital Corporation, as the initial L/C Issuer and as Agent.

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10.12**	Stock Purchase Agreement, dated as of August 15, 2006, by and among RathGibson, Inc., Greenville Tube Company and the Sellers named therein.
10.13*	Employment Agreement, dated as of March 3, 2006, by and among RathGibson, Inc., RGCH Holdings Corp. and RGCH Holdings LLC and David Pudelsky.
10.14*	Employment Agreement, dated as of March 3, 2006, by and among RathGibson, Inc., RGCH Holdings Corp. and RGCH Holdings LLC and Nick Cray.
10.15*	Leasehold Mortgage, Security Agreement, Assignment of Leases and Rents, Financing Statement and Fixture Filing, dated December 22, 2006, by RathGibson, Inc., Leasehold Mortgagor, to General Electric Capital Corporation, as Agent and Leasehold Mortgagee.
10.16*	Lease Agreement, dated December 22, 2006, by and between AGNL RathGibson L.L.C., as Landlord, and RathGibson, Inc., as Tenant.
10.17*	Amended and Restated Employment Agreement, dated as of April 25, 2007, by and among RathGibson, Inc., RGCH Holdings Corp. and RGCH Holdings LLC and Jeffrey J. Nelb.
12*	Computation of Ratio of Earnings to Fixed Charges.
21*	Subsidiary of the Company.
23.1*	Consent of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP.
23.2*	Consent of Independent Registered Public Accounting Firm - Deloitte & Touche LLP.
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.
99.1*	Schedule II - Valuation and Qualifying Accounts - Fiscal Years Ended January 31, 2007, 2006 and 2005.

*   Filed herewith.

** Incorporated herein by reference to an exhibit of the Company’s Registration Statement on Form S-4 (File No. 333-134875).

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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:  April 25, 2007
/s/ Harley B. Kaplan
Harley B. Kaplan
President and Chief Executive Officer
(Authorized Signatory and
	Principal Executive Officer)

Date:  April 25, 2007
/s/ Barry C. Nuss
Barry C. Nuss
Chief Financial Officer
(Authorized Signatory and
	Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Harley B. Kaplan	President and Chief Executive Officer and Director	April 25, 2007
Harley B. Kaplan

82

EX-10

_

EX-10

EXHIBIT 10.14

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT ("Agreement") dated as of March 3, 2006 among RathGibson, Inc. (the "Company") and its affiliated companies, RGCH Holdings Corp. ("Holdings") and RGCH Holdings LLC (the "LLC"), and Nick Cray (the "Employee") (together, the "Parties").

WHEREAS, the Parties wish to establish the terms of the Employee's employment with the Company.

Accordingly, the Parties agree as follows:

1.

Employment and Acceptance.  The Company, Holdings and the LLC shall employ the Employee, and the Employee shall accept employment, subject to the terms of this Agreement, on the "Closing Date," as defined under the Stock Purchase Agreement by and among the Company, the LLC, and the current holders of all capital stock of the Company, dated as of December 6, 2005 (the "Effective Date").

2.

Term.  Subject to earlier termination pursuant to Section 5 of this Agreement, the employment relationship hereunder shall continue from the Effective Date until the first anniversary of the Effective Date (the "Initial Term") and shall extend for successive one (1) year terms thereafter, unless any Party shall have given ninety (90) days written notice to the other, prior to the expiration of the Initial Term or extended term, that it does not wish to extend the Term.  As used in this Agreement, the "Term" shall refer to the period beginning on the Effective Date and ending on the date the Employee's employment terminates in accordance with this Section 2 or Section 5.  In the event that the Employee's employment terminates, the Company's obligation to continue to pay all Base Salary (defined below in Section 4.1), as adjusted, "Bonus" (defined below in Section 4.2), and other benefits then accrued shall terminate except as may be provided for in Section 6 of this Agreement.

3.

Duties and Title.  

3.1

Title.  The Employee shall serve in the capacity of Vice President of Operations of the Company, Holdings, and the LLC, and shall report to the Chief Executive Officer of the Company.  

3.2

Duties.  The Employee will have the same authority and responsibilities as he held in his position as Vice President of Operations of the Company prior to the Effective Date and will perform such duties customarily performed by a vice president of operations of a company in similar lines of business as the Company, including such duties as may be assigned to the Employee by the Board of Directors of the LLC (the "Board") or the Chief Executive Officer of the Company.  The Employee will devote all his full business time and attention to the performance of such duties and to the promotion of the business and interests of the Company, Holdings, the LLC, and their subsidiaries.  This Section 3.2, however, shall not prevent the Employee, during the Term, from serving as a member of the board of directors of civic and charitable organizations, provided that such membership does not materially interfere

10073273.1

with the Employee's performance of his duties under this Agreement or conflict with Section 7.3 of this Agreement.  

4.

Compensation and Benefits by the Company.  As compensation for all services rendered pursuant to this Agreement, the Company shall provide the Employee the following during the Term:

4.1

Base Salary.  The Company will pay to the Employee an annual base salary of  $215,000, payable in accordance with the customary payroll practices of the Company ("Base Salary"), less applicable withholdings for federal, state, and local taxes.  The Board will review annually the Employee's Base Salary for upward adjustment.  

4.2

Bonus.  The Employee shall be eligible to receive an annual bonus ("Bonus") under a plan established by the Company in the amount determined by the compensation committee of the Board.  

4.3

Participation in Employee Benefit Plans.  The Employee shall be entitled, if and to the extent eligible, to participate in all of the applicable benefit plans of the Company, pursuant to the terms of such plans.  Notwithstanding the foregoing, the Employee shall not, at any time, receive any personal loans from the Company pursuant to any benefit plan or otherwise.  

4.4

Vacation.  The Employee shall be entitled to twenty (20) days of paid vacation each fiscal year of the Company.  The carry-over of vacation days shall be in accordance with the vacation policy set forth in the Rath Manufacturing Co., Inc. Employee Handbook dated May 2005.  The Employee shall not be entitled to payment for unused vacation days upon the termination of his employment except as set forth in Section 6.2 below.  

4.5

Expense Reimbursement.  The Employee shall be entitled to receive reimbursement for all appropriate business expenses incurred by him in connection with his duties under this Agreement in accordance with the policies of the Company as in effect from time to time.

5.

Termination of Employment.

5.1

Death.  The Employee's employment hereunder shall terminate immediately upon his death.  

5.2

Disability.  The Company may immediately terminate the Employee's employment due to his "Disability."  For purposes of this Agreement, "Disability" shall mean a good faith determination by the Board in accordance with applicable law that as a result of a physical or mental injury or illness, the Employee is unable to perform the essential functions of his job with or without reasonable accommodation for a period of (i) ninety (90) consecutive days or (ii) one hundred eighty (180) days in any twelve (12) month period.  

5.3

By the Company for Cause.  The Company may immediately terminate the Employee's employment, for "Cause" (as defined below), by action of the Board, upon written notice by the Board to the Employee identifying the act or acts constituting Cause.  For purposes of this Agreement, "Cause" means: (i) the Employee’s willful and continued failure

10073273.1 - 2 -

(other than as a result of incapacity due to mental or physical impairment) to substantially perform his duties hereunder, which is not remedied within ten (10) days after receipt of written notice from the Board specifying such failure; (ii) the Employee’s failure to carry out, or comply with, any lawful and reasonable directive of the Board or the Chief Executive Officer of the Company, which is not remedied within thirty (30) days after receipt of written notice from the Board or the Chief Executive Officer specifying such failure; (iii) the Employee’s conviction of or plea of nolo contendre to any felony or other crime involving moral turpitude; (iv) the Employee’s knowing unlawful use or possession of illegal drugs; or (v) the Employee’s commission of a material bad faith act of fraud, embezzlement, misappropriation, willful misconduct, gross neglige nce, or breach of fiduciary duty, in each case against the Company, Holdings, the LLC, or any of their subsidiaries.  

5.4

By the Company without Cause.  The Company may immediately terminate the Employee's employment without Cause at any time without prior notice.  

5.5

By the Employee.  The Employee may terminate his employment hereunder at any time, with or without "Good Reason" (as defined below), upon thirty (30) days prior written notice to the Company.  The Employee's employment shall terminate as of thirty (30) days from the date notice is given, unless, with respect to a notice regarding a termination based on Good Reason, the Company corrects the circumstances constituting Good Reason within such thirty (30) day period.  For purposes of this Agreement, "Good Reason" means, without the Employee's consent, (i) a reduction in Base Salary or (ii) a material adverse reduction in the Employee's employee benefits; provided, however, that Good Reason shall not include acts which are cured by the Company within thirty (30) days following the Company's receipt of written notice from the Employee of the existence o f circumstances constituting Good Reason.  Any notice of termination for Good Reason must be given within thirty (30) days following the Employee's learning of circumstances constituting Good Reason.  

5.6

Removal from any Boards and Position.  If the Employee's employment is terminated for any reason under this Agreement, he shall be deemed to resign (i) if a member, from the Board or any other board to which he has been appointed or nominated by or on behalf of the Company, Holdings or the LLC and (ii) from any position with the Company, Holdings, the LLC, or any of their subsidiaries, including, but not limited to, an officer of the Company.

6.

Obligations upon Termination.

6.1

By the Company for Cause or by the Employee Without Good Reason or Due to Death or Disability.  If (i) the Employee's employment with the Company terminates due to his death; (ii) the Company terminates the Employee's employment with the Company for Cause; (iii) the Company terminates the Employee's employment with the Company due to the Employee's Disability; or (iv) the Employee terminates his employment with the Company without Good Reason, the Employee or the Employee's legal representatives (as appropriate), shall be entitled to receive the following:  

(a)

the Employee's accrued but unpaid Base Salary and benefits set forth in Section 4.3, if any, to the date of termination (the "Accrued Benefits"); and

10073273.1 - 3 -

(b)

expenses reimbursable under Section 4.5 incurred but not yet reimbursed to the Employee to the date of termination.

6.2

By the Company Without Cause or By the Employee for Good Reason.  If the Company terminates the Employee's employment without Cause or if the Employee terminates his employment for Good Reason, the Employee shall be entitled to receive the following, upon execution without revocation of a valid general release of all claims against the Company, Holdings, the LLC, and Castle Harlan, Inc., substantially in the form attached hereto as Exhibit A:  

(a)

the Accrued Benefits;

(b)

the Employee's accrued but unpaid vacation, if any, to the date of termination;

(c)

continued Base Salary for twelve (12) months after the date of termination, payable in monthly installments; and

(d)

continued coverage under the Company's medical and dental plans for twelve (12) months after the date of termination; provided, that the Company may provide such coverage through reimbursement of the cost of continuation of group health coverage, pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1986, to the extent the Employee is eligible and subject to the terms of the plan and the law.  

6.3

Election Not to Extend the Term.  In the event that any Party elects not to extend the Term pursuant to Section 2 of this Agreement, unless the Employee’s employment with the Company is earlier terminated pursuant to Section 5 of this Agreement, the Employee’s termination of employment hereunder (whether or not the Employee continues as an employee of the Company thereafter) shall be deemed to occur on the close of business on the day immediately preceding the next scheduled date on which the extension begins, and the Employee shall be entitled to receive the Accrued Benefits.  

6.4

Nondisparagement.  Except in connection with any legal dispute between the Parties or an order of a court or governmental agency with jurisdiction, the Employee shall not at any time (whether during or after the Term) publish or communicate to any person or entity any "Disparaging" (as defined below) remarks, comments or statements concerning the Company, Holdings, the LLC, Castle Harlan, Inc., their parents, subsidiaries and affiliates, and their respective present and former members, partners, directors, officers, shareholders, employees, agents, attorneys, successors and assigns, and the Company, Holdings, the LLC, and Castle Harlan, Inc. shall not at any time (whether during or after the Term) publish or communicate to any person or entity any Disparaging remarks, comments or statements concerning the Employee and shall instruct their respective present members, partners, directors, and officers to not at any time publish or communicate to any person or entity any Disparaging remarks, comments or statements concerning the Employee.  "Disparaging" remarks, comments or statements are those that impugn the character, honesty, integrity or morality or business acumen or abilities in connection with any aspect of the operation of business of the individual or entity being disparaged.

10073273.1 - 4 -

7.

Restrictions and Obligations of the Employee.  

7.1

Confidentiality.  i)  During the course of the Employee's employment by the Company (prior to and during the Term), the Employee has had and will have access to certain trade secrets and confidential and proprietary information relating to the Company, Holdings, the LLC, and their subsidiaries (the "Protected Parties") which is not readily available from sources outside the Company.  The confidential and proprietary information and, in any material respect, trade secrets of the Protected Parties are among their most valuable assets, including but not limited to, their customer, supplier and vendor lists; databases; competitive strategies; computer programs, frameworks, or models; marketing programs; sales, financial, marketing, training and technical information; product development (and proprietary product data); and any other information, whether c ommunicated orally, electronically, in writing or in other tangible forms, concerning how the Protected Parties create, develop, acquire or maintain their products and marketing plans, target their potential customers and operate their retail and other businesses.  The Protected Parties invested, and continue to invest, considerable amounts of time and money in their process, technology, and know-how; obtaining and developing the goodwill of their customers; their other external relationships; their data systems and data bases; and all the information described above (hereinafter collectively referred to as "Confidential Information"), and any misappropriation or unauthorized disclosure of Confidential Information in any form would irreparably harm the Protected Parties.  The Employee acknowledges that such Confidential Information constitutes valuable, highly confidential, special and unique property of the Protected Parties.  The Employee shall hold in a fiduciary capacity for the benefit of the Protected Parties all Confidential Information relating to the Protected Parties and their businesses, which shall have been obtained by the Employee during the Employee's employment by the Company, Holdings or the LLC (prior to and during the Term) and which shall not be or become public knowledge (other than by acts by the Employee or representatives of the Employee in violation of this Agreement).  Except as required by law or an order of a court or governmental agency with jurisdiction, the Employee shall not, during the period the Employee is employed by the Company or at any time thereafter, disclose any Confidential Information, directly or indirectly, to any person or entity for any reason or purpose whatsoever, nor shall the Employee use it in any way, except in the course of the Employee's employment with, and for the benefit of, the Protected Parties or to enforce any rights or defend any claims hereunder, provided that such disclosure is relevant to the enforcement of such rig hts or defense of such claims and is only disclosed in the formal proceedings related thereto.  The Employee shall take all reasonable steps to safeguard the Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft.  The Employee understands and agrees that the Employee shall acquire no rights to any such Confidential Information.

(b)

All files, records, documents, drawings, specifications, data, computer programs, intangible property (including but not limited to trade names, registered and unregistered trademarks and service marks, brand names, patents, and copyrights) and similar items relating thereto or to the business carried on by the Company, Holdings, the LLC, and their subsidiaries, as well as all customer lists, specific customer information, compilations of product research and marketing techniques of the Company, Holdings, the LLC, and their subsidiaries, whether prepared by the Employee or otherwise, coming into the Employee's possession, shall remain the exclusive property of the Company, Holdings, the LLC, and their subsidiaries, and the Employee shall not

10073273.1

remove any such items from their premises, except in furtherance of the Employee's duties under this Agreement.

(c)

It is understood that while employed by the Company, the Employee will promptly disclose to it, and assign to it the Employee's interest in any invention, improvement or discovery made or conceived by the Employee, either alone or jointly with others, which arises out of the Employee's employment with the Company (prior to and during the Term).  At the Company's request and expense, the Employee will assist the Company, Holdings, the LLC, and their subsidiaries during the Term and thereafter in connection with any controversy or legal proceeding relating to such invention, improvement or discovery and in obtaining domestic and foreign patent or other protection covering the same.

(d)

As requested by the Company and at the Company's expense, from time to time and upon the termination of the Employee's employment with the Company for any reason, the Employee will promptly deliver to the Company all copies and embodiments, in whatever form, of all Confidential Information in the Employee's possession or within his control (including, but not limited to, memoranda, records, notes, plans, photographs, manuals, notebooks, documentation, program listings, flow charts, magnetic media, disks, diskettes, tapes and all other materials containing any Confidential Information) irrespective of the location or form of such material.  If requested by the Company, the Employee will provide the Company with written confirmation that all such materials have been delivered to the Company as provided herein.

7.2

Non-Solicitation or Hire.  During the Term and for a period of twelve (12) months following the termination of the Employee's employment for any reason, the Employee shall not directly or indirectly (a) solicit or attempt to solicit or induce, directly or indirectly, any party who is a customer or client of the Company, Holdings, the LLC, or any of their subsidiaries, or who was a customer or client of the Company, Holdings, the LLC, or any of their subsidiaries at any time during the twelve (12) month period immediately prior to the date the Employee's employment terminates, for the purpose of marketing, selling or providing to any such party any services or products offered by or available from the Company, Holdings, the LLC, or any of their subsidiaries. (b) interfere with or attempt to interfere with any business relationships (whether formed before, during, or after the T erm) of the Company, Holdings, the LLC, or any of their subsidiaries with their suppliers, or (c) hire or solicit or attempt to hire or solicit or induce, directly or indirectly, any employee of the Company, Holdings, the LLC, or any of their subsidiaries or any person, who was an employee of the Company, Holdings, the LLC, or any of their subsidiaries during the six (6) month period immediately prior to the date the Employee's employment hereunder terminates, to terminate such employee's employment relationship with the Company, Holdings, the LLC, or any of their subsidiaries in order to enter into a similar relationship with the Employee, or any other person or entity; provided however, that advertising for employment in any online careers website, newspaper, trade journal or other publication available for general distribution to the public without specific reference to any particular employees shall not constitute a breach of this Section 7.2.  

7.3

Non-Competition.  During the Term and for a period of twelve (12) months following the termination of the Employee's employment for any reason, the Employee shall not, whether individually as a director, manager, member, stockholder, partner,

10073273.1 - 6 -

owner, employee, consultant or agent of any business, or in any other capacity, other than on behalf of the Company, organize, establish, own, operate, manage, control, engage in, participate in, invest in, permit his name to be used by, act as a consultant or advisor to, render services for (alone or in association with any person, firm, corporation or business organization), or otherwise assist any person or entity that engages in or owns, invests in, operates, manages or controls any venture or enterprise which engages or proposes to engage in any business conducted by the Company, Holdings, the LLC, or any of their subsidiaries (x) on the date of the Employee's termination of employment (including, without limitation, any business which the Company, Holdings, the LLC, or any of their subsidiaries has specific plans to conduct in the future and as to which the Employee is aware) or (y) within twelve (12) months prior to the Employee's termination of employment with the Company in the geographic locations where the Company, Holdings, the LLC, or any of their subsidiaries engages or proposes to engage in such business (the "Competitive Business").  Notwithstanding the foregoing, the Employee may, directly or indirectly own, solely as an investment, securities of any firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise engaged in the business of the Company which are publicly traded on a national or regional stock exchange or on the over-the-counter market if the Employee is not a controlling person of, or a member of a group which controls, such entity and does not directly or indirectly own 5% or more of any class of securities of such entity.  

7.4

Property.  The Employee acknowledges that all originals and copies of materials, records and documents generated by him or coming into his possession during his employment (prior to and during the Term) are the sole property of the Company, Holdings, the LLC, or any of their subsidiaries ("Company Property").  During the Term, and at all times thereafter, the Employee shall not remove, or cause to be removed, from the premises of the Company, Holdings, the LLC, or any of their subsidiaries, copies of any record, file, memorandum, document, or equipment, or any other item relating to the business of the Company, Holdings, the LLC, or any of their subsidiaries, except in furtherance of his duties under the Agreement.  When the Employee's employment terminates, or upon request of the Company at any time, the Employee shall promptly deliver to the Company all C ompany Property in his possession or control.

8.

Remedies; Specific Performance.  The Parties acknowledge and agree that the Employee's breach or threatened or attempted breach of any of the covenants or restrictions set forth in Section 7 will result in irreparable and continuing damage to the Protected Parties for which there may be no adequate remedy at law and that the Protected Parties shall be entitled to equitable relief, including but not limited to, specific performance and injunctive relief as remedies for any such breach or threatened or attempted breach.  The Employee also agrees that such remedies shall be in addition to any and all remedies, including damages, available to the Protected Parties against him for such breaches or threatened or attempted breaches.  In addition, without limiting the Protected Parties' remedies for any breach by the Employee of any covenants or restrictions set forth in Sec tion 7, in the event of such breach, (i) the Employee shall not be entitled to any payments set forth in Section 6 hereof, except as required by law, and (ii) the Company will have no obligation to pay any of the amounts that remain payable by the Company under Section 6.  

10073273.1 - 7 -

9.

Other Provisions.

9.1

Notices.  Any notice or other communication required or which may be given hereunder shall be in writing and shall be delivered personally, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid or overnight mail and shall be deemed given when so delivered personally or sent by facsimile transmission or, if mailed, four (4) days after the date of mailing or one (1) day after overnight mail, as follows:

(a)

If to the Company, to:

RathGibson, Inc.
c/o Castle Harlan, Inc.  
150 East 58th Street, 38th Floor

New York, New York 10155

Attention:

William M. Pruellage

Telephone:

(212) 317-6417

Fax:

(212) 207-8042

With a copy to:

Schulte Roth & Zabel LLP
919 Third Avenue
New York, NY  10022
Attention:  

Robert Goldstein
Telephone:

(212) 756-2000
Fax:

(212) 593-5955

(b)

If to the Employee, to the Employee's home address reflected in the Company's records.

9.2

Entire Agreement.  This Agreement contains the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto.  

9.3

Representations and Warranties by the Employee.  The Employee represents and warrants that he is not a party to or subject to any restrictive covenants, legal restrictions or other agreements in favor of any entity or person which would in any way preclude, inhibit, impair or limit the Employee's ability to perform his obligations under this Agreement, including, but not limited to, non-competition agreements, non-solicitation agreements or confidentiality agreements.

9.4

Waiver and Amendments.  This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by the Parties or, in the case of a waiver, by the Party waiving compliance.  No delay on the part of any Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any right, power or privilege hereunder, nor any single or partial exercise of any right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder.

10073273.1

9.5

Governing Law, Dispute Resolution and Venue.  

(a)

This Agreement shall be governed and construed in accordance with the laws of the State of New York applicable to agreements made and/or to be performed entirely within that State, without regard to conflicts of laws principles.  

(b)

The Parties agree irrevocably to submit to the exclusive jurisdiction of the federal courts or, if no federal jurisdiction exists, the state courts, located in the City of New York, Borough of Manhattan, for the purposes of any suit, action or other proceeding brought by any Party arising out of any breach of any of the provisions of this Agreement and hereby waive, and agree not to assert by way of motion, as a defense or otherwise, in any such suit, action, or proceeding, any claim that it is not personally subject to the jurisdiction of the above-named courts, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper, or that the provisions of this Agreement may not be enforced in or by such courts.  In addition, the Parties agree to the waiver of a jury trial.  

9.6

Assignment.  This Agreement, and all of the Employee’s rights and duties hereunder, shall not be assignable or delegable by the Employee.  Any purported assignment or delegation by the Employee in violation of the foregoing shall be null and void ab initio and of no force and effect.  This Agreement may be assigned by the Company, Holdings or the LLC to a person or entity which is an affiliate or a successor in interest to substantially all of the business operations of the Company, Holdings or the LLC.  Upon such assignment, the rights and obligations of the Company, Holdings or the LLC hereunder shall become the rights and obligations of such affiliate or successor person or entity; provided that, in the event such affiliate person or entity is unable to satisfy the obligations owed to the Employee under this Agreement, the Company shall remain lia ble for such obligations.  

9.7

Successors; Binding Agreement.  This Agreement shall inure to the benefit of and be binding upon personal or legal representatives, executors, administra­tors, successors, heirs, distributees, devisees and legatees.

9.8

Counterparts.  This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument.

9.9

Headings.  The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of terms contained herein.

9.10

Severability.  If any term, provision, covenant or restriction of this Agreement, or any part thereof, is held by a court of competent jurisdiction of any foreign, federal, state, county or local government or any other governmental, regulatory or administrative agency or authority to be invalid, void, unenforceable or against public policy for any reason, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected or impaired or invalidated.  The Employee acknowledges that the restrictive covenants contained in Section 7 are a condition of this Agreement and are reasonable and valid in temporal scope and in all other respects.  

10073273.1 - 9 -

9.11

Judicial Modification.  If any court determines that any of the covenants in Section 7, or any part of any of them, is invalid or unenforceable, the remainder of such covenants and parts thereof shall not thereby be affected and shall be given full effect, without regard to the invalid portion.  If any court determines that any of such covenants, or any part thereof, is invalid or unenforceable because of the geographic or temporal scope of such provision, such court shall reduce such scope to the minimum extent necessary to make such covenants valid and enforceable.

9.12

Tax Withholding.  The Company is authorized to withhold from any benefit provided or payment due hereunder, the amount of withholding taxes due any federal, state or local authority in respect of such benefit or payment and to take such other action as may be necessary in the opinion of the Board to satisfy all obligations for the payment of such withholding taxes.

9.13

Conformance with Code Section 409A.  The Parties hereto agree to negotiate in good faith should any amendment to the Agreement be required in order to comply with Section 409A of the Internal Revenue Code.  

10073273.1 - 10 -

IN WITNESS WHEREOF, the Parties hereto, intending to be legally bound hereby, have executed this Agreement as of the day and year first above mentioned.

EMPLOYEE

/s/ Nick Cray

Name: Nick Cray

RATHGIBSON, INC.

By: /s/ Harley B. Kaplan

Name: Harley B. Kaplan

Title: President and Chief Executive Officer

RGCH HOLDINGS CORP.

By: /s/ John Morningstar

Name: John Morningstar  

Title: Vice President

RGCH HOLDINGS LLC

By: /s/ John Morningstar

Name: John Morningstar  

Title: Vice President

With respect to Section 6.4,

CASTLE HARLAN, INC.

By: /s/ John Morningstar

Name: John Morningstar  

Title: Managing Director

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EXHIBIT A

SEPARATION AGREEMENT AND GENERAL RELEASE

RathGibson, Inc. (the "Company") and its affiliated companies, RGCH Holdings Corp. ("Holdings") and RGCH Holdings LLC (the "LLC"), and Nick Cray (the "Employee") (together, the "Parties") entered into an employment agreement, effective [__________] (the "Employment Agreement").  The Parties hereby agree that this Separation Agreement and General Release (the "Agreement") sets forth their complete agreement and understanding regarding the termination of the Employee's employment with the Company.

1.

Separation Date.  The Employee's employment with the Company will terminate effective [_______________] (the "Separation Date").  The Employee agrees to return all property belonging to the Company, Holdings, the LLC, and any of their subsidiaries no later than the Separation Date.  Except as specifically provided below, the Employee shall not be entitled to receive any benefits of employment following the Separation Date.

2.

Consideration of the Company.  In consideration for the releases and covenants by the Employee in this Agreement, the Company will provide the Employee with the following:  [insert consideration as set forth in the Employment Agreement]

3.

Employee Release of Rights.  The Employee (defined for the purpose of this Paragraph 3 as the Employee and the Employee's agents, representatives, attorneys, assigns, heirs, executors, and administrators) irrevocably, fully, and unconditionally releases the Released Parties (defined as the Company, Holdings, the LLC, Castle Harlan, Inc., and each of their affiliated companies, parents, subsidiaries, predecessors, successors, assigns, divisions, related entities and any of their past or present employees, officers, agents, insurers, attorneys, administrators, officials, directors, shareholders, employee benefit plans, and the sponsors, fiduciaries, or administrators of the Company's employee benefit plans) from any and all liability, claims, demands, actions, causes of action, suits, grievances, debts, sums of money, agreements, promises, damages, back and front pay, costs, expenses, attorneys' fees, and remedies of any type, arising or that may have arisen out of or in connection with the Employee's employment with or termination of employment from the Company, from the beginning of time to the date hereof, including but not limited to claims, actions or liability under:  (1) Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Civil Rights Act of 1866, the Age Discrimination in Employment Act, the Americans with Disabilities Act of 1990, the Fair Labor Standards Act, the Workers' Adjustment and Retraining Notification Act, the Employee Retirement Income Security Act of 1974, the New York State Human Rights law, or the Administrative Code of the City of New York, all as amended; (2) any other federal, state or local statute, ordinance, or regulation regarding employment, termination of employment, or discrimination in employment, and (3) the common law relating to employment contracts, wrongful discharge. defamation, or any other matter.

4.

Waiver of Reinstatement.  The Employee waives any reinstatement or future employment with the Company, Holdings or the LLC and agrees never to apply for employment or otherwise seek to be hired, rehired, employed, re-employed, or reinstated by the Company, Holdings, the LLC, or any of its affiliated companies or corporations.

10073273.1 - 12 -

5.

No Encouragement of Claims.  The Employee agrees not to encourage or assist any person who files a lawsuit, charge, claim or complaint against the Released Parties unless the Employee is required to render such assistance pursuant to a lawful subpoena or other legal obligation.  

6.

Cooperation of the Employee.  The Employee agrees to cooperate with the Company, Holdings, the LLC, or any of their subsidiaries in any reasonable manner as the Company, Holdings, the LLC, or any of their subsidiaries may request, including but not limited to furnishing information to and otherwise consulting with the Company; and assisting the Company in any litigation or potential litigation or other legal matters, including but not limited to meeting with and fully answering the questions of the Company or its representatives or agents, and testifying and preparing to testify at any deposition or trial.  The Company agrees to reimburse the Employee for any reasonable out of pocket expenses incurred as a result of such cooperation.  

7.

Non-admission/Inadmissibility.  This Agreement does not constitute an admission by the Company, Holdings, the LLC, or any of their subsidiaries that any action it took with respect to the Employee was wrongful, unlawful or in violation of any local, state, or federal act, statute, or constitution, or susceptible of inflicting any damages or injury on the Employee, and the Company, Holdings, the LLC, and their subsidiaries specifically deny any such wrongdoing or violation.  This Agreement is entered into solely to resolve fully all matters related to or arising out of the Employee's employment with and termination from the Company, and its execution and implementation may not be used as evidence, and shall not be admissible in a subsequent proceeding of any kind, except one alleging a breach of this Agreement.

8.

Severability.  The provisions of this Agreement shall be severable and the invalidity of any provision shall not affect the validity of the other provisions.

9.

Governing Law.  This Agreement shall be governed by and construed in accordance with the laws and judicial decisions of the State of New York, without regard to its principles of conflicts of laws.

10.

Scope of Agreement.  The Employee understands that he remains bound to those provisions in the Employment Agreement, which survive the termination of the Employee's employment, including but not limited to, those provisions in Section7 of the Employment Agreement.  Except as specifically set forth in such provisions, this Agreement contains the entire agreement and understanding between the Employee and the Company concerning the matters described herein, and supersedes all prior agreements, discussions, negotiations, understandings and proposals of the Parties.  The terms of this Agreement cannot be changed except in a subsequent document signed by both Parties.

11.

Revocation Period.  The Employee has the right to revoke this Agreement for up to seven (7) days after he signs it.  In order to revoke this Agreement, the Employee must sign and send a written notice of the decision to do so, addressed to [name] at [insert title, and address], and that written notice must be received by the Company no later than the eighth (8th) day after the Employee signed this Agreement.  If the Employee revokes this Agreement, the Employee will not be entitled to any of the consideration from the Company described in paragraph 2 above, except to the extent required by law.  

10073273.1 - 13 -

12.

Voluntary Execution of Agreement.  The Employee acknowledges that:

a.

the Employee has carefully read this Agreement and fully understands its meaning;

b.

the Employee had the opportunity to take up to twenty one (21) days after receiving this Agreement to decide whether to sign it;

c.

the Employee understands that the Company is hereby advising him, in writing, to consult with an attorney before signing it;

d.

the Employee is signing this Agreement, knowingly, voluntarily, and without any coercion or duress; and

e.

everything the Employee is receiving for signing this Agreement is described in the Agreement itself or in his Employment Agreement, and no other promises or representations have been made to cause the Employee to sign it.

13.

Nondisclosure.  The Employee shall not disclose the contents or substance of this Agreement to any third parties, other than the Employee's attorneys, accountants, or as required by law and shall instruct each of the foregoing not to disclose the same.

EMPLOYEE

____________________________________

Name:

RATHGIBSON, INC.

By:

Name:  

Title:  

RGCH HOLDINGS CORP.

By:

Name:  

Title:  

RGCH HOLDINGS LLC

By:

Name:  

Title:  

10073273.1 - 14 -

EX-10

_

EX-10

EXHIBIT 10.16

LEASE AGREEMENT

by and between

AGNL RATHGIBSON, L.L.C.,

a Delaware limited liability company,

as LANDLORD

and

RATHGIBSON, INC.,

a Delaware corporation,

as TENANT

Premises:	2505 Foster Avenue, Janesville, Wisconsin 53547
	2533 Foster Avenue, Janesville, Wisconsin 53547

Dated as of: December 22, 2006

411990

TABLE OF CONTENTS

Page

EXHIBITS

Exhibit “A-1”

- 2505 Real Property

Exhibit “A-2” – 2533 Real Property

Exhibit “B-1”

- 2505 Machinery and Equipment

Exhibit “B-2” – 2533 Machinery and Equipment

-i-

Exhibit “C”

- Schedule of Permitted Encumbrances

Exhibit “D”

- Rent Schedule

Exhibit “E”

- Acquisition Costs

Exhibit “F”

- Premises Percentage Allocation of Basic Rent

Exhibit “G”

- Patriot Act Compliance

Exhibit “H”

- Warehouse Expansion Improvements

SCHEDULES

Schedule  16

- Existing Insurance Policies

-ii-

LEASE AGREEMENT (as amended, supplemented or modified, this “Lease”), made as of this 22nd day of December, 2006, between AGNL RATHGIBSON, L.L.C., a Delaware limited liability company (together with its successors and assigns “Landlord”), with an address at c/o Angelo, Gordon & Co., L.P., 245 Park Avenue, 26^th Floor New York, New York 10167-0094, and RATHGIBSON, INC., a Delaware corporation (together with its successors and permitted assigns, “Tenant”) with an address at 2505 Foster Avenue, Janesville, WI  53547.

In consideration of the rents and provisions herein stipulated to be paid and performed, Landlord and Tenant hereby covenant and agree as follows:

1.

Demise of Premises.  Landlord hereby demises and lets to Tenant, and Tenant hereby takes and leases from Landlord, for the term and upon the provisions hereinafter specified, the following described property:

(a)

the real property located at 2505 Foster Avenue, Janesville, WI  53547, and being more particularly described in Exhibit “A-1” (the “2505 Real Property”);

(b)

the building containing approximately 183,806 square feet in the aggregate (to be expanded as provided in this Lease) and all other structures and improvements situated on, or affixed or appurtenant to the Real Property (collectively, the “2505 Improvements”);

(c)

all tenements, hereditaments, easements, rights-or-way, rights, privileges in and to the Real Property, including (i) easements over other lands granted by any Easement Agreement and (ii) any streets, ways, alleys, vaults, gores or strips of land adjoining the Real Property (collectively, the “2505 Appurtenances”);  

(d)

all fixtures located on or affixed to the Real Property or the Improvements (collectively, the “2505 Fixtures”); and

(e)

all machinery, equipment and other property described in Exhibit “B-1” (collectively, the “2505 ­Equipment”).  The 2505 Real Property, the 2505 Improvements, the 2505 Appurtenances, and the 2505 Fixtures, are referred to herein, collectively, as the “2505 Leased Premises”; and

(f)

the real property located at 2533 Foster Avenue, Janesville, WI 53547, and being more particularly described in Exhibit “A-2” (the “2533 Real Property”);

(g)

the building containing approximately 93,464 square feet in the aggregate and all other structures and improvements situated on, or affixed or appurtenant to the Real Property (collectively, the “2533 Improvements”);

(h)

all tenements, hereditaments, easements, rights-or-way, rights, privileges in and to the Real Property, including (i) easements over other lands granted by any Easement Agreement and (ii) any streets, ways, alleys, vaults, gores or strips of land adjoining the Real Property (collectively, the “2533 Appurtenances”);  

(i)

all fixtures located on or affixed to the Real Property or the Improvements (collectively, the “2533 Fixtures”); and

(j)

all machinery, equipment and other property described in Exhibit “B-2” (collectively, the “2533 ­Equipment”).  The 2533 Real Property, the 2533 Improvements, the 2533 Appurtenances, and the 2533 Fixtures, are referred to herein, collectively, as the “2533 Leased Premises”.

2.

Certain Definitions.

“Acquisition Cost” means, with respect to any Leased Premises, the Acquisition Cost specified in Exhibit E for such Leased Premises.

“Additional Rent” is defined in Paragraph 7.

“Adjoining Property” means all sidewalks, driveways, curbs, gores and vault spaces adjoining any the Leased Premises.

“Affected Premises” is defined in Paragraph 18(a).

“Alterations” means all changes, additions, improvements or repairs to, all alterations, reconstructions, restorations, renewals, replacements or removals of and all substitutions or replacements for any of the Improvements or Equipment, both interior and exterior, structural and non-structural, and ordinary and extraordinary and shall include any Major Alterations.

“Applicable Initial Date” is defined in Paragraph 29.

“Appurtenances” means the 2505 Appurtenances and the 2533 Appurtenances.

“Architect” is defined in the Construction Agency Agreement.

“Assignment” means any assignment of rents and leases from Landlord to a Lender which (a) encumbers any of the Leased Premises and (b) secures Landlord's obligation to repay a Loan, as the same may be amended, supplemented or modified from time to time.

“Basic Rent” is defined in Paragraph 6.

“Basic Rent Payment Date” is defined in Paragraph 6.

“Business Day” means any day other than a Saturday, Sunday or a day on which commercial banks in New York City are required or authorized to be closed.  

“Casualty” means any loss of or damage to or destruction of all or any portion of any of the Leased Premises.

“Commencement Date” is defined in Paragraph 5(a).

“Condemnation” means (a) any taking or damaging of all or any portion of any of the Leased Premises (i) in or by condemnation or other eminent domain proceedings pursuant to any Law, (ii) by reason of any agreement with any condemnor in settlement of or under threat of any such condemnation or other eminent domain proceeding, or (iii) by any other means, (b) any de facto condemnation, or (c) any Requisition.  A Condemnation shall be considered to have taken

Page 2

place as of the later of the date actual physical possession is taken by the condemnor, or the date on which the right to compensation and damages accrues under the applicable Law.

“Condemnation Notice” means notice or knowledge of the institution of or intention to institute any proceeding for Condemnation.

“Construction Agency Agreement” means the Construction Agency Agreement dated of even date herewith among Landlord, Tenant and the Escrow Agent.

“Construction Agreement” is defined in the Construction Agency Agreement.

“Construction Escrow” is defined in the Construction Agency Agreement.

“Costs” of a Person or associated with a specified transaction means all reasonable out-of-pocket costs and expenses incurred by such Person or associated with such transaction, including without limitation, reasonable attorneys' fees and expenses, court costs, customary and reasonable brokerage fees, escrow fees, title insurance premiums, recording fees and transfer taxes, as the circumstances require, and the costs, fees and expenses associated with the Plans, and with construction and completion of the Warehouse Expansion Improvements.

“CPI” is defined in Exhibit D.

“Credit Entity” means any Person that immediately following such assignment or subletting and having given effect thereto will have a publicly traded unsecured senior debt rating of “Baa” or better from Moody's or a rating of “BBB” or better from S&P (or, if such Person does not then have rated debt, a determination that by either of such rating agencies its unsecured senior debt would be so rated by such agency and will not be on “Negative Credit Watch”), and in the event both such rating agencies cease to furnish such ratings, then a comparable rating by any rating agency acceptable to Landlord and Lender.

“Default Rate” is defined in Paragraph 7(a)(iv).

“Default Termination Amount” is defined in Paragraph 23(a)(iii).

“Easement Agreement” means any condition, covenant, restriction, easement, declaration, license or other agreement listed as a Permitted Encumbrance or as may hereafter affect the Leased Premises.

“Environmental Law” means (a) whenever enacted or promulgated, any applicable Federal, state, foreign or local law, statute, ordinance, rule, regulation, license, permit, authorization, approval, consent, court order, judgment, decree, injunction, code, requirement or agreement with any governmental entity, (i) relating to pollution (or the cleanup thereof), or the protection of air, water vapor, surface water, groundwater, drinking water supply, land (including land surface or subsurface), plant, aquatic and animal life from injury caused by a Hazardous Substance or (ii) concerning exposure to, or the use, containment, storage, recycling, reclamation, reuse, treatment, generation, discharge, transportation, processing, handling, labeling, production, disposal or remediation of any Hazardous Substance, Hazardous Condition or Hazardous Activity, as now or hereafter in ef fect, and (b) any common law or equitable

Page 3

doctrine (including, without limitation, injunctive relief and tort doctrines such as negligence, nuisance, trespass and strict liability) that may impose liability or obligations or injuries or damages due to or threatened as a result of the presence of, exposure to, or ingestion of, any Hazardous Substance.  The term Environmental Law includes, without limitation, the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act, the Federal Water Pollution Control Act, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resources Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments to RCRA), the Federal Solid Waste Disposal Act, the Federal Toxic Substance Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety and Health Act o f 1970, the Federal National Environmental Policy Act and the Federal Hazardous Materials Transportation Act, each as now or hereafter in effect and any similar state or local Law.

“Environmental Violation” means (a) any direct or indirect discharge, disposal, spillage, emission, escape, pumping, pouring, injection, leaching, release, seepage, filtration or transporting of any Hazardous Substance at, upon, under, onto or within any of the Leased Premises, or from any of the Leased Premises to the environment, in violation of any Environmental Law or in excess of any reportable quantity established under any Environmental Law or which could result in any liability to any Federal, state or local government or any other Person for the costs of any removal or remedial action or natural resources damage or for bodily injury or property damage, (b) any deposit, storage, dumping, placement or use of any Hazardous Substance at, upon, under or within any of the Leased Premises or which extends to any Adjoining Property in violation of any Environmental Law or i n excess of any reportable quantity established under any Environmental Law or which could result in any liability to any Federal, state or local government or to any other Person for the costs of any removal or remedial action or natural resources damage or for bodily injury or property damage, (c) the abandonment or discarding of any barrels, containers or other receptacles containing any Hazardous Substances in violation of any Environmental Laws, (d) any activity, occurrence or condition which could result in any liability, cost or expense to Landlord or Lender or any other owner or occupier of any of the Leased Premises, or which could result in a creation of a lien on any of the Leased Premises under any Environmental Law or (e) any violation of or noncompliance with any Environmental Law.

“Equipment” means the 2505 Equipment and the 2533 Equipment.

“Escrow Agent” means Chicago Title Insurance Company.

“Escrow Charges” is defined in Paragraph 9(b).

“Escrow Payment” is defined in Paragraph 9(b).

“Expiration Date” is defined in Paragraph 5(a).

“Event of Default” is defined in Paragraph 22(a).

“Fair Market Value” means, with respect to any Leased Premises, the higher of (a) the fair market value of such Leased Premises as of the Relevant Date as if unaffected and unencumbered by this Lease or (b) the fair market value of such Leased Premises as of the

Page 4

Relevant Date as affected and encumbered by this Lease and assuming that the Term has been extended for all extension periods provided for herein.  For all purposes of this Lease, Fair Market Value shall be determined in accordance with the procedure specified in Paragraph 29.

“Fair Market Value Date” means the date on which the Fair Market Value is determined in accordance with Paragraph 29.

“Federal Funds” means Federal or other immediately available funds which at the time of payment are legal tender for the payment of public and private debts in the United States of America.

“Final Completion Date” means the date on which (a) the Warehouse Expansion Improvements, including all “punch list” items shall have been completed in accordance with the Plans as certified by the Architect, (b) all permanent permits and licenses required for the occupancy of the Warehouse Expansion Improvements have been obtained and (c) Tenant is in occupancy of the Warehouse Expansion Improvements, but in no event later than April 1, 2007.

“Fixtures” means the 2505 Fixtures and the 2533 Fixtures.

“Guaranty of Completion” means that certain guaranty agreement dated of even date herewith given by Tenant in favor of Bear Stearns Commercial Mortgage, Inc. and Landlord, relating to the completion of the Warehouse Expansion Improvements by Tenant.

“Hazardous Activity” means any activity, process, procedure or undertaking which directly or indirectly (a) procures, generates or creates any Hazardous Substance; (b) causes or results in (or threatens to cause or result in) the release, seepage, spill, leak, flow, discharge or emission of any Hazardous Substance into the environment (including the air, ground water, watercourses or water systems), (c) involves the containment or storage of any Hazardous Substance; or (d) would cause any of the Leased Premises or any portion thereof to become a hazardous waste treatment, recycling, reclamation, processing, storage or disposal facility within the meaning of any Environmental Law.

“Hazardous Condition” means any condition which would support any claim or liability under any Environmental Law, including the presence of underground storage tanks.

“Hazardous Substance” means (a) any substance, material, product, petroleum, petroleum product, derivative, compound or mixture, mineral (including asbestos), chemical, gas, medical waste, or other pollutant, in each case whether naturally occurring, man-made or the by-product of any process, that is toxic, harmful or hazardous or acutely hazardous to the environment or public health or safety or (b) any substance supporting a claim under any Environmental Law, whether or not defined as hazardous as such under any Environmental Law.  Hazardous Substances include, without limitation, any toxic or hazardous waste, pollutant, contaminant, industrial waste, petroleum or petroleum-derived substances or waste, radon, radioactive materials, asbestos, asbestos containing materials, urea formaldehyde foam insulation, lead and polychlorinated biphenyls.

“Impositions” is defined in Paragraph 9(a).

Page 5

“Improvements” means the 2505 Improvements, the 2533 Improvements and the Warehouse Expansion Improvements.

“Indemnitee” is defined in Paragraph 15.

“Insurance Requirements” means the requirements of all insurance policies maintained in accordance with this Lease.

“Landlord” is defined in the introductory Paragraph.

“Law” means any constitution, statute, rule of law, code, ordinance, order, judgment, decree, injunction, rule, regulation, policy, requirement or administrative or judicial determination, even if unforeseen or extraordinary, of every duly constituted governmental authority, court or agency, now or hereafter enacted or in effect.

“Lease” is defined in the introductory Paragraph.

“Lease Year” means, with respect to the first Lease Year, the period commencing on the Commencement Date and ending at midnight on the last day of the twelfth (12^th) full consecutive calendar month following the month in which the Commencement Date occurred, and each succeeding twelve (12) month period during the Term.

“Leased Premises” means the 2505 Leased Premises and the 2533 Leased Premises.

“Legal Requirements” means the requirements of all present and future Laws, including all permit and licensing requirements and all covenants, restrictions and conditions, including all Easement Agreements, now or hereafter of record which may be applicable to Tenant or to any of the Leased Premises, or to the use, manner of use, occupancy, possession, operation, maintenance, alteration, repair or restoration of any of the Leased Premises.

“Lender” means any Person which may, on or after the date hereof, make a Loan to Landlord or be the holder of a Note, together with its successors, transferees and assigns.

“Lienholders” is defined in Paragraph 34(c).

“Loan” means any loan made by one or more Lenders to Landlord, which loan is secured by a Mortgage and an Assignment and evidenced by a Note.

“Major Alterations” is defined in Paragraph 34.

“Monetary Obligations” means Rent, Impositions, Escrow Charges and all other sums payable by Tenant under this Lease to Landlord, to any third party on behalf of Landlord, or to any Indemnitee.

“Moody's” means Moody's Investor Services, Inc.

Page 6

“Mortgage” means any mortgage or deed of trust from Landlord to a Lender which (a) encumbers any of the Leased Premises and (b) secures Landlord's obligation to repay a Loan, as the same may be amended, supplemented or modified.

“Net Award” means (a) the entire award payable to Landlord or Lender by reason of a Condemnation, less any sums paid pursuant to a separate claim by Tenant for (i) any furniture, fixtures and equipment owned by Tenant and affected by such Condemnation, or (ii) Tenant’s relocation expenses; or (b) the entire proceeds of any insurance policy by reason of a Casualty, in each case, less any expenses incurred by Landlord and Lender in collecting such award or proceeds.

“Note” means any promissory note evidencing Landlord's obligation to repay a Loan, as the same may be amended, supplemented or modified.

“Partial Casualty” means any Casualty which does not constitute a Termination Event.

“Partial Condemnation” means any Condemnation which does not constitute a Termination Event.

“Permitted Asset Transfer” is defined in Paragraph 21(j).

“Permitted Change of Control” is defined in Paragraph 21(k).

“Permitted Encumbrances” means those covenants, restrictions, reservations, liens, conditions and easements and other encumbrances, other than any Mortgage or Assignment, listed on Exhibit C.

“Permitted Leasehold Mortgage” is defined in Paragraph 35.

“Permitted Violations” is defined in Paragraph 14.

“Person” means an individual, partnership, limited liability company, association, corporation or other entity.

“Plans” is defined in the Construction Agency Agreement.

“Prepayment Premium” means any payment required to be made by Landlord to a Lender under a Note or other document evidencing or securing a Loan (other than payments of principal and/or interest) solely by reason of any prepayment or defeasance by Landlord of any principal due under such Loan, and which may, without limitation, take the form of (a) a “make whole” or yield maintenance clause requiring a prepayment premium or (b) a defeasance payment (such defeasance payment to be an amount equal to the positive difference between (i) the total amount required to defease a Loan and (ii) the outstanding principal balance of the Loan as of the date of such defeasance plus reasonable Costs of Landlord and Lender).

“Present Value” of any amount means such amount discounted by a rate per annum which is the lower of (a) the Prime Rate at the time such present value is determined or (b) six percent (6%) per annum.

Page 7

“Prime Rate” means the interest rate per annum as published, from time to time, in The Wall Street Journal as the “Prime Rate” in its column entitled “Money Rate”.  The Prime Rate may not be the lowest rate of interest charged by any “large U.S. money center commercial banks” and Landlord makes no representations or warranties to that effect.  In the event The Wall Street Journal ceases publication or ceases to publish the “Prime Rate” as described above, the Prime Rate shall be the average per annum discount rate (the “Discount Rate”) on ninety-one (91) day bills (“Treasury Bills”) issued from time to time by the United States Treasury at its most recent auction, plus three hundred (300) basis points.  If no such 91-day Treasury Bills are then being issued, the Discou nt Rate shall be the discount rate on Treasury Bills then being issued for the period of time closest to ninety-one (91) days.

“Purchase and Sale Agreement” means the Purchase and Sale Agreement dated of even date herewith between Landlord and Foster Avenue, LLC with respect to the 2533 Leased Premises.

“Qualified Transferee” means a Person that has (or whose principals or key management personnel have) not less than five (5) years experience in the stainless steel tubing manufacturing business and which, immediately following an assignment of this Lease and after taking such assignment of this Lease into account, has a credit rating equal or better to the credit rating of Tenant on the date hereof.

“Real Property” means the 2505 Real Property and the 2533 Real Property.

“Rejection Notice” is defined in Paragraph 18(d).

“Relevant Amount” means, with respect to any Leased Premises, the Termination Amount or the Default Termination Amount with respect to such Leased Premises, as the case may be.

“Relevant Date” means (a) in the event of a Termination Notice pursuant to Paragraph 18 with respect to a Condemnation, the date immediately prior to the date on which the applicable Condemnation Notice is received, (b) in the event of a Termination Notice pursuant to Paragraph 18 with respect to a Casualty, the date immediately prior to the date on which the applicable Casualty occurs, (c) in the event of a redetermination of Fair Market Value pursuant to Paragraph 20(c), the date on which Fair Market Value is determined, and (d) in the event Landlord provides Tenant with notice of its intention to require Tenant to make a termination offer under Paragraph 23(a)(iii), the date immediately prior to the Event of Default giving rise to the need to determine Fair Market Value.

“Remaining Obligations” is defined in Paragraph 18(d).

“Remaining Premises” means any Leased Premises that is not an Affected Premises under Paragraph 18.

“Remaining Sum” means Remaining Sum as defined in Paragraph 19(c).

“Renewal Date” is defined in Paragraph 5.

Page 8

“Renewal Term” is defined in Paragraph 5.

“Rent” means, collectively, Basic Rent and Additional Rent.

“Requisition” means a temporary requisition or confiscation of the use or occupancy of all or a portion of any of the Leased Premises by any governmental authority, civil or military, whether pursuant to an agreement with such governmental authority in settlement of or under threat of any such requisition or confiscation.

“Review Criteria” is defined in Paragraph 21(b).

“S&P” means Standard and Poor's Ratings Services, a division of McGraw Hill Companies, Inc.

“Site Assessment” is defined in Paragraph 10(c).

“Site Reviewers” is defined in Paragraph 10(c).

“State” means the State of Wisconsin.

“Subleases” means, with respect to the 2533 Real Property, the Sublease Agreement dated as of October 30, 2006 between Tenant, as sublandlord, and First Safety Corporation, as subtenant, as amended, supplemented or modified, and those certain two (2) oral sublease agreements between Tenant, as sublandlord, and Goex Corporation and Prent Corporation, as subtenants, respectively.

“Subsidiary(ies)” means, as to any Person, any corporation, partnership, limited liability company, association, or other business entity of which such Person directly or indirectly owns more than 50% of the capital stock or other equity interests.

“Surviving Obligations” means any obligations of Tenant under this Lease, actual or contingent, which arise on or prior to the expiration or prior termination of this Lease or which survive such expiration or termination by their own terms.

“Tenant” is defined in the introductory Paragraph.

“Tenant Certificate” means the Tenant Certificate executed and delivered by Tenant to Landlord in connection with this Lease.

“Term” is defined in Paragraph 5(a).

“Termination Amount” means, with respect to any Leases Premises, the greater of (a) the sum of the Fair Market Value of such Leased Premises and any applicable Prepayment Premium or (b) the sum of the Acquisition Cost of such Leased Premised and any applicable Prepayment Premium.

“Termination Date” is defined in Paragraph 18(c).

Page 9

“Termination Event” means a Casualty or Condemnation described in Paragraph 18(a) or Paragraph 18(b).

“Termination Notice” is defined in Paragraph 18(a).

“Third Party Purchaser” is defined in Paragraph 21(i).

“Warehouse Expansion Improvements” means the warehouse improvements to be constructed on the 2505 Real Property more particularly described in Exhibit “H”.

“Warranties” is defined in Paragraph 3(d).

“Work” is defined in Paragraph 13(b).

3.

Title and Condition .

(a)

The Leased Premises are demised and let subject to (i) any Mortgage and Assignment in effect from time to time, (ii) the rights of any Persons in possession of the Leased Premises as of the date hereof, (iii) the state of title of the Leased Premises as of the date hereof, including any Permitted Encumbrances, (iv) any state of facts which an accurate survey or physical inspection of the Leased Premises might show, (v) all Legal Requirements, including any existing violation of any thereof, and (vi) the condition of the Leased Premises as of the date hereof, without representation or warranty by Landlord.

(b)

Tenant acknowledges that the Leased Premises are in good condition and repair at the inception of this Lease.  LANDLORD LEASES AND WILL LEASE AND TENANT TAKES AND WILL TAKE THE LEASED PREMISES AS IS WHERE IS AND WITH ALL FAULTS.  TENANT ACKNOWLEDGES THAT LANDLORD (WHETHER ACTING AS LANDLORD HEREUNDER OR IN ANY OTHER CAPACITY) HAS NOT MADE AND WILL NOT MAKE, NOR SHALL LANDLORD BE DEEMED TO HAVE MADE, ANY WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE LEASED PREMISES, INCLUDING ANY WARRANTY OR REPRESENTATION AS TO (i) ITS FITNESS, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE, (ii) THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, (iii) THE EXISTENCE OF ANY DEFECT, LATENT OR PATENT, (iv) LANDLORD'S TITLE THERETO, (v) VALUE, (vi) COMPLIANCE WITH SPECIFICATIONS, (vii) LOCATION, (viii) USE, (ix) COND ITION, (x) MERCHANTABILITY, (xi) QUALITY, (xii) DESCRIPTION, (xiii) DURABILITY (xiv) OPERATION, (xv) THE EXISTENCE OR PRESENCE OF ANY HAZARDOUS SUBSTANCE, OR (xvi) COMPLIANCE OF THE LEASED PREMISES WITH ANY LEGAL REQUIREMENT; AND ALL RISKS RELATED TO ANY OF THE FOREGOING ARE TO BE BORNE BY TENANT, EXCEPT WHEN CAUSED BY LANDLORD’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.  TENANT ACKNOWLEDGES THAT THE LEASED PREMISES ARE OF ITS SELECTION AND TO ITS SPECIFICATIONS AND THAT THE LEASED PREMISES HAVE BEEN INSPECTED BY TENANT AND ARE SATISFACTORY TO IT.  IN THE EVENT OF ANY DEFECT OR DEFICIENCY IN ANY OF THE LEASED PREMISES OF ANY NATURE, WHETHER LATENT OR PATENT, LANDLORD SHALL NOT HAVE ANY RESPONSIBILITY OR LIABILITY WITH RESPECT THERETO OR FOR ANY

Page 10

INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING STRICT LIABILITY IN TORT).  THE PROVISIONS OF THIS PARAGRAPH 3(b) HAVE BEEN NEGOTIATED, AND ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION OF ANY WARRANTIES BY LANDLORD, EXPRESS OR IMPLIED, WITH RESPECT TO THE CONDITION OF THE LEASED PREMISES.

(c)

Tenant acknowledges that Tenant has examined the title to the Leased Premises prior to the execution and delivery of this Lease and has found the same to be satisfactory for the purposes contemplated hereby.  Tenant represents and warrants to Landlord that (i) Tenant has conveyed to Landlord good and marketable fee simple title to the Real Property, free and clear of all liens and encumbrances other than the Permitted Encumbrances, (ii) Tenant has only the leasehold right of possession and use of the Leased Premises, as provided herein, (iii) the Leased Premises conform to all Legal Requirements and all Insurance Requirements, (iv) all easements necessary or appropriate for the use or operation of the Leased Premises have been obtained and maintained, (v) neither Tenant or any agent, officer, employee, principal or affiliate of Tenant has granted or knowingly suffered to ex ist any unrecorded deeds, mortgages, land contracts, options to purchase, agreements or other instruments adversely affecting title to any of the Leased Premises or any lien, encumbrance, transfer of interest, constructive trust, or other equity in the Leased Premises, (vi) all real property taxes due and payable with respect to the Real Property and the Leased Premises have been paid in full, (vii) Tenant has received no notice of any Casualty, Condemnation or pending or threatened special assessments affecting the Leased Premises, (viii) Tenant has received no complaint with respect to, or notice of, any litigation filed against Tenant, the Real Property or the Leased Premises that would adversely affect the current use or operation of the Leased Premises or the ability of Tenant to perform its obligations under the Lease, (ix) all contractors and subcontractors who have performed work on or supplied materials to the Leased Premises have been fully paid, and all materials and supplies have been fully paid for, (x) all permits, licenses, approvals and third-party consents necessary for the use and operation of the Leased Premises have been obtained and remain in full force and effect and no violations or defaults exist thereunder, (xi) the Improvements have been fully completed in all material respects in a workmanlike manner of first class quality, (xii) all Equipment necessary for the use or operation of the Leased Premises has been installed and is presently fully operative in all material respects, and (xiii) other than this Lease and the Subleases, there are no other leases in effect with respect to the Leased Premises.  The foregoing representations and warranties shall survive the date on which this Lease is fully executed.

(d)

Landlord hereby assigns to Tenant, without recourse or warranty whatsoever, in conjunction with Landlord, the right to enforce all assignable warranties, guaranties, indemnities, causes of action and similar rights (collectively “Warranties”) which Landlord may have against any manufacturer, seller, engineer, contractor or builder in respect of any of the Leased Premises.  Such assignment shall remain in effect until the expiration or earlier termination of this Lease (unless Tenant or its affiliate or designee acquires such Leased Premises, in which instance such assignment shall become permanent and irrevocable with respect to such Leased Premises), whereupon such assignment shall cease and all of the Warranties shall automatically revert to Landlord.  In confirmation of such reversion Tenant shall execute and deliver promptly any certificate or other document reas onably required by Landlord.  Landlord shall also retain the right to enforce any Warranties upon the occurrence of an Event of Default.  Tenant shall use

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commercially reasonable efforts to enforce the Warranties in accordance with their respective terms.

(e)

Pursuant to the Construction Agency Agreement, Tenant will cause the Warehouse Expansion Improvements to be constructed with funds more particularly described in and made available pursuant to the Construction Agency Agreement.  The Warehouse Expansion Improvements and the Plans will be owned by Landlord and are included within the Leased Premises.  Tenant acknowledges that the Warehouse Expansion Improvements have not yet been constructed and that, pursuant to the Construction Agency Agreement entered into by Landlord and Tenant, Tenant has the responsibility for causing the Warehouse Expansion Improvements to be completed in accordance with the terms of the Construction Agreement and the Construction Agency Agreement.  Landlord will not make any representations or warranties with respect to the Warehouse Expansion Improvements, except that Landlord has the obligation to provid e to Tenant the funds described therein pursuant to the terms and provision of the Construction Agency Agreement.  Tenant further acknowledges that, upon occurrence of an Event of Default, Landlord may terminate the Construction Agency Agreement, and in addition to all other remedies of Landlord under this Lease, Landlord shall have the right to retain all amounts in the Construction Escrow and the right, but not the obligation, to complete construction of the Warehouse Expansion Improvements in accordance with the Plans.  If Landlord so completes construction of the Warehouse Expansion Improvements, Tenant will not be excused from paying all Rent due pursuant to the terms of this Lease, and Landlord shall have the right to exercise any or all of its remedies hereunder following an Event of Default.  All representations and warranties and acknowledgments of Tenant regarding the Leased Premises contained in Paragraph 3(b) shall be deemed to have been made again as of the Final Completion D ate.

(f)

LANDLORD AND TENANT AGREE THAT IT IS THEIR  MUTUAL INTENT TO CREATE, AND THAT THIS LEASE CONSTITUTES, A MASTER LEASE WITH RESPECT TO EACH AND EVERY PARCEL OF REAL PROPERTY AND IMPROVEMENTS INCLUDED IN ANY AND ALL OF THE LEASED PREMISES (WHEREVER LOCATED), THAT THIS LEASE IS NOT INTENDED AND SHALL NOT BE CONTSTRUED TO BE SEPARATE LEASES AND THAT ALL THE TERMS AND CONDITIONS HEREOF SHALL GOVERN THE RIGHTS AND OBLIGATIONS OF LANDLORD AND TENANT WITH RESPECT THERETO.

(g)

TENANT, ON BEHALF OF ITSELF AND ANY TRUSTEE OR LEGAL REPRESENTATIVE (UNDER THE FEDERAL BANKRUPTCY CODE OR ANY SIMILAR STATE INSOLVENCY PROCEEDING) EXPRESSLY ACKNOWLEDGES AND AGREES THAT, NOTWITHSTANDING THE PROVISIONS OF PARAGRAPH 18 HEREOF OR ANY OTHER PROVISION IN THIS LEASE TO THE CONTRARY, IT IS THE EXPRESS INTENT OF LANDLORD AND TENANT TO CREATE, AND THAT THIS LEASE CONSTITUTES, A SINGLE LEASE WITH RESPECT TO EACH AND EVERY PARCEL OF LAND, IMPROVEMENTS AND EQUIPMENT INCLUDED IN EACH AND ALL OF THE RELATED PREMISES (WHEREVER LOCATED) AND SHALL NOT BE (OR BE DEEMED TO BE) DIVISIBLE OR SEVERABLE INTO SEPARATE LEASES FOR ANY PURPOSE WHATSOEVER, AND TENANT, ON BEHALF OF ITSELF AND ANY SUCH TRUSTEE OR LEGAL REPRESENTATIVE, HEREBY WAIVES ANY RIGHT TO CLAIM OR ASSERT A CONTRARY POSITION IN ANY ACTION OR PROCEEDING; IT BEING FURTHER

Page 12

UNDERSTOOD AND AGREED BY TENANT THAT THE ALLOCATIONS OF ACQUISITION COST AND PERCENTAGE ALLOCATION OF BASIC RENT AS SET FORTH ON EXHIBIT “E” AND EXHIBIT “F” HEREOF ARE INCLUDED TO PROVIDE A FORMULA FOR RENT ADJUSTMENT AND LEASE TERMINATION UNDER CERTAIN CIRCUMSTANCES AND AS AN ACCOMMODATION TO TENANT.  ANY EVENT OF DEFAULT HEREUNDER IN CONNECTION WITH ANY RELATED PREMISES SHALL BE DEEMED TO BE AN EVENT OF DEFAULT WITH RESPECT TO THE ENTIRE LEASED PREMISES (WHEREVER LOCATED).  THE FOREGOING AGREEMENTS AND WAIVERS BY TENANT IN THIS PARAGRAPH 3(f) ARE MADE AS A MATERIAL INDUCEMENT TO LANDLORD TO ENTER INTO THE TRANSACTION CONTEMPLATED BY THIS LEASE AND THAT, BUT FOR THE FOREGOING AGREEMENTS AND WAIVERS BY TENANT, LANDLORD WOULD NOT CONSUMMATE THIS LEASE TRANSACTION.

4.

Use of Leased Premises; Quiet Enjoyment.

(a)

Tenant may occupy and use the Leased Premises as office, manufacturing and warehouse facilities in connection with its stainless steel tubing manufacturing business and for no other purpose.  Tenant shall be responsible for obtaining and maintaining all permits, licenses, certificates of occupancy, or any other items required by Law or any Legal Requirement with respect to Tenant’s permitted use and occupancy of the Leased Premises.  Tenant shall not use or occupy or permit any of the Leased Premises to be used or occupied, nor do or permit anything to be done in or on any of the Leased Premises, in a manner which would or might (i) violate any Legal Requirement or Permitted Encumbrance, (ii) make void or voidable or cause any insurer to cancel any insurance required by this Lease, or make it difficult or impossible to obtain any such insurance at commercially reasonab le rates, (iii) make void or voidable, cancel or cause to be cancelled or release any of the Warranties, (iv) cause structural injury to any of the Improvements or (v) constitute a public or private nuisance or waste.  If during the Term Tenant’s use or occupancy of any of the Leased Premises are no longer permitted by Law or any Legal Requirement, Tenant shall not have the right to terminate this Lease.  

Notwithstanding the foregoing, Tenant may request that Landlord approve any use of the Leased Premises for any purpose not otherwise permitted under this Paragraph 4(a); provided that (i) such proposed use shall not be prohibited under any applicable Law, and (ii) no Event of Default shall exist.  With respect to any request made by Tenant in accordance with the immediately foregoing sentence, Landlord shall have the right to grant or withhold its approval in its reasonable discretion; provided that in granting or withholding its approval or disapproval, Landlord shall consider: (A) the condition of the Leased Premises; (B) Tenant's most recent financial statements and Tenant's projections, in form and substance reasonably satisfactory to Landlord, based on the proposed new occupancy and use of the Leased Premises; and (C) such additional information related to the proposed u se of the Leased Premises as Landlord or Lender shall reasonably request, including without limitation, (1) information relating to any Alterations required in connection with such proposed use and Tenant's proposed method of funding the cost thereof; (2) any additional insurance requirements required in connection with such proposed use, (3) any additional permits, licenses and other items required to operate the Leased Premises for such proposed use, and (4) any conditions that Lender may impose upon Landlord and/or Tenant with respect to the change in use proposed by Tenant.  If Landlord shall consent to the

Page 13

proposed changes in use of the Leased Premises, Tenant agrees to execute and deliver any amendment to this Lease or such other documentation as Landlord and Lender shall reasonably require with respect to the change of use of the Leased Premises.  Tenant shall be responsible for all fees (including reasonable attorney fees) and out-of-pocket costs actually incurred by Landlord as a result of Landlord's review and approval or disapproval of Tenant's proposed new occupancy and use of the Leased Premises.

(b)

Subject to the provisions hereof, so long as no Event of Default has occurred and is continuing, Tenant shall quietly hold, occupy and enjoy the Leased Premises throughout the Term, without any hindrance, ejection or molestation by Landlord with respect to matters that arise after the date hereof, provided that Landlord or its agents may enter upon and examine any of the Leased Premises at such reasonable times as Landlord may select and upon reasonable notice to Tenant (except in the case of any emergency, in which event no notice shall be required) for the purpose of inspecting such Leased Premises, verifying compliance or non-compliance by Tenant with its obligations hereunder and the existence or non-existence of an Event of Default or event which with the passage of time and/or notice would constitute an Event of Default, showing such Leased Premises to prospective Lenders and purc hasers, making any repairs and taking such other action with respect to such Leased Premises as is permitted by any provision hereof.  Tenant shall permit inspection of any of the Leased Premises by any federal, state, county or municipal officer or representative to determine if such Leased Premises or any portion thereof comply with any Law or Legal Requirement.

5.

Term.

(a)

Subject to the provisions hereof, Tenant shall have and hold the Leased Premises for an initial term (as extended or renewed in accordance with the provisions hereof, the “Term”) commencing on the date hereof (the “Commencement Date”) and ending on the last day of the two hundred fortieth (240th) full calendar month next following the date hereof (the “Expiration Date”).  If all Rent and all other sums due hereunder shall not have been fully paid by the end of the Term, Landlord may, at its option, extend the Term until all said sums shall have been fully paid.

(b)

Provided that if, on or prior to the Expiration Date or any other Renewal Date (as hereinafter defined) this Lease shall not have been terminated pursuant to any provision hereof, then on the Expiration Date and on the tenth (10^th) anniversary of the Expiration Date (each such date, a “Renewal Date”), the Term shall be deemed to have been automatically extended for an additional period of ten (10) years (each of the extension periods, a “Renewal Term”), unless Tenant shall notify Landlord in writing in recordable form at least twenty four (24) months prior to the next Renewal Date that Tenant is terminating this Lease as of the next Renewal Date.  Any such extension of the Term shall be subject to all of the provisions of this Lease (except that Tenant shall not have the right to any additional Renewal Terms).

(c)

If Tenant exercises its option pursuant to Paragraph 5(b) not to have the Term automatically extended, or if an Event of Default occurs, then Landlord shall have the right during the remainder of the Term then in effect and, in any event, Landlord shall have the right during the last year of the Term, to (i) advertise the availability of any of the Leased Premises for sale or reletting and to erect upon any of the Leased Premises two (2) signs in a location and

Page 14

having an appearance reasonably acceptable to Tenant indicating such availability and (ii) show any of the Leased Premises to prospective purchasers or tenants or their agents at such reasonable times during Tenant's normal business hours as Landlord may select.

6.

Basic Rent.

Tenant shall pay to Landlord for the Leased Premises during the Term, annual rent in the amounts (“Basic Rent”) and on the dates (each, a “Basic Rent Payment Date”) provided for in Exhibit “D”.  Each payment of Basic Rent shall be made to Landlord (or one or more other Persons as Landlord may designate) in Federal Funds on each Basic Rent Payment Date, without offset, abatement or deduction,  pursuant to wire transfer instructions delivered to Tenant from time to time.

7.

Additional Rent.

(a)

Tenant shall pay and discharge, as additional rent (collectively, “Additional Rent”):

(i)

except as otherwise specifically provided herein, all Costs of Tenant, Landlord (including Costs of Landlord’s counsel and Landlord’s reasonable internal Costs) and any other Persons specifically referenced herein which are incurred in connection or associated with (A) the ownership, use, non-use, occupancy, monitoring, possession, operation, condition, design, construction, maintenance, alteration, repair or restoration of the Leased Premises pursuant to the provisions of this Lease, (B) the enforcement of, in accordance with this Lease, or the performance of any of Tenant's obligations under this Lease, (C) any sale or other transfer of any of the Leased Premises to Tenant under this Lease, including costs and expenses incurred in connection with the payment of a Prepayment Premium, (D) any Condemnation proceedings, (E) the adjustment, settlement or comprom ise of any insurance claims involving or arising from any of the Leased Premises, (F) the prosecution, defense or settlement of any litigation involving or arising from any of the Leased Premises, this Lease, or the sale of any of the Leased Premises to Landlord, (G) the exercise or enforcement by Landlord of any of its rights under this Lease, (H) any amendment or supplement to or modification or termination of this Lease requested by Tenant or necessitated by any action of Tenant, including without limitation, any default by Tenant in the performance of any of its obligations under this Lease, (I)  the preparation, negotiation and execution of this Lease, any act undertaken by Landlord (or its counsel) at the request of Tenant, any act of Landlord performed on behalf of Tenant, or the review and monitoring of compliance by Tenant with the terms of this Lease, including compliance with the Construction Agency Agreement applicable Law, (J) Tenant's failure to act promptly in a n emergency situation, (K) associated with the wire transfers of Rent payments, and (L) all other items specifically required to be paid by Tenant under this Lease;

(ii)

If all or any portion of any installment of Basic Rent is due and not paid by the applicable Basic Rent Payment Date, an amount (the “Late Charge”) equal to five percent (5%) of the amount of such unpaid installment or portion thereof to reimburse Landlord for its cost and inconvenience incurred as a result of Tenant's delinquency;

(iii)

a sum equal to any additional sums (including any late charge in excess of the amount payable under clause (ii) above for that portion of the Basic Rent paid to the Lender

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as scheduled installments of principal and interest, default penalties, interest in excess of amounts payable under clause (iv) below for that portion of the Basic Rent paid to the Lender as scheduled installments of principal and interest, and fees of Lender's counsel) which are payable by Landlord to any Lender under any Note by reason of Tenant's late payment or non-payment of Basic Rent or by reason of an Event of Default; and

(iv)

interest at the rate (the “Default Rate”) of five percent (5%) over the Prime Rate per annum on the following sums until paid in full: (A) all overdue installments of Basic Rent from the respective due dates thereof, (B) all overdue amounts of Additional Rent relating to obligations of Tenant hereunder which Landlord shall have paid on behalf of Tenant, from the date of payment thereof by Landlord, and (C) all other overdue amounts of Additional Rent, from the date when any such amount becomes overdue.

(b)

Tenant shall pay and discharge (i) any Additional Rent referred to in Paragraph 7(a)(i) when the same shall become due; provided that amounts which are billed to Landlord or any third party, but not to Tenant, shall be paid within ten (10) days after Landlord's demand for payment thereof, and (ii) any other Additional Rent, within ten (10) days after Landlord's demand for payment thereof.

(c)

In no event shall amounts payable under Paragraph 7(a)(ii), (iii) and (iv) or elsewhere in this Lease exceed the maximum amount permitted by applicable Law.

8.

Net Lease: Non-Terminability.

(a)

This is a net lease and all Monetary Obligations shall be paid without notice or demand and without set-off, counterclaim, recoupment, abatement, suspension, deferment, diminution, deduction, reduction or defense (collectively, a “Set-Off”).

(b)

This Lease and the rights of Landlord and the obligations of Tenant hereunder shall not be affected by any event or for any reason or cause whatsoever foreseen or unforeseen.

(c)

The obligations of Tenant hereunder shall be separate and independent covenants and agreements, all Monetary Obligations shall continue to be payable in all events (or, in lieu thereof, Tenant shall pay amounts equal thereto), and the obligations of Tenant hereunder shall continue unaffected unless the requirement to pay or perform the same shall have been terminated pursuant to an express provision of this Lease.  The obligation to pay Rent or amounts equal thereto shall not be affected by any collection of rents by any governmental body pursuant to a tax lien or otherwise.  All Rent payable by Tenant hereunder shall constitute “rent” for all purposes (including Section 502(b)(6) of the Federal Bankruptcy Code).

(d)

Except as otherwise expressly provided herein, Tenant shall have no right and hereby waives all rights which it may have under any Law to (i) quit, terminate or surrender this Lease or any of the Leased Premises, or (ii)  any Set-Off of any Monetary Obligations.

9.

Payment of Impositions.

(a)

Tenant shall pay and discharge when due: all taxes (including real and personal property, franchise, sales, use, gross receipts and rent taxes); all charges for any easement or

Page 16

agreement maintained for the benefit of the Leased Premises; all assessments (including special assessments and any other charges or claims imposed by a governmental or municipal entity) and levies; all fines, penalties and other costs in connection with noncompliance with any applicable Law; all permit, inspection and license fees; all rents and charges for water, sewer, utility and communication services relating to the Leased Premises; all ground rents and all other public charges, imposed upon or assessed against (i) Tenant, (ii) Tenant's interest in any of the Leased Premises, (iii) any of the Leased Premises, (iv) Landlord as a result of or arising in respect of the acquisition, ownership, occupancy, leasing, use, possession or sale of any of the Leased Premises, any activity conducted on the Leased Premises, or the Rent, or (v) any Lender by reason of any Note, Mortgage, Assignment or other document evidencing or securing a Loan and which (as to this clause (v)) Landlord has agreed to pay (collectively, the “Impositions”); provided that nothing herein shall obligate Tenant to pay (A) income, excess profits or other taxes of Landlord (or Lender) which are determined on the basis of Landlord's (or Lender's) net income or net worth (unless such taxes are in lieu of or a substitute for any other tax, assessment or other charge upon or with respect to any of the Leased Premises which, if it were in effect, would be payable by Tenant under the provisions hereof or by the terms of such tax, assessment or other charge), (B) any estate, inheritance, succession, gift or similar tax imposed on Landlord or (C) any capital gains tax imposed on Landlord in connection with the sale of any of the Leased Premises to any Person.  Landlord shall have the right to require Tenant to pay, together with scheduled installments of Basic Rent, the amount of the gros s receipts or rent tax, if any, payable with respect to the amount of such installment of Basic Rent.  If any Imposition may be paid in installments without interest or penalty, Tenant shall have the option to pay such Imposition in installments.  Tenant shall prepare and file all tax reports required by governmental authorities which relate to the Impositions.  Tenant shall deliver to Landlord (1) copies of all settlements and notices pertaining to the Impositions which may be issued by any governmental authority within ten (10) days after Tenant's receipt thereof, (2) receipts for payment of all taxes required to be paid by Tenant hereunder within thirty (30) days after the due date thereof and (3) receipts for payment of all other Impositions within ten (10) days after Landlord's request therefor.

(b)

Following the occurrence of an Event of Default, or if Landlord is required by a Lender, Tenant shall pay to Landlord such amounts (each an “Escrow Payment”) monthly or as required by such Lender (but not more often than monthly) so that there shall be in an escrow account an amount sufficient to pay the Escrow Charges (as hereinafter defined) as they become due.  As used herein, “Escrow Charges” means real estate taxes and assessments on or with respect to any of the Leased Premises or payments in lieu thereof and premiums on any insurance required by this Lease and any reserves for capital improvements, deferred maintenance, repair and/or tenant improvements and leasing commissions required by any Lender.  Landlord shall determine the amount of the Escrow Charges (it being agreed that if required by a Lender, such amount shall equal any correspondi ng escrow installments required to be paid by Landlord) and the amount of each Escrow Payment.  The Escrow Payments shall not be commingled with any other funds of Landlord or other Persons and no interest thereon shall be due or payable to Tenant.  Landlord shall apply the Escrow Payments to the payment of the Escrow Charges in such order or priority as Landlord shall determine or as required by Law.  If at any time the Escrow Payments theretofore paid to Landlord shall be insufficient for the payment of the Escrow Charges, Tenant, within ten (10) days after Landlord's demand therefor, shall pay the amount of the deficiency to Landlord.   If at any time after escrows are required to

Page 17

be paid by Tenant pursuant to this Paragraph 9(b) no Event of Default as described in the first sentence of this Paragraph 9(b) exists for six (6) consecutive months, Tenant shall not be required to continue to pay such escrows unless and until another such Event of Default occurs, and all sums on deposit in such escrow account shall be paid over to Tenant promptly after either of such conditions is no longer in effect.  However, if escrows are so reinstituted, Tenant shall be required to pay the escrows described in this Paragraph 9(b) for the balance of the Term.  At the end of the Term, the balance remaining in any escrow account, including all interest accrued thereon, shall be returned to Tenant.

10.

Compliance with Laws and Easement Agreements; Environmental Matters.

(a)

Tenant shall, at its expense, comply with and conform to, and cause the Leased Premises and any other Person occupying any part of the Leased Premises to comply with and conform to, all Insurance Requirements and all Legal Requirements (including all applicable Environmental Laws).  Tenant shall not at any time (i) cause, permit or suffer to occur any Environmental Violation or (ii) permit any sublessee, assignee or other Person occupying any of the Leased Premises under or through Tenant to cause, permit or suffer to occur any Environmental Violation and, at the request of Landlord or Lender, Tenant shall promptly remediate or undertake any other appropriate response action to correct any existing Environmental Violation, however immaterial but in a manner which is commercially reasonable and sufficient to remediate or correct such Environmental Violations to levels consistent with the permitted uses of the Leased Premises and in all instances in a manner and to a degree that complies with all Legal Requirements (including all applicable Environmental Laws), or (iii) without the prior written consent of Landlord and Lender, permit any drilling or exploration for or extraction, removal, or production of any minerals from the surface or the subsurface of any of the Real Property, regardless of the depth thereof or the method of mining or extraction thereof.  Any and all reports prepared for or by Landlord with respect to the Leased Premises shall be for the sole benefit of Landlord and Lender and no other Person shall have the right to rely on any such reports.

(b)

Tenant, at its sole cost and expense, will at all times promptly and faithfully abide by, discharge and perform all of the covenants, conditions and agreements contained in any Easement Agreement on the part of Landlord or the occupier to be kept and performed thereunder.  Tenant will not alter, modify, amend or terminate any Easement Agreement, give any consent or approval thereunder, or enter into any new Easement Agreement without, in each case, prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed.  As long as no Event of Default is continuing, Landlord shall not alter, modify, amend or terminate any Easement Agreement, give any consent or approval thereunder or enter into any new Easement Agreement without, in each case, the prior written consent of Tenant, which shall not be unreasonably withheld, conditioned or delayed. &nb sp;Provided, Landlord shall not be required to obtain Tenant’s prior written consent or any consent of Tenant, to alter, modify, amend or terminate any Easement Agreement, give any consent or approval thereunder or enter into any new Easement Agreement where Landlord’s action is required by any Legal Requirement or not discretionary.  

(c)

Upon prior written notice from Landlord, Tenant shall permit such persons as Landlord may designate (“Site Reviewers”) to visit any of the Leased Premises during Tenant’s

Page 18

normal business hours and in a manner which does not unreasonably interfere with Tenant's operations and perform, as agents of Tenant, environmental site investigations and assessments (“Site Assessments”) on any of the Leased Premises in any of the following circumstances:  (i) in connection with any sale, financing or refinancing of any of the Leased Premises, (ii) within the six month period prior to the expiration of the Term, (iii) if required by Lender or the terms of any credit facility to which Landlord is bound, (iv) if an Event of Default exists, or (v) at any other time that Landlord or Lender have a reasonable grounds, based on facts known to Landlord and Lender, to believe that an Environmental Violation or any condition that could reasonably be expected to result in any Environmental Violation exists.  Such Site Assessments may include both above and below the ground testing for Environmental Violations and such other tests as may be necessary, in the opinion of the Site Reviewers, to conduct the Site Assessments; provided that no such Site Assessment shall include an invasive investigation unless in the opinion of the Site Reviewer an invasive investigation is required under any applicable Law or by a governmental authority having jurisdiction over the Leased Premises.  Tenant shall supply to the Site Reviewers such historical and operational information regarding the applicable Leased Premises as may be reasonably requested by the Site Reviewers to facilitate the Site Assessments, and shall make available for meetings with the Site Reviewers appropriate personnel having knowledge of such matters.  The cost of performing and reporting any Site Assessments shall be paid by Tenant, provided, if Tenant is not in default under this Lease and Landlord has no reasonable grounds to believe that an Environmental Violation or any cond ition that could reasonably be expected to result in any Environmental Violation exists, the cost of any Site Assessment performed for due diligence purposes related to any proposed sale or re-leasing of the Leased Premises by Landlord shall be paid by Landlord.

(d)

If an Environmental Violation occurs or is found to exist and, in Landlord's reasonable judgment, the cost of remediation of, or other response action with respect to, the same is likely to exceed $300,000.00, Tenant shall provide to Landlord, within ten (10) days after Landlord's request therefor, adequate financial assurances that Tenant will effect such remediation in accordance with applicable Environmental Laws.  Such financial assurances shall be a bond or letter of credit or other assurances satisfactory to Landlord in form and substance and in an amount equal to or greater than Landlord's reasonable estimate, based upon a Site Assessment performed pursuant to Paragraph 10(c), of the anticipated cost of such remedial action.  Any such financial assurances shall be reduced from time-to-time as appropriate to maintain an amount equal to greater than Landlord 6;s reasonable estimate for the remaining work to be performed on the Leased Premises; provided no such reduction shall be permitted unless this Lease remains in full force and effect at all times during the performance of such work.  

(e)

Notwithstanding any other provision of this Lease, if an Environmental Violation occurs or is found to exist and the Term would otherwise terminate or expire, then, at the option of Landlord, the Term shall be automatically extended beyond the date of termination or expiration and this Lease shall remain in full force and effect beyond such date until the earlier to occur of (i) the completion of all remedial action in accordance with applicable Environmental Laws or (ii) the date specified in a written notice from Landlord to Tenant terminating this Lease.

(f)

If Tenant fails to promptly comply with any requirement of any Environmental Law in connection with any Environmental Violation which occurs or is found to exist, Landlord

Page 19

shall have the right (but no obligation) to take any and all actions as Landlord shall deem necessary or advisable in order to cure such Environmental Violation.

(g)

Tenant shall notify Landlord promptly after becoming aware of any Environmental Violation (or alleged Environmental Violation) or noncompliance with any of the covenants contained in this Paragraph 10 and shall forward to Landlord promptly after receipt thereof copies of all orders, reports, notices, permits, applications or other communications relating to any such violation or noncompliance.

(h)

All future leases, subleases or concession agreements relating to the Leased Premises entered into by Tenant shall contain covenants of the other party thereto which are identical to the covenants contained in Paragraph 10(a).

(i)

As of the date of this Lease, Tenant hereby represents that all required actions and obligations of Tenant with respect to those code enforcement actions and orders to correct from the City of Janesville noted in those certain zoning letters for the Property received by Landlord on September 25, 2006 for the Property and December 6, 2006 for the 2505 Real Property have been performed, except, Tenant is still required to provide the City of Janesville building inspector with architectural plans related to work completed in the modular shipping office located on the Property (“Modular Office Work”).  Tenant shall complete the Modular Office Work on or prior to February 28, 2007.

11.

Liens; Recording.

(a)

Tenant shall not, directly or indirectly, create or permit to be created or to remain and shall promptly discharge or remove any lien, levy or encumbrance on any of the Leased Premises or on any Rent or any other sums payable by Tenant under this Lease, other than any Mortgage or Assignment, the Permitted Encumbrances and any mortgage, lien, encumbrance or other charge created by or resulting solely from any act or omission of Landlord.  NOTICE IS HEREBY GIVEN THAT LANDLORD SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO TENANT OR TO ANYONE HOLDING OR OCCUPYING ANY OF THE LEASED PREMISES THROUGH OR UNDER TENANT, AND THAT NO MECHANICS' OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LANDLORD IN AND TO ANY OF THE LEASED PREMISES.  LANDLORD MAY AT ANY TIME POST ANY REASONABLE NOTICES ON ANY OF TH E LEASED PREMISES REGARDING SUCH NON-LIABILITY OF LANDLORD.

(b)

Tenant shall execute, deliver and record, file or register (collectively, “record”) all such instruments as may be required by any present or future Law in order to evidence the respective interests of Landlord and Tenant in the Leased Premises, and shall cause a memorandum of this Lease (or, if such a memorandum cannot be recorded, this Lease), and any supplement hereto or thereto, to be recorded in such manner and in such places as may be required or permitted by any present or future Law in order to protect the validity and priority of this Lease.

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12.

Maintenance and Repair.

(a)

Tenant shall at all times maintain the Leased Premises in as good repair and appearance as they are on the date hereof (subject to normal wear and tear) and fit to be used for their intended use in accordance with the better of the practices generally recognized as then acceptable by other companies in its industry or observed by Tenant with respect to the other real properties owned or operated by it.  Tenant shall at all times maintain the Equipment in as good mechanical condition as it was on the later of the date hereof or the date of its installation, except for ordinary wear and tear.  Tenant shall at all times maintain the Warehouse Expansion Improvements in as good repair and appearance as they are on the Final Completion Date.  Tenant shall take every other action necessary or appropriate for the preservation and safety of the Leased Premises.  Tenant shall promptl y make all Alterations of every kind and nature, whether foreseen or unforeseen, which may be required to comply with the foregoing requirements of this Paragraph 12(a) or to comply with any Legal Requirement.  Landlord shall not be required to make any Alteration, whether foreseen or unforeseen, or to maintain any of the Leased Premises in any way, and Tenant hereby expressly waives any right which may be provided for in any Law now or hereafter in effect to make Alterations at the expense of Landlord or to require Landlord to make Alterations.  Any Alteration made by Tenant pursuant to this Paragraph 12 shall be made in conformity with the provisions of Paragraph 13.  Tenant hereby agrees and covenants not to commit or permit any of the Leased Premises to suffer waste, and shall take all commercially reasonable precautions necessary or required to prevent waste from occurring at any of the Leased Premises.  Notwithstanding the foregoing, (i) in no event shall the provisio ns of this Paragraph 12(a) be construed to require Tenant to make replacements of existing improvements in any circumstance in which the making of repairs to existing improvements would be sufficient to maintain the Leased Premises in as good a condition as on the date hereof, subject to ordinary wear and tear, and (ii) if Landlord determines that the roof needs to be replaced in the last two (2) years of the end of the Term and Landlord shall in its sole discretion require Tenant to make such replacement, the cost of such replacement will be borne by Tenant; provided that if Tenant elects to terminate this Lease at end of the initial Term, the cost of such replacement will be apportioned between Landlord and Tenant with Tenant’s share equal to the cost of such roof replacement multiplied by a fraction, the numerator of which shall be the remainder of the Term from the time Landlord determines the roof needs replacement, and the denominator of which shall be the anticipated useful life of such ro of as replaced.

(b)

If any Improvement, now or hereafter constructed, shall (i) encroach upon any setback or any property, street or right-of-way adjoining any of the Leased Premises, (ii) violate any zoning restrictions, including without limitation height or set-back restrictions, or the provisions of any restrictive covenant affecting any of the Leased Premises, (iii) hinder or obstruct any easement or right-of-way to which any of the Leased Premises is subject or (iv) impair the rights of others in, to or under any of the foregoing, Tenant shall, promptly after receiving notice or otherwise acquiring knowledge thereof, either (A) obtain from all necessary parties waivers or settlements of all claims, liabilities and damages resulting from each such encroachment, violation, hindrance, obstruction or impairment, whether the same shall affect Landlord, Tenant or both, or (B) take su ch action as shall be necessary to remove all such encroachments, hindrances or obstructions and to end all such violations or impairments, including, if necessary, making Alterations.

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(c)

Tenant’s covenants and agreements to maintain and repair the Leased Premises in this Paragraph 12 shall run with the land.

(d)

To the extent permitted by Law, Tenant waives its rights under and agrees not to enforce against Landlord the provisions of Section 704.07 of the Wisconsin Statutes, as amended (the “Wisconsin Statutes”).  Landlord shall have no duty or obligation to make any of the repairs or have any of the maintenance obligations set out in Section 704.07 of the Wisconsin Statutes.

13.

Alterations and Improvements.

(a)

Other than the Warehouse Expansion Improvements, which are expressly permitted without Landlord’s consent, Tenant shall not make (a) any non-structural Alterations to the Leased Premises that cost more than $750,000 in the aggregate over the Term or (ii) any structural Alterations to the Leased Premises, without having first obtained the prior written consent of Landlord and Lender.  Tenant shall not construct upon the Real Property any additional buildings without having first obtained the prior written consent of Landlord (which consent shall not be unreasonably withheld, conditioned and delayed) and Lender.  Tenant shall not be required to remove any Alterations except as required by Law or as required by Landlord as the condition to its consent to such Alteration.  

(b)

If Tenant makes any Alterations pursuant to this Paragraph 13 or Paragraph 34 or as required by Paragraph 12 or 17 (such Alterations and actions being hereinafter collectively referred to as “Work”), then (i) the market value of the applicable Leased Premises shall not be lessened by any such Work or its usefulness impaired, (ii) all such Work shall be performed by Tenant in a good and workmanlike manner, (iii) all such Work shall be expeditiously completed in compliance with all Legal Requirements, (iv) all such Work shall comply with the requirements of all insurance policies required to be maintained by Tenant hereunder, (v) if any such Work involves the replacement of Equipment or parts thereto, all replacement Equipment or parts shall have a value and useful life equal to the greater of (A) the value and useful li fe on the date hereof of the Equipment being replaced or (B) the value and useful life of the Equipment being replaced immediately prior to the occurrence of the event which required its replacement (assuming such replaced Equipment was then in the condition required by this Lease), (vi) Tenant shall promptly discharge or remove all liens filed against the Leased Premises arising out of such Work, (vii) Tenant shall procure and pay for all permits and licenses required in connection with any such Work, (viii) all such Work shall be the property of Landlord and shall be subject to this Lease, and Tenant shall execute and deliver to Landlord any document requested by Landlord evidencing the assignment to Landlord of all estate, right, title and interest (other than the leasehold estate created hereby) of Tenant or any other Person thereto or therein, and (ix) Tenant shall comply, to the extent requested by Landlord or required by this Lease, with the provisions of Paragraphs 12(a) and& nbsp;19(a), whether or not such Work involves restoration of any of the Leased Premises.

14.

Permitted Contests.

Notwithstanding any other provision of this Lease, Tenant shall not be required to (a) pay any Imposition, (b) discharge or remove any lien referred to in Paragraph 11 or 13 or (c) take any action with respect to any encroachment, violation, hindrance, obstruction or impairment referred to in Paragraph 12(b) (such non-compliance with the terms hereof being hereinafter referred to

Page 22

collectively as “Permitted Violations”) and may dispute or contest the same, so long as at the time of such non-compliance no Event of Default exists and so long as Tenant shall contest, in good faith, the existence, amount or validity thereof, the amount of the damages caused thereby, or the extent of its or Landlord's liability therefor by appropriate proceedings which shall operate during the pendency thereof to prevent or stay (i) the collection of, or other realization upon, the Permitted Violation so contested, (ii) the sale, forfeiture or loss of any of the Leased Premises or any Rent to satisfy or to pay any damages caused by any Permitted Violation, (iii) any interference with the use or occupancy of any of the Leased Premises, (iv) any interference with the payment of any Rent, or (v) the cancellation or increase in the rate of any insurance policy or a stateme nt by the carrier that coverage will be denied.  Tenant shall provide Landlord security which is satisfactory, in Landlord's reasonable judgment, to assure that such Permitted Violation is corrected, including all Costs, interest and penalties that may be incurred or become due in connection therewith.  While any proceedings which comply with the requirements of this Paragraph 14 are pending and any required security is held by Landlord, Landlord shall not have the right to correct any Permitted Violation thereby being contested unless Landlord is required by Law to correct such Permitted Violation and Tenant's contest does not prevent or stay such requirement as to Landlord.  Each such contest shall be promptly and diligently prosecuted by Tenant to a final conclusion, except that Tenant, so long as the conditions of this Paragraph 14 are at all times complied with, has the right to attempt to settle or compromise such contest through negotiations.  Tenant shall pay any and all losses, judgments, decrees and Costs in connection with any such contest and shall, promptly after the final determination or adjudication of such contest, fully pay and discharge the amounts which shall be levied, assessed, charged or imposed or be determined to be payable therein or in connection therewith, together with all penalties, fines, interest and Costs thereof or in connection therewith, and perform all acts the performance of which shall be ordered or decreed as a result thereof.  No such contest shall subject Landlord to the risk of any civil or criminal liability.

15.

Indemnification.

(a)

Tenant shall pay, protect, indemnify, defend, save and hold harmless Landlord, Lender and all other Persons described in Paragraph 30 (each an “Indemnitee”) from and against any and all liabilities, losses, damages (including punitive damages), penalties, Costs (including attorneys' fees and costs), causes of action, suits, claims, demands or judgments of any nature whatsoever, howsoever caused, without regard to the form of action and whether based on strict liability, gross negligence, negligence or any other theory of recovery at law or in equity, arising from (i) any matter pertaining to the acquisition (or the negotiations leading thereto), ownership, leasing, use, non-use, occupancy, operation, management, condition, design, construction, maintenance, repair or restoration of any of the Leased Premises, (ii) any Casualty in any manner arising from any of t he Leased Premises, whether or not Indemnitee has or should have knowledge or notice of any defect or condition causing or contributing to said Casualty, (iii) any violation by Tenant of (A) any provision of this Lease (including any representation or warranty), (B) any contract or agreement to which Tenant is a party, (C) any Legal Requirement or (D) any Permitted Encumbrance or any encumbrance Tenant consented to or the Mortgage or Assignment or (iv) any alleged, threatened or actual Environmental Violation, including (A) liability for response costs and for costs of removal and remedial action incurred by the United States Government, any state or local governmental unit or any other Person, or damages from injury to or destruction or loss of natural resources, including the reasonable costs of

Page 23

assessing such injury, destruction or loss, incurred pursuant to Section 107 of CERCLA, or any successor section or act or provision of any similar state or local Law, (B) liability for costs and expenses of abatement, correction or clean-up, fines, damages, response costs or penalties which arise from the provisions of any of the other Environmental Laws and (C) liability for personal injury or property damage arising under any statutory or common-law tort theory, including damages assessed for the maintenance of a public or private nuisance or for carrying on of a dangerous activity.

(b)

In case any action or proceeding is brought against any Indemnitee by reason of any such claim, (i) Tenant may, except in the event of a conflict of interest or a dispute between Tenant and any such Indemnitee or during the continuance of an Event of Default, retain its own counsel and defend such action (it being understood that Landlord may employ counsel of its choice to monitor the defense of any such action, the cost of which shall be paid by Tenant) and (ii) such Indemnitee shall notify Tenant to resist or defend such action or proceeding by retaining counsel reasonably satisfactory to such Indemnitee (it being agreed that any counsel selected by Tenant’s insurance company shall be deemed satisfactory), and such Indemnitee will cooperate and assist in the defense of such action or proceeding if reasonably requested to do so by Tenant.  In the event of a conflict of in terest or dispute or during the continuance of an Event of Default, Landlord shall have the right to select counsel, and the cost of such counsel shall be paid by Tenant.

(c)

The obligations of Tenant under this Paragraph 15 shall survive any termination, expiration or rejection in bankruptcy of this Lease.

16.

Insurance.

(a)

Each policy of insurance listed on Schedule 16(a) attached hereto (the “Existing Insurance Policies”) is in full force and effect and all premiums due with respect thereto have been paid.  There are no claims outstanding or pending under any Existing Insurance Policies.

(b)

Tenant shall obtain, pay for and maintain the following insurance on or in connection with each of the Leased Premises:

(i)

Insurance against all risk of physical loss or damage to the Improvements and Equipment as provided under “Special Causes of Loss” form coverage, including the perils of hail, windstorm, flood coverage, earthquake and acts of terrorism, in amounts not less than the actual replacement cost of the Improvements and Equipment without deduction for depreciation; provided that, if Tenant's insurance company is unable or unwilling to include any or all of such excluded perils, Tenant shall have the option of purchasing coverage against such perils from another insurer on a “Difference in Conditions” form or through a stand-alone policy.  Such policies shall contain Replacement Cost and Agreed Amount Endorsements and “Law and Ordinance” coverage (at full replacement cost).  Such policies and endorsements shall contain deductibles not more than $25,000 per occurr ence.  Such policies shall name Landlord as a named insured, and Lender as mortgagee/loss payee, with respect to such Leased Premises.

(ii)

Commercial General Liability Insurance and Umbrella/Excess Liability Insurance, including Business Automobile Liability Insurance (including Non-Owned and Hired Automobile Liability) against claims for personal injury, bodily injury, death, accident or

Page 24

property damage occurring on, in or as a result of the use of the Leased Premises, in an amount not less than $15,000,000 on a per location basis and on an occurrence basis.  Coverage shall also include elevators/escalators (if any), independent contractors, contractual liability and Products/Completed Operations Liability coverage.  Such policies shall name Landlord and Lender as additional insureds with respect to such Leased Premises.

(iii)

Workers’ compensation insurance in the amount required by applicable Law .  

(iv)

Employers’ liability insurance covering all persons employed by Tenant in connection with any work done on or about such Leased Premises in the amount of $1,000,000 per accident, $1,000,000 per illness, per employee, and $1,000,000 per illness, in the aggregate.

(v)

Comprehensive Boiler and Machinery/Equipment Breakdown Insurance on any of the Equipment or any other equipment on or in such Leased Premises, in an amount not less than $5,000,000 per accident for damage to property (and which may be carried as part of the coverage required under clause (i) above or pursuant to a separate policy or endorsement).  If such coverage is provided pursuant to a separate Boiler and Machinery policy or endorsement, Tenant will obtain a Joint Loss Agreement.  Either such Boiler and Machinery policy endorsements or the Special Causes of Loss policy required in clause (i) above shall include at least $3,000,000 per incidence for Off-Premises Service Interruption, Expediting Expenses, Ammonia Contamination, and Hazardous Materials Clean-Up Expense and may contain a deductible not to exceed $25,000.  Such policies shall name Landlord and Le nder as loss payees with respect to such Leased Premises.  

(vi)

Business Income/Extra Expense Insurance at limits sufficient to cover 100% of the period of indemnity not less than eighteen (18) months from time of loss and an extended period of indemnity of three hundred sixty-five (365) days.  Such policies shall name Landlord and Lender as loss payees with respect to such Leased Premises.

(vii)

During any period in which substantial Alterations at such Leased Premises are being undertaken, builder's risk insurance covering the total completed value, including all hard and soft costs (which shall include business interruption coverage) with respect to the Improvements being constructed, altered or repaired (on a completed value, non-reporting basis), replacement cost of work performed and equipment, supplies and materials furnished in connection with such construction, alteration or repair of Improvements or Equipment, together with such other endorsements as Landlord may reasonably require, and general liability, worker's compensation and automobile liability insurance with respect to the Improvements being constructed, altered or repaired, in such form and in such amounts as Landlord may reasonably require.  Such policies shall name Landlord and Lender as loss payees with respe ct to such Leased Premises.

(viii)

Such other insurance (or other terms with respect to any insurance required pursuant to this Paragraph 16, including without limitation amounts of coverage, deductibles, form of mortgagee clause) on or in connection with such Leased Premises as Landlord or Lender may reasonably require (including, without limitation mold insurance); provided that, such insurance is available to Tenant on a commercially reasonable basis and is

Page 25

consistent, as to types of coverage and amounts, with the requirements generally of institutional lenders or prudent owners or operators of similar properties.

(c)

The insurance required by Paragraph 16(a) shall be written by companies having a Best's rating of A:X or above and a claims paying ability rating of AA or better by S&P or equivalent rating agency approved by Landlord and Lender in their sole discretion and are authorized to write insurance policies by, the State Insurance Department (or its equivalent) for the states in which the Leased Premises are located.  The insurance policies (i) shall be for such terms as Landlord may reasonably approve and (ii) shall be in amounts sufficient at all times to satisfy any coinsurance requirements thereof. If said insurance or any part thereof shall expire, be withdrawn, become void, voidable, unreliable or unsafe for any reason, including a breach of any condition thereof by Tenant or the failure or impairment of the capital of any insurer, or if for any other reason wha tsoever said insurance shall become reasonably unsatisfactory to Landlord, Tenant shall immediately obtain new or additional insurance reasonably satisfactory to Landlord.

(d)

Each insurance policy referred to in clauses (i), (iv), (v) and (vi) of Paragraph 16(a) shall contain standard non-contributory mortgagee clauses in favor of and acceptable to Lender.  Each policy required by any provision of Paragraph 16(a), except clause (iii) thereof, shall provide that it may not be cancelled, substantially modified or allowed to lapse on any renewal date except after thirty (30) days' prior written notice to Landlord and Lender.

(e)

Tenant shall pay as they become due all premiums for the insurance required by Paragraph 16(a), shall renew or replace each policy and deliver to Landlord evidence of the payment of the full premium therefor or installment then due at least ten (10) days prior to the expiration date of such policy, and shall promptly deliver to Landlord all original certificates of insurance evidencing such coverages or, if required by Lender, original or certified policies. All certificates of insurance (including liability coverage) provided to Landlord and Lender shall be on ACORD Form 27 (or its equivalent).

(f)

Anything in this Paragraph 16 to the contrary notwithstanding, any insurance which Tenant is required to obtain pursuant to Paragraph 16(a) may be carried under a “blanket” policy or policies covering other properties of Tenant or under an “umbrella” policy or policies covering other liabilities of Tenant, as applicable; provided that, such blanket or umbrella policy or policies otherwise comply with the provisions of this Paragraph 16, and upon request, Tenant shall provide to Landlord a Statement of Values which may be reviewed annually and shall be amended to the extent determined necessary by Landlord based on revised Replacement Cost Valuations.  The original or a certified copy of each such blanket or umbrella policy shall promptly be delivered to Landlord.

(g)

Tenant shall not carry separate insurance concurrent in form or contributing in the event of a Casualty with that required in this Paragraph 16 unless (i) Landlord and Lender are included therein as named insureds, with loss payable as provided herein, and (ii) such separate insurance complies with the other provisions of this Paragraph 16.  Tenant shall immediately notify Landlord of such separate insurance and shall deliver to Landlord the original policies or certified copies thereof.

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(h)

Each policy (other than workers’ compensation coverage ) shall contain an effective waiver by the carrier against all claims for payment of insurance premiums against Landlord and shall contain a full waiver of subrogation against the Landlord.

(i)

The proceeds of any insurance required under Paragraph 16(a) shall be payable as follows:

(i)

proceeds payable under clauses (ii), (iii) and (iv) of Paragraph 16(a) and proceeds attributable to the general liability coverage of Builder's Risk insurance under clause (vi) of Paragraph 16(a) shall be payable to the Person entitled to receive such proceeds; and

(ii)

proceeds of insurance required under clause (i) of Paragraph 16(a) and proceeds attributable to Builder's Risk insurance (other than its general liability coverage provisions) under clause (vi) of Paragraph 16(a) shall be payable to Landlord or Lender and applied as set forth in Paragraph 17 or, if applicable, Paragraph 18.  Tenant shall apply the Net Award to restoration of the Leased Premises in accordance with the applicable provisions of this Lease unless a Termination Event shall have occurred and Tenant has given a Termination Notice.

17.

Casualty and Condemnation.

(a)

Tenant shall give Landlord and Lender prompt notice of the occurrence of any Casualty.  Landlord and Lender, in their discretion and upon notice to Tenant (except that no notice to Tenant shall be required if an Event of Default has occurred and is continuing), may adjust, collect and compromise all claims under any of the insurance policies required by Paragraph 16(a) (except public liability insurance claims payable to a Person other than Tenant, Landlord or Lender) and to execute and deliver on behalf of Tenant all necessary proofs of loss, receipts, vouchers and releases required by the insurers.  Provided that no Event of Default has occurred and is continuing, Tenant shall be entitled to participate with Landlord and Lender in any adjustment, collection and compromise of the Net Award payable in connection with a Casualty.  Tenant agrees to sign, upon the request of L andlord or Lender, all such proofs of loss, receipts, vouchers and releases.  If Landlord or Lender so requests, Tenant shall adjust, collect and compromise any and all such claims, and Landlord and Lender shall have the right to join with Tenant therein.  Any final adjustment, settlement or compromise of any such claim shall be subject to the prior written approval of Landlord and Lender, and Landlord and Lender shall have the right to prosecute or contest, or to require Tenant to prosecute or contest, any such claim, adjustment, settlement or compromise.  Each insurer is hereby authorized and directed to make payment under said policies, including return of unearned premiums, directly to Landlord or, if required by the Mortgage, to Lender instead of to Landlord and Tenant jointly, and Tenant hereby appoints each of Landlord and Lender as Tenant's attorneys-in-fact to endorse any draft therefor.  The rights of Landlord under this Paragraph 17(a) shall be extended to Lender if and to the extent that any Mortgage so provides.

(b)

Tenant shall provide Landlord and Lender prompt written notice of Tenant’s receipt of a Condemnation Notice.  Landlord and Lender are authorized to collect, settle and compromise, in their discretion (and, if no Event of Default exists, upon notice to Tenant), the

Page 27

amount of any Net Award.  Provided that no Event of Default has occurred and is continuing, Tenant shall be entitled to participate with Landlord and Lender in any Condemnation proceeding or negotiations under threat thereof and to contest the Condemnation or the amount of the Net Award therefor.  No agreement with any condemnor in settlement or under threat of any Condemnation shall be made by Tenant without the written consent of Landlord and Lender, which consent shall not be unreasonably withheld, delayed or conditioned.  Subject to the provisions of this Paragraph 17(b), Tenant hereby irrevocably assigns to Landlord any award or payment to which Tenant is or may be entitled by reason of any Condemnation, whether the same shall be paid or payable for Tenant's leasehold interest hereunder or otherwise; but nothing in this Lease shall impair Tenant's right to any award or payment on account of Tenant's trade fixtures, equipment or other tangible property which is not part of the Equipment, moving expenses or loss of business, if available, to the extent that and so long as (i) Tenant shall have the right to make, and does make, a separate claim therefor against the condemnor and (ii) such claim does not in any way reduce either the amount of the award otherwise payable to Landlord for the Condemnation of Landlord's fee interest in the applicable Leased Premises or the amount of the award (if any) otherwise payable for the Condemnation of Tenant's leasehold interest hereunder.  The rights of Landlord under this Paragraph 17(b) shall also be extended to Lender if and to the extent that any Mortgage so provides.

(c)

If any Partial Casualty (whether or not insured against) or Partial Condemnation shall occur (other than a Requisition) with respect to any of the Leased Premises, this Lease shall continue, notwithstanding such event, and there shall be no abatement or reduction of any Monetary Obligations.  Promptly after such Partial Casualty or Partial Condemnation, Tenant, as required in Paragraphs 12(a) and 13(b), shall commence and diligently continue to restore the applicable Leased Premises as nearly as possible to its value, condition and character immediately prior to such event (assuming the Leased Premises to have been in the condition required by this Lease).  Upon the receipt by Landlord of the entire Net Award of such Partial Casualty or Partial Condemnation, Landlord shall make such Net Award available to Tenant for restoration in accordance with and subject to the provisio ns of Paragraph 19(a).  If a Requisition shall occur, Tenant shall comply with the terms and conditions of Paragraph 17(d).  If any Casualty or Condemnation which is not a Partial Casualty, Partial Condemnation or Requisition shall occur, Tenant shall comply with the terms and conditions of Paragraph 18. Upon the expiration of the Term, any portion of such Net Award which shall not have been previously paid as set forth above shall be retained by Landlord.

(d)

In the event of a Requisition of the Leased Premises, any Net Award payable by reason of such Partial Condemnation shall be (i) retained by Landlord, or (ii) paid to Lender.

18.

Termination Events.

(a)

If all of any of the Leased Premises shall be taken by a Condemnation, Tenant shall, within thirty (30) days after Tenant receives a Condemnation Notice, give to landlord written notice (a “Termination Notice”) of Tenant’s election to terminate this Lease with respect to such Leased Premises (the “Affected Premises”).

(b)

If a substantial portion of any of the Leased Premises is taken by a Condemnation or all or a substantial portion of any of the Leased Premises is totally damaged or destroyed by a

Page 28

Casualty, Tenant shall have the option, within thirty (30) days after Tenant receives a Condemnation Notice or thirty (30) days after the Casualty, as the case may be, to give to Landlord a Termination Notice with respect to such Affected Premises.  If Tenant elects not to give Landlord a Termination Notice, then Tenant shall restore, rebuild or repair such Affected Premises in accordance with Paragraphs 17 and 19.  

(c)

A Termination Notice shall contain (i) notice of Tenant's intention to terminate this Lease with respect to the Affected Premises on the first Basic Rent Payment Date which occurs at least ninety (90) days after the Fair Market Value Date (the “Termination Date”) and (ii) a binding and irrevocable offer of Tenant to pay the Termination Amount with respect to the Affected Premises.  Promptly upon the delivery to Landlord of a Termination Notice, Landlord and Tenant shall commence to determine Fair Market Value with respect to the Affected Premises.  

(d)

Landlord shall have the right to accept or reject any offer by Tenant to pay the Termination Amount with respect to any Affected Premises.  If Landlord desires to reject any such offer, Landlord shall deliver to Tenant, not later than thirty (30) days following the Fair Market Value Date, written notice of Landlord’s rejection of such offer (a “Rejection Notice”).  Any such Rejection Notice shall contain the written consent of Lender to Landlord's rejection of Tenant's offer to pay the Termination Amount set out in the Termination Notice with respect to the Affected Premises.  If Landlord rejects Tenant’s offer to pay the Termination Amount with respect to the Affected Premises, this Lease shall terminate with respect to such Affected Premises on the Termination Date. Upon such termination, (i) Tenant shall pay to Landlord all Monetary Obligations and all other obligations and liabilities under this Lease allocable to the Affected Premises due on or prior to the Termination Date (collectively, “Remaining Obligations”), (ii) all other obligations of Tenant under this Lease with respect to the Affected Premises shall terminate except for any Surviving Obligations, (iii) Tenant shall immediately vacate and shall have no further right, title or interest in or to the Affected Premises, (iv) the Net Award shall be retained by Landlord, and (v) if the 2505 Premises are the Affected Premises, Landlord shall retain any amounts remaining in the Construction Escrow.  Notwithstanding anything to the contrary hereinabove contained, (A) if on the Termination Date, Landlord shall not have received the full amount of the Net Award payable by reason of the applicable Termination Event, then the Termination Date shall be automatically extended to the first Basic Rent Payment Date after the receipt by Landlord of the full amount of the N et Award and (B) if on the Termination Date, Tenant has not satisfied all Remaining Obligations allocable to the Affected Premises, then Landlord may, at its option, extend the Termination Date to a date which is no later than the first Basic Rent Payment Date after the date on which Tenant has satisfied all such Remaining Obligations.

(e)

If Tenant shall not have received a Rejection Notice by the thirtieth (30^th) day following the Fair Market Value Date, Landlord shall be conclusively presumed to have accepted Tenant’s offer to pay the Termination Amount with respect to the Affected Premises.  If Landlord accepts or is presumed to have accepted Tenant’s offer to pay the Termination Amount with respect to the Affected Premises then, on the Termination Date, (i) Tenant shall pay to Landlord the Termination Amount and all Remaining Obligations allocable to the Affected Premises and, (ii) Landlord shall (A) disburse to Tenant any amounts remaining in the

Page 29

Construction Escrow and (B) if requested by Tenant, convey to Tenant or its designee the Affected Premises or the remaining portion thereof, if any, all in accordance with Paragraph 20.

(f)

In the event of the termination of this Lease as to any Affected Premises as hereinabove provided, this Lease shall remain in full force and effect as to the Remaining Premises; provided that the Basic Rent for the Remaining Premises to be paid after such termination shall be the Basic Rent otherwise payable hereunder with respect to the Leased Premises multiplied by a percentage equal to the sum of the percentages set forth on Exhibit “F” for the Remaining Premises.

19.

Restoration.

(a)

If any Net Award is in excess of $100,000, Landlord (or Lender if required by any Mortgage) shall hold the Net Award in a fund (the “Restoration Fund”) and disburse amounts from the Restoration Fund only in accordance with the following conditions:

(i)

prior to commencement of restoration, (A) the architects, contracts, contractors, plans and specifications and a budget for the restoration shall have been approved by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed (B) Landlord and Lender shall be provided by Tenant with mechanics' lien insurance (if available) and acceptable performance and payment bonds which insure completion of and payment for the restoration, are in an amount and form and have a surety reasonably acceptable to Landlord, and name Landlord and Lender as additional dual obligees, and (C) appropriate waivers of mechanics' and materialmen's liens shall have been filed;

(ii)

at the time of any disbursement, no Event of Default shall exist and no mechanics' or materialmen's liens shall have been filed against the applicable Leased Premises and remain undischarged;

(iii)

disbursements shall be made from time to time in an amount not exceeding the cost of the Work completed since the last disbursement, upon receipt of (A) satisfactory evidence, including architects' certificates, of the stage of completion, the estimated total cost of completion and performance of the Work to date in a good and workmanlike manner in accordance with the contracts, plans and specifications, (B) waivers of liens, (C) contractors' and subcontractors' sworn statements as to completed Work and the cost thereof for which payment is requested, (D) a satisfactory bringdown of title insurance and (E) other evidence of cost and payment so that Landlord and Lender can verify that the amounts disbursed from time to time are represented by Work that is completed, in place and free and clear of mechanics' and materialmen's lien claims;

(iv)

each request for disbursement shall be accompanied by a certificate of Tenant, signed by the president or a vice president of Tenant, describing the Work for which payment is requested, stating the cost incurred in connection therewith, stating that Tenant has not previously received payment for such Work and, upon completion of the Work, also stating that the Work has been fully completed and complies with the applicable requirements of this Lease;

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(v)

Landlord may retain ten percent (10%) of the Restoration Fund until the Work is substantially completed, except for “punch-list” items permitted pursuant to the Construction Agency Agreement;

(vi)

If the Restoration Fund is held by Landlord, the Restoration Fund shall not be commingled with Landlord's other funds and shall bear interest at a rate agreed to by Landlord and Tenant; and

(vii)

such other reasonable conditions as Landlord or Lender may impose.

(b)

Prior to commencement of restoration and at any time during restoration, if the estimated cost of completing the restoration Work free and clear of all liens, as reasonably determined by Landlord’s construction consultant or agent, exceeds the amount of the Net Award available for such restoration, the amount of such excess shall, within five (5) days of demand by Landlord, be paid by Tenant to Landlord to be added to the Restoration Fund.  Any sum so added by Tenant which remains in the Restoration Fund upon completion of restoration shall be refunded to Tenant.  For purposes of determining the source of funds with respect to the disposition of funds remaining after the completion of restoration, the Net Award shall be deemed to be disbursed prior to any amount added by Tenant.  

(c)

If any sum remains in the Restoration Fund after completion of the restoration and any refund to Tenant pursuant to Paragraph 19(b), such sum (the “Remaining Sum”) shall be retained by Landlord or, if required by a Note or Mortgage, paid by Landlord to a Lender.

20.

Procedures Upon Purchase.

(a)

If any of the Leased Premises are purchased by Tenant pursuant to any provision of this Lease, Landlord need not convey any better title thereto than that which was conveyed to Landlord, and Tenant or its designee shall accept such title, subject, however, to the Permitted Encumbrances and to all other liens, exceptions and restrictions on, against or relating to such Leased Premises created by or on behalf of Tenant and not by or on behalf of Landlord and to all applicable Laws, but free of the lien of and security interest created by any Mortgage or Assignment and liens, exceptions and restrictions on, against or relating to the Leased Premises which have been created by or resulted solely from acts of Landlord after the date of this Lease, unless the same are Permitted Encumbrances or customary utility easements benefiting such Leased Premises or were created with the concurrence of Tenant or as a result of a default by Tenant under this Lease.

(b)

Upon the date fixed for any such purchase of any of the Leased Premises pursuant to any provision of this Lease (any such date the “Purchase Date”), Tenant shall pay to Landlord, or to any Person to whom Landlord directs payment, the Relevant Amount therefor specified herein, in Federal Funds, less any credit of the Net Award received and retained by Landlord or a Lender allowed against the Relevant Amount, and Landlord shall deliver to Tenant (i) a special warranty deed which describes the premises being conveyed and conveys the title thereto as provided in Paragraph 20(a), (ii) such other instruments as shall be necessary to transfer to Tenant or its designee any other property (or rights to any Net Award not yet received by Landlord or a Lender) then required to be sold by Landlord to Tenant pursuant to this Lease and (iii) any Net Award received by Land lord, not credited to Tenant against the Relevant Amount

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and required to be delivered by Landlord to Tenant pursuant to this Lease; provided, that if any Monetary Obligations remain outstanding on such date, then Landlord may deduct from the Net Award the amount of such Monetary Obligations; and further provided, that if any event has occurred which Landlord has reasonable grounds, based on known facts, to believe will likely subject any Indemnitee to any liability which Tenant is required to indemnify against pursuant to Paragraph 15, then an amount shall be deducted from the Net Award which, in Landlord's reasonable judgment, is sufficient to satisfy such liability, which amount shall be deposited in an escrow account with a financial institution reasonably satisfactory to Landlord and Tenant pending resolution of such matter.  If on the Purchase Date any Monetary Obligations remain outstanding and no Net Award is payable to Tenant by Landlord or th e amount of such Net Award is less than the amount of the Monetary Obligations, then Tenant shall pay to Landlord on the Purchase Date the amount of such Monetary Obligations.  Upon the completion of such purchase, this Lease and all obligations and liabilities of Tenant hereunder shall terminate with respect to the applicable Leased Premises (but not with respect the Remaining Premises), except any Surviving Obligations.

(c)

If the completion of such purchase shall be delayed after (i) the Termination Date, in the event of a purchase pursuant to Paragraph 18 or, (ii) the date scheduled for such purchase, in the event of a purchase under any other provision of this Lease then (x) Rent shall continue to be due and payable until completion of such purchase and (y) at Landlord's sole option, Fair Market Value shall be redetermined and the Relevant Amount payable by Tenant pursuant to the applicable provision of this Lease shall be adjusted to reflect such redetermination.

(d)

Any prepaid Monetary Obligations paid to Landlord shall be prorated as of the Purchase Date, and the prorated unapplied balance shall be deducted from the Relevant Amount due to Landlord; provided that no apportionment of any Impositions shall be made upon any such purchase.

21.

Assignment and Subletting: Prohibition against Leasehold Financing.

(a)

Tenant may not assign this Lease (voluntarily or involuntarily, whether by operation of law or otherwise, including through merger or consolidation) to any Person other than (i) an assignment of all, but not less than all, of Tenant’s interest in this Lease in connection with a Permitted Asset Transfer or a Permitted Change of Control, or (ii) an assignment to a Person which is and continues throughout the Term to be (A) a wholly-owned Subsidiary of Tenant or (B) a Credit Entity, without the prior written consent of Landlord (which consent shall not be unreasonably withheld, conditioned or delayed) and Lender.  Any purported assignment in violation of this Paragraph 21(a) shall be null and void.

(b)

If Tenant desires to assign this Lease to a Person (a “Non-Preapproved Assignee”) that is not a wholly-owned Subsidiary of Tenant or a Credit Entity (a “Non-Preapproved Assignment”) then Tenant shall, not less than ninety (90) days prior to the date on which it desires to make such Non-Preapproved Assignment, submit to Landlord and Lender information regarding the following with respect to the Non-Preapproved Assignee (collectively, the “Review Criteria”): (A) credit, (B) capital structure, (C) management, (D) operating history, (E) proposed use of the Leased Premises and (F) risk factors associated with the proposed use of the Leased Premises by the Non-Preapproved Assignee.  Landlord and Lender shall review such

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information and shall approve or disapprove the Non-Preapproved Assignment no later than the thirtieth (30^th) day following receipt of all such information, and Landlord and Lender shall be deemed to have acted reasonably in granting or withholding consent if such grant or disapproval is based on their review of the Review Criteria applying prudent business judgment.  If a response is not received by Tenant by the expiration of such thirty (30) day period, such Non-Preapproved Assignment shall be deemed disapproved.

(c)

Tenant shall have the right, upon thirty (30) days prior written notice to Landlord and Lender, to enter into (x) one or more subleases with any wholly-owned Subsidiary of Tenant or any Credit Entity or (y) one or more subleases with any third parties that demise, in the aggregate, up to, but not to exceed ten percent (10%) of the gross leaseable area (on a square footage basis) of any of the Improvements, with no consent or approval of Landlord being required or necessary (each, a “Preapproved Sublet”). Other than pursuant to Preapproved Sublets, at no time during the Term shall subleases exist for more than ten percent (10%) of the gross leaseable area (on a square footage basis) of any of the Improvements without the prior written consent of Landlord, which consent shall be granted or withheld based on a review of the Review Criteria as they relate to the proposed subtenant and the terms of the proposed sublease.  Landlord and Lender shall be deemed to have acted reasonably in granting or withholding consent if such grant or disapproval is based on their review of the Review Criteria applying prudent business judgment.  Any purported sublease in violation of this Paragraph 21(c) shall be null and void.

(d)

If Tenant assigns all of its rights and interest under this Lease, the assignee under such assignment shall expressly assume all the obligations of Tenant hereunder, actual or contingent, arising after the date of such assignment, by a written instrument delivered to Landlord at the time of such assignment and shall also provide a certification reasonably required by Landlord related to compliance with the USA Patriot Act substantially in the form of Exhibit “G”.  Each sublease of any of the Leased Premises shall (A) be expressly subject and subordinate to this Lease and any Mortgage encumbering such Leased Premises; (B) not extend beyond the then current Term minus one day; (C) terminate upon any termination of this Lease, unless Landlord elects in writing, to cause the subtenant to attorn to and recognize Landlord as the lessor under such sublease, w hereupon such sublease shall continue as a direct lease between the subtenant and Landlord upon all the terms and conditions of such sublease; and (D) bind the subtenant to all covenants contained in Paragraphs 4(a), 10 and 12 with respect to subleased premises to the same extent as if the subtenant were the Tenant.  Except as provided in Paragraph 21(j) and Paragraph 21(k), no assignment or sublease shall affect or reduce any of the obligations of Tenant hereunder, and all such obligations of Tenant shall continue in full force and effect as obligations of a principal and not as obligations of a guarantor, as if no assignment or sublease had been made.  No assignment or sublease shall impose any additional obligations on Landlord under this Lease.

(e)

Tenant shall, within ten (10) days after the execution and delivery of any assignment or sublease, deliver a duplicate original copy thereof to Landlord which, in the event of an assignment, shall be in recordable form.  With respect to any assignment to a wholly-owned Subsidiary of Tenant or Credit Entity or any Preapproved Sublet, at least thirty (30) days prior to the effective date of such assignment or sublease, Tenant shall provide to Landlord information reasonably required by Landlord to establish that the Person involved in any such

Page 33

proposed assignment or sublet is a wholly-owned Subsidiary of Tenant, a Credit Entity, or satisfies the criteria set forth in this Lease for a Preapproved Sublet, as the case may be.

(f)

As security for performance of its obligations under this Lease, Tenant hereby grants, conveys and assigns to Landlord all right, title and interest of Tenant in and to all subleases now in existence or hereafter entered into with respect to all or any portion of any of the Leased Premises, any and all extensions, modifications and renewals thereof and all rents, issues and profits therefrom.  Landlord hereby grants to Tenant a license to collect and enjoy all rents and other sums of money payable under any sublease of any of the Leased Premises; provided, however, that Landlord shall have the absolute right at any time during the continuation of an Event of Default upon notice to Tenant and any subtenants to revoke said license and to collect such rents and sums of money and to retain the same.  Any amounts collected shall be applied to Rent payments next due and owing .  Tenant shall not consent to, cause or allow any modification or alteration of any of the terms, conditions or covenants of any of the subleases or the termination thereof, without the prior written consent of Landlord nor shall Tenant accept any rents more than thirty (30) days in advance of the accrual thereof nor do nor permit anything to be done, the doing of which, nor omit or refrain from doing anything, the omission of which, will or could be a breach of or default in the terms of any of the subleases.

(g)

Except as provided in Paragraph 35, Tenant shall not have the power to mortgage, pledge or otherwise encumber its interest under this Lease or any sublease of the Leased Premises, and any such mortgage, pledge or encumbrance made in violation of this Paragraph 21 shall be void and of no force and effect.

(h)

Tenant shall pay to Landlord with each monthly installment of Basic Rent, as Additional Rent, one half of all Net Sublet Rent paid by any subtenant for the prior month under any sublease for all or any portion of any of the Leased Premises, except in the event that such sublease is to a wholly-owned subsidiary of Tenant.  The term “Net Sublet Rent” as used in this Paragraph 21(h) means the aggregate amount of all rent payable by all subtenants for any portion of any of the Leased Premises less all reasonable costs and expenses incurred by Tenant in connection with such subletting, including, without limitation (i) any operating expenses certified by Tenant relating to that portion of such Leased Premises sublet (ii) the cost of any improvements constructed and paid for by Tenant specifically for such subtenant and (iii) the product of (A) Basic Rent then in effect multiplied by (B) the percentage of the leaseable square feet of such Leased Premises sublet.

(i)

Landlord may sell or transfer any of the Leased Premises at any time without Tenant's consent to one or more third parties (each a “Third Party Purchaser”).  In the event of any such transfer, Tenant shall attorn to any Third Party Purchaser as Landlord so long as such Third Party Purchaser and Landlord notify Tenant in writing of such transfer and such transferee of Landlord’s interest takes the Leased Premises subject to this Lease.  At the request of Landlord, Tenant will execute such documents confirming Tenant’s attornment and such other agreements as Landlord may reasonably request (including, without limitation, a separate leases for each Leased Premises); provided that such agreements do not increase the liabilities and obligations of Tenant hereunder.

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(j)

Tenant shall not, in a single transaction or series of transactions (including any interim merger or consolidation), sell, convey, transfer, abandon or lease to any Person all or substantially all of its assets (an “Asset Transfer”), and any such Asset Transfer shall be deemed an assignment in violation of this Lease; except that Tenant shall have the right to conduct an Asset Transfer (a “Permitted Asset Transfer”) if the following conditions are met: (i) the Asset Transfer is to a Person that (A) immediately following such transaction or transactions, taken in the aggregate, is (or would be on pro forma basis) (x) a wholly-owned Subsidiary of Tenant, (y) a Credit Entity, or (z) a Qualified Transferee or (B) is approved in writing by Landlord and Lender under the Review Criteria as a Non-Preapproved Assignee in accordance with the provisions of Paragraph 21(b ); and (ii) this Lease is assigned to such Person as a part of such Asset Transfer.  In the event of an Asset Transfer to a wholly-owned Subsidiary of Tenant, any subsequent sale of the assets of the original Tenant named herein by such Tenant Subsidiary shall be governed by the requirements of this subparagraph (j) irrespective of whether or not such sale would be considered a sale of all or substantially all of the assets of such Tenant Subsidiary.  Upon the consummation of a Permitted Asset Transfer with a Person that is a Qualified Transferee, Landlord shall release Tenant from its obligations under this Lease (other than any Surviving Obligations) upon receipt from Tenant of evidence satisfactory to Landlord that such Person is a Qualified Transferee.      

(k)

At no time during the Term shall any Person or “group” (within the meaning of Section 13(d) or Section 14(d) of the Securities Exchange Act of 1934, as amended) pursuant to a single transaction or series of related transactions (i) acquire, directly or indirectly, more than 50% of the voting stock, partnership interests, membership interests or other equitable and/or beneficial interests of Tenant (“Control”) or (ii) obtain, directly or indirectly, the power (whether or not exercised) to elect a majority of the directors of Tenant or voting control of any partnership or limited liability company or other entity acting as its general partner or managing member (including through a merger or consolidation of Tenant with or into any other Person), unless the purchaser of such Control or Person who acquires such voting power shall: (A)&nbs p;after taking into account the transaction that resulted in the acquisition of such Control or voting power, (x) be a Credit Entity or a Qualified Transferee and (y) shall enter into a guaranty satisfactory to Landlord pursuant to which it guarantees the payment and performance of the obligations of Tenant under this Lease, or (B) be approved in writing by Landlord under the Review Criteria as a Non-Preapproved Assignee in accordance with the provisions of Paragraph 21(b) above (a “Permitted Change of Control”).  Except as permitted in this Paragraph 21(k), any such change of Control or voting power (by operation of law, merger, consolidation or otherwise) shall be deemed an assignment in violation of this Lease; provided, however, that a deemed assignment pursuant to the transfer of the outstanding capital stock of Tenant shall not be deemed to include the sale of such stock by persons or parties through the “over-the-counter market” or through a ny recognized stock exchange, other than by those deemed to be a “control-person” within the meaning of the Securities Exchange Act of 1934.  

(l)

Notwithstanding anything to the contrary contained in this Paragraph 21, Tenant shall not have the right to assign this Lease (voluntarily or involuntarily, whether by operation of law or otherwise, including through merger or consolidation) or sublet the Leased Premises to any Person at any time that an Event of Default shall exist.  

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22.

Events of Default.

(a)

The occurrence of any one or more of the following (after expiration of any applicable cure period as provided in this Paragraph 22(a)) shall, at the sole option of Landlord, constitute an “Event of Default” under this Lease:

(i)

a failure by Tenant to pay any Monetary Obligation, regardless of the reason for such failure, and such default continues beyond the date that is five (5) days after the date on which such Monetary Obligation was due;

(ii)

a failure by Tenant duly to perform and observe, or a violation or breach of, any other provision of this Lease not otherwise specifically mentioned in this Paragraph 22(a), which default continues beyond the date that is thirty (30) days from the date on which Tenant receives notice of such default or, if such default cannot be cured within such thirty (30) day period and delay in the exercise of a remedy would not (in Landlord’s reasonable judgment) cause a material adverse harm to Landlord of the Leased Premises, the cure period shall be extended for the period required to cure the default (but such cure period, including any extension, shall not in the aggregate exceed ninety (90) days; provided that Tenant shall commence to cure the default within said thirty (30) day period and shall actively and diligently and in good faith proceed with and continue the curing of the de fault until it shall be fully cured;

(iii)

any representation or warranty made by Tenant herein or in any certificate, demand or request made pursuant hereto proves to be incorrect, as of the date made, in any material respect;

(iv)

Tenant shall fail to comply with the requirements of Paragraph 16;

(v)

Tenant shall enter into an transaction or series of transactions in violation of Paragraph 21;

(vi)

Tenant shall have abandoned any of the Leased Premises;

(vii)

Tenant shall fail to maintain in effect any license or permit necessary for the use, occupancy or operation of any of the Leased Premises;

(viii)

Tenant shall fail to deliver the estoppel described in Paragraph 25 within the time period specified therein;

(ix)

Tenant shall fail to perform or observe, or shall violate or breach, or shall make a misrepresentation under, any provision of any Assignment or any other document between Tenant and Lender or from Tenant to Lender, if such failure, violation, breach or misrepresentation gives rise to a default beyond any applicable cure period with respect to any Loan;

(x)

Tenant shall default in the performance of its obligations under the Construction Agency Agreement or the Guaranty of Completion;

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(xi)

Tenant shall fail to make any payment of principal or interest on any obligations for borrowed money having an original principal balance of $2,000,000 or more in the aggregate, or Tenant shall fail to perform any other provision contained in any instrument under which any such obligation is created or secured (including the breach of any covenant thereunder), (x) if such payment is a payment at maturity or a final payment, or (y) if an effect of such default is to cause, or permit any Person to cause, such obligation to become due prior to its stated maturity;

(xii)

Tenant shall fail to pay, beyond any applicable cure period, rent under, or perform of any other material provision of, any other lease or leases that have, in the aggregate, rental obligations over the terms thereof of $1,000,000 or more;

(xiii)

a final, non-appealable judgment or judgments for the payment of money in excess of $250,000 in the aggregate shall be rendered against Tenant and the same shall remain undischarged for a period of sixty (60) consecutive days;

(xiv)

Tenant shall (A) voluntarily be adjudicated a bankrupt or insolvent, (B) seek or consent to the appointment of a receiver or trustee for itself or for any of the Leased Premises, (C) file a petition seeking relief under the bankruptcy or other similar laws of the United States, any state or any jurisdiction, (D) make a general assignment for the benefit of creditors, or (E) be unable to pay its debts as they mature;

(xv)

a court shall enter an order, judgment or decree appointing, without the consent of Tenant, a receiver or trustee for it or for any of the Leased Premises or approving a petition filed against Tenant which seeks relief under the bankruptcy or other similar laws of the United States, any state or any jurisdiction, and such order, judgment or decree shall remain undischarged or unstayed sixty (60) days after it is entered;

(xvi)

Tenant shall be liquidated or dissolved or shall begin proceedings towards its liquidation or dissolution; or

(xvii)

the estate or interest of Tenant in any of the Leased Premises shall be levied upon or attached in any proceeding and such estate or interest is about to be sold or transferred or such process shall not be vacated or discharged within sixty (60) days after it is made.  

(xviii)

Tenant shall fail to perform its obligations under Paragraph 10(i) in the manner or time set forth in Paragraph 10(i).

23.

Remedies and Damages Upon Default.

(a)

If an Event of Default shall have occurred and is continuing, Landlord shall have the right, at its sole option, then or at any time thereafter, to exercise its remedies and to collect damages from Tenant in accordance with this Paragraph 23, subject in all events to applicable Law, without demand upon or notice to Tenant except as otherwise provided in this Paragraph 23 or under any applicable Law.  Landlord and Tenant hereby agree that Section 704.17(3) of the Wisconsin Statutes shall not apply to this Lease and that Tenant’s failure to comply with a

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default notice from Landlord shall not cause this Lease to terminate except as otherwise provided by this Lease.  

(i)

Landlord may give Tenant notice of Landlord's intention to terminate this Lease on a date specified in such notice.  Upon such date, this Lease, the estate hereby granted and all rights of Tenant hereunder shall expire and terminate.  Upon such termination, Tenant shall immediately surrender and deliver possession of the Leased Premises to Landlord in accordance with Paragraph 26.  If Tenant does not so surrender and deliver possession of all of the Leased Premises, Landlord may re-enter and repossess all or any of the Leased Premises not surrendered, by any available legal process.  Upon or at any time after taking possession of all or any of the Leased Premises, Landlord may, by legal process, remove any Persons or property therefrom.  Landlord shall be under no liability for or by reason of any such entry, repossession or removal.  Notwithstanding such ter mination of the Lease, Landlord may collect the damages set forth in Paragraph 23(b)(i) or 23(b)(ii).

(ii)

Landlord may terminate Tenant’s right of possession (but not this Lease) and may repossess all or any of the Leased Premises by any available legal process without thereby releasing Tenant from any liability hereunder and, except as required by applicable Law, without demand or notice of any kind to Tenant and without terminating this Lease.  After repossession of all or any of the Leased Premises pursuant hereto, Landlord shall have the right to relet such Leased Premises to such tenant or tenants, for such term or terms, for such rent, on such conditions and for such uses as Landlord in its sole discretion may determine, and collect and receive any rents payable by reason of such reletting.  Landlord may make such Alterations in connection with such reletting as it may deem advisable in its sole discretion.  Notwithstanding any such termination of Tenant’s right of p ossession of all or any of the Leased Premises, Landlord may (A) exercise the remedy set forth in and collect the damages permitted by Paragraph 23(a)(iii) or (B) collect the damages set forth in Paragraph 23(b)(ii) or, at any time thereafter, elect to terminate this Lease and in such event Landlord shall have the right and remedies specified in the last sentence of Paragraph 23(a)(i).

(iii)

Landlord may, upon notice to Tenant, require Tenant to make an irrevocable offer to terminate this Lease in its entirety for an amount (the “Default Termination Amount”) specified in the next sentence.  The “Default Termination Amount” shall be the greatest of (A) the sum of the Fair Market Value of the Leased Premises and the applicable Prepayment Premium which Landlord will be required to pay in prepaying any Loan with proceeds of the Default Termination Amount or (B) the sum of the Acquisition Cost and the applicable Prepayment Premium which Landlord will be required to pay in prepaying any Loan with proceeds of the Default Termination Amount or (C) an amount equal to the Present Value of the entire Basic Rent from the date of such purchase to the date on which the then Term would expire.  Upon such notice to Tenant, Tenant shall be deemed to have made such offer and shall, if requested by Landlord, within ten (10) days following such request, deposit with Landlord as payment against the Default Termination Amount the amount described in (B) above, and Landlord and Tenant shall promptly commence to determine Fair Market Value.  Within thirty (30) days after the Fair Market Value Date, Landlord shall accept or reject such offer.  If Landlord accepts such offer then, on the tenth (10^th) business day after such acceptance, (A) Tenant shall pay to Landlord the Default Termination Amount less any deposit paid to Landlord by Tenant as above provided, (B) Landlord shall distribute to Tenant all amounts remain in the

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Construction Escrow, and, (C) at the request of Tenant, Landlord will convey the Leased Premises to Tenant or its designee in accordance with Paragraph 20.  Any rejection by Landlord of such offer shall have no effect on any other remedy Landlord may have under this Lease.

(iv)

Landlord may declare by notice to Tenant the entire Basic Rent (in the amount of Basic Rent then in effect) for the remainder of the then current Term to be immediately due and payable.  Tenant shall immediately pay to Landlord all such Basic Rent discounted to its Present Value, all accrued Rent then due and unpaid, all other Monetary Obligations which are then due and unpaid and all Monetary Obligations which arise or become due by reason of such Event of Default (including any Costs of Landlord).  Upon receipt by Landlord of all such accelerated Basic Rent and Monetary Obligations, this Lease shall remain in full force and effect and Tenant shall have the right to possession of the Leased Premises from the date of such receipt by Landlord to the end of the Term, and subject to all the provisions of this Lease, including the obligation to pay all increases in Basic Rent and all Mon etary Obligations that subsequently become due, except that (A) no Basic Rent which has been prepaid hereunder shall be due thereafter during the said Term and (B) Tenant shall have no option to extend or renew the Term.

(b)

The following constitute damages to which Landlord shall be entitled if Landlord exercises its remedies under Paragraph 23(a)(i) or 23(a)(ii):

(i)

If Landlord exercises its remedy under Paragraph 23(a)(i) but not its remedy under Paragraph 23(a)(ii) (or attempts to exercise such remedy and is unsuccessful in reletting the Leased Premises) then, upon written demand from Landlord, Tenant shall pay to Landlord, as liquidated and agreed final damages for Tenant's default and in lieu of all current damages beyond the date of such demand (it being agreed that it would be impracticable or extremely difficult to fix the actual damages), an amount equal to the Present Value of the excess, if any, of (A) all Basic Rent from the date of such demand to the date on which the Term is scheduled to expire hereunder in the absence of any earlier termination, re-entry or repossession over (B) the then fair market rental value of the Leased Premises for the same period.  Tenant shall also pay to Landlord all accrued Rent then due a nd unpaid, all other Monetary Obligations which are then due and unpaid, all Monetary Obligations which arise or become due by reason of Tenant’s default hereunder, including any Costs of Landlord in connection with the repossession of the Leased Premises and any attempted reletting thereof, including all brokerage commissions, legal expenses, reasonable attorneys' fees, employees' expenses, costs of Alterations and expenses and preparation for reletting.

(ii)

If Landlord exercises its remedy under Paragraph 23(a)(i) or its remedies under Paragraph 23(a)(i) and 23(a)(ii), then Tenant shall, until the end of what would have been the Term in the absence of the termination of the Lease, and whether or not any of the Leased Premises shall have been relet, be liable to Landlord for, and shall pay to Landlord, as liquidated and agreed current damages all Monetary Obligations which would be payable under this Lease by Tenant in the absence of such termination less the net proceeds, if any, of any reletting pursuant to Paragraph 23(a)(ii), after deducting from such proceeds all accrued Rent then due and unpaid, all other Monetary Obligations which are then due and unpaid, all Monetary Obligations which arise or become due by reason of such Event of Default, including any Costs of Landlord incurred in connection with such repossessing and reletting, including all brokerage

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commissions, legal expenses, reasonable attorneys' fees, employees' expenses, costs of Alterations and expenses and preparation for reletting; provided that if Landlord has not relet the Leased Premises, such Costs of Landlord shall be considered to be Monetary Obligations payable by Tenant.

(iii)

Tenant shall be and remain liable for all sums aforesaid, and Landlord may recover such damages from Tenant and institute and maintain successive actions or legal proceedings against Tenant for the recovery of such damages.  Nothing herein contained shall be deemed to require Landlord to wait to begin such action or other legal proceedings until the date when the Term would have expired by its own terms had there been no such Event of Default.

(c)

Notwithstanding anything to the contrary herein contained, in lieu of or in addition to any of the foregoing remedies and damages, Landlord may exercise any remedies and collect any damages available to it at law or in equity.  If Landlord is unable to obtain full satisfaction pursuant to the exercise of any remedy, it may pursue any other remedy which it has hereunder or at law or in equity.

(d)

Landlord shall, in its sole discretion, use commercially reasonable efforts to mitigate any of its damages hereunder as required by applicable Law.  To the extent permitted by Law, Tenant hereby waives the right to request or seek a reduction in the damages that Landlord may seek under this Lease based on an argument that Landlord failed to mitigate its damages as required by Section 704.29 of the Wisconsin Statutes, and Tenant hereby agrees to stipulate that the Landlord’s efforts at reletting the premises and the amounts received as a result of any such reletting are reasonable as provided by Section 704.29 of the Wisconsin Statutes.  If any Law shall validly limit the amount of any damages provided for herein to an amount which is less than the amount agreed to herein, Landlord shall be entitled to the maximum amount available under such Law.

(e)

No termination of this Lease, repossession or reletting of any of the Leased Premises, exercise of any remedy or collection of any damages pursuant to this Paragraph 23 shall relieve Tenant of any Surviving Obligations.

(f)

WITH RESPECT TO ANY REMEDY OR PROCEEDING OF LANDLORD OR TENANT HEREUNDER, EACH HEREBY WAIVES THE SERVICE OF NOTICE WHICH MAY BE REQUIRED BY ANY APPLICABLE LAW (AS PERMITTED BY APPLICABLE LAW) AND ANY RIGHT TO A TRIAL BY JURY.

(g)

Upon the occurrence of any Event of Default, Landlord shall have the right (but no obligation) to perform any act required of Tenant hereunder and, if performance of such act requires that Landlord enter any of the Leased Premises, Landlord may enter the Leased Premises for such purpose

(h)

No failure of Landlord (i) to insist at any time upon the strict performance of any provision of this Lease or (ii) to exercise any option, right, power or remedy contained in this Lease shall be construed as a waiver, modification or relinquishment thereof.  A receipt by Landlord of any sum in satisfaction of any Monetary Obligation with knowledge of the breach of any provision hereof shall not be deemed a waiver of such breach, and no waiver by Landlord of

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any provision hereof shall be deemed to have been made unless expressed in a writing signed by Landlord.

(i)

Tenant hereby waives and surrenders, for itself and all those claiming under it, including creditors of all kinds, (i) any right and privilege which it or any of them may have under any present or future Law to redeem any of the Leased Premises or to have a continuance of this Lease after termination of this Lease or of Tenant's right of occupancy or possession pursuant to any court order or any provision hereof, and (ii) the benefits of any present or future Law which exempts property from liability for debt or for distress for rent.

(j)

Except as otherwise provided herein, all remedies are cumulative and concurrent and no remedy is exclusive of any other remedy.  Each remedy may be exercised at any time an Event of Default has occurred and is continuing and may be exercised from time to time.  No remedy shall be exhausted by any exercise thereof.

24.

Notices.

All notices, demands, requests, consents, approvals, offers, statements and other instruments or communications required or permitted to be given pursuant to the provisions of this Lease shall be in writing and shall be deemed to have been given and received for all purposes when delivered in person or by Federal Express or other reliable 24-hour delivery service or five (5) Business Days after being deposited in the United States mail, by registered or certified mail, return receipt requested, postage prepaid, addressed to the other party at the address set forth below or when delivery is refused.  Notices sent to Landlord shall be to the attention of Joseph Wekselblatt, Chief Financial Officer, Angelo, Gordon & Co., L.P., 245 Park Avenue, 26th Floor, New York, NY  10167-0094, and notices sent to Tenant shall be to 2505 Foster Avenue, Janesville, W isconsin.  A copy of any notice given by Tenant to Landlord shall be addressed to the attention of Michele E. Williams, Esquire, Arent Fox PLLC, 1050 Connecticut Avenue, N.W., Washington, D.C.  20036-5339.  For the purposes of this Paragraph, any party may substitute another address stated above (or substituted by a previous notice) for its address by giving fifteen (15) days' notice of the new address to the other party, in the manner provided above.

25.

Estoppel Certificate.

At any time upon not less than ten (10) days' prior written request by either Landlord or Tenant (the “Requesting Party”) to the other party (the “Responding Party”), the Responding Party shall deliver to the Requesting Party a statement in writing, executed by an authorized officer of the Responding Party, certifying (a) that, except as otherwise specified, this Lease is unmodified and in full force and effect, (b) the dates to which Basic Rent, Additional Rent and all other Monetary Obligations have been paid, (c) that, to the knowledge of the signer of such certificate and except as otherwise specified, no default by either Landlord or Tenant exists hereunder, (d) such other matters as the Requesting Party may reasonably request, and (e) if Tenant is the Responding Party that, except as otherwise specified, there are no proceedings p ending or, to the knowledge of the signer, threatened, against Tenant before or by a court or administrative agency which, if adversely decided, would materially and adversely affect the financial condition and operations of Tenant.  Any such statements by the Responding Party may be relied upon by the Requesting Party, any Person whom the Requesting Party notifies the

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Responding Party in its request for the certificate is an intended recipient or beneficiary of the certificate, any Lender or their assignees and by any prospective purchaser or mortgagee of any of the Leased Premises.  Any certificate required under this Paragraph 25 and delivered by Tenant shall state that, in the opinion of each person signing the same, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to the subject matter of such certificate.

26.

Surrender.  

Upon the expiration or earlier termination of this Lease, Tenant shall peaceably leave and surrender the Leased Premises to Landlord in the same condition in which the Leased Premises were at the commencement of this Lease, except as repaired, rebuilt, restored, altered, replaced or added to as permitted or required by any provision of this Lease, ordinary wear and tear excepted.  Upon such surrender, Tenant shall (a) remove from the Leased Premises all property which is owned by Tenant or third parties other than Landlord and Alterations required to be removed pursuant to Paragraph 13 hereof and (b) repair any damage caused by such removal.  Property not so removed shall become the property of Landlord, and Landlord may thereafter cause such property to be removed from any of the Leased Premises.  The cost of removing and disposing of such property and repairing a ny damage to any of the Leased Premises caused by such removal shall be paid by Tenant to Landlord upon demand.  Landlord shall not in any manner or to any extent be obligated to reimburse Tenant for any such property which becomes the property of Landlord pursuant to this Paragraph 26.

27.

No Merger of Title.

There shall be no merger of the leasehold estate created by this Lease with the fee estate in any of the Leased Premises by reason of the fact that the same Person may acquire or hold or own, directly or indirectly, (a) the leasehold estate created hereby or any part thereof or interest therein and (b) the fee estate in any of the Leased Premises or any part thereof or interest therein, unless and until all Persons having any interest in the interests described in (a) and (b) above which are sought to be merged shall join in a written instrument effecting such merger and shall duly record the same.

28.

Books and Records.

(a)

Tenant shall keep adequate records and books of account with respect to the finances and business of Tenant generally and with respect to the Leased Premises, in accordance with generally accepted accounting principles (“GAAP”) consistently applied, and shall permit Landlord and Lender by their respective agents, accountants and attorneys, upon reasonable notice to Tenant, to visit and inspect the Leased Premises and examine (and make copies of) the records and books of account and to discuss the finances and business with the officers of Tenant, at such reasonable times as may be requested by Landlord.  Upon the request of Lender or Landlord (either telephonically or in writing), Tenant shall provide the requesting party with copies of any information to which such party would be entitled in the course of a personal visit.

(b)

Tenant shall deliver to Landlord and to Lender within ninety (90) days of the close of each fiscal year, annual audited financial statements of Tenant prepared by nationally

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recognized independent certified public accountants.  Tenant shall also furnish to Landlord within forty-five (45) days after the end of each of the three remaining quarters unaudited financial statements and all other quarterly reports of Tenant, certified by Tenant's chief financial officer, and all filings, if any, of Form 10-K, Form 10-Q and other required filings with the Securities and Exchange Commission pursuant to the provisions of the Securities Exchange Act of 1934, as amended, or any other Law.  All financial statements of Tenant shall be prepared in accordance with GAAP consistently applied.  All annual financial statements shall be accompanied (i) by an opinion of said accounting firm stating that (A) there are no qualifications as to the scope of the audit and (B) the audit was performed in accordance with GAAP and (ii) by the affidavit of the president or a vice president of Tenant, dated within five (5) days of the delivery of such statement, stating that (C) the affiant knows of no Event of Default, or event which, upon notice or the passage of time or both, would become an Event of Default which has occurred and is continuing hereunder or, if any such event has occurred and is continuing, specifying the nature and period of existence thereof and what action Tenant has taken or proposes to take with respect thereto and (D) except as otherwise specified in such affidavit, that Tenant has fulfilled all of its obligations under this Lease which are required to be fulfilled on or prior to the date of such affidavit.

29.

Determination of Value.

(a)

Whenever a determination of Fair Market Value is required pursuant to any provision of this Lease, such Fair Market Value shall be determined in accordance with the following procedure:

(i)

Landlord and Tenant shall endeavor to agree upon such Fair Market Value within thirty (30) days after the date (the “Applicable Initial Date”) on which (A) Tenant provides Landlord with notice of its intention to terminate this Lease and purchase the Leased Premises pursuant to Paragraph 18, (B) Landlord provides Tenant with notice of its intention to redetermine Fair Market Value pursuant to Paragraph 20(c) or (C) Landlord provides Tenant with notice of Landlord's intention to require Tenant to make an offer to purchase the Leased Premises pursuant to Paragraph 23(a)(iii).  Upon reaching such agreement, the parties shall execute an agreement setting forth the amount of such Fair Market Value.

(ii)

If the parties shall not have signed such agreement within thirty (30) days after the Applicable Initial Date, Tenant shall within fifty (50) days after the Applicable Initial Date select an appraiser and notify Landlord in writing of the name, address and qualifications of such appraiser.  Within twenty (20) days following Landlord's receipt of Tenant's notice of the appraiser selected by Tenant, Landlord shall select an appraiser and notify Tenant of the name, address and qualifications of such appraiser.  Such two appraisers shall endeavor to agree upon Fair Market Value based on a written appraisal made by each of them as of the Relevant Date (and given to Landlord by Tenant).  If such two appraisers shall agree upon a Fair Market Value, the amount of such Fair Market Value as so agreed shall be binding and conclusive upon Landlord and Tenant.

(iii)

If such two appraisers shall be unable to agree upon a Fair Market Value within twenty (20) days after the selection of an appraiser by Landlord, then such appraisers shall advise Landlord and Tenant of their respective determination of Fair Market Value and shall

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select a third appraiser to make the determination of Fair Market Value.  The selection of the third appraiser shall be binding and conclusive upon Landlord and Tenant.

(iv)

If such two appraisers shall be unable to agree upon the designation of a third appraiser within ten (10) days after the expiration of the twenty (20) day period referred to in clause (iii) above, or if such third appraiser does not make a determination of Fair Market Value within twenty (20) days after his selection, then such third appraiser or a substituted third appraiser, as applicable, shall, at the request of either party hereto (with respect to the other party), be appointed by the President or Chairman of the American Arbitration Association in New York, New York.  The determination of Fair Market Value made by the third appraiser appointed pursuant hereto shall be made within twenty (20) days after such appointment.

(v)

If a third appraiser is selected, Fair Market Value shall be the average of the determination of Fair Market Value made by the third appraiser and the determination of Fair Market Value made by the appraiser (selected pursuant to Paragraph 29(a)(ii) hereof) whose determination of Fair Market Value is nearest to that of the third appraiser.  Such average shall be binding and conclusive upon Landlord and Tenant.

(vi)

All appraisers selected or appointed pursuant to this Paragraph 29(a) shall (A) be independent qualified MAI appraisers (B) have no right, power or authority to alter or modify the provisions of this Lease, (C) utilize the definition of Fair Market Value hereinabove set forth above, and (D) be registered in the State where the applicable Leased Premises is located if such State provides for or requires such registration.

(vii)

The Cost of the procedure described in this Paragraph 29(a) above shall be borne by Tenant.

(b)

If, by virtue of any delay, Fair Market Value is not determined by the expiration or termination of the then current Term, then the date on which the Term would otherwise expire or terminate shall be extended with respect to the Leased Premises or the Affected Premises, as applicable, to the date specified for termination in the particular provision of this Lease pursuant to which the determination of Fair Market Value is being made.

(c)

In determining Fair Market Value as defined in clause (b) of the definition of Fair Market Value, the appraisers shall add (a) the present value of the Rent with respect to the Leased Premises or Affected Premises, as applicable, for the remaining Term, assuming the Term has been extended for all extension periods provided herein (with assumed increases in the CPI to be determined by the appraisers) using a discount rate (which may be determined by an investment banker retained by each appraiser) based on the creditworthiness of Tenant and (b) the present value of the Leased Premises or the Affected Premises, as applicable, as of the end of such Term (having assumed the Term has been extended for all extension periods provided herein).  The appraisers shall further assume that no default then exists under the Lease, that Tenant has complied (and will comply) with all provis ions of the Lease.

30.

Non-Recourse as to Landlord.

Anything contained herein to the contrary notwithstanding, any claim based on or in respect of any liability of Landlord under this Lease shall be limited to actual damages and shall

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be enforced only against the Leased Premises and not against any other assets, properties or funds of (a) Landlord, (b) any director, member, officer, general partner, limited partner, employee or agent of Landlord (or any legal representative, heir, estate, successor or assign of any thereof), (c) any predecessor or successor partnership, corporation, limited liability company (or other entity) of Landlord, or any of its general partners, members or shareholders, or (d) any other Person.

31.

Financing.

(a)

Tenant agrees to pay all Costs incurred by Landlord in connection with the purchase and leasing of the Leased Premises including, without limitation, the out-of-pocket cost of appraisals, environmental reports, title insurance, engineering and property condition reports, surveys, legal fees and expenses and brokers’ fees.

(b)

Tenant agrees to pay, within ten (10) days following written request from Landlord, all Costs incurred by Landlord in connection with the financing of the initial Loan, including any “points” or commitment fees, brokers’ fees, survey and title costs and the fees and expenses of Landlord's and Lender's counsel.

(c)

Tenant agrees to pay, within three (3) Business Days of written demand therefor, any Cost (other than the principal of the Note and interest thereon at the contract rate of interest specified therein) imposed upon Landlord by Lender pursuant to the Note, the Mortgage or the Assignment which is not caused solely by the gross negligence or willful misconduct of Landlord and which is not otherwise reimbursed by Tenant to Landlord pursuant to any other provision of this Lease.

(d)

If Landlord desires to obtain or refinance any Loan, Tenant shall negotiate in good faith with Landlord concerning any request made by any Lender or proposed Lender for changes or modifications in this Lease.  In particular, Tenant shall agree, upon request of Landlord, to supply, within ten (10) days after a written request from Landlord, any such Lender with such notices and information as Tenant is required to give to Landlord hereunder and to extend the rights of Landlord hereunder to any such Lender and to consent to such financing if such consent is requested by such Lender.  Tenant shall provide any other consent or statement and shall execute any and all other documents that such Lender requires in connection with such financing, including any environmental indemnity agreement and subordination, non-disturbance and attornment agreement (which agreement Tenant must be provided pursuant to Section 32 of this Lease), so long as the same do not materially adversely affect any right, benefit or privilege of Tenant under this Lease or does not in any manner increase Tenant's obligations under this Lease.  Such subordination, non-disturbance and attornment agreement may require Tenant to confirm that (i) Lender and its assigns will not be liable for any misrepresentation, act or omission of Landlord and (ii) Lender and its assigns will not be subject to any counterclaim, demand or offsets which Tenant may have against Landlord.

32.

Subordination, Non-Disturbance and Attornment.

This Lease and Tenant's interest hereunder shall be subordinate to any Mortgage or other security instrument hereafter placed upon any of the Leased Premises by Landlord, and to any and all advances made or to be made thereunder, to the interest thereon, and all renewals,

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replacements and extensions thereof; provided that any such Mortgage or other security instrument (or a separate instrument in recordable form duly executed by the holder of any such Mortgage or other security instrument and delivered to Tenant) shall provide for the recognition of this Lease and all Tenant's rights hereunder unless and until an Event of Default exists or Landlord shall have the right to terminate this Lease pursuant to any applicable provision hereof.

33.

Tax Treatment; Reporting.

Landlord and Tenant each acknowledge that each shall treat this transaction as a true lease for state law purposes and shall report this transaction as a Lease for Federal income tax purposes.  For Federal income tax purposes each shall report this Lease as a true lease with Landlord as the owner of the Leased Premises and Equipment and Tenant as the lessee of such Leased Premises and Equipment including: (i) treating Landlord as the owner of the property eligible to claim depreciation deductions under Section 167 or 168 of the Internal Revenue Code of 1986 (the “Code”) with respect to the Leased Premises and Equipment, (ii) Tenant reporting its Rent payments as rent expense under Section 162 of the Code, and (iii) Landlord reporting the Rent payments as rental income.  For the avoidance of doubt, nothing in this Lease shall be deemed to constitute a guaranty, warranty or representation by either Landlord or Tenant as to the actual treatment of this transaction for state law purposes and for Federal law purposes.

34.

Financing Major Alterations.

(a)

Should Tenant, during the Term of this Lease, desire to make Alterations to any of the Leased Premises (other than the Warehouse Expansion Improvements which are not subject to this Paragraph 34) which are not readily removable without causing material damage to such Leased Premises and which will cost in excess of $750,000 in the aggregate as to all of the Leased Premises (“Major Alterations”), Tenant shall, prior to the commencement of construction of such Major Alterations, offer by written notice to Landlord (a “Payment Offer”) to accept payment from Landlord for the costs (the “Alteration Cost”) thereof, to wit:  cost of labor and materials, financing fees, legal fees, survey, title insurance and other normal and customary loan or construction costs.

(b)

Should Landlord accept Tenant's offer, which acceptance shall be made in writing within sixty (60) days after receipt by Landlord of such offer, Landlord and Tenant shall enter into good faith negotiations regarding the execution and delivery of a written agreement of modification of this Lease.  Tenant shall pay all Costs incurred by Landlord in connection with any such modification to this Lease and such financing, including closing costs, taxes, recording charges and legal fees and expenses.

(c)

To the extent that the terms of the Mortgage or any other document encumbering any of the Leased Premises shall require the consent of Lender and/or the holder or holders of any encumbrance on any of the Leased Premises (the “Lienholders”) to the addition or construction of any Major Alterations or to the financing thereof by Landlord, the rights and obligations of Landlord and Tenant under Paragraph 13 and this Paragraph 34 are expressly conditioned upon Tenant's obtaining, prior to the commencement of any construction, the Lienholders' written consent to such construction and to Landlords obtaining, in the event Landlord has accepted Tenant's offer to accept payment for the Major Alterations, the Lienholders' written consent to such financing.

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(d)

Should Tenant's offer to accept payment for the Major Alterations not be accepted by Landlord within said sixty (60) day period, or should Landlord and Tenant be unable in good faith to agree upon the terms of the modification of this Lease, Tenant shall, subject to the provisions of Paragraph 13 of this Lease, have the right to construct the Major Alterations at Tenant's sole cost and expense.  In any event, the construction of the Major Alterations shall be performed in accordance with the provisions of Paragraph 12 and Paragraph 13 hereof and the Major Alterations shall be the property of Landlord and part of the Leased Premises subject to this Lease.

(e)

Nothing contained in this Paragraph 34 shall be construed to modify Paragraph 13 hereof, and the provisions of Paragraph 12 and Paragraph 13 shall apply to all Major Alterations made or constructed hereunder; provided, however, that Landlord's prior written consent shall be required for all Major Alterations.

35.

Permitted Leasehold Mortgage.

Tenant shall not encumber its leasehold estate in any of the Leased Premises, by means of a leasehold mortgage, deed of trust pledge or similar security device, except by means of a Permitted Leasehold Mortgage.  For purposes of this Lease, a “Permitted Leasehold Mortgage” shall satisfy the following criteria:

(a)

Such leasehold mortgage shall be granted by Tenant for purposes of financing (i) a Major Alteration for which Landlord has granted its prior written consent, or (ii) Tenant’s equipment, machinery, inventory or other personal property;

(b)

The mortgagee under such leasehold mortgage shall be a national banking association, state chartered bank, savings and loan association, insurance company, savings bank, foreign bank authorized to do business in the United States, trust company, real estate investment trust, or pension fund, having gross assets in excess of $500,000,000 or such other institution as Landlord shall approve.

(c)

Such leasehold mortgage shall be subject to such documents as are customarily acceptable to Landlord or Lender in order to protect such lender’s lien and security interest in Tenant’s leasehold estate, including without limitation (i) the right to receive notice of an Event of Default by Tenant under this Lease and a period to cure such Event of Default, (ii) a waiver of Landlord’s statutory lien and other rights in Tenant’s equipment, machinery, inventory and other personal property, and (iii) the benefits of any non-disturbance and attornment agreement in favor of Tenant; provided, however, that in the event that such leasehold mortgagee becomes a successor tenant under this Paragraph 35, such leasehold mortgagee shall be required to be in compliance with all of the terms of this Lease.

36.

Miscellaneous.

(a)

The Paragraph headings in this Lease are used only for convenience in finding the subject matters and are not part of this Lease or to be used in determining the intent of the parties or otherwise interpreting this Lease.

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(b)

As used in this Lease, the singular shall include the plural and any gender shall include all genders as the context requires and the following words and phrases shall have the following meanings: (i) “including” means “including without limitation”; (ii) “provisions” means “provisions, terms, agreements, covenants and/or conditions”; (iii) “lien” means “lien, charge, encumbrance, title retention agreement, pledge, security interest, mortgage and/or deed of trust”; (iv) “obligation” means “obligation, duty, agreement, liability, covenant and/or condition”; (v) “the Leased Premises” means “the Leased Premises or any part thereof or interest therein”; (vi) “any of the Real Property” means “the Real Property or any part thereof or interest therein”; (vii) “any of the Improvements” means “the Improvements or any part thereof or interest therein”; (viii) “any of the Equipment” means “the Equipment or any part thereof or interest therein”; and (ix) “any of the Adjoining Property” means “the Adjoining Property or any part thereof or interest therein”.

(c)

Any act which Landlord is permitted to perform under this Lease may be performed at any time and from time to time by Landlord or any person or entity designated by Landlord.  Each appointment of Landlord as attorney-in-fact for Tenant hereunder is irrevocable and coupled with an interest.

(d)

Except as otherwise expressly provided in this Lease, Landlord shall not unreasonably withhold or delay its consent whenever such consent is required under this Lease.  Tenant hereby waives any claim for damages against or liability of Landlord which is based upon a claim that Landlord has unreasonably withheld or unreasonably delayed any consent or approval requested by Tenant, and Tenant agrees that its sole remedy shall be an action for declaratory judgment.  If with respect to any required consent or approval Landlord is required by the express provisions of this Lease not to unreasonably withhold or delay its consent or approval, and if it is determined in any such proceeding referred to in the preceding sentence that Landlord acted unreasonably, the requested consent or approval shall be deemed to have been granted; however, Landlord shall have no liability whatsoever to Tenant for its refusal or failure to give such consent or approval.  Tenant's sole remedy for Landlord's unreasonably withholding or delaying, consent or approval shall be as provided in this Paragraph.

(e)

Time is of the essence with respect to the performance by Tenant of its obligations under this Lease.

(f)

Landlord shall in no event be construed for any purpose to be a partner, joint venturer or associate of Tenant or of any subtenant, operator, concessionaire or licensee of Tenant with respect to the Leased Premises or otherwise in the conduct of their respective businesses.

(g)

This Lease and any documents which may be executed by Tenant on or about the effective date hereof at Landlord's request, including, without limitation, the Tenant’s Certificate,  constitute the entire agreement between the parties and supersede all prior understandings and agreements, whether written or oral, between the parties hereto relating to the Leased Premises and the transactions provided for herein.  Landlord and Tenant are business entities having substantial experience with the subject matter of this Lease and have each fully participated in the negotiation and drafting of this Lease.  Accordingly, this Lease shall be construed without regard to the rule that ambiguities in a document are to be construed against the drafter.

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(h)

This Lease may be modified, amended, discharged or waived only by an agreement in writing signed by the party against whom enforcement of any such modification, amendment, discharge or waiver is sought.

(i)

The covenants of this Lease shall run with the land and bind Tenant, its successors and assigns and all present and subsequent encumbrancers and subtenants of any of the Leased Premises, and shall inure to the benefit of Landlord, its successors and assigns.  If there is more than one Tenant, the obligations of each shall be joint and several.

(j)

Notwithstanding any provision in this Lease to the contrary, all Surviving Obligations of Tenant shall survive the expiration or termination of this Lease.

(k)

If any one or more of the provisions contained in this Lease shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Lease, but this Lease shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.

(l)

All exhibits attached hereto are incorporated herein as if fully set forth.

(m)

Each of Landlord and Tenant hereby agree that the State of New York has a substantial relationship to the parties and to the underlying transaction embodied hereby, and in all respects (including, without limiting the generality of the foregoing, matters of construction, validity and performance) this Lease and the obligations arising hereunder shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts made and performed therein and all applicable law of the United States of America; except that, at all times, the provisions for the creation of the leasehold estate, enforcement of Landlord's rights and remedies with respect to right of re-entry and repossession, surrender, delivery, ejectment, dispossession, eviction or other in-rem proceeding or action regarding the Leased Premises pursuant to Paragraph 23 hereof shall be governed by and construed according to the Laws of the State in which the Leased Premises is located, it being understood that, to the fullest extent permitted by law of such State, the law of the State of New York shall govern the validity and the enforceability of the Lease, and the obligations arising hereunder.  To the fullest extent permitted by law, Tenant hereby unconditionally and irrevocably waives any claim to assert that the law of any other jurisdiction governs this Lease.  Any legal suit, action or proceeding against Tenant arising out of or relating to this Lease may be instituted in any Federal or state court sitting in the State of New York, and Tenant waives any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding in such County and State, and Tenant hereby expressly and irrevocably submits to the jurisdiction of any such court in any suit, action or proceeding.  Notwithstanding the foregoing, nothing herein shall prevent or prohibit Landlord from instituting any suit, action or proceeding in any other proper venue or jurisdiction in which Tenant is located or where service of process can be effectuated.

(n)

To Tenant’s knowledge, neither Tenant nor any of the members, shareholders, partners or any other Person comprising Tenant is a Specially Designated National or Blocked Person.  As used herein, the term “Specially Designated National or Blocked Person” shall mean a person or entity (i) designated by the Department of Treasury’s Office of Foreign Assets Control, or other governmental entity, from time to time as a “specially designated national or

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blocked person”  or similar status, (ii) described in Section 1 of U.S. Executive Order 13224 issued on September 23, 2001, or (iii) otherwise identified by government or legal authority as a person or entity with whom Landlord or its affiliates are prohibited from transacting business.

(o)

Tenant hereby confirms that this Lease is enforceable as a written lease pursuant to Section 704.03 of the Wisconsin Statutes, and, if requested by Landlord, Tenant will execute any further instruments or assurances, if necessary, to make this Lease comply with Section 704.03 of the Wisconsin Statutes.

(p)

Tenant will maintain as confidential (i) any and all information obtained about the Landlord prior to and following the execution of this Lease (including without limitation, any financial or operating information of, or related to, the Landlord), and (ii) the terms and conditions of this Lease (as originally circulated or as negotiated) and all other documents related to the execution of this Lease.  Notwithstanding the foregoing, Tenant shall be permitted to disclose information related to this Lease described in item (ii) above: (x) in accordance with Tenant’s general public disclosure policy; provided Tenant has obtained Landlord’s prior consent to the contents of any such disclosure, (y) to Tenant’s officers, employees, board members, accountants, attorneys, shareholders, members and lenders in accordance with usual and customary business practices; provided such indiv iduals or entities agree, at the time of such disclosure by Tenant, to be bound by the terms and conditions of this Paragraph 40(p), and (z) as required by any Legal Requirement; in addition, Tenant may disclose any information described in item (i) above if required by any Legal Requirement.  Tenant hereby consents to the disclosure by Landlord of the existence of and of the terms and conditions of this Lease, and the use by Landlord of the tradename, name, or logo of Tenant, and of any entity having an ownership or management interest in Tenant, in accordance with Landlord’s general public disclosure policy; including, without limitation, disclosures made by Landlord and its affiliates to their investors, lenders, analysts and in connection with any offering memo or marketing materials distributed by Landlord and its affiliates.  This provision shall survive beyond the termination of this Lease.  Tenant shall not record this Lease or any memorandum thereof in the land records of any cou nty or jurisdiction or with any governmental authority, without the prior written consent and approval of the Landlord.

Page 50

IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be duly executed under seal as of the day and year first above written.

LANDLORD:

AGNL RATHGIBSON, L.L.C.,

a Delaware limited liability company

By:

AGNL Manager, Inc.,

its sole manager

By: /s/ Peter B. Kaplan Jr.

Name: Peter B. Kaplan Jr.

Title: Managing Director

Page 51

ATTEST:

TENANT:

RATHGIBSON, INC.,

a Delaware corporation

By: /s/ Laura Manke

By: /s/ William S. Anacker

Title: Notary Public

Title: Secretary

[Corporate Seal]

Page 52

EXHIBIT A-1

2505 REAL PROPERTY

Parcel A:
Parcel 1:
Lot 2 of a Certified Survey Map recorded in the office of the Register of Deeds for Rock County, Wisconsin, on October 25, 1990 in Vol. 14, Pages 410 and 411 of Certified Survey Maps, as Document No. 1121941, being part of Lot 1 of North Janesville Industrial Park located in the NE 1/4 of the NW 1/4 of Section 19, T.3N., R.13E., of the 4^th P.M., City of Janesville, Rock County, Wisconsin..

Parcel 2:
Easement for the benefit of Parcel 1 created by easement for common use by and between Rath Manufacturing Co., Inc., a Wisconsin Corporation and DRS Investment Group, a Wisconsin Partnership, dated January 21, 1991 and recorded in the office of the Register of Deeds for Rock County, Wisconsin, on January 31, 1991 on Card 465, Image 367 as Document No. 1126829, for grant of driveway easement, grant of access easement, pavement easement and parking easement.

Parcel 3:
Easement for the benefit of Parcel 1 created by easement for common use by and between Rath Acquisition Corp., a Delaware Corporation and DRS Investment Group, a Wisconsin Partnership dated January 31, 1991 and recorded in the office of the Register of Deeds for Rock County, Wisconsin on September 23, 1991 on Card 497, Image 920 as Document No. 1142012, for grant of utility easement.

Parcel B:
Lot 1 of a Certified Survey Map recorded in said Register's office on January 21, 1980 in Vol. 9, Pages 181 and 182 of Certified Survey Maps as Document No. 919268, being part of the NW 1/4 of Section 19, T.3N., R.13E., of the 4^th P.M., City of Janesville, Rock County, Wisconsin.

EXHIBIT A-1, Page 1

EXHIBIT A-2

2533 REAL PROPERTY

Parcel C

Lots 1 and 2 of a Certified Survey Map recorded on December 28, 1981 in Vol. 10, Pages 479-481 of Certified Survey Maps of Rock County, Wisconsin, being part of the NE 1/4 of the NW 1/4 and part of the SE 1/4 of the NW 1/4 of Section 19, T.3N., R.13E., of the 4^th P.M., City of Janesville, Rock County, Wisconsin.

EXHIBIT A-2, Page 1

EXHIBIT B-1

2505 MACHINERY AND EQUIPMENT

All fixtures, machinery, apparatus, equipment, fittings and appliances of every kind and nature whatsoever now or hereafter affixed or attached to or installed in the 2505 Leased Premises (except as hereafter provided), including all electrical, anti-pollution, heating, lighting (including hanging fluorescent lighting), incinerating, power, air cooling, air conditioning, humidification, sprinkling, plumbing, lifting, cleaning, fire prevention, fire extinguishing and ventilating systems, devices and machinery and all engines, pipes, pumps, tanks (including exchange tanks and fuel storage tanks), motors, conduits, ducts, steam circulation coils, blowers, steam lines, compressors, oil burners, boilers, doors, windows, loading platforms, lavatory facilities, stairwells, fencing (including cyclone fencing), passenger and freight elevators, overhead cranes and garage units, together with all additions thereto, substitutions therefor and replacements the reof required or permitted by this Lease, but excluding all personal property and all trade fixtures, machinery, office, manufacturing and warehouse equipment which are not necessary to the operation of the buildings which constitute part of the 2505 Leased Premises for the uses permitted under Paragraph 4(a) of this Lease.

EXHIBIT B-1, Page 1

EXHIBIT B-2

2533 MACHINERY AND EQUIPMENT

All fixtures, machinery, apparatus, equipment, fittings and appliances of every kind and nature whatsoever now or hereafter affixed or attached to or installed in the 2533 Leased Premises (except as hereafter provided), including all electrical, anti-pollution, heating, lighting (including hanging fluorescent lighting), incinerating, power, air cooling, air conditioning, humidification, sprinkling, plumbing, lifting, cleaning, fire prevention, fire extinguishing and ventilating systems, devices and machinery and all engines, pipes, pumps, tanks (including exchange tanks and fuel storage tanks), motors, conduits, ducts, steam circulation coils, blowers, steam lines, compressors, oil burners, boilers, doors, windows, loading platforms, lavatory facilities, stairwells, fencing (including cyclone fencing), passenger and freight elevators, overhead cranes and garage units, together with all additions thereto, substitutions therefor and replacements the reof required or permitted by this Lease, but excluding all personal property and all trade fixtures, machinery, office, manufacturing and warehouse equipment which are not necessary to the operation of the buildings which constitute part of the 2533 Leased Premises for the uses permitted under Paragraph 4(a) of this Lease.

EXHIBIT B-2, Page 1

EXHIBIT C

PERMITTED ENCUMBRANCES

1.

Easement granted by Katherine S. Peterson and Isabel Smith to Wisconsin Power & Light Company on August 14, 1928 and recorded on August 23, 1928 in Vol. 261 of Deeds, on Page 365 as Document No. 342668.

2.

Easement Assignment dated December 7, 2000 and recorded January 9, 2001 as Document No. 1479802, given by Wisconsin Electric Power Company, a Wisconsin Corporation to American Transmission Company, LLC, a Wisconsin Limited Liability Company.

3.

Public or private rights, if any, in such portion of the premises as may be laid out, used or dedicated for street, highway or alley purposes.

4.

Reservation for easement as designated on the Certified Survey Map recorded in the office of the Register of Deeds for Rock County, Wisconsin on October 25, 1990 as Document No. 1121941 reserving the West 10 feet of the subject premises for utility easement and the East 50 feet for sewer and water easement.

5.

Reservation for easement as designated on the Certified Survey Map recorded in said register’s office on January 21, 1980 as Document No. 919268, reserving the West 10 feet of said premises for utility easement.

6.

Terms, conditions, restrictions and provisions relating to the use and maintenance of the easements described as Parcels 2 and 3 of Parcel A as contained in Easement for Common Use recorded on January 31, 1991 as Document No. 1126829 and Easement for Common Use recorded on September 23, 1991 as Document No. 1142012.

7

Rights of DRS Investment Group, a Wisconsin Partnership, its successors and/or assigns to use the easements as set forth in Parcels, 2 and 3 of Parcel A.

8.

Facts disclosed by an affidavit executed November 13, 1996 and recorded November 18, 1996 as Document No. 1313848. (Affects Parcels A & B)

9.

Note:  Record of Variance City of Janesville by and between City of Janesville and Rath Gibson dated September 27, 2006 and recorded September 27, 2005 as Document No. 1766091.

10.

Electric Line Easement dated January 10, 1963 and recorded May 20, 1963 in Vol. 83 of Records, Page 314 as Document No. 659592 given by Frank L. Murphy to Wisconsin Power & Light Company.

11.

Underground Electric Easement dated April 29, 1992 and recorded July 15, 1992 on Card 557, Images 545 to 550 as Document No. 1167579 given by DRS Investment Group, a Wisconsin Partnership to Wisconsin Power & Light Company.

12.

Reservation for easement as designated on the Certified Survey Map recorded December 28, 1981 as Document No. 948324, reserving the West 10 feet of the subject premises for utility easement.

EXHIBIT C, Page 1

13.

Notation as set forth on Certified Survey Map recorded December 28, 1981 as Document No. 948324 state as follows:

a) NOTE: The water pressure in this area is inadequate and provisions for adequate water pressure will have to be done by the individual lot owner.

b) Utility easement as set forth are for the use of public bodies and private public utilities having rights to serve the platted area.

(Affects Parcel C)

14.

The following as disclosed on ALTA/ACSM Land Title Survey prepared by Combs and Associates, Inc. dated September 23, 2006 as Project No. 106-374:

a)

Fence encroaches onto the adjacent property to the East of the subject premises.

b)

Crushed Stone encroaches onto the subject premises 4 ft. +/- from the adjoining property on the East.

c)

Violation of encroachment as to Bituminous Pavement and Parking Stalls on to the Utility Easement on the Westside of Parcel B of the Survey, the Westside of Parcel 2 and the Southside of Parcel C.

d)

Violation of encroachment as to Concrete Pavement and Building onto the Utility Easement on the Westside of Parcel 1 of the Survey.

e)

Violation of encroachment as to Concrete Pavement onto the 50’ Sewer and Water Easement between Parcel 1 and Parcel C.

f)

Violation of encroachment as to Smokers Shelter onto the Building Setback Line on the Eastside of Parcel C of the Survey.

g)

Violation of encroachment as to Concrete Pavement onto the Electric Line Easement on the Eastside of Parcel C of the Survey.

Page 2

EXHIBIT D

BASIC RENT PAYMENTS

1.

Basic Rent.

(a)

Initial Term.  Subject to the adjustments provided for in Paragraphs 2, 3 and 4 below, Basic Rent payable in respect of the Term shall be $878,900.00 per annum, payable quarterly in advance on the first (1^st) day of January, April, July and October, commencing on January 1, 2007 (each a “Basic Rent Payment Date”), in equal installments of $219,725.00 each.  Pro rata Basic Rent for the period from the date hereof through the first (1^st) day of April, 2007 shall be paid on the date hereof, and pro rata Basic Rent for the period from the final Basic Rent Payment Date of the initial Term through the last day of initial Term shall be paid with the final installment of Basic Rent for the initial Term.

(b)

Renewal Term.  Annual Basic Rent for the first year of each Renewal Term shall be an amount determined in accordance with Paragraphs 2, 3 and 4 below, payable in equal quarterly installments.

2.

CPI Adjustments to Basic Rent.  The Basic Rent shall be subject to adjustment, in the manner hereinafter set forth, for increases in the index known as United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index, All Urban Consumers, United States City Average, All Items, (1982-84=100) (“CPI”) or the successor index that most closely approximates the CPI.  If the CPI shall be discontinued with no successor or comparable successor index, Landlord and Tenant shall attempt to agree upon a substitute index or formula, but if they are unable to so agree, then the matter shall be determined by arbitration in accordance with the rules of the American Arbitration Association then prevailing in New York City.  Any decision or award resulting from such arbitration shall be final and binding upon Landlord and Tenant and judgment thereon may be entered in any court of competent jurisdiction.  In no event will the annual Basic Rent as adjusted by the CPI adjustment be less than the Basic Rent in effect for the one (1) year period immediately preceding such adjustment.

3.

Effective Dates of CPI Adjustments.  Basic Rent shall be adjusted annually to reflect changes in the CPI, commencing on the first (1st) anniversary of the Basic Rent Payment Date on which the first full quarterly installment of Basic Rent shall be due and payable (the “First Full Basic Rent Payment Date”).  As of the first (1st) anniversary of the First Full Basic Rent Payment Date and thereafter on the each subsequent anniversary of the First Full Basic Rent Payment Date, Basic Rent shall be adjusted to reflect increases in the CPI during the most recent one (1) year period immediately preceding each of the foregoing dates (each such date being hereinafter referred to as the “Basic Rent Adjustment Date”).

4.

Method of Adjustment for CPI Adjustment.

(a)

As of each Basic Rent Adjustment Date when the average CPI determined in clause (i) below exceeds the Beginning CPI (as defined in this Paragraph 4(a)), the Basic Rent in effect immediately prior to the applicable Basic Rent Adjustment Date shall be multiplied by a fraction, the numerator of which shall be the difference between (i) the average CPI for the three (3) most recent calendar months (the “Prior Months”) ending prior to such Basic Rent

EXHIBIT D, Page 1

Adjustment Date for which the CPI has been published on or before the forty-fifth (45^th) day preceding such Basic Rent Adjustment Date and (ii) the Beginning CPI, and the denominator of which shall be the Beginning CPI.  An amount equal to the lesser of (x) the product of such multiplication or three percent (3%) of the Basic Rent in effect immediately prior to such Basic Rent Adjustment Date shall be added to the Basic Rent in effect immediately prior to such Basic Rent Adjustment Date. As used herein, “Beginning CPI” means the average CPI for the three (3) calendar months corresponding to the Prior Months, but occurring one (1) year earlier.  If the average CPI determined in clause (i) is the same or less than the Beginning CPI, the Basic Rent will remain the same for the ensuing one (1) year period.

(b)

Effective as of a given Basic Rent Adjustment Date, Basic Rent payable under this Lease until the next succeeding Basic Rent Adjustment Date shall be the Basic Rent in effect after the adjustment provided for as of such Basic Rent Adjustment Date.

(c)

Notice of the new annual Basic Rent shall be delivered to Tenant on or before the tenth (10^th) day preceding each Basic Rent Adjustment Date, but any failure to do so by Landlord shall not be or be deemed to be a waiver by Landlord of Landlord's rights to collect such sums.  Tenant shall pay to Landlord, within ten (10) days after a notice of the new annual Basic Rent is delivered to Tenant, all amounts due from Tenant, but unpaid, because the stated amount as set forth above was not delivered to Tenant at least ten (10) days preceding the Basic Rent Adjustment Date in question.

EXHIBIT G, Page 2

EXHIBIT E

ACQUISITION COST

2505 Leased Premises

$7,050,000

2533 Leased Premises

$2,350,000

EXHIBIT E, Page 1

EXHIBIT F

PREMISES PERCENTAGE ALLOCATION OF BASIC RENT¹

2505 Leased Premises

75%

2533 Leased Premises

25%

EXHIBIT F, Page 1

EXHIBIT G

Certification Related to the USA Patriot Act

On behalf of [Insert name of subtenant/assignee] (“[Subtenant/Assignee]”), I hereby certify to the following:

1.

[Subtenant/Assignee] maintains a place of business that is located at a fixed address (other than an electronic address or post office box) know as __________________________.

2.

[Subtenant/Assignee] is subject to the laws of the United State and has no knowledge that it is not in full compliance with laws relating to bribery, corruption, fraud, money laundering and the Foreign Corrupt Practices Act.

3.

The names and addresses of [Subtenant/Assignee]’s Owners, officers and directors are accurately reflected on Annex A to this certification.  “Owner” means any individual who owns, controls, or has the power to vote more than 5% of any class of [Subtenant/Assignee]’s stock, or otherwise controls or has the power to control [Subtenant/Assignee].

4.

None of said Owners, officers or directors appears on any of the following lists maintained by the United States government (“Government Lists”):

a.

The two lists maintained by the United States Department of Commerce (Denied Persons and Entities; the Denied Persons list can be found at www.bxa.doc.gov/DPL/Default.shtm; the Entity List can be found at www.bxa.doc.gov/Entities/Default.htm;

b.

The list maintained by the United States Department of Treasury (Specially Designated Nationals and Blocked Persons, which can be found at www.ustreas.gov/ofac/t11sdn.pdf);

c.

Two lists maintained by the United States Department of State (Terrorist Organizations and Debarred Parties; the State Department List of Terrorists can be found at www.state.gov/s/ct/rls/fs/2001/6531.htm; the List of Debarred Parties can be found at www.pmdtc.org/debar059.htm); and

d.

Any other list of terrorists, terrorist organizations or narcotics traffickers maintained pursuant to any of the rules and regulations of Office of Foreign Assets Control, U.S. Department of the Treasury, or by any other government.

5.

 [Subtenant/Assignee] does not transact business on behalf of, or for the direct or indirect benefit of, any individual or entity named on any Government List.

I, _____________________, certify that I have read and understand this Certification and that the statements made in this certification and the attached Annexes are true and correct.

EXHIBIT G, Page 1

This Certification is made on behalf of [[Subtenant/Assignee]].

__________________________________
(Signature)

__________________________________
(Title)

Executed on this _____ day of ___________, 200_.

EXHIBIT G, Page 2

ANNEX A – OWNERS, OFFICERS AND DIRECTORS

NAME

TITLE/POSITION

EXHIBIT G, Page 3

EXHIBIT H

WAREHOUSE EXPANSION IMPROVEMENTS

[Proposal Attached]

EXHIBIT H, Page 1

Schedule 16(a)

Existing Insurance

[Insurance Certificates Attached]

Footnotes

1If any of the Leased Premises ceases to be subject to this Lease, the percentage shown on this Exhibit F for each of the Leased Premises which remains subject to this Lease shall be adjusted proportionately so that the total of such percentages shall be 100%.

Schedule 16(a), Page 1

EX-10

_

EX-12

Exhibit 12

Computation of Ratio of Earnings to Fixed Charges

					Successor		Predecessor
					Period		Period
					February 8,		February 1,
					2006 through		2006 through		Fiscal Years Ended January 31,
					January 31,		February 7,
					2007		2006		2006		2005		2004		2003
Earnings:
Pretax income (loss) from continuing
	operations before adjustment for
	minority interests in consolidated
	subsidiaries or income or loss from
	equity investees			$	(466)	$	(6,740)	$	15,926	$	11,960	$	162	$	(1,577)
Plus:
Fixed charges					26,176		368		17,398		14,537		15,362		16,126
		Total earnings, before fixed charge
			addition	$	25,710	$	6,372	$	33,324	$	26,497	$	15,524	$	14,549
Fixed charges:
Interest expensed and capitalized					25,580		336		16,838		13,882		14,551		15,226
Plus:
Amortized premiums, discounts and
	capitalized expenses related to
	indebtedness				-		-		10		137		276		387
Estimate of the interest within rental
	expense (1/3 of rent expense)				596		32		550		518		535		513
		Total fixed charges		$	26,176	$	368	$	17,398	$	14,537	$	15,362	$	16,126
Ratio of earnings to fixed charges(1)					0.98		(17.32)		1.92		1.82		1.01		0.90

(1)

Fixed charges exceed earnings by $6,740 and $1,577 in the period February 1, 2006 through February 7, 2006 and fiscal 2003, respectively.

EX-21

ITEM 1

EX-23

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to incorporation by reference in the Registration Statement on Form S-4 No. 333-134875 of RathGibson Inc. of our report dated April 4, 2005, except for information in Notes 3 (not presented therein) and 10 for which the date is January 9, 2006 relating to the consolidated financial statements and financial statement schedule, which is included in this Annual Report on Form 10-K.  

/s/ PricewaterhouseCoopers LLP

Milwaukee, Wisconsin

April 23, 2007

EX-23

Example 5

EX-31

EX-31

ITEM 1

EX-32

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

 TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of RathGibson, Inc. (the “Company”) on Form 10-K for the fiscal year ended January 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Harley B. Kaplan, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1.

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  April 25, 2007

/s/ Harley B. Kaplan

Harley B. Kaplan

President and Chief Executive Officer

EX-32

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

 TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of RathGibson, Inc. (the “Company”) on Form 10-K for the fiscal year ended January 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Barry C. Nuss, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1.

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  April 25, 2007

/s/ Barry C. Nuss

Barry C. Nuss

Chief Financial Officer

EX-99

EXHIBIT 99.1

Schedule II - Valuation and Qualifying Accounts

Fiscal Years Ended January 31, 2007, 2006 and 2005

(in thousands)

				Balance at		Charged to		Charged to				Balance at
				Beginning of		Costs and		Other				End of
Description				Period		Expenses		Accounts (1)		Deductions (2)		Period
Allowance for doubtful
	accounts
	Fiscal Year Ended January  31,
		2005	$	338	$	256	$	-	$	(15)	$	579
		2006	$	579	$	71	$	-	$	-	$	650
		2007	$	650	$	6	$	30	$	(190)	$	496
Inventory reserves
	Fiscal Year Ended January  31,
		2005	$	922	$	606	$	-	$	(214)	$	1,314
		2006	$	1,314	$	1,105	$	-	$	(1,509)	$	910
		2007	$	910	$	842	$	440	$	(1,272)	$	920

(1)

Primarily relates to allowance for doubtful accounts and inventory reserves acquired in acquisitions.

(2)

Includes write-offs of trade accounts receivable, net of recoveries of amounts previously written-off and write-offs of obsolete inventory.