UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, ~~2006~~2008

Commission File Number 333-132918

FLAG INTERMEDIATE HOLDINGS CORPORATION

HOLDINGS CORPORATION

(Exact name of Registrant as Specified in its Charter)

Delaware		20-3779375
(State or other jurisdictionof incorporation or organization)		(I.R.S. EmployerIdentification Number)
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

Commission File Number 001-13123

METALS USA, INC.

(Exact name of Registrant as Specified in its Charter)

Delaware		76-0533626
(State or other jurisdictionof incorporation or organization)		(I.R.S. EmployerIdentification Number)
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
One Riverway, Suite 1100Houston, Texas		77056
One Riverway, Suite 1100 Houston, Texas		77056
(Address of Principal Executive Offices)		(Zip Code)

Registrants’ telephone number, including area code: (713) 965-0990

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 ¨ x No ¨ x

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

Large accelerated ~~filer~~ filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ¨ No x

~~APPLICABLE~~Number ~~ONLY~~of TOshares ~~ISSUERS~~of ~~INVOLVED~~common INstock ~~BANKRUPTCY~~outstanding at November 3, 2008 of Flag Intermediate Holdings Corporation.: 100

PROCEEDINGS DURING THE PRECEEDING FIVE YEARS

Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨

Number of shares of common stock outstanding at August 14, 2006 of Flag Intermediate Holdings Corporation: 100

Number of shares of common stock outstanding at August 14, 2006 of Metals USA, Inc.: 100

FLAG INTERMEDIATE HOLDINGS CORPORATION AND

METALS USA, INC. AND SUBSIDIARIES

SAFE HARBOR STATEMENT—FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Quarterly Report, other than statements of historical fact, that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. These statements appear in a number of places, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements represent our reasonable judgment on the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties and other factors that could cause our actual results and financial position to differ materially from those contemplated by the statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “may,” “~~will,” “~~should,” “plan,” “project” and other words of similar meaning. In particular, these include, but are not limited to, statements relating to the following:

• projected operating or financial results, including anticipated cash flows from operations and asset sale proceeds;

•

expectations regarding capital expenditures, interest expense and other payments;

• our beliefs and assumptions relating to our liquidity position, including our ability to adapt to changing market conditions; and

• our ability to compete effectively for market share with industry participants;.

Any or all of our forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors including, among others:

•

supply, demand, prices and other market conditions for steel and other commodities;

•

the timing and extent of changes in commodity prices;

•

the effects of competition in our business lines;

•

the condition of the steel and metal markets generally, which will be affected by interest rates, foreign currency fluctuations and general economic conditions;

•

the ability of our counterparties to satisfy their financial commitments;

•

tariffs and other government regulations relating to our products and services;

•

adverse developments in our relationship with both our key employees and unionized employees;

•

operational factors affecting the ongoing commercial operations of our facilities, including catastrophic weather-related damage, regulatory approvals, permit issues, unscheduled blackouts, outages or repairs, unanticipated changes in fuel costs or availability of fuel emission credits or workforce issues;

• our ability to operate our businesses efficiently, manage capital expenditures and costs (including general and administrative expenses) ~~tightly~~ and generate earnings and cash flow; ~~and~~

• ~~general~~our ~~political~~substantial ~~conditions and developments in the United States and in foreign countries whose affairs affect supply, demand and markets for steel, metals and metal products.~~indebtedness;

1• general political conditions and developments in the United States and in foreign countries whose affairs affect supply, demand and markets for steel, other metals and metal products;

~~Table~~• ofour ~~Contents~~ability to retain key employees; and

In• ~~addition, there may be other factors that could cause~~ our ~~actual~~expectations ~~results~~with respect to be materially different from the results referenced in the forward-looking statements, some of which are included elsewhere in this Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Many of these factors will be important in determining our ~~actual~~acquisition ~~future results~~activity. Consequently, no forward-looking statement can be guaranteed. Our actual future results may vary materially from those expressed or implied in any forward-looking statements. All forward-looking statements contained in this Form 10-Q are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this Form 10-Q, except as otherwise required by applicable law.

In addition, there may be other factors that could cause our actual results to be materially different from the results referenced in the forward-looking statements, some of which are included elsewhere in this Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Many of these factors will be important in determining our actual future results. Consequently, no forward-looking statement can be guaranteed. Our actual future results may vary materially from those expressed or implied in any forward-looking statements. All forward-looking statements contained in this Form 10-Q are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this Form 10-Q, except as otherwise required by applicable law.

FLAG INTERMEDIATE HOLDINGS CORPORATION AND

~~METALS USA, INC. AND~~ SUBSIDIARIES

~~INDEX~~TABLE OF CONTENTS

PART I. – FINANCIAL INFORMATION
	PART I.—FINANCIAL INFORMATION
Item 1. Financial Statements
Item 1.	Financial Statements
Unaudited Consolidated Balance Sheets at June 30, 2006 and December 31, 2005	4
	Unaudited Condensed Consolidated Balance Sheets at September 30, 2008 and December 31, 2007	4
Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005	5
	Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007	5
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005	6
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007	6
Notes to Unaudited Consolidated Financial Statements	7
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results ofOperations	37
Item 3. Quantitative and Qualitative Disclosures about Market Risk	44
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	58
Item 4. Controls and Procedures	44
Item 4.	Controls and Procedures	58
PART II. – OTHER INFORMATION
	PART II.—OTHER INFORMATION
Item 1. Legal Proceedings	45
Item 1.	Legal Proceedings	59
Item 1A. Risk Factors	45
Item 1A.	Risk Factors	59
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3. Defaults Upon Senior Securities	45
Item 3.	Defaults Upon Senior Securities	59
Item 4. Submission Of Matters To A Vote Of Security Holders	45
Item 4.	Submission of Matters to a Vote of Security Holders	59
Item 5. Other Information	45
Item 5.	Other Information	59
Item 6. Exhibits	46
Item 6.	Exhibits	60
Signature	47	61
Certifications

FLAG INTERMEDIATE HOLDINGS CORPORATION AND ~~SUBSIDIARY~~SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share amounts)

	June 30, 2006		December 31, 2005
	September 30,2008		December 31,2007
ASSETS
Assets
CURRENT ASSETS:
Current Assets:
Cash	$	19.3	$	11.3
Cash and cash equivalents	$	173.0	$	13.6
Accounts receivable, net of allowance of $7.7 and $7.8, respectively		220.7		172.9
Accounts receivable, net of allowance of $8.7 and $8.3, respectively		277.8		193.3
Inventories		~~392~~562.95		~~350~~409.78
Deferred tax asset		15.5		8.3
Deferred income tax asset		22.0		19.7
Prepaid expenses and other		13.6		25.2
Prepayments and other		7.3		7.4
Total current assets		~~662~~1,042.06		~~568~~643.48
PROPERTY AND EQUIPMENT, net		191.8		171.6
Property and equipment, net		190.1		202.1
GOODWILL, net		39.0		15.8
Assets held for sale, net		1.8		—
OTHER ASSETS, net		35.3		39.5
Intangible assets, net		16.3		23.3
Total assets	$	928.1	$	795.3
Goodwill		57.9		60.2
LIABILITIES AND STOCKHOLDER’S EQUITY
Other assets		22.8		21.7
CURRENT LIABILITIES:
Total assets	$	1,331.5	$	951.1
Accounts payable	$	102.7	$	68.2
Liabilities and Stockholder’s Equity
Accrued liabilities		44.8		46.3
Current liabilities:
Current portion of long-term debt		0.6		0.6
Accounts payable	$	84.8	$	75.3
Total current liabilities		148.1		115.1
Accrued liabilities		75.6		54.3
LONG-TERM DEBT, less current portion		575.3		472.9
Current portion of long-term debt		1.6		2.3
DEFERRED INCOME TAX LIABILITY		59.3		60.0
Total current liabilities		162.0		131.9
OTHER LONG-TERM LIABILITIES		21.3		15.3
Long-term debt, less current portion		823.0		563.1
Total liabilities		804.0		663.3
Deferred income tax liability		64.5		67.4
COMMITMENTS AND CONTINGENCIES
Other long-term liabilities		24.2		21.1
STOCKHOLDER’S EQUITY:
Total liabilities		1,073.7		783.5
Common stock, $.01 par value, 100 shares authorized, issued, and outstanding; at June 30, 2006 and December 31, 2005, respectively		—		—
Commitments and contingencies
Additional paid-in capital		117.4		134.0
Stockholder’s Equity:
Retained earnings (deficit)		6.7		(2.0	)
Common stock, $.01 par value, 100 shares authorized, issued and outstanding at September 30, 2008 and December 31, 2007		—		—
Total stockholder’s equity		124.1		132.0
Additional paid-in capital		126.8		121.3
Total liabilities and stockholder’s equity	$	928.1	$	795.3
Retained earnings		127.7		45.6
Accumulated other comprehensive income		3.3		0.7
Total stockholder’s equity		257.8		167.6
Total liabilities and stockholder’s equity	$	1,331.5	$	951.1

See notes to unaudited condensed consolidated financial statements.

FLAG INTERMEDIATE HOLDINGS CORPORATION AND ~~SUBSIDIARY~~SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Successor Company			Predecessor Company		Successor Company			Predecessor Company
	Three Months Ended June 30, 2006			Three Months Ended June 30, 2005		Six Months Ended June 30, 2006			Six Months Ended June 30, 2005
	(In millions)
NET SALES	$	458.2		$	426.8	$	887.8		$	854.4
OPERATING COSTS AND EXPENSES:
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)		343.4			336.6		684.4			670.4
Operating and delivery		43.5			37.9		85.2			75.7
Selling, general and administrative		30.1			24.7		57.3			49.0
Depreciation and amortization		4.6			0.9		8.8			1.6
Operating income		36.6			26.7		52.1			57.7
OTHER (INCOME) EXPENSE:
Interest expense		12.9			3.2		24.9			6.4
Other (income) expense, net		(0.1	)		—		(0.2	)		(0.2	)
NET INCOME BEFORE INCOME TAXES		23.8			23.5		27.4			51.5
Provision for income taxes		9.9			9.2		11.4			19.9
NET INCOME	$	13.9		$	14.3	$	16.0		$	31.6

(In millions)

See notes to unaudited consolidated financial statements.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Net Sales	$	617.7		$	469.6		$	1,699.8		$	1,413.1
Operating costs and expenses:
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)		446.4			363.2			1,245.9			1,083.2
Operating and delivery		48.6			43.7			144.6			133.6
Selling, general and administrative		33.3			28.2			95.9			86.4
Depreciation and amortization		5.3			5.2			16.2			15.5
Gain on sale of property and equipment		(0.9	)		—			(2.4	)		—
Impairment of property and equipment		—			—			—			0.2

Operating income		85.0			29.3			199.6			94.2
Other (income) expense:
Interest expense		12.8			14.4			40.8			43.9
Other (income) expense, net		0.2			(0.1	)		0.2			(0.1	)

Income before income taxes		72.0			15.0			158.6			50.4
Provision for income taxes		31.0			7.3			63.6			21.4

Net income	$	41.0		$	7.7		$	95.0		$	29.0

See notes to unaudited condensed consolidated financial statements.

FLAG INTERMEDIATE HOLDINGS CORPORATION AND ~~SUBSIDIARY~~SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Successor Company			Predecessor Company
	Six Months Ended June 30, 2006			Six Months Ended June 30, 2005
	(In millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	16.0		$	31.6
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for bad debts		2.8			1.6
Adjustment to Predecessor Company tax attribute valuation allowance		—			1.8
Depreciation and amortization		9.2			1.8
Amortization of debt issuance costs		1.2			0.2
Deferred income taxes		(8.1	)		—
Non-cash stock-based compensation		1.1			—
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(42.7	)		(23.2	)
Inventories		(36.4	)		61.1
Prepaid expenses and other		11.8			1.0
Accounts payable and accrued liabilities		27.6			(4.0	)
Income taxes payable		2.3			0.8
Other operating		(0.7	)		(0.3	)
Net cash provided by (used in) operations		(15.9	)		72.4
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of assets		—			0.1
Purchases of assets		(7.0	)		(8.4	)
Acquisition costs, net of cash acquired		(45.5	)		—
Net cash provided by (used in) investing activities		(52.5	)		(8.3	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on credit facility		102.6			(52.6	)
Repayments on long-term debt		(0.2	)		(10.1	)
Debt issuance costs		(1.0	)		(0.1	)
Dividends paid		(25.0	)		—
Issuance of common stock		—			0.1
Net cash provided by (used in) financing activities		76.4			(62.7	)
NET INCREASE IN CASH		8.0			1.4
CASH, beginning of period		11.3			12.6
CASH, end of period	$	19.3		$	14.0
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	23.2		$	5.0
Cash paid for income taxes	$	5.3		$	17.0

(In millions)

See notes to unaudited consolidated financial statements.


	Nine Months Ended September 30,
	2008			2007
Cash flows from operating activities:
Net income	$	95.0		$	29.0
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
(Gain) loss on sale of property and equipment		(2.4	)		—
Impairment of property and equipment		—			0.2
Provision for bad debts		2.3			1.7
Depreciation and amortization		18.2			16.6
Amortization of debt issuance costs		2.4			2.0
Deferred income taxes		(1.9	)		(4.5	)
Stock-based compensation		0.8			4.5
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(85.3	)		(15.8	)
Inventories		(152.7	)		50.6
Prepayments and other		(0.6	)		3.5
Accounts payable and accrued liabilities		29.8			6.5
Other		9.4			3.7

Net cash (used in) provided by operations		(85.0	)		98.0

Cash flows from investing activities:
Sale of assets		9.5			1.0
Purchases of assets		(8.9	)		(16.0	)
Acquisition costs, net of cash acquired		—			(38.4	)

Net cash provided by (used in) investing activities		0.6			(53.4	)

Cash flows from financing activities:
Borrowings on credit facility		959.5			337.0
Repayments on credit facility		(698.0	)		(366.0	)
Repayments on long-term debt		(2.3	)		(0.5	)
Deferred financing costs		(2.5	)		(1.7	)
Dividends paid		(12.9	)		(16.5	)

Net cash provided by (used in) financing activities		243.8			(47.7	)

Net increase in cash and cash equivalents		159.4			(3.1	)
Cash and cash equivalents, beginning of period		13.6			14.2

Cash and cash equivalents, end of period	$	173.0		$	11.1

Supplemental Cash Flow Information:
Cash paid for interest	$	28.4		$	33.5

Cash paid for income taxes	$	28.1		$	21.2

See notes to unaudited condensed consolidated financial statements.

FLAG INTERMEDIATE HOLDINGS CORPORATION AND ~~SUBSIDIARY~~SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Inin millions, except share amounts)

1. ~~ORGANIZATION~~Organization ~~AND~~and ~~BASIS~~Basis OFof ~~PRESENTATION~~Presentation

Recent Developments

On May 18, 2005, Metals USA Holdings Corp. (formerly named Flag Holdings Corporation), a Delaware corporation (“Metals USA Holdings”), and its wholly owned subsidiary, Flag Acquisition Corporation, a Delaware corporation (“Flag Acquisition”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Metals USA, Inc. (“Metals USA, Inc.”). On November 30, 2005, Flag Acquisition, then a wholly owned subsidiary of Flag Intermediate Holdings Corporation (“Flag Intermediate”) merged with and into Metals USA, Inc., (the “Merger”) with Metals USA, Inc. being the surviving corporation. Flag Intermediate and Flag Acquisition conducted no operations during the period May 9, 2005 (date of inception) to November 30, 2005. See Note 2—Acquisition for additional information regarding the Merger.

Flag Intermediate and its wholly owned subsidiary Metals USA, Inc. are referred to collectively herein as the “Company” or “Successor Company” and Metals USA, Inc. prior to the merger on November 30, 2005 is referred to as the “Predecessor Company.” The Company applied Statement of Financial Accounting Standards No. 141, “Business Combinations” on the merger date and, as a result, the merger consideration was allocated to the respective values of the assets acquired and liabilities assumed from the Predecessor Company (see Note 2). As a result of the application of purchase accounting, the Successor Company balances and amounts presented in the consolidated financial statements and footnotes are not comparable with those of Predecessor Company.

Organization

WeOn ~~are a leading~~May 18, ~~provider~~2005, ofMetals ~~value-added~~USA ~~processed~~Holdings ~~steel,~~Corp. ~~stainless~~(formerly ~~steel,~~named ~~aluminum~~Flag ~~and~~Holdings ~~specialty metals~~Corporation), asa ~~well~~Delaware ascorporation ~~manufactured~~(“Metals ~~metal~~USA ~~components.~~Holdings”), ~~Our~~and ~~operations~~its ~~are~~wholly ~~organized~~owned ~~into~~subsidiary, ~~three~~Flag ~~product~~Acquisition ~~group~~Corporation, ~~segments.~~a ~~Approximately~~Delaware ~~88%~~corporation ~~of our revenue is derived from the~~(“Flag ~~metals~~Acquisition”), ~~service~~entered ~~center and distribution activities that are segmented~~ into ~~two~~an ~~groups,~~Agreement ~~Flat Rolled~~ and ~~Plates~~Plan ~~and Shapes. The remaining portion~~ of ~~our~~Merger ~~revenue~~(the is“Merger ~~derived~~Agreement”) ~~from~~with ~~the~~Metals ~~Building Products Group~~USA, ~~which principally manufactures and distributes aluminum products related to the residential and commercial construction and improvement industry~~Inc. We(“Metals ~~purchase metal from primary producers who generally focus on large volume sales of unprocessed metals in standard configurations and sizes~~USA”). InOn ~~most cases~~November 30, we2005, ~~perform~~Flag ~~customized~~Acquisition, ~~value-added~~then ~~processing~~a ~~services~~wholly ~~required~~owned tosubsidiary ~~meet~~of ~~specifications~~Flag ~~provided~~Intermediate Holdings byCorporation ~~end-use~~(“Flag ~~customers.~~Intermediate”) ~~The~~merged ~~Flat~~with ~~Rolled Group~~ and ~~Plates~~into ~~and~~Metals ~~Shapes~~USA ~~Group~~(the ~~customers~~“Merger”), ~~are~~with inMetals ~~businesses~~USA ~~such~~being asthe ~~machining,~~surviving ~~furniture,~~corporation. ~~transportation equipment,~~Flag ~~power and process equipment~~Intermediate, ~~industrial/commercial,~~its ~~construction~~wholly ~~and~~owned ~~fabrication,~~subsidiary ~~consumer~~Metals ~~durables~~USA, ~~electrical equipment industries,~~ and ~~machinery~~the ~~and~~wholly ~~equipment~~owned subsidiaries ~~manufacturers.~~of ~~The~~Metals ~~Building~~USA ~~Products Group customers~~ are ~~distributors~~referred ~~and contractors~~to ~~engaged~~collectively inherein ~~residential~~as ~~and~~the ~~commercial building products~~“Company.”

We believe that we are a leading provider of value-added processed carbon steel, stainless steel, aluminum and specialty metals, as well as manufactured metal components. For the nine months ended September 30, 2008, approximately 94% of our revenue was derived from our metals service center and processing activities, which are segmented into two groups: Flat Rolled and Non-Ferrous Group and Plates and Shapes Group. The remaining portion of our revenue was derived from our Building Products Group, which principally manufactures and sells aluminum products related to the residential remodeling industry. We purchase metal from primary producers that generally focus on large volume sales of unprocessed metals in standard configurations and sizes. In most cases, we perform the customized, value-added processing services required to meet the specifications provided by end-use customers. Our Plates and Shapes Group and Flat Rolled and Non-Ferrous Group customers are in the land and marine transportation, energy, aerospace, defense, electrical and appliance manufacturing, fabrication, furniture, commercial construction, and machinery and equipment industries. Our Building Products Group customers are primarily distributors and contractors engaged in the residential remodeling industry.

Basis of Presentation

Principles of Consolidation—The condensed consolidated financial statements include the accounts of Flag Intermediate, and Metals USA, ~~Inc.~~ and its subsidiaries. ~~All~~Intercompany ~~intercompany~~ accounts and transactions have been eliminated in the consolidated financial statements.

Interim Financial Information—The interim consolidated financial statements included herein are unaudited; however, they include ~~all~~ adjustments of a normal recurring nature which, in our opinion, are necessary to present fairly the interim consolidated financial information as of and for the periods indicated. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year.

Use of Estimates and Assumptions—The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net sales and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates.

~~Use~~FLAG ofINTERMEDIATE ~~Estimates~~HOLDINGS ~~and~~CORPORATION ~~Assumptions—The~~AND ~~preparation~~SUBSIDIARIES of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net sales and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements.

~~Inventories—Inventories~~NOTES ~~are~~TO ~~stated~~UNAUDITED atCONDENSED ~~the~~CONSOLIDATED ~~lower~~FINANCIAL ~~of cost or market. Our inventories are accounted for using a variety of methods including specific identification, average cost and the first-in first-out~~ STATEMENTS—(~~“FIFO”~~Continued) ~~method of accounting.~~

~~Goodwill—Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired~~ (in ~~connection with the business acquisition. At December 31~~millions, ~~2005,~~except ~~recorded~~share ~~goodwill~~amounts) ~~was $15.8, resulting from the Merger described in Note 2.~~

InAllowance ~~connection~~for ~~with~~Doubtful ~~the~~Accounts—The ~~acquisitions~~determination ~~during~~of collectibility of the ~~six~~Company’s accounts ~~months~~receivable ~~ended~~requires ~~June 30,~~management ~~2006~~to ~~described~~make frequent judgments and estimates in ~~Note~~order 2,to wedetermine ~~recorded~~the anappropriate ~~additional~~amount ~~$28~~of allowance needed for doubtful accounts.1 The Company’s allowance for doubtful accounts is estimated to cover the risk of ~~goodwill~~loss related to accounts receivable. ~~There~~This ~~was~~allowance nois ~~amortization~~maintained ofat ~~goodwill,~~a ~~however,~~level ~~goodwill~~we ~~was~~consider ~~reduced for~~appropriate ~~the~~based ~~six~~on ~~months~~historical ~~ended~~and ~~June 30,~~other ~~2006~~factors bythat $4affect collectibility.9, ~~including~~These ~~$3.8~~factors toinclude ~~adjust~~historical trends of write-offs, recoveries and credit losses, the ~~Predecessor~~careful ~~Company~~monitoring ~~tax~~of ~~attribute~~customer ~~valuation~~credit ~~allowance~~quality, and $1projected economic and market conditions.1 toDifferent ~~recognize~~assumptions ~~the~~or ~~tax~~changes ~~benefit~~in ~~realized~~economic ~~related~~circumstances tocould ~~goodwill~~result ofin ~~the~~changes ~~Predecessor~~to ~~Company~~the allowance.

~~Intangible Assets~~Inventories—~~The~~Inventories ~~Successor~~are ~~Company~~stated ~~intangible~~at ~~assets~~the ~~consist~~lower of ~~customer~~cost ~~lists~~or ~~which~~market. ~~were~~Our ~~recorded~~inventories asare accounted for using a ~~result~~variety of ~~the~~methods ~~Merger described~~including specific identification, average cost and the first-in ~~Note~~first-out 2method of accounting. WeInventory quantities are ~~amortizing~~regularly ~~the~~reviewed ~~customer~~and ~~lists~~provisions ~~over~~for ~~five~~excess ~~years~~or ~~using~~obsolete aninventory ~~accelerated~~are ~~amortization~~recorded ~~method~~primarily ~~which~~based ~~approximates~~on ~~its~~our ~~useful~~forecast ~~life~~of ~~and~~future ~~value~~demand toand market usconditions.

AsFinancial Derivatives—We use financial derivatives to mitigate the Company’s exposure to volatility in interest rates. The Company hedges only exposures in the ordinary course of ~~June~~business. The Company accounts for its derivative instruments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 30133, “Accounting ~~2006~~for Derivative Instruments and Hedging Activity” (“SFAS 133”), which requires all derivatives to be carried on the ~~Successor~~balance sheet at fair value and meet certain documentary and analytical requirements to qualify for hedge accounting treatment. Hedge accounting creates the potential for a statement of operations match between the changes in fair values of derivatives and the changes in cost of the associated underlying transactions, in this case interest expense. Derivatives held by the Company ~~had~~are designated as hedges of specific exposures at inception, with an expectation that changes in the ~~following~~fair ~~amounts~~value ~~related~~will essentially offset the change in cost for the underlying exposure. Fair values of derivatives are determined from market observation or dealer quotations. Interest rate swap derivatives outstanding at September 30, 2008, all have remaining terms of approximately three years or less and the associated underlying transactions are expected to ~~intangible~~occur ~~assets:~~within that time frame.

	January 1, 2006		Accumulated Amount		June 30, 2006
	Gross Carrying Amortization				Gross Carrying Amortization
Customer lists	$	21.5	(4.0	)	$	17.5

The effective portion of the change in fair value of derivatives is reported in other comprehensive income, a component of stockholders’ equity, until the underlying transaction occurs. Any determination that an underlying transaction is not probable of occurring will result in the recognition in earnings of gains and losses deferred in other comprehensive income. Amounts due from counterparties (unrealized hedge gains) or owed to counterparties (unrealized hedge losses) are included in other assets and accrued liabilities, respectively.

NoSee ~~significant~~Note ~~residual~~5 ~~value is estimated~~ for ~~these~~additional ~~intangible~~information ~~assets.~~on ~~Aggregate~~underlying ~~amortization expense~~hedge ~~for~~categories, ~~the~~notional ~~three months~~ and ~~six~~fair ~~months~~values ~~ended~~of ~~June 30~~derivatives, ~~2006~~types ~~was $2.0~~ and ~~$4.0,~~classifications ~~respectively. The following table represents the total estimated amortization~~ of ~~intangible~~derivatives used, ~~assets~~and ~~for~~gains ~~2006~~ and ~~the~~losses ~~four~~from ~~succeeding~~hedging ~~years:~~activity.

For the Year Ending	Estimated Amortization Expense
2006	$	7.8
2007	$	6.1
2008	$	4.3
2009	$	2.5
2010	$	0.8

Goodwill—We use estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of net tangible and identifiable intangible assets acquired. Goodwill represents the excess of the cost of an acquired business over the net amounts assigned to assets acquired and liabilities assumed.

~~Debt~~Intangible ~~Issuance Costs~~Assets—WeIntangible ~~defer~~assets ~~certain~~consist ~~expenses~~primarily ~~incurred in connection with our long-term debt and amortize these costs to interest expense over the term~~ of ~~the~~customer ~~respective agreements~~lists. ~~Amortization~~We ofare ~~debt~~amortizing ~~issuance costs recorded by~~ the ~~Successor~~customer ~~Company~~lists ~~for~~over ~~the~~five ~~three~~years ~~months~~using ~~ended from June 30, 2006 and for the Predecessor~~an ~~Company~~accelerated ~~for~~amortization ~~the~~method ~~three~~which ~~months~~approximates ~~ended~~their ~~June 30,~~useful ~~2005~~life ~~were $0.6~~ and ~~$0.1,~~economic ~~respectively.~~value ~~Amortization~~to ~~of debt issuance costs recorded by the Successor Company for the six months ended June 30, 2006 and for the Predecessor Company for the six months ended June 30, 2005 were $1~~us.2 ~~and $0.2, respectively.~~

~~Revenue~~Debt ~~recognition~~Issuance Costs—We ~~recognize revenues when products are~~defer ~~shipped~~certain ~~and~~expenses ~~our~~incurred ~~significant~~to ~~obligations~~obtain ~~have~~debt ~~been~~financing ~~satisfied. Shipping~~ and ~~handling~~amortize these costs ~~billed~~ to ~~our~~interest ~~customers~~expense ~~are~~over ~~accounted~~the ~~for~~terms ~~as revenues. Risk~~ of ~~loss~~the ~~for~~respective ~~products~~agreements. ~~shipped~~See ~~passes~~Note at6 ~~the~~for ~~time~~additional ofinformation ~~shipment.~~on ~~Provisions~~debt ~~are~~issuance ~~made currently for estimated returns~~costs.

WeFLAG ~~derive~~INTERMEDIATE ~~the~~HOLDINGS ~~net~~CORPORATION ~~sales~~AND ofSUBSIDIARIES our Plates and Shapes and Flat Rolled Groups from the processing and sale of metal products to end-users including metal fabrication companies, general contractors and OEMs. Pricing is generally based upon the underlying metal cost as well as a margin associated with customized value-added services as specified by the customer. The net sales of our Building Products Group are derived from the sales of finished goods to local distributors and general contractors who are generally engaged in the residential remodeling industry.

~~Cost~~NOTES ofTO ~~sales—Our~~UNAUDITED ~~Plates~~CONDENSED ~~and~~CONSOLIDATED ~~Shapes~~FINANCIAL ~~and~~STATEMENTS—(Continued) Flat Rolled Groups classify, within cost of sales, the underlying commodity cost of metal purchased in mill form, the cost of inbound freight charges together with third-party processing cost, if any. Cost of sales with respect to our Building Products Group, includes the cost of raw materials, manufacturing labor and overhead costs, together with depreciation and amortization expense associated with property, buildings and equipment used in the manufacturing process.

~~Operating and~~(in delivery expense—Our operating and delivery expense reflects the cost incurred by our Plates and Shapes and Flat Rolled Groups for labor and facility costs associated with the value-added metal processing services that we provide. With respect to our Building Products Groupmillions, ~~operating~~except ~~costs~~share ~~are~~amounts) associated with the labor and facility costs attributable to the distribution and warehousing of our finished goods at our service center facilities. Delivery expense reflects labor, material handling and other third party costs incurred with the delivery of product to customers.

~~Selling,~~Fair ~~general~~Value of Financial Assets and ~~administrative expenses~~Liabilities—~~Selling,~~Statement ~~general~~of ~~and~~Financial ~~administrative~~Accounting ~~expenses~~Standard No. 157 ~~include~~“Fair ~~sales~~Value ~~and~~Measurements” ~~marketing~~(“SFAS ~~expenses,~~157”) ~~executive~~defines ~~officers’~~fair ~~compensation,~~value ~~office~~as ~~and~~the ~~administrative~~exchange ~~salaries,~~price ~~insurance,~~that ~~accounting,~~would ~~legal,~~be ~~computer~~received ~~systems,~~for ~~and~~an ~~professional~~asset ~~services and~~or ~~costs~~paid ~~not~~to ~~directly~~transfer ~~associated~~a ~~with~~liability (an exit price) in the ~~processing,~~principal ~~manufacturing,~~or ~~operating~~most advantageous market for the asset or ~~delivery~~liability ~~costs~~in ofan ~~our~~orderly ~~products~~transaction between market participants on the measurement date. SFAS 157 classifies the inputs used to measure fair value into the following hierarchy:

~~Depreciation~~Level ~~and amortization—Depreciation~~1 ~~and~~– ~~amortization~~Quoted ~~expense~~prices ~~represents~~in ~~the~~active ~~costs~~markets ~~associated~~for ~~with~~identical ~~property,~~assets ~~buildings~~or ~~and~~liabilities. ~~equipment~~The ~~used~~Company ~~throughout~~uses ~~the~~stock ~~company~~quotes ~~except~~from ~~for~~an ~~depreciation~~active, established ~~and~~stock ~~amortization~~market ~~expense~~for ~~associated~~the ~~with~~valuation ~~the~~of ~~manufacturing~~its ~~assets employed~~short-term byinvestments, ~~our~~which ~~Building~~are ~~Products~~reported ~~Group,~~in ~~which~~other iscurrent ~~included~~assets ~~within~~in ~~cost~~the ofCompany’s ~~sales~~consolidated balance sheet.

~~Foreign~~Level ~~Currency~~2 ~~Translation—The~~– ~~Company translates~~Observable ~~assets~~inputs ~~and~~other ~~liabilities~~than ~~its~~Level ~~recently~~1 ~~acquired~~prices ~~foreign~~such ~~subsidiary~~as ~~located~~quoted inprices ~~Canadian~~for ~~(see~~similar ~~Note~~assets ~~2),~~or ~~where~~liabilities; ~~the~~quoted ~~functional~~prices ~~currency~~in markets isthat ~~the~~are ~~Canadian~~not ~~dollar,~~active; ~~into~~or ~~U.S.~~other ~~dollars~~inputs atthat ~~the~~are ~~current~~observable ~~rate~~or ofcan ~~exchange~~be oncorroborated ~~the~~by ~~last~~observable ~~day~~market ofdata ~~the~~for ~~reporting period.~~substantially ~~Revenues and expenses are translated at~~ the ~~average~~full ~~monthly~~term ~~exchange~~of ~~rates. The cumulative translation adjustments are not significant to~~ the ~~consolidated~~assets ~~financial~~or ~~statements~~liabilities.

~~New~~The ~~Accounting~~Company’s ~~Pronouncements~~interest rate swap derivatives are valued using market data which is derived by combining certain inputs with quantitative models and processes to generate interest rate forward curves and discount factors (see Note 5).

InLevel June 2006, the Financial Accounting Standards Board, or FASB, issued FASB interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, or FIN 48, which clarifies the accounting for uncertainty in income taxes3 ~~recognized~~– inUnobservable ~~the~~inputs ~~financial~~that ~~statements~~are insupported ~~accordance~~by ~~with~~little FASB Statement 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~~no tomarket ~~be taken in a tax return and also provides guidance on derecognition~~activity, ~~classification,~~but ~~interest~~which and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for the fiscal years beginning after December 15, 2006; however, earlier application of the provisions of the interpretation is encouraged. We are ~~currently~~significant ~~evaluating~~to the ~~impact,~~fair ifvalue ~~any,~~ of ~~applying~~ the ~~guidance~~assets ~~provided~~or inliabilities ~~FIN~~as ~~48;~~determined ~~however,~~by wemarket ~~do not expect the adoption of FIN 48 to have a material impact on our consolidated results of operations, financial position or cash flows~~participants.

2.Assets ~~ACQUISITIONS~~ and liabilities measured at fair value on a recurring basis are summarized below:

2005 Acquisition -


	Fair Value Measurements as of September 30, 2008
	Total		Level 1		Level 2		Level 3
Short-term investments	$	0.2	$	0.2	$	—	$	—
Interest rate swaps		2.7		—		2.7		—

Total		2.9		0.2		2.7		—

OnUnrealized ~~November 30,~~gains ~~2005,~~or ~~Flag~~losses ~~Acquisition,~~on ashort-term ~~wholly~~investments ~~owned subsidiary of Flag Intermediate, merged with~~ and ~~into~~derivatives ~~Metals~~are ~~USA,~~recorded ~~Inc.~~in ~~with~~accumulated other ~~Metals~~comprehensive ~~USA,~~income ~~Inc.~~(loss) ~~being~~at ~~the~~each ~~surviving~~measurement ~~corporation~~date. ~~The Merger was consummated pursuant to the Merger Agreement by and among Metals USA, Inc., Flag Acquisition, and~~

Revenue recognition—We recognize revenues generally when products are shipped and our significant obligations have been satisfied. Shipping and handling costs billed to our customers are accounted for as revenues. Risk of loss for products shipped passes at the time of shipment. Provisions are made currently for estimated returns.

Cost of sales—Our Plates and Shapes and Flat Rolled and Non-Ferrous Groups classify, within cost of sales, the underlying commodity cost of metal purchased in mill form, the cost of inbound freight charges together with third-party processing cost, if any.

Cost of sales for our Building Products Group includes the cost of raw materials, manufacturing labor and overhead costs, together with depreciation and amortization expense associated with property, buildings and equipment used in the manufacturing process.

Operating and delivery expense—Our operating and delivery expense reflects the cost incurred by our Plates and Shapes and Flat Rolled and Non-Ferrous Groups for labor and facility costs associated with the value-added metal processing services that we provide. With respect to our Building Products Group, operating costs

~~Metals~~FLAG ~~USA~~INTERMEDIATE ~~Holdings.~~HOLDINGS ~~Metals~~CORPORATION ~~USA~~AND ~~Holdings~~SUBSIDIARIES was formed by Apollo Management V L.P. (“Apollo”). As a result of and immediately following the Merger, Metals USA, Inc. became and is a wholly owned subsidiary of Flag Intermediate. Flag Intermediate has no assets other than its investment in Metals USA, Inc., conducts no operations and is a guarantor of both the Senior Secured Asset-Based Revolving Credit Facility and the 11 1/8% Senior Secured Notes due 2015 of Metals USA, Inc.

~~The~~NOTES ~~Merger~~TO ~~was~~UNAUDITED ~~accounted~~CONDENSED ~~for~~CONSOLIDATED asFINANCIAL ~~a purchase by Flag Acquisition of Metals USA, Inc. in accordance with SFAS No. 141, “Business Combinations”~~ STATEMENTS—(~~“SFAS 141”~~Continued). Total Merger consideration was $648.0, including $458.7 for common stock and warrants, $152.5 for the assumption of debt and revolving credit loans, $16.6 for debt issuance costs and $20.2 for direct merger costs (including $2.6 paid by Metals USA, Inc. prior to closing of the Merger). Total Merger consideration reconciles to the net acquisition costs as follows:

Total Merger consideration	$	648.0
Less:
Assumption of debt and revolving credit loans		(152.5	)
Debt issuance costs		(16.6	)
Use of cash on hand at closing		(46.2	)
Merger costs paid by Metals USA, Inc.		(2.6	)
Acquisition costs, net of cash acquired	$	430.1

(in millions, except share amounts)

~~The total acquisition costs were allocated to the acquired assets and assumed liabilities based~~ ~~upon~~are ~~estimates~~associated ofwith ~~their respective fair values as of~~ the ~~closing~~labor ~~date of the Merger using valuation~~ and ~~other~~facility ~~studies.~~costs ~~Based~~attributable onto ~~these studies,~~ the ~~fair~~warehousing ~~value~~ of ~~inventories,~~our ~~property~~finished ~~and~~goods ~~equipment~~at ~~and~~our ~~intangibles~~sales ~~(customer~~center ~~lists)~~facilities. ~~were~~Delivery ~~increased by~~expense ~~$14.9,~~reflects ~~$118.6 and $22.2~~labor, ~~respectively.~~material ~~The~~handling ~~fair value of deferred taxes~~ and ~~long-term~~other ~~liabilities~~third ~~were~~party ~~increased~~costs byincurred ~~$64.8~~with ~~and $3.1. The following table summarizes~~ the ~~estimated~~delivery ~~fair values~~ of ~~the~~product ~~assets~~to ~~acquired~~customers. ~~and the liabilities assumed at the date of acquisition:~~

Total Assets acquired	$	735.2
Total Liabilities assumed		321.2
Net Assets Acquired	$	414.0

Delivery expense totaled $13.5, $11.8, $39.8 and $35.0 for the three and nine months ended September 30, 2008 and 2007, respectively.

~~The~~Selling, ~~excess~~general ofand administrative ~~aggregate~~expenses—Selling, ~~purchase~~general ~~price~~and ~~over~~administrative ~~the~~expenses ~~new~~include ~~assets~~sales ~~acquired~~and ofmarketing ~~$16.1~~expenses, ~~was~~executive ~~recorded~~officers’ ascompensation, office and administrative salaries, insurance, accounting, legal, computer systems and ~~goodwill~~professional asservices ofcosts ~~December 1~~not directly associated with the processing, ~~2005~~manufacturing, operating or delivery costs of our products.

~~The~~Depreciation ~~Merger~~and ~~was~~amortization—Depreciation ~~financed~~and ~~through~~amortization ~~cash~~expense ~~contributions~~represents tothe ~~Metals~~costs ~~USA~~associated ~~Holdings~~with ~~of $140.0~~property, ~~less~~buildings ~~$6.0~~and ~~of transaction~~equipment ~~fees~~used ~~paid~~throughout tothe ~~Apollo~~Company ~~and~~except ~~accounted~~ for asdepreciation aand ~~reduction~~amortization inexpense ~~capital,~~associated with ~~proceeds~~the ~~from~~manufacturing ~~the~~assets ~~sale~~employed ofby ~~$275.0~~our ofBuilding ~~11 1/8%~~Products ~~Senior~~Group, ~~Secured~~which ~~Notes~~is ~~due~~included ~~2015~~within ~~and~~cost ~~borrowings~~of ~~from~~sales. aThis ~~Senior~~caption ~~Secured~~also ~~Asset-Based~~includes ~~Credit~~amortization ~~Facility~~of intangible assets.

~~2006~~Foreign Currency Translation—The functional currency for our Canadian subsidiary, Allmet, is the Canadian dollar. We translate the functional ~~Acquisitions~~currency -into U.S. dollars based on the current exchange rate at the end of the period for the balance sheet and a weighted average rate for the period on the statement of operations. The resulting translation adjustments are recorded in accumulated other comprehensive income (loss), a component of stockholder’s equity.

~~During~~New ~~the~~Accounting ~~six~~Pronouncements months ended June 30, 2006, the Company completed two acquisitions for an aggregate purchase price of $50.7 (referred to collectively as the “2006 Acquisitions”). The excess of aggregate purchase price over the net assets acquired of $28.1 was allocated to goodwill. The purchase price allocation for these acquisitions has not been finalized, pending the completion of valuations of intangible assets.

OnIn May ~~17,~~ ~~2006~~2008, ~~Metals~~the ~~USA~~Financial ~~purchased~~Accounting ~~all~~Standards ofBoard ~~the~~(“FASB”) ~~assets~~issued ~~and business~~SFAS ~~operations of Port City~~No. 162, ~~located~~“Hierarchy inof ~~Tulsa,~~Generally ~~Oklahoma,~~Accepted ~~for~~Accounting Principles” ~~approximately~~(“SFAS ~~$41~~162”).3, ~~which~~This ~~includes~~statement ais ~~$5.0~~intended ~~contingent~~to ~~payout~~improve ~~that~~financial ~~may~~reporting beby ~~made~~identifying ina ~~2009~~consistent framework, or ~~earlier~~hierarchy, ~~subject~~for toselecting ~~certain~~accounting ~~performance~~principles ~~criteria.~~to ~~The~~be ~~maximum~~used ~~amount~~in ~~payable~~preparing ~~has~~financial ~~been~~statements ~~accrued~~of innongovernmental ~~accordance~~entities ~~with~~that ~~SFAS~~are ~~141.~~presented ~~Founded~~ in ~~1977,~~conformity ~~Port~~with ~~City~~GAAP. isThis astatement ~~value-added~~will ~~processor~~be ofeffective ~~steel~~60 ~~plate~~days ~~whose~~following ~~range~~the U.S. Securities and ~~depth~~Exchange Commission’s approval of ~~processing~~the ~~capabilities~~Public ~~are~~Company ~~highly~~Accounting ~~complementary~~Oversight toBoard ~~the~~amendment ~~capital~~to ~~investments~~AU Section 411, ~~the~~“The ~~Company~~Meaning ~~has~~of ~~already~~Present ~~made~~Fairly in ~~its~~Conformity ~~Plates~~with ~~and Shapes~~Generally ~~segment~~Accepted Accounting Principles.” ~~Port~~The ~~City~~Company ~~had~~is ~~sales~~currently inevaluating ~~excess~~the potential impact, if any, of ~~$47~~the ~~million~~adoption inof ~~2005~~SFAS 162 on its consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. SFAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP SFAS 142-3”). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of FSP SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R (revised 2007), “Business Combinations” (“SFAS 141R”) and other applicable accounting literature. FSP SFAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date. The Company is currently evaluating the potential impact, if any, of FSP SFAS 142-3 on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”), which expands the disclosure requirements in SFAS 133 about an entity’s derivative instruments and hedging activities. SFAS 161’s disclosure

OnFLAG ~~May 12,~~INTERMEDIATE ~~2006,~~HOLDINGS ~~the~~CORPORATION ~~Company~~AND ~~purchased~~SUBSIDIARIES all of the assets and operations of Dura-Loc for approximately $10.4 Canadian dollars (or approximately U.S. $9.4). Dura-Loc has one manufacturing facility located near Toronto, Ontario, Canada and a sales and distribution facility located in California. Dura-Loc, which was established in 1984, is one of the leading stone-coated metal roof manufacturers in North America, and Dura-Loc is also the only manufacturer of such products located in the eastern half of North America, a market not yet fully developed for the high-end, stone-coated metal products we produce. Dura-Loc had sales of $12.8 Canadian dollars (or approximately U.S. $11.3) during calendar year 2005.

AsNOTES ~~a result~~TO ofUNAUDITED ~~the~~CONDENSED ~~Merger,~~CONSOLIDATED ~~the~~FINANCIAL results of operations for Metals USA, Inc. are included in the historical results identified for the Predecessor Company for 2005 and the Successor Company beginning December 1, 2005. The results of operations of the 2006 Acquisitions, Port City and Dura-Loc, are included in the Company’s consolidated results of operations beginning May 1, 2006 and May 13, 2006, respectively. The following unaudited pro forma information presents STATEMENTS—( i Continued) the Predecessor’s consolidated results of operations for the three months and six months ended June 30, 2005 as if the Merger and the 2006 Acquisitions had occurred on January 1, 2005 and ( ii ) the Successor’s consolidated results of operations for the three and six months ended June 30, 2006 as if the 2006 Acquisitions had occurred on January 1, 2006:

	SuccessorCompany		Predecessor Company		Successor Company		Predecessor Company
	Three MonthsEndedJune 30,2006		Three Months Ended June 30,2005		Six MonthsEndedJune 30,2006		Six Months Ended June 30, 2005
Revenues	$	464.4	$	442.2	$	910.8	$	883.9
Net Income		12.9		8.0		16.0		18.5

(in millions, except share amounts)

3 provisions apply to all entities with derivative instruments subject to SFAS 133 and its related interpretations. ~~INVENTORIES~~The provisions also apply to related hedged items, bifurcated derivatives, and nonderivative instruments that are designated and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. Such disclosures, as well as existing SFAS 133 required disclosures, generally will need to be presented for every annual and interim reporting period. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the potential impact of adopting SFAS 161, if any, on its consolidated financial statements.

~~Inventories~~In ~~consist~~December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”), which replaces SFAS 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired in connection with a business combination. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effect of the ~~following:~~business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of an entity’s first fiscal year that begins after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 141R on the Company’s financial statements.

	June 30, 2006		December 31, 2005
Raw materials—
Plates and Shapes	$	212.1	$	173.6
Flat Rolled		105.0		85.8
Building Products		17.3		24.3
Total raw materials		334.4		283.7
Work-in-process and finished goods—
Plates and Shapes		—		—
Flat Rolled		26.5		33.0
Building Products		32.0		34.0
Total work-in-process and finished goods		58.5		67.0
Total inventories	$	392.9	$	350.7

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 requires that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This Statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008. The Company has not yet determined the impact, if any, that SFAS 160 will have on its financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets and liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees, issued debt and other eligible financial instruments. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company did not elect to measure additional financial assets and liabilities at fair value.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”), which requires the recognition of the funded status of benefit plans in the balance sheet. SFAS 158 also requires certain gains and losses that are deferred under current pension accounting rules to be recognized in accumulated other comprehensive income, net of tax effects. These deferred costs (or income) will continue to be recognized as a component of net periodic pension cost, consistent with current recognition rules. For entities with no publicly traded equity securities, the effective date for the recognition of the funded status is for fiscal years ending after June 15, 2007. In addition, the ability to measure the plans’ benefit obligations, assets and net periodic cost at a date prior to the fiscal year-end date is eliminated for fiscal years ending after December 15, 2008. The adoption of the recognition element of SFAS 158 had no effect on the Company’s financial statements. The adoption of the measurement date element of SFAS 158 is not expected to have a material impact on the Company’s financial statements.

4.FLAG ~~OTHER~~INTERMEDIATE ~~ASSETS~~HOLDINGS CORPORATION AND SUBSIDIARIES

~~Other~~NOTES ~~assets~~TO ~~consist~~UNAUDITED ofCONDENSED ~~the~~CONSOLIDATED ~~following:~~FINANCIAL STATEMENTS—(Continued)

	June 30, 2006		December 31, 2005
Customer lists	$	17.5	$	21.5
Deferred financing costs		8.7		9.4
Deferred debt offering costs		7.6		7.0
Other		1.5		1.6
Total other assets	$	35.3	$	39.5

(in millions, except share amounts)

~~The~~In ~~amortization~~September 2006, the FASB issued SFAS 157, which enhances existing guidance for measuring assets and liabilities using fair value. SFAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the ~~customer~~use ~~lists~~of fair value to measure assets and ~~debt~~liabilities. ~~issuance~~SFAS ~~costs~~157 also emphasizes that fair value is a market-based measurement, ~~including~~not ~~deferred~~an ~~financing~~entity-specific ~~costs~~measurement, and sets out a fair value hierarchy with the highest priority being quoted market prices in active markets. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157, as it relates to financial assets and financial liabilities, was effective for the ~~debt~~Company ~~offering~~as ~~costs~~of January 1, 2008. SFAS 157 did not require any new fair value measurements for existing assets and liabilities on the Company’s balance sheet as of the date of adoption. Rather, the provisions of SFAS 157 are ~~discussed~~to inbe ~~Note~~applied prospectively. As such, there was no impact to the Company’s financial statements as of the January 1, 2008 adoption date, and for the nine months ended September 30, 2008, we have included the Statement’s expanded disclosures about the use of fair value to measure assets and liabilities within the Company’s financial statements.

5In February 2008, the FASB issued FASB Staff Position No. ~~ACCRUED~~FAS ~~LIABILITIES~~157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”), which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until fiscal years beginning after November 15, 2008. The Company is currently evaluating the potential impact of adopting FSP FAS 157-2, if any, on its consolidated financial statements.

~~Accrued~~2. ~~liabilities~~Acquisitions ~~consist of the following:~~

	June 30, 2006		December 31, 2005
Accrued salaries and employee benefits	$	13.8	$	14.6
Accrued taxes, other than income		4.8		4.8
Accrued income taxes payable		2.3		—
Accrued insurance		4.3		4.6
Accrued audit and tax fees		1.3		1.6
Accrued lease terminations		0.3		1.2
Accrued liability to pre-bankruptcy stockholders		—		3.4
Accrued interest		3.7		3.3
Accrued management fees		7.6		8.7
Other		6.7		4.1
Total accrued liabilities	$	44.8	$	46.3

2007 Acquisition

6On July 2, 2007, we purchased the business operations of Lynch Metals (“Lynch Metals”), for approximately $42.4. ~~DEBT~~The purchase price was funded by borrowings under the asset-based revolving credit facility entered into by Metals USA (the “ABL facility”) in connection with the Merger, $38.4 of which was paid at closing, and approximately $4.0 of which was deferred and is being paid in various installments over a period of two years from the closing date. The excess of the aggregate purchase price over the estimated fair value of net assets acquired was approximately $20.5, which was allocated to goodwill. The estimated fair value of accounts receivable, inventories, and property and equipment acquired were $4.4, $4.2 and $1.8, respectively. The estimated fair value of customer list and trade name intangible assets was $10.1 and $3.3, respectively. The estimated fair value of accounts payable and accrued liabilities assumed was $2.3. In connection with the completion of the valuation of property and equipment in the second quarter of 2008, $0.4 was reclassified from goodwill to property and equipment. The results of operations for the Lynch Metals acquisition are included in the Company’s consolidated results of operations beginning July 2, 2007.

~~Debt~~Lynch ~~consists~~Metals is a value-added metal service center that focuses on specialty aluminum, with locations in New Jersey and California. Lynch Metals uses enhanced technologies in slitting, shearing, and cut-to-length to service the just-in-time requirements of its customers, who are predominately manufacturers of air/heat transfer products specifically focused on aerospace, automotive and industrial applications. This acquisition is an important strategic addition to our Flat Rolled and Non-Ferrous Group because it supports our continued shift in product mix from ferrous products to non-ferrous and stainless products and strengthens our non-ferrous presence in the ~~following:~~strategic Northeast and Southern California regions. Lynch Metals’ product line and processing capabilities are highly complementary to our Flat Rolled and Non-Ferrous segment, and we expect to expand sales of Lynch Metals’ non-ferrous products into our existing geographic base, as well as expand sales of non-ferrous and stainless products into Lynch Metals’ geographic base.

	June 30, 2006		December 31, 2005
Senior secured asset-based revolving credit facility	$	294.0	$	191.4
11 1/8% senior secured notes due 2015		275.0		275.0
Industrial Revenue Bond		5.7		5.7
Other		1.2		1.4
Total debt		575.9		473.5
Less—current portion of debt		0.6		0.6
Total long-term portion of debt	$	575.3	$	472.9

The weighted average interest rates under all of our credit facilities for the three months ended June 30, 2006 and 2005 were 9.18% and 4.69%, respectively, and for the six months ended June 30, 2006 and 2005 were 9.24% and 4.51%, respectively.

Senior Secured Asset-Based Revolving Credit Facility—On December 1, 2005, the Successor Company entered into a Senior Secured Asset-Based Revolving Credit Facility (the “ABL facility”) in connection with the Merger.

~~The~~FLAG ~~ABL~~INTERMEDIATE ~~facility~~HOLDINGS ~~permits~~CORPORATION usAND toSUBSIDIARIES borrow on a revolving basis during the period beginning on December 1, 2005 and ending on the sixth anniversary thereof. Substantially all of our subsidiaries are borrowers under the ABL facility. The ABL provides for borrowings, subject to a borrowing base calculation, of up to $450.0, initially comprised of $415.0 of Tranche A Commitments and $35.0 of the Tranche A-1 Commitments. While the Tranche A-1 Commitments are outstanding, the borrowing base is subject to greater advance rates than would be otherwise in effect. A permanent reduction of the maximum Tranche A-1 Commitments to $25.0 occurred on June 1, 2006, with a corresponding permanent increase to $425.0 in the Tranche A Commitments, leaving the total ABL facility unchanged. The maximum availability under the ABL facility is based on eligible receivables and eligible inventory, subject to certain reserves. As of June 30, 2006, we had $137.4 of additional borrowing capacity under the ABL facility.

~~The~~NOTES ~~obligations~~TO ~~under~~UNAUDITED ~~the~~CONDENSED ~~ABL~~CONSOLIDATED ~~facility~~FINANCIAL ~~are guaranteed by the Company and certain of our future domestic subsidiaries and are secured~~ STATEMENTS—(iContinued) on ~~a first-priority lien basis by accounts receivable and inventory and (ii) on a second-priority lien basis by other assets, subject to certain exceptions and permitted liens.~~

The ABL facility bears interest with respect to loans utilizing the Tranche A Commitments at the bank’s base rate or LIBOR, at our option, plus an applicable margin ranging between 1.25% and 2.00% as determined (in ~~accordance with the loan and security agreement governing the ABL facility. The ABL facility bears interest with respect to the Tranche A-1 Commitments at the bank’s base rate or LIBOR~~millions, atexcept ~~our~~share option, plus an applicable margin initially at 3.75% and after the first adjustment rate under the ABL facility, 3.50%. The marginal rates related to the Tranche A Commitments will vary with our financial performance as measured by a fixed charge coverage ratio. The fixed charge coverage ratio is determined by dividing (iamounts) ~~the~~ sum of Adjusted EBITDA (as defined by the loan and security agreement governing the ABL facility) minus income taxes paid in cash minus non-financed capital expenditures by (ii) the sum of certain distributions paid in cash, cash interest expense and scheduled principal reductions on debt. As long as our borrowing availability is $45.0 or greater, we do not have to maintain a minimum fixed charge coverage ratio. Should borrowing availability fall below $45.0, we must maintain a fixed charge coverage ratio of 1.0 to 1.0.

~~Interest~~Pro onForma ~~base~~Results rate loans is payable on the last day of each quarter. Interest on LIBOR loans is payable on maturity of the LIBOR loan or on the last day of the quarter if the term of the LIBOR loan exceeds 90 days. A commitment fee is payable on any unused commitments under the ABL facility of 0.25% per annum. The applicable base rate and the effective LIBOR rate for the Tranche A Commitments and Tranche A-1 Commitments were 8.25% and 5.48% as of June 30, 2006.

The ~~loan~~following ~~and~~unaudited ~~security~~pro ~~agreement~~forma ~~governing~~information ~~the~~presents ~~ABL facility requires us to comply with limited affirmative, negative and subjective covenants,~~ the ~~most~~Company’s ~~significant~~consolidated results of ~~which~~operations ~~are:~~for ~~(i)~~ the ~~maintenance~~nine ofmonths aended ~~borrowing base availability of at least $45.0~~September 30, 2007 ~~or,~~as if ~~such required borrowing base availability is not maintained,~~ the ~~maintenance~~Lynch ofMetals ~~the~~acquisition ~~fixed~~had ~~charge~~occurred ~~coverage ratio, (ii) restrictions~~ on ~~additional indebtedness and (iii)~~January ~~restrictions on liens~~1, ~~guarantees~~2007: ~~and quarterly dividends. There are no limitations with respect to capital expenditures.~~

The loan and security agreement governing the ABL facility provides for up to $15.0 of swingline loans and up to $100.0 for the issuance of letters of credit. Both the face amount of any outstanding letters of credit and any swingline loans will reduce borrowing availability under the ABL facility on a dollar-for-dollar basis.


	Nine Months Ended September 30, 2007
Revenues	$	1,428.7
Net Income		29.8

The ABL facility contains customary representations, warranties and covenants as a precondition to lending, which includes a material adverse change in the business, limitations on our ability to incur or guarantee additional debt, subject to certain exceptions, pay dividends, or make redemptions and repurchases, with respect to capital stock, create or incur certain liens, make certain loans or investments, make acquisitions or investments, engage in mergers, acquisitions, asset sales and sale lease-back transactions, and engage in certain transactions with affiliates3. InInventories ~~addition, the ABL facility requires a lock-box arrangement, which in the absence of default, is controlled by the Company.~~

Inventories consist of the following:


	September 30, 2008		December 31, 2007
Raw materials—
Plates and Shapes	$	341.9	$	222.9
Flat Rolled and Non-Ferrous		149.9		117.0
Building Products		13.5		13.6

Total raw materials		505.3		353.5

Work-in-process and finished goods—
Plates and Shapes		—		—
Flat Rolled and Non-Ferrous		38.8		35.8
Building Products		18.4		20.5

Total work-in-process and finished goods		57.2		56.3

Total inventories	$	562.5	$	409.8

4. Intangible Assets

The carrying amounts of the Company’s intangible assets are as follows:


	September 30, 2008			December 31, 2007
Customer lists	$	41.6		$	41.6
Effect of foreign currency		0.1			0.5
Less: Accumulated amortization		(28.6	)		(22.2	)

	$	13.1		$	19.9

Trade name	$	3.3		$	3.3
Less: Accumulated amortization		(0.2	)		(0.1	)

	$	3.1		$	3.2

Patents	$	0.6		$	0.6
Less: Accumulated amortization		(0.5	)		(0.4	)

	$	0.1		$	0.2

~~The~~FLAG ~~ABL~~INTERMEDIATE ~~facility~~HOLDINGS ~~contains~~CORPORATION ~~events~~AND ofSUBSIDIARIES default with respect to: default in payment of principal when due, default in the payment of interest, fees or other amounts after a specified grace period, material breach of the representations or warranties, default in the performance of specified covenants, failure to make any payment when due under any indebtedness with a principal amount in excess of a specified amount, certain bankruptcy events, certain ERISA violations, invalidity of certain security agreements or guarantees, material judgments, or a change of control. In the event of default the agreement may: (i) restrict the account or refuse to make revolving loans; (ii) cause customer receipts to be applied against the Company borrowings under the ABL facility causing the Company to suffer a rapid loss of liquidity and the ability to operate on a day-to-day basis; (iii) restrict or refuse to provide Letters of Credit; or ultimately: (iv) terminate the Commitments and this Agreement; (v) declare any or all obligations to be immediately due and payable if such default is not cured in the specified period required. Any payment default or acceleration under the ABL facility would also result in a default under the Notes that would provide the holders of the Notes with the right to demand immediate repayment. We are in compliance with all covenants as of June 30, 2006.

OnNOTES ~~July 18,~~TO ~~2006,~~UNAUDITED ~~Amendment~~CONDENSED ~~No. 1~~CONSOLIDATED toFINANCIAL ~~the loan and security agreement governing our ABL facility~~ STATEMENTS—(~~“Amendment No. 1”~~Continued) was executed to: 1) modify the FCCR calculation solely with respect to permitted acquisitions, by excluding all dividends from the calculation, 2) allow the Adjusted EBITDA of our Canadian subsidiary to be included in our FCCR calculation and 3) change the definition of a qualified public offering to include an offering made by our parent company. This Amendment No. 1 did not have any impact on our current covenant compliance.

~~Costs~~(in ~~related to the establishment of the ABL facility were capitalized and are being charged to interest expense over the life of the ABL facility. Unamortized issuance costs of $8.7 as of June 30~~millions, ~~2006,~~except ~~are~~share ~~included~~amounts) ~~in other long-term assets.~~

~~11 1/8%~~Aggregate ~~Senior~~amortization ~~Secured~~expense ~~Notes~~for ~~Due 2015—On November 30, 2005, Flag Acquisition sold an aggregate principal amount of our 11 1/8% Senior Secured Notes Due 2015 (~~the ~~“Notes”).~~three ~~The~~and ~~Notes~~nine ~~will~~months ~~bear~~ended ~~interest at a rate per annum equal to 11~~September ~~1/8%~~30, ~~payable~~2008 ~~semi-annually in arrears, on June 1~~ and ~~December 1~~2007 was ~~of each year~~$2.0, ~~commencing on June 1, 2006~~$6. ~~The Notes will mature on December 1~~6, ~~2015~~$2.2 ~~We may redeem some or all of the Notes at any time on or after December 1, 2010 at a predetermined redemption price plus accrued~~ and ~~unpaid interest and additional interest, if any, to the applicable redemption date~~$6. ~~In addition~~9, ~~on or prior to December 1, 2008, we may redeem up to 35% of the aggregate principal amount of the Notes with the net proceeds of certain equity offerings~~respectively. If we experience a change of control and we do not redeem the Notes, we will be required to make an offer to repurchase the Notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.

~~As a~~The ~~result~~following oftable ~~the~~represents ~~Merger described in Note 2, Metals USA, Inc. assumed~~ the ~~obligations~~total ofestimated ~~Flag~~amortization ~~Acquisition including the Notes. All operating subsidiaries~~ of ~~Metals~~customer ~~USA,~~list ~~Inc, have agreed, jointly and severally with Flag Intermediate~~intangible ~~(“Guarantors”)~~assets, toexcluding ~~unconditionally and irrevocably guarantee Metals USA, Inc.’s obligations under~~ the ~~Notes~~effect ~~and Indenture Agreement dated as~~ of ~~November 30,~~foreign ~~2005. Additionally~~currency, ~~Flag~~for ~~Intermediate has unconditionally guaranteed to be a primary obligor of~~ the ~~due~~five ~~and~~succeeding ~~punctual~~years: ~~payment and performance of the obligations under the Indenture.~~

Metals USA Holdings is not a guarantor of the Notes. There is a limitation on the amount of funds which can be transferred by the Guarantors to Metals USA Holdings in the form of dividends. The amount of dividends available for distribution to Metals USA Holdings was $24.7 as of June 30, 2006 (which is net of the $25.0 dividend paid to Metals USA Holdings on May 24, 2006). Such amount available for distribution shall be increased by an amount equal to 50% of Consolidated Net Income or reduced by an amount equal to 100% of Consolidated Net Loss. Condensed consolidating financial statements for Metals USA Holdings and its direct and indirect subsidiaries, all of which are wholly owned, are not presented as Metals USA Holdings has no significant independent assets or operations.


For the Year Ending	Estimated Amortization Expense
2008 (remaining three months)	$	2.0
2009	$	5.4
2010	$	3.6
2011	$	1.6
2012	$	0.5

~~The~~5. ~~indebtedness~~Derivatives evidenced by the Notes and the guarantees will rank: equally with all of our and the Guarantors existing and future senior indebtedness; junior in priority as to collateral that secures the ABL facility on a first-priority lien basis with respect to our and the Guarantors’ obligations under the ABL

In February 2008, we entered into a series of interest rate swap agreements that entitle us to receive quarterly payments of interest at a floating rate indexed to the three-month London Interbank Offered Rate (“LIBOR”) and pay a fixed rate that ranges from 2.686% to 2.997%, thereby converting a portion of the outstanding borrowings on our ABL facility from a floating rate obligation to a fixed rate obligation. The interest rate swap agreements all have initial terms of approximately three years or less and the associated underlying transactions are expected to occur within that time frame.

We have designated the interest rate swaps as cash flow hedges for accounting purposes. We account for these hedges in accordance with SFAS 133, and therefore defer in accumulated other comprehensive income (loss), a component of stockholder’s equity, the effective portion of cash flow hedging gains and losses that equal the change in cost of the underlying hedged transactions. As the underlying hedged transactions occur, the associated deferred hedging gains and losses are reclassified into earnings to match the change in cost of the transaction.

Below are the notional transaction amounts and fair value for the Company’s outstanding derivatives at September 30, 2008. Because we hedge only with derivatives that have high correlation with the underlying transaction cost, changes in derivatives fair value and the underlying cost are expected to largely offset.

We recognized a pretax loss of $2.4 in earnings (interest expense) during the nine months ended September 30, 2008, which was due to the change in fair value of the interest rate swap derivatives previous to their qualification for hedge accounting treatment. Other pretax realized gains and losses from derivatives which were recognized in earnings during the nine months ended September 30, 2008, subsequent to qualification for hedge accounting treatment, amounted to $0.2 of additional interest expense. These gains and losses effectively offset changes in the cost of the Company’s hedged exposure, and no amount of such gains and losses resulted from hedge ineffectiveness, nor was any component of these gains and losses excluded from the Company’s assessment of hedge effectiveness. The fair value of the Company’s interest rate swaps was $2.7 at September 30, 2008, with $1.6 classified as other current assets and $1.1 classified as other noncurrent assets in the consolidated balance sheet.

~~facility,~~FLAG ~~any~~INTERMEDIATE ~~other~~HOLDINGS ~~debt~~CORPORATION ~~incurred~~AND ~~after~~SUBSIDIARIES December 1, 2005 that has a priority security interest relative to the Notes in the collateral that secures the ABL facility, any hedging obligations related to the foregoing debt and all cash management obligations incurred with any lender under the ABL facility; equal in priority as to collateral that secures the Notes and the guarantees on a first-priority lien basis with respect to our and the Guarantors’ obligations under any other equivalent priority lien obligations incurred after December 1, 2005; and senior to all of our and the Guarantors’ existing and future subordinated indebtedness. The Notes will also be effectively junior to the liabilities of the non-guarantor subsidiaries.

~~The~~NOTES ~~Notes~~TO ~~contain~~UNAUDITED ~~customary representations,~~CONDENSED ~~warranties~~CONSOLIDATED ~~and~~FINANCIAL ~~covenants~~STATEMENTS—(Continued) for the type and nature of an asset-based senior secured revolving credit facility, including limitations on our, the other borrowers’, or the guarantors’ ability to incur or guarantee additional debt, subject to certain exceptions, pay dividends, or make redemptions and repurchases, with respect to capital stock, create or incur certain liens, make certain loans or investments, make acquisitions or investments, engage in mergers, acquisitions, asset sales and sale lease-back transactions, and engage in certain transactions with affiliates.

~~The Notes contain events of default with respect to: default~~ (in ~~payment of principal when due~~millions, ~~default~~except inshare ~~the payment of interest, fees or other~~ amounts) after a specified grace period, material breach of the representations or warranties, default in the performance of specified covenants, failure to make any payment when due under any indebtedness with a principal amount in excess of a specified amount, certain bankruptcy events, certain ERISA violations, invalidity of certain security agreements or guarantees, material judgments, or a change of control. We are in compliance with all covenants as of June 30, 2006.

~~Costs related to the establishment of the Notes were capitalized and are being charged to interest expense over the life of the Notes~~6. ~~Unamortized~~Other ~~issuance~~Assets ~~costs of $7.6 as of June 30, 2006, are included in other long-term assets.~~

~~Industrial~~Other ~~Revenue~~assets ~~Bond—The~~consist ~~Industrial~~of ~~Revenue Bond (“IRB”) is payable on May 1, 2016 in one lump sum payment. The interest rate assessed on~~ the ~~IRB~~following: varies from month to month and was 4.08% at June 30, 2006. The IRB is secured by real estate and equipment acquired with proceeds from the IRB. The IRB places various restrictions on certain of our subsidiaries, including but not limited to maintenance of required insurance coverage, maintenance of certain financial ratios, limits on capital expenditures and maintenance of tangible net worth and is supported by a letter of credit. We are in compliance with all covenants as of June 30, 2006.

7. STOCKHOLDER’S EQUITY


	September 30, 2008		December 31, 2007
Deferred financing costs	$	8.7	$	7.9
Deferred debt offering costs		6.3		6.9
Deferred management fees		5.2		6.1
Noncurrent portion of interest rate swaps		1.1		—
Other		1.5		0.8

Total other assets	$	22.8	$	21.7

~~Common~~Aggregate ~~Stock—In~~amortization ~~accordance with its Certificate~~ of ~~Incorporation~~debt ~~dated~~issuance ~~November 3,~~costs ~~2005,~~for ~~Flag~~the ~~Intermediate~~three ~~was~~and ~~authorized~~nine tomonths ~~issue 100 shares of capital stock~~ended September 30, ~~all~~2008 ofand ~~which~~2007 ~~were~~was ~~shares of common stock~~$0.9, $2.014, ~~par value~~$0.7 ~~All such shares are issued~~ and ~~outstanding at December 31~~$2.0, ~~2005 and are owned by Metals USA Holdings~~respectively.

~~Immediately prior to the effective time of the Merger, all outstanding shares of common stock were cancelled in exchange for a cash payment of $22~~7.00 ~~per~~Accrued ~~share~~Liabilities of common stock. As a result of the Merger described in Note 2, all of the issued and outstanding capital stock of Metals USA, Inc. is held indirectly by Metals USA Holdings through Flag Intermediate, its wholly-owned subsidiary. Investment funds associated with Apollo own approximately 97% of the capital stock of Metals USA Holdings (or approximately 90% on a fully-diluted basis). The remainder of the capital stock of Metals USA Holdings is held by Metals USA, Inc. management participants. See Note 11 for further information on Related Party transactions.

~~Cash~~Accrued ~~Dividend—~~liabilities Onconsist May 23, 2006, Flag Intermediate declared a $25 million dividend payable to its parent company, Metals USA Holdings. The dividend was paid on May 24, 2006. Concurrently, on May 23, 2006, Metals USA Holdings declared a $25 million dividend to its stockholders of ~~record~~the asfollowing: ~~of that date. The dividend was paid on May 24, 2006.~~


	September 30, 2008		December 31, 2007
Accrued salaries and employee benefits	$	20.7	$	15.2
Accrued income taxes		13.2		—
Accrued taxes, other than income		5.0		4.4
Accrued interest		12.0		4.7
Accrued insurance		5.2		5.1
Accrued audit and tax fees		2.5		0.6
Accrued warranty liability		0.5		0.5
Accrued lease terminations		0.3		0.5
Accrued management fees		5.3		6.6
Accrued Merger consideration—Predecessor common shares outstanding		8.1		8.1
Other		2.8		8.6

Total accrued liabilities	$	75.6	$	54.3

8. Debt

Debt consists of the following:


	September 30, 2008		December 31, 2007
Senior Secured Asset-Based Revolving Credit Facility (ABL facility)	$	542.0	$	280.5
11¹/8% Senior Secured Notes due 2015 (Metals USA Notes)		275.0		275.0
Industrial Revenue Bond		5.7		5.7
Other		1.9		4.2

Total debt		824.6		565.4
Less—current portion of debt		1.6		2.3

Total long-term portion of debt	$	823.0	$	563.1

8.FLAG ~~STOCK-BASED~~INTERMEDIATE ~~COMPENSATION~~HOLDINGS CORPORATION AND SUBSIDIARIES

~~The~~NOTES ~~Successor~~TO ~~Company~~UNAUDITED ~~has~~CONDENSED noCONSOLIDATED ~~stock-based~~FINANCIAL ~~compensation arrangements of its own, but its indirect parent, Metals USA Holdings, has adopted a stock-based Amended and Restated 2005 Stock Incentive Plan~~ STATEMENTS—(~~“the Plan”~~Continued) which permits the issuance of options and restricted stock awards on Metals USA Holding’s stock to employees and directors of, or consultants to, the Company, except that consultants may only receive awards with the consent of the president of the Metals USA, Inc. As of June 30, 2006, 1,002,311 options and 57,600 restricted stock awards had been granted by Metals USA Holding’s under the Amended and Restated 2005 Stock Incentive Plan. As a result of the options and restricted stock awards being issued to employees and directors of the Successor Company, the Successor Company is required to reflect the stock-based compensation expense related to these options and restricted stock awards within its consolidated statement of operations. A total of $0.3 and $0.6 was recorded as stock-based employee compensation during the three months and six months ended June 30, 2006. This compensation expense is based on the adoption of Statement of Financial Accounting Standards No. 123-Revised 2004 (“SFAS 123(R)”), “Share-Based Payment.” by Metals USA Holdings effective January 1, 2006. The total income tax benefit recognized in the Company’s income statement for stock-based compensation arrangements was $0.1 and $0.2 during the three months and six months ended June 30, 2006.

~~Description~~(in ofmillions, ~~Share Option~~except ~~Plan~~share amounts)

The ~~Plan~~weighted ~~has~~average ~~reserved for issuance up to 1.4 million shares of common stock. Metals USA Holdings believes that the granting of such awards promotes an increasing personal~~ interest inrates ~~furthering~~under the ~~growth~~ABL ~~and~~facility ~~success~~for ~~of Metals USA Holdings, and to provide a means of rewarding outstanding performance by such persons to~~ the ~~Company~~three and~~/or~~ ~~its~~nine ~~Subsidiaries.~~months ~~The~~ended ~~Plan has two tranches of options~~September 30, ~~Tranche~~2008 A and ~~Tranche~~2007 B.were ~~Tranche A options will vest on a pro-rata basis over five years~~3.93%, ~~have a term of ten years, and expire if not exercised~~4. ~~Tranche B options~~44%, which include both a service and a performance condition, vest on the eighth anniversary of the date of grant or earlier dependent on the satisfaction of an internal rate of return on capital invested, have a term of ten years from date of grant, and expire if not exercised6.76% Awards are generally granted with an exercise price equal to the fair value of Metals USA Holdings’s stock at the date of grant. The fair value price of the stock is a calculated value based on the date of each of the respective grants using a combination of discounted cash flows and ~~financial metrics from companies with similar characteristics of Metals USA Holdings~~7.14%, ~~Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the Plan)~~respectively. ~~The Tranche A options and Tranche B options are described in further detail below.~~

InSenior ~~connection~~Secured ~~with~~Asset-Based ~~the~~Revolving ~~cash dividend discussed in Note 7 and pursuant~~Credit toFacility the Plan’s provisions of rights preservation, the Board of Directors modified the outstanding options by reducing the option price per share by $1.78 in order to retain the participants’ rights proportionate with those prior to the dividend payment. This reduction has been reflected in the exercise price discussed below and did not result in additional compensation expense. The compensation cost of these options, based on the original grant date option price, is being charged to administrative expense over the vesting period, which was not affected by this modification.

~~Tranche~~The AABL ~~Options~~facility permits us to borrow on a revolving basis through November 30, 2011. Substantially all of our subsidiaries are borrowers under the ABL facility.

~~The~~On ~~fair~~June 8, ~~value~~2007, ofwe ~~each~~executed ~~option~~an ~~award~~amendment isto ~~estimated on~~ the ~~date~~ABL offacility ~~grant~~(the ~~using~~“June ~~a black-scholes option valuation model. Expected~~2007 ~~volatilities~~amendment”), ~~are~~which ~~calculated~~increased ~~using~~ the ~~average~~commitment ~~historical~~from ~~annualized~~$450.0 ~~volatilities of four similar companies publicly traded stock with financial characteristics similar~~ to ~~those~~$525.0, comprised of ~~Metals USA Holdings~~$500.0 ~~The volatilities are annualized over the expected term~~ of ~~the~~Tranche ~~options~~A ~~from~~Commitments ~~the~~and ~~date~~$25.0 of ~~grant. The volatilities used in determining the~~ Tranche A-1 ~~options~~Commitments. ~~are~~Additionally, ~~calculated by averaging~~ the ~~four~~June ~~companies~~2007 ~~annualized~~amendment ~~volatilities~~reduced ~~over~~the aborrowing ~~period~~cost ofon ~~6.5 years before~~ the ~~date~~Tranche ofA ~~grant.~~facility ~~These~~by ~~historical~~25 ~~volatilities~~basis ~~are~~points, ~~used~~reduced ~~as Metals USA Holdings’s stock was not publicly traded and~~ the ~~Company~~borrowing ~~has~~cost noon ~~historical data upon which to base its calculation for~~ the ~~volatility~~Tranche ofA-1 ~~the~~facility ~~stock.~~by ~~The~~75 ~~Company~~basis ~~uses~~points ~~historical~~and ~~data~~gave ~~from~~us the ~~Predecessor~~ ~~Company’s~~ option ~~plan~~ to ~~estimate~~increase ~~option~~the ~~exercise~~Tranche ~~and~~A ~~employee~~Commitments ~~termination~~by ~~within~~$100.0. ~~the~~The ~~valuation~~June ~~model~~2007 asamendment ~~the~~did ~~Company~~not ~~has~~have noany ~~historical~~impact ~~data~~on ~~for~~our ~~its~~covenant ~~current option plan~~compliance. ~~An estimated forfeiture rate of five percent was calculated by~~Costs ~~observing~~incurred ~~the~~in ~~amount~~connection ofwith ~~cancellation of stock options versus~~ the ~~amount~~June ~~granted~~2007 ~~during~~amendment ~~the~~totaled ~~last two years of the Predecessor Company’s stock plan~~$1.6, ~~The~~and ~~expected~~are ~~term~~being ofamortized ~~options~~over ~~granted is derived by using~~ the ~~“simplified”~~existing ~~method. The risk-free rate for periods within the expected~~ term of the ~~option~~ABL isfacility, ~~based~~which onexpires ~~the~~November 30, ~~daily U~~2011.S. ~~Treasury securities at 7-year constant maturity rate.~~

On July 1, 2008, we executed our option to increase the Tranche A Commitments by $100.0, which increased the total commitment from $525.0 to $625.0. All other existing terms under the ABL facility remained unchanged. Costs incurred to exercise the option to increase the ABL facility totaled $2.4, and are being amortized over the existing term of the ABL facility.

The maximum availability under the ABL facility is based on eligible receivables and eligible inventory, subject to certain reserves. During September 2008, we borrowed approximately $160.0 on the ABL facility in response to concerns about credit markets. As of September 30, 2008, we had eligible collateral of $618.7, $542.0 in outstanding advances, $15.2 in open letters of credit and $61.5 of additional borrowing capacity. As of September 30, 2008, we had $173.0 of available cash and cash equivalents.

The obligations under the ABL facility are guaranteed by the Company and certain of our domestic subsidiaries and are secured (i) on a first-priority lien basis by accounts receivable and inventory and (ii) on a second-priority lien basis by other assets, subject to certain exceptions and permitted liens.

The ABL facility bears interest with respect to loans utilizing the Tranche A Commitments at the bank’s base rate plus an applicable margin ranging between -0.25% and -0.50%, or LIBOR, at our option, plus an applicable margin ranging between 1.00% and 1.75% as determined in accordance with the amended loan and security agreement governing the ABL facility. The ABL facility bears interest with respect to the Tranche A-1 Commitments at the bank’s base rate plus an applicable margin of 0.75%, or LIBOR, at our option, plus an applicable margin of 2.75% under the June 2007 amendment. The marginal rates related to the Tranche A Commitments will vary with our financial performance as measured by the fixed charge coverage ratio (the “FCCR”). The FCCR is determined by dividing (i) the sum of Adjusted EBITDA (as defined by the loan and security agreement governing the ABL facility) minus income taxes paid in cash minus non-financed capital expenditures by (ii) the sum of certain distributions paid in cash, cash interest expense and scheduled principal reductions on debt, and is calculated based on such amounts for the most recent period of four consecutive fiscal quarters. As long as our borrowing availability is greater than or equal to $45.0, we do not have to maintain a minimum fixed charge coverage ratio. Should borrowing availability fall below $45.0, we must maintain a fixed charge coverage ratio of at least 1.0 to 1.0. As of September 30, 2008, our FCCR was 3.21.

Interest on base rate loans is payable on the last day of each quarter. Interest on LIBOR loans is payable on maturity of the LIBOR loan or on the last day of the quarter if the term of the LIBOR loan exceeds 90 days. A

~~The~~FLAG ~~following~~INTERMEDIATE isHOLDINGS aCORPORATION ~~summary~~AND ofSUBSIDIARIES ~~stock option activity for Tranche A:~~

	WeightedAverage FairValue perShare		Exercise Priceper Share		WeightedAverageExercise Priceper Share		Number ofShares
Balance, January 1, 2006							380,760
Granted to directors	$	5.82	$	8.22	$	8.22	200,000
Granted to employees	$	6.27	$	8.89	$	8.89	20,395
Exercised		—		—		—	—
Canceled or expired		—		—		—	—
Balance, June 30, 2006							601,155
Exercisable as of:
June 30, 2006						—	—

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A(in ~~summary of the status of the Company’s nonvested shares as of June 30~~millions, ~~2006~~except ~~is presented~~share ~~below:~~amounts)

	WeightedAverage Grant-Date Fair Valueper Share		Number ofShares
Nonvested at January 1, 2006			380,760
Granted to directors	$	5.82	200,000
Granted to employees	$	6.27	20,395
Vested
Exercised		—	—
Canceled or expired		—	—
Nonvested at June 30, 2006			601,155
Exercisable as of:
June 30, 2006		—	—

commitment fee of 0.25% per annum is payable on any unused commitments under the ABL facility. The applicable base rate and the effective LIBOR rate for the Tranche A Commitments and Tranche A-1 Commitments were 5.00% and 4.05%, respectively, as of September 30, 2008.

The ~~weighted-average~~loan ~~grant-date~~and security ~~fair~~agreement ~~value~~governing ofthe ~~Tranche~~ABL Afacility ~~options~~requires ~~granted~~us ~~during~~to comply with limited affirmative, negative and subjective covenants, the ~~first~~most ~~six months~~significant of ~~2006~~which ~~was~~are: (i) the maintenance of a borrowing base availability of at least $545.870, ~~based~~or, onif such required borrowing base availability is not maintained, the ~~following~~maintenance ~~assumptions:~~of the FCCR, (ii) restrictions on additional indebtedness and (iii) restrictions on liens, guarantees and quarterly dividends. There are no limitations with respect to capital expenditures.

Expected dividend yield	0.0	%
Expected stock price volatility	54.9	%
Risk free interest rate	4.3—4.6	%
Expected life of options (in years)	6.5

AsThe ofABL ~~June 30,~~facility ~~2006~~contains customary representations, ~~there~~warranties ~~was~~and ~~$3.3~~covenants ~~million~~as ofa ~~total~~precondition ~~unrecognized~~to ~~compensation~~lending, ~~cost~~which ~~related~~includes a material adverse change in the business, limitations on our ability to ~~nonvested~~incur ~~share~~or guarantee additional debt, subject to certain exceptions, pay dividends, or make redemptions and repurchases with respect to capital stock, repay debt, create or incur certain liens, make certain loans or investments, make acquisitions or investments, engage in mergers, acquisitions, asset sales and sale lease-~~based~~back ~~compensation~~transactions, ~~arrangements~~and ~~granted~~engage ~~under~~in certain transactions with affiliates. In addition, the ~~Tranche~~ABL Afacility ~~options~~requires a lock-box arrangement, which as long as borrowing availability is greater or equal to $45.0 and in the absence of default, is controlled by the Company.

~~Tranche~~The BABL facility ~~Options~~contains events of default with respect to: default in payment of principal when due, default in the payment of interest, fees or other amounts after a specified grace period, material breach of the representations or warranties, default in the performance of specified covenants, failure to make any payment when due under any indebtedness with a principal amount in excess of a specified amount, certain bankruptcy events, certain ERISA violations, invalidity of certain security agreements or guarantees, material judgments or a change of control. In the event of default the agreement may permit the lenders to: (i) restrict the account or refuse to make revolving loans; (ii) cause customer receipts to be applied against borrowings under the ABL facility causing the Company to suffer a rapid loss of liquidity and the ability to operate on a day-to-day basis; (iii) restrict or refuse to provide letters of credit; or ultimately: (iv) terminate the commitments and the agreement; or (v) declare any or all obligations to be immediately due and payable if such default is not cured in the specified period required. Any payment default or acceleration under the ABL facility would also result in a default under the Metals USA Notes that would provide the holders of the Metals USA Notes with the right to demand immediate repayment. We are in compliance with all covenants as of September 30, 2008.

~~Tranche~~In BFebruary ~~options~~2008, ~~which~~$250.0 ~~include~~notional ~~both~~amount ~~a service and a performance condition, vest on the eighth anniversary~~ of ~~the~~outstanding ~~date~~borrowings ofunder ~~grant or earlier dependent on~~ the ~~satisfaction~~ABL offacility anwas ~~internal~~swapped ~~rate~~from ~~of return on capital invested, have~~ a ~~term~~floating ofLIBOR-based ~~ten~~rate ~~years from date of grant, and expire if not exercised. Awards are generally granted with an exercise price equal~~ to ~~the~~a ~~fair~~fixed ~~value of Metals USA Holdings’s~~rate ~~stock~~(see atNote ~~the date of grant~~5).

~~The~~Costs ~~performance~~related ~~condition~~to the establishment of the ~~Tranche~~ABL Bfacility, ~~options~~in isaddition ~~satisfied~~to ~~when~~subsequent ~~the~~amendments ~~Investor~~to ~~Internal~~the ~~Rate~~ABL offacility, ~~Return~~were ~~(“IRR”)~~capitalized onand are being charged to interest expense over the ~~funds~~life ~~managed~~of bythe ~~Apollo~~ABL ~~with~~facility. ~~respect~~Unamortized toissuance ~~its~~costs ~~investment~~of in$8.7 usas ~~equals~~of orSeptember 30, ~~exceeds~~2008, ~~25%~~are ~~prior~~included toin ~~the~~other ~~eighth~~non-current ~~anniversary~~assets.

11 ¹/8% Senior Secured Notes Due 2015

On November 30, 2005, Flag Acquisition sold $275.0 million aggregate principal amount of the Metals USA Notes. The Metals USA Notes bear interest at a rate per annum equal to 11¹ /8%, payable semi-annually in arrears, on June 1 and December 1 of each year, commencing on June 1, 2006. The Metals USA Notes will

~~The~~FLAG ~~fair~~INTERMEDIATE ~~value~~HOLDINGS ofCORPORATION ~~the~~AND ~~Tranche~~SUBSIDIARIES B options was estimated on the date of grant using the same option valuation model used for the Tranche A options. As of June 30, 2006 management could not predict the probability when or if the performance condition will be satisfied. If this performance condition is satisfied, the options will vest immediately at the date of satisfaction and all of the expense will concurrently be recognized.

~~The~~NOTES ~~volatilities~~TO ~~used~~UNAUDITED inCONDENSED ~~determining~~CONSOLIDATED ~~the Tranche~~FINANCIAL BSTATEMENTS—(Continued) options volatility were the same as that of the Tranche A options. The risk-free rate for periods within expected term of the option is based on the daily U.S. Treasury securities at 10-year constant maturity rate.

~~The~~(in ~~following~~millions, isexcept ashare ~~summary~~amounts) ~~of stock option activity for Tranche B:~~

	Weighted Average Fair Value per Share		Exercise Price per Share		Weighted AverageExercise Price per Share		Number of Shares
Balance, January 1, 2006							380,761
Granted to directors		—		—		—	—
Granted to employees	$	5.64	$	8.89	$	8.89	20,395
Exercised		—		—		—	—
Canceled or expired		—		—		—	—
Balance, June 30, 2006							401,156
Exercisable as of:
June 30, 2006						—	—

mature on December 1, 2015. We may redeem some or all of the Metals USA Notes at any time on or after December 1, 2010 at a predetermined redemption price plus accrued and unpaid interest and additional interest, if any, to the applicable redemption date. In addition, on or prior to December 1, 2008, we may redeem up to 35% of the aggregate principal amount of the Metals USA Notes with the net proceeds of certain equity offerings. If we experience a change of control and we do not redeem the Metals USA Notes, we will be required to make an offer to repurchase the Metals USA Notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.

AAs ~~summary~~a result of the ~~status~~Merger, Metals USA assumed the obligations of Flag Acquisition including the ~~Company~~Metals USA Notes. All domestic operating subsidiaries of Metals USA have agreed, jointly and severally with Flag Intermediate (“Guarantors”), to unconditionally and irrevocably guarantee Metals USA’s ~~nonvested~~obligations ~~shares~~under the Metals USA Notes and Indenture dated as of ~~June~~November 30, ~~2006~~2005. isAdditionally, Flag Intermediate has unconditionally guaranteed to be a primary obligor of the due and punctual payment ~~presented~~and ~~below:~~performance of the obligations under the Indenture.

	WeightedAverageGrant-DateFair Valueper Share		Number ofShares
Nonvested at January 1, 2006			380,761
Granted to directors		—	—
Granted to employees	$	5.64	20,395
Vested
Exercised		—	—
Canceled or expired		—	—
Nonvested at June 30, 2006			401,156
Exercisable as of:
June 30, 2006		—	—

Metals USA Holdings is not a guarantor of the Metals USA Notes. There is a limitation on the amount of funds which can be transferred by the Guarantors to Metals USA Holdings in the form of dividends. The amount of dividends available for distribution to Metals USA Holdings was $75.3 as of September 30, 2008. Such amount available for distribution shall be increased by an amount equal to 50% of Consolidated Net Income, as defined, or reduced by an amount equal to 100% of Consolidated Net Loss, as defined.

The ~~weighted-average~~indebtedness ~~grant-date~~evidenced ~~fair~~by ~~value~~the ofMetals ~~Tranche~~USA BNotes ~~options~~and ~~granted~~the ~~during~~guarantees will rank: equally with all of our and the ~~six~~Guarantors’ ~~months~~existing and future ~~ended~~senior ~~June~~indebtedness; junior in priority as to collateral that secures the ABL facility on a first-priority lien basis with respect to our and the Guarantors’ obligations under the ABL facility, any other debt incurred after December 301, 2005 ~~2006~~that ~~was~~has ~~$5.64~~a priority security interest relative to the Metals USA Notes in the collateral that secures the ABL facility, ~~based~~any hedging obligations related to the foregoing debt and all cash management obligations incurred with any lender under the ABL facility; equal in priority as to collateral that secures the Metals USA Notes and the guarantees on a first-priority lien basis with respect to our and the ~~following~~Guarantors’ ~~assumptions:~~obligations under any other equivalent priority lien obligations incurred after December 1, 2005; and senior to all of our and the Guarantors’ existing and future subordinated indebtedness. The Metals USA Notes will also be effectively junior to the liabilities of the non-guarantor subsidiaries.

Expected dividend yield	0.0	%
Expected stock price volatility	54.3	%
Risk free interest rate	4.7	%
Expected life of options (in years)	8.0

The Metals USA Notes contain covenants that are customary for debt instruments, including limitations on our or the guarantors’ ability to incur or guarantee additional debt, subject to certain exceptions, pay dividends, or make redemptions and repurchases with respect to capital stock, create or incur certain liens, make certain loans or investments, make acquisitions or investments, engage in mergers, acquisitions, asset sales and sale lease-back transactions, and engage in certain transactions with affiliates.

AsThe ofMetals ~~June 30,~~USA ~~2006~~Notes ~~there~~indenture ~~was~~contains ~~$2.6~~certain ~~million~~customary events of ~~total~~default, ~~unrecognized~~including ~~compensation~~(subject, ~~cost~~in ~~related~~some cases, to ~~nonvested~~ ~~share-~~customary cure periods thresholds) defaults based ~~compensation~~on ~~arrangements~~(1) the ~~granted~~failure to make payments under the ~~Tranche~~Metals BUSA ~~options~~indenture when due, (2) breach of covenants, (3) cross-defaults to other material indebtedness, (4) bankruptcy events and (5) material judgments. We were in compliance with all covenants as of September 30, 2008.

Costs related to the establishment of the Metals USA Notes were capitalized and are being charged to interest expense over the life of the Metals USA Notes. Unamortized issuance costs of $6.3 as of September 30, 2008, are included in other non-current assets.

~~Restricted~~FLAG ~~Stock~~INTERMEDIATE HOLDINGS CORPORATION AND SUBSIDIARIES

~~The~~NOTES ~~Plan~~TO ~~utilizes~~UNAUDITED ~~grants~~CONDENSED ofCONSOLIDATED ~~restricted~~FINANCIAL ~~stock~~STATEMENTS—(Continued) as long-term compensation for its directors and employees of, or consultants to, the Successor Company or any of its Subsidiaries. Grants of restricted stock have a vesting period that is determined at the discretion of the board of directors.

Under APB 25, prior to January 1, 2006, deferred compensation was charged for the market value of restricted shares granted. The deferred compensation balance is shown as a reduction to the Successor Company’s stockholders’ equity (in ~~the accompanying consolidated balance sheet at December 31~~millions, ~~2005.~~except ~~Upon~~share ~~adoption~~amounts) of SFAS No. 123R, the deferred compensation balance at January 1, 2006 was reversed and recorded to additional paid-in capital. Under both APB 25 and SFAS No. 123R, the market value of the restricted shares granted is amortized ratably over the restricted period.

~~Prior~~Industrial toRevenue ~~January 1,~~Bond 2006, under APB 25, the Company recorded the effect of forfeitures on compensation expense related to restricted stock as it actually occurred. Effective January 1, 2006, under SFAS No. 123R, the Company is required to record compensation cost for stock-based compensation utilizing an estimated forfeiture rate. Historical data related to forfeitures experienced by the Company was used to estimate forfeiture rates. The impact on previously recognized expense from the change in forfeiture rates was not material.

~~For~~The ~~the~~Industrial ~~three~~Revenue ~~months~~Bond ~~ended~~(“IRB”) ~~June~~is payable on May 301, ~~2006,~~2016 noin ~~shares~~one ~~were granted~~lump sum payment. ~~For~~The interest rate assessed on the ~~six~~IRB ~~months~~varies ~~ended~~from month ~~June~~to month and was 8.48% at September 30, ~~2006~~2008. The IRB is secured by real estate and equipment acquired with proceeds from the IRB. The IRB places various restrictions on certain of our subsidiaries, 3including but not limited to maintenance of required insurance coverage,~~600~~ ~~shares~~maintenance of certain financial ratios, limits on capital expenditures and maintenance of tangible net worth and is supported by a letter of credit. We were ~~granted~~in compliance with all covenants as of September 30, 2008.

Metals USA Holdings’ Senior Floating Rate Toggle Notes due 2012

On July 10, 2007, Metals USA Holdings issued $300.0 initial aggregate principal amount of Senior Floating Rate Toggle Notes due July 1, 2012 (the “2007 Notes”). The 2007 Notes are senior unsecured obligations that are not guaranteed by any of Metals USA Holdings’ subsidiaries. As such, the 2007 Notes are structurally subordinated to all indebtedness and other liabilities (including trade payables) of Metals USA Holdings’ subsidiaries.

The initial five interest payments on the 2007 Notes were paid solely in cash. Metals USA Holdings must make an election regarding whether subsequent interest payments will be made in cash or through PIK Interest prior to the start of the applicable interest period. Metals USA Holdings may elect to pay interest (1) entirely in cash or (2) entirely by increasing the principal amount of the 2007 Notes or issuing new 2007 Notes (“PIK Interest”), or (3) on 50% of the outstanding principal amount of the 2007 Notes in cash and on 50% of the outstanding principal amount of the 2007 Notes by increasing the principal amount of the outstanding 2007 Notes or by issuing new 2007 Notes (“Partial PIK Interest”). Cash interest on the 2007 Notes will accrue at a rate per annum, reset quarterly, equal to LIBOR plus a spread of 6.00%, which increases by 0.25% to 6.25% in year 2, by 0.50% to 6.50% in year 3, and by 0.75% to 6.75% in year 4. In the event PIK Interest is paid on the 2007 Notes after the first four interest periods, the then-applicable margin over LIBOR on the 2007 Notes would increase by 0.75% for each period in which PIK Interest is paid. If Metals USA Holdings elects to pay any PIK Interest, Metals USA Holdings will increase the principal amount on the 2007 Notes or issue new 2007 Notes in an amount equal to the amount of PIK Interest for the applicable interest payment period to holders of the 2007 Notes on the relevant record date. Interest is payable quarterly in arrears on January 1, April 1, July 1 and October 1. PIK Interest notes, resulting from the conversion of interest into PIK notes, when paid will be treated as an operating activity in Metals USA Holdings’ consolidated statements of cash flows in accordance with SFAS No. 95 “Statement of Cash Flows” (“SFAS 95”).

Although the 2007 Notes are not recorded on the Company’s balance sheet, Flag Intermediate plans to provide funds to service the 2007 Notes to Metals USA Holdings as reflected in the following table. Estimated interest was calculated using a 3-month LIBOR forward curve, with the initial spread and increases to the initial spread for the applicable periods as discussed above.


For the Year Ending	Estimated Cash Interest Expense		Estimated PIK Interest Expense
2008 (remaining three months)	$	6.6	$	7.3
2009	$	26.7	$	28.9
2010	$	28.5	$	30.8
2011	$	31.5	$	33.8
2012	$	24.7	$	26.3

9.FLAG ~~SEGMENT~~INTERMEDIATE ~~AND~~HOLDINGS ~~RELATED~~CORPORATION ~~INFORMATION~~AND SUBSIDIARIES

~~The~~NOTES ~~following~~TO ~~table~~UNAUDITED ~~shows~~CONDENSED ~~summarized~~CONSOLIDATED ~~financial~~FINANCIAL ~~information~~STATEMENTS—(Continued) concerning our reportable segments. The reconciliation of operating income to net income before income taxes is shown within the Consolidated Statements of Operations and therefore is not separately presented.

	As of and for the Three Months Ended June 30,
	Plates and Shapes		FlatRolled		Building Products		Corporate and Other			Total
Successor Company
2006:
Net sales	$	219.7	$	189.6	$	54.0	$	(5.1	)	$	458.2
Operating income (loss)		27.1		10.6		6.7		(7.8	)		36.6
Capital expenditures		1.0		1.2		1.0		0.1			3.3
Depreciation and amortization(1)		1.4		1.0		0.2		2.2			4.8
Predecessor Company
2005:
Net sales	$	171.6	$	205.7	$	54.7	$	(5.2	)	$	426.8
Operating income (loss)		16.5		8.4		7.1		(5.3	)		26.7
Capital expenditures		3.6		0.6		1.0		0.4			5.6
Depreciation and amortization		0.4		0.1		0.1		0.4			1.0
	As of and for the Six Months Ended June 30,
	Plates and Shapes		FlatRolled		Building Products		Corporate and Other			Total
Successor Company
2006:
Net sales	$	418.1	$	381.1	$	99.5	$	(10.9	)	$	887.8
Operating income (loss)		44.3		16.8		6.3		(15.3	)		52.1
Total assets		377.3		203.7		110.1		237.0			928.1
Capital expenditures		2.9		1.8		2.1		0.2			7.0
Depreciation and amortization(1)		2.5		1.9		0.4		4.4			9.2
Predecessor Company
2005:
Net sales	$	348.3	$	418.1	$	99.1	$	(11.1	)	$	854.4
Operating income (loss)		36.0		21.8		10.0		(10.1	)		57.7
Total assets		251.5		163.7		102.9		159.6			677.7
Capital expenditures		4.5		1.1		2.2		0.6			8.4
Depreciation and amortization		0.8		0.2		0.2		0.6			1.8

(in millions, except share amounts)

~~(1)~~Flag ~~Includes~~Intermediate ~~depreciation~~provided ~~expense~~funds ~~reflected~~to inMetals ~~cost~~USA ofHoldings ~~goods~~to ~~sold~~fund ~~for~~the initial five quarterly interest payments on the ~~Building~~2007 ~~Products~~Notes, ~~Group~~which were paid on October 1, 2007, January 2, 2008, April 1, 2008, July 1, 2008, and October 1, 2008 and which totaled $7.7, $8.4, $8.1, $6.5 and $6.6, respectively.

On September 26, 2008, Metals USA Holdings made a permitted election under the indenture governing the 2007 Notes to pay all interest that is due on January 1, 2009, for the interest period beginning on October 1, 2008, and ending on December 31, 2008, entirely through PIK Interest. Metals USA Holdings must make an election regarding whether subsequent interest payments will be made in cash, through PIK Interest, or Partial PIK Interest, prior to the start of the applicable interest period. In the absence of such an election for any interest period, interest on the 2007 Notes will be payable according to the election for the previous interest period. As a result, the PIK Interest election is now the default election for future interest periods unless Metals USA Holdings elects otherwise not later than the commencement of an interest period.

The terms of the ABL facility, as well as the indenture governing the Metals USA Notes, restrict Flag Intermediate and certain of its subsidiaries from making payments or transferring assets to Metals USA Holdings, including dividends, loans, or distributions. Such restrictions include prohibition of dividends in an event of default and limitations on the total amount of dividends paid to Metals USA Holdings. In the event these agreements do not permit Flag Intermediate to provide Metals USA Holdings with sufficient distributions to fund interest and principal payments on the 2007 Notes when due, Metals USA Holdings may default on the 2007 Notes unless other sources of funding are available. Amounts available under these restricted payment provisions amounted to $75.3 under the indenture governing the Metals USA Notes and $130.4 under the loan and security agreement governing the ABL facility as of September 30, 2008.

Our affiliates, which include Apollo Management V L.P. (“Apollo Management” and together with its affiliated investment entities “Apollo”), as well as our Chief Executive Officer and our Chief Financial Officer, have purchased a portion of our 2007 Notes in the market. As of September 30, 2008, the amount of outstanding 2007 Notes held by our affiliates was $91.4, $90.9 of which were held by Apollo, with the remainder held by the executive officers referred to above. From time to time, depending upon market, pricing and other conditions, as well on cash balances and liquidity, we, our subsidiaries or affiliates may seek to purchase or sell additional indebtedness of us or our affiliates. Any such future purchases or sales may be made in the open market, privately negotiated transactions, tender offers or otherwise.

On February 26, 2008, Metals USA Holdings exchanged $216.0 aggregate principal amount of the $300.0 aggregate principal amount privately placed 2007 Notes for substantially identical 2007 Notes registered under the Securities Act of 1933, as amended.

9. Stockholder’s Equity

Common Stock—In accordance with its Certificate of Incorporation dated November 3, 2005, Flag Intermediate was authorized to issue 100 shares of capital stock, all of which were shares of common stock, $.01 par value. All such shares are issued and outstanding at September 30, 2008, and are owned by Metals USA Holdings.

As a result of the Merger, all of the issued and outstanding capital stock of Metals USA is held indirectly by Metals USA Holdings through Flag Intermediate, its wholly-owned subsidiary. Investment funds associated with Apollo Management V L.P. (“Apollo Management” and together with its affiliated investment entities “Apollo”)

~~10.~~FLAG ~~COMMITMENTS~~INTERMEDIATE HOLDINGS CORPORATION AND ~~CONTINGENCIES~~SUBSIDIARIES

WeNOTES ~~are~~TO ~~involved~~UNAUDITED inCONDENSED aCONSOLIDATED ~~variety~~FINANCIAL ofSTATEMENTS—(Continued) claims, lawsuits and other disputes arising in the ordinary course of business. We believe the resolution of these matters and the incurrence of their related costs and expenses should not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

~~11.~~(in ~~RELATED~~millions, ~~PARTY~~except ~~TRANSACTIONS~~ share amounts)

~~Upon~~ own ~~completion~~approximately 97% of the ~~Merger,~~capital westock ~~and~~of Metals USA Holdings ~~entered into a management agreement with Apollo pursuant to which Apollo~~ (or ~~its~~approximately ~~affiliates~~90% ~~will provide us with management services. Pursuant to such agreement, Apollo will receive an annual management fee equal to $2.0, payable~~ on ~~March 15~~a offully-diluted ~~every year, starting on March 15, 2006~~basis). ~~Apollo~~The ~~elected~~remainder ~~to waive $0.5~~ of the ~~annual~~capital ~~management~~stock ~~fee. The management agreement will terminate on December 31, 2012, unless earlier terminated by Apollo. Apollo was paid the $1.5 on March 15, 2006. Deferred management fees~~ of ~~$8.6 were recorded as a current~~ ~~asset,~~Metals ~~and~~USA ~~are~~Holdings ~~being~~is ~~amortized~~held ~~using~~by ~~the~~our ~~straight-line method over the term of the~~ management ~~agreement~~participants. ~~For~~See ~~the~~Note ~~three~~14 ~~months~~for ~~and~~further ~~six~~information ~~months~~on ~~ended~~Related ~~June 30,~~Party ~~2006, amortization of deferred management fees were $0~~transactions.3 ~~and $0.6, respectively, with $0.2 and $0.4, respectively, recorded as an administrative expense and $0.1 and $0.2, respectively, recorded as interest expense.~~

~~The~~January ~~management~~2007 ~~agreement~~Dividend—On ~~also~~January 3, ~~provides~~2007, ~~that~~Metals ~~affiliates~~USA Holdings used the net proceeds from the issuance of ~~Apollo~~$150.0 ~~will~~initial beaggregate ~~entitled~~principal toamount ~~receive~~of aSenior ~~fee~~Floating inRate ~~connection~~Toggle ~~with~~Notes ~~certain~~due ~~subsequent~~2012 ~~financing,~~(the ~~acquisition~~“2006 Notes”), ~~disposition~~as ~~and~~well ~~change~~as $8.2 of additional ~~control~~borrowings ~~transactions~~under ~~with~~the ABL facility, to pay a ~~value~~cash dividend of approximately $25144.08 orto ~~more~~its stockholders, ~~such~~which ~~fee~~include toApollo ~~be equal~~and tocertain 1%members of ~~the~~our ~~gross~~management, ~~transaction~~to ~~value~~make a cash payment (partially in lieu of ~~any~~the ~~such~~cash ~~transaction~~dividend) of $4.2 Asto its avested ~~result~~stock ofoption holders (the ~~acquisition~~cash ofpayment ~~Port~~and ~~City~~the oncash ~~May 17~~dividend are referred to collectively as the “January 2007 Dividend”), ~~2006~~which ~~discussed~~include ~~further~~certain inmembers ~~Footnote~~of 2our management, ~~Apollo~~and ~~was~~to ~~paid~~pay afees ~~fee~~and expenses related to the issuance of the 2006 Notes, including a $01.45 transaction fee to Apollo.

~~Upon~~In aconnection ~~termination~~with of the ~~management~~January ~~agreement~~2007 ~~prior~~Dividend, tothe ~~December 31,~~outstanding ~~2012,~~employee ~~Apollo~~stock options ~~will~~under beMetals ~~entitled~~USA toHoldings’ ~~receive~~Amended ~~the~~and ~~present~~Restated ~~value~~2005 ofStock ~~(a) $14.0, less~~Incentive ~~(b) the~~Plan ~~aggregate~~were ~~amount~~adjusted ofa ~~management~~second ~~fees~~time ~~that~~(see ~~were~~Note ~~paid~~10 tofor ita ~~under~~discussion of the ~~agreement~~adjustments ~~prior~~ to ~~such~~the ~~termination,~~stock ~~and less (c~~options) ~~management~~. ~~fees~~The ~~waived.~~combination ~~Both~~of the ~~management~~reduction ~~agreement~~of ~~and~~the ~~transaction~~per ~~fee~~share ~~agreement contain customary~~exercise ~~indemnification~~price ~~provisions~~of inthe ~~favor~~stock ofoptions ~~Apollo~~ and ~~its~~the ~~affiliates,~~cash aspayment ~~well~~to asvested ~~expense~~stock ~~reimbursement~~option ~~provisions~~holders ~~with~~was, ~~respect~~on toa ~~expenses~~per ~~incurred~~share bybasis, ~~Apollo~~approximately ~~and~~equal ~~its~~to ~~affiliates~~the inper ~~connection~~share ~~with~~amount ~~its performance~~ of ~~services~~the ~~thereunder~~dividend.

12July 2007 Dividend—On July 10, 2007, Metals USA Holdings used the net proceeds from the issuance of the 2007 Notes, as well as approximately $8.3 ~~GUARANTOR/NON-GUARANTOR~~of ~~SUBSIDIARY~~additional ~~FINANCIAL~~borrowings ~~INFORMATION~~under the ABL facility, to redeem the 2006 Notes (for approximately $150.0 plus accrued and unpaid interest of approximately $5.4 ), to pay a cash dividend of approximately $130.3 to its stockholders, which include Apollo and certain members of management, to make a cash payment (partially in lieu of the cash dividend) of approximately $9.2 to its stock option holders (the cash payment and the cash dividend are referred to collectively as the “July 2007 Dividend”), which include certain members of our management, and to pay fees and expenses related to the offering of the 2007 Notes.

~~The following condensed consolidating financial information is for the parent company, Flag Intermediate, a holding company with no assets or operations and Metals USA, Inc~~10., ~~a management holding company which owns 100% of the guarantor and non~~Stock-~~guarantor~~Based ~~subsidiaries.~~Compensation

We have no stock-based compensation arrangements of our own, but our direct parent, Metals USA Holdings, has adopted a stock-based Amended and Restated 2005 Stock and Incentive Plan (“the Plan”) which permits the issuance of options and restricted stock awards on Metals USA Holdings’ stock to employees and directors of, or consultants to, the Company, except that consultants may only receive awards with the consent of the president of Metals USA. As a result of the options and restricted stock awards being issued to employees and directors of the Company, the Company is required to reflect the stock-based compensation expense related to these options and restricted stock awards within its consolidated statements of operations. A total of $0.1, $0.3, $0.8 and $4.5 were recorded as stock-based employee compensation during the three and nine months ended September 30, 2008 and 2007, respectively.

On January 3, 2007, the Board of Directors of Metals USA Holdings adopted the Metals USA Holdings Corp. 2006 Deferred Compensation Plan (the “Deferred Compensation Plan”). The Deferred Compensation Plan was adopted in connection with the January 2007 Dividend, and credits to individual accounts established for stock option holders an amount equal to $6.56 per share on certain unvested options, for a total of approximately $2.3. Payment of this liability is subject to continued employment for two years following the adoption date, and will be paid in one lump sum upon completion of such period. Expense of $1.4 related to the Deferred Compensation Plan will be recognized over a two-year vesting period beginning on the date of adoption of the Deferred Compensation Plan. A total of $0.2, $0.6, $0.2 and $0.5 were recorded as deferred compensation during the three and nine months ended September 30, 2008 and 2007, respectively.

	FlagIntermediateHoldings, Inc.		MetalsUSA, Inc.			GuarantorSubsidiaries		Non-GuarantorSubsidiaries			Adjustments &Eliminations			Consolidated
As of June 30, 2006
ASSETS
CURRENT ASSETS:
Cash	$	—	$	15.0		$	4.0	$	0.3		$	—		$	19.3
Accounts receivable		—		—			219.2		1.5			—			220.7
Inventories		—		—			391.8		1.1			—			392.9
Deferred tax asset		—		15.4			—		0.1			—			15.5
Prepaid expenses and other		—		10.1			3.5		—			—			13.6
Total current assets		—		40.5			618.5		3.0			—			662.0
Property and equipment, net		—		2.7			186.0		3.1			—			191.8
Goodwill, net		—		14.9			18.5		5.6			—			39.0
Investment in subsidiaries, net		124.1		227.4			—		—			(351.5	)		—
Other assets, net		—		34.9			0.4		—			—			35.3
Total assets	$	124.1	$	320.4		$	823.4	$	11.7		$	(351.5	)	$	928.1
	FlagIntermediateHoldings, Inc.		MetalsUSA, Inc.			GuarantorSubsidiaries		Non-GuarantorSubsidiaries			Adjustments &Eliminations			Consolidated
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	—	$	1.1		$	100.9	$	0.7		$	—		$	102.7
Accrued liabilities		—		21.7			22.8		0.3			—			44.8
Current portion of long-term debt		—		0.6			—		—			—			0.6
Total current liabilities		—		23.4			123.7		1.0			—			148.1
Long-term debt, less current portion		—		569.2			6.1		—			—			575.3
Deferred income tax liability		—		59.3			—		—			—			59.3
Intercompany payable (receivable)		—		(465.0	)		418.4		46.6			—			—
Other long-term liabilities		—		9.4			10.7		1.2			—			21.3
Total liabilities		—		196.3			558.9		48.8			—			804.0
Commitments and contingencies Stockholder’s equity:
Common stock, $.01 par value, 100 shares authorized, issued and outstanding at December 31, 2005		—		—			—		—			—			—
Additional paid-in capital		117.4		117.4			149.8		20.1			(287.3	)		117.4
Retained earnings		6.7		6.7			114.7		(57.2	)		(64.2	)		6.7
Total stockholder’s equity		124.1		124.1			264.5		(37.1	)		(351.5	)		124.1
Total liabilities and stockholder’s equity	$	124.1	$	320.4		$	823.4	$	11.7		$	(351.5	)	$	928.1

FLAG INTERMEDIATE HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in millions, except share amounts)

Description of Share Option Plan

The Plan has reserved for issuance up to 1.4 million shares of common stock. The Plan has two tranches of options, Tranche A and Tranche B. Tranche A options vest on a pro-rata basis over five years, have a term of ten years, and expire if not exercised. Tranche B options, which include both a service and a performance condition, vest on the eighth anniversary of the date of grant or earlier dependent on the satisfaction of an internal rate of return on capital invested, have a term of ten years from date of grant, and expire if not exercised. Awards are generally granted with an exercise price equal to the fair value of Metals USA Holdings’ stock at the date of grant. The fair value of the stock is a calculated value based on the date of each of the respective grants using a combination of discounted cash flows and financial metrics from companies with similar characteristics of Metals USA Holdings. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the Plan).

In connection with a $25.0 dividend paid to Metals USA Holdings in May 2006 (the “May 2006 Dividend”) and pursuant to the Plan’s provisions of rights preservation, the Board of Directors modified the outstanding options by reducing the per share exercise price by $1.78 in order to retain the participants’ rights proportionate with those prior to the dividend payment.

In connection with the January 2007 Dividend, the outstanding employee stock options under the Plan were adjusted a second time by an amount approximately equal to the per share amount of this dividend. The per share exercise price of the options granted on November 30, 2005, was decreased by $4.22 to $4.00 and the per share exercise price of the options granted on March 17, 2006, was reduced by $4.89 to $4.00.

Because the payment of the January 2007 Dividend resulted in the internal rate of return of the funds managed by Apollo with respect to its investment in Metals USA Holdings to be near 25%, the Board of Directors exercised its discretion under the Plan to vest all of the outstanding Tranche B options. In addition, the Board of Directors exercised its discretion to vest all Tranche A options granted to directors affiliated with Apollo. In connection with the accelerated vesting of these options, we recognized $1.8 of non-cash stock-based compensation expense, net of related tax effects, in the first quarter of 2007.

In connection with the July 2007 Dividend, stock option holders were paid approximately $9.25 per share on outstanding options (an amount equal to the per-share amount of the July 2007 Dividend), for a total of approximately $9.2. The cash payment to holders of outstanding options to acquire shares of Metals USA Holdings’ common stock was made to equitably adjust such option holders by the Metals USA Holdings Board of Directors pursuant to the exercise of its discretion to preserve the rights of options holders under the Plan. As a result of the cash payment on outstanding options, we were required to recognize $0.3 of non-cash stock-based compensation expense, net of related tax effects, in the third quarter of 2007.

Tranche A Options

The fair value of Tranche A option awards was estimated on the date of grant using a black-scholes option valuation model. No options have been granted since the first quarter of 2006. The following is a summary of valuation assumptions for Tranche A option grants outstanding as of September 30, 2008:


Expected dividend yield		0%
Expected stock price volatility		54.7%-54.9%
Risk free interest rate		4.0%-4.6%
Expected life of options (in years)		6.5-10.0

	FlagIntermediateHoldings, Inc.			MetalsUSA, Inc.			GuarantorSubsidiaries			Non-GuarantorSubsidiaries		Adjustments &Eliminations			Consolidated
For the Three Months Ended June 30, 2006
NET SALES	$	—		$	—		$	456.6		$	1.6	$	—		$	458.2
OPERATING COSTS AND EXPENSES:
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)		—			—			342.3			1.1		—			343.4
Operating and delivery		—			—			43.3			0.2		—			43.5
Selling, general and administrative		—			0.9			29.1			0.1		—			30.1
Depreciation and amortization		—			2.1			2.5			—		—			4.6
Operating income (loss)		—			(3.0	)		39.4			0.2		—			36.6
EQUITY IN EARNINGS OF SUBSIDIARIES		(13.9	)		(23.0	)		—			—		36.9			—
OTHER (INCOME) EXPENSE:
Interest expense		—			12.9			—			—		—			12.9
Intercompany charges		—			(16.7	)		16.7			—		—			—
Loss (gain) on securitized receivables		—			—			—			—		—			—
Other (income) expense, net		—			—			(0.1	)		—		—			(0.1	)
INCOME (LOSS) BEFORE INCOME TAXES		13.9			23.8			22.8			0.2		(36.9	)		23.8
Provision (benefit) for income taxes		—			9.9			—			—		—			9.9
NET INCOME (LOSS)	$	13.9		$	13.9		$	22.8		$	0.2	$	(36.9	)	$	13.9

FLAG INTERMEDIATE HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in millions, except share amounts)

The following is a summary of stock option activity for Tranche A options for the nine-month period ended September 30, 2008:


	Weighted Average Fair Value		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number of Options
Balance, December 31, 2007	$	6.58	$	4.00		595,630
Granted		—		—		—
Exercised		—		—		—
Canceled or expired		—		—		—

Balance, September 30, 2008	$	6.58	$	4.00	7.2	595,630

Vested and Exercisable as of:
September 30, 2008			$	4.00	7.2	334,254

A summary of nonvested Tranche A stock options for the nine-month period ended September 30, 2008, is presented below:


	Weighted Average Grant-Date Fair Value		Number of Options
Nonvested at December 31, 2007	$	6.58	265,455
Granted		—	—
Vested		6.58	(4,079	)
Exercised		—	—
Canceled or expired		—	—

Nonvested at September 30, 2008	$	6.58	261,376

As of September 30, 2008, there was $1.0 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Tranche A options, which will be amortized over a remaining period of 2.2 years.

Tranche B Options

The fair value of the Tranche B options was also estimated on the date of grant using the same option valuation model used for the Tranche A options. No options have been granted since the first quarter of 2006. The following is a summary of valuation assumptions for Tranche B option grants outstanding as of September 30, 2008:


Expected dividend yield		0%
Expected stock price volatility		54.3%-54.7%
Risk free interest rate		4.0%-5.0%
Expected life of options (in years)		8.0-10.0

	FlagIntermediateHoldings, Inc.			MetalsUSA, Inc.			GuarantorSubsidiaries			Non-GuarantorSubsidiaries		Adjustments &Eliminations			Consolidated
For the Six Months Ended June 30, 2006
NET SALES	$	—		$	—		$	886.2		$	1.6	$	—		$	887.8
OPERATING COSTS AND EXPENSES:
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)		—			—			683.3			1.1		—			684.4
Operating and delivery		—			—			85.0			0.2		—			85.2
Selling, general and administrative		—			1.7			55.5			0.1		—			57.3
Depreciation and amortization		—			4.1			4.7			—		—			8.8
Operating income (loss)		—			(5.8	)		57.7			0.2		—			52.1
EQUITY IN EARNINGS OF SUBSIDIARIES		(16.0	)		(26.4	)		—			—		42.4			—
OTHER (INCOME) EXPENSE:
Interest expense		—			24.8			0.1			—		—			24.9
Intercompany charges		—			(31.6	)		31.6			—		—			—
Loss (gain) on securitized receivables		—			—			—			—		—			—
Other (income) expense, net		—			—			(0.2	)		—		—			(0.2	)
INCOME (LOSS) BEFORE INCOME TAXES		16.0			27.4			26.2			0.2		(42.4	)		27.4
Provision (benefit) for income taxes		—			11.4			—			—		—			11.4
NET INCOME (LOSS)	$	16.0		$	16.0		$	26.2		$	0.2	$	(42.4	)	$	16.0

FLAG INTERMEDIATE HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in millions, except share amounts)

The following is a summary of stock option activity for Tranche B options for the nine-month period ended September 30, 2008:


	Weighted Average Fair Value		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number of Options
Balance, December 31, 2007	$	6.92	$	4.00		395,631
Granted		—		—		—
Exercised		—		—		—
Canceled or expired		—		—		—

Balance, September 30, 2008	$	6.92	$	4.00	7.2	395,631

Vested and Exercisable as of:
September 30, 2008			$	4.00	7.2	395,631

All Tranche B stock options outstanding as of September 30, 2008 are fully vested and exercisable.

Restricted Stock

The Plan allows for grants of restricted stock as long-term compensation for directors and employees of, or consultants to, the Company or any of its subsidiaries. Grants of restricted stock have a vesting period that is determined at the discretion of the Board of Directors. The Company amortizes stock-based compensation expense associated with restricted stock ratably over the vesting period. For the nine-month period ending September 30, 2008, there were no shares of nonvested restricted stock outstanding.

11. Income Taxes

As of September 30, 2008, our unrecognized tax benefits totaled $9.3, and based on the contingent and uncertain nature of our liability, we are unable to make an estimate of the period of potential cash settlement, if any, with respective taxing authorities. The total amount of unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate is $2.9 for the nine months ended September 30, 2008.

We file numerous consolidated and separate income tax returns in the United States and various foreign jurisdictions. We are no longer subject to U.S. Federal income tax examinations for years before 2002 and are no longer subject to state and local, or foreign income tax examinations for years before 2000.

We account for any applicable interest and penalties on uncertain tax positions as a component of income tax expense. As of September 30, 2008, the liability for uncertain income taxes includes interest and penalties of $2.5, of which $1.1 and $1.6 is included in our statement of operations and impacted the Company’s effective income tax rate for the three and nine months ended September 30, 2008.

We expect total unrecognized tax benefits to decrease by $1.0 to $1.5 over the next twelve months due to the expiration of the statute of limitation for a filing position.

	FlagIntermediateHoldings, Inc.			MetalsUSA, Inc.			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			Adjustments &Eliminations			Consolidated
For the Six Months Ended June 30, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	16.0		$	16.0		$	26.2		$	0.2		$	(42.4	)	$	16.0
Adjustments for non-cash and non-operating items—
(Gain) loss on sale of property and equipment		—			—			—			—			—			—
Equity in earnings of subsidiaries		(16.0	)		(26.4	)		—			—			42.4			—
Provision for bad debts, net of recoveries		—			—			2.8			—			—			2.8
Adjustment to Predecessor Company tax attribute valuation allowance		—			—			—			—			—			—
Depreciation and amortization		—			4.1			5.1			—			—			9.2
Amortization of deferred financing costs		—			1.2			—			—			—			1.2
Deferred income taxes		—			(8.1	)		—			—			—			(8.1	)
Non-cash stock-based compensation		—			1.1			—			—			—			1.1
Changes in operating assets and liabilities, net of effects of Merger—
Accounts receivable		—			—			(42.5	)		(0.2	)		—			(42.7	)
Inventories		—			—			(36.5	)		0.1			—			(36.4	)
Prepaid expenses and other		—			9.1			2.7			—			—			11.8
Accounts payable and accrued liabilities		—			5.8			21.6			0.2			—			27.6
Income taxes payable		—			2.3			—			—			—			2.3
Other operating, net		—			—			(0.7	)		—			—			(0.7	)
Net cash provided by (used in) operating activities		—			5.1			(21.3	)		0.3			—			(15.9	)

FLAG INTERMEDIATE HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in millions, except share amounts)

12. Segment and Related Information

The following tables show summarized financial information for our reportable segments. The amounts shown as an operating loss under the column heading “Corporate and Other” consist primarily of general and administrative costs that are not allocated to the segments. Goodwill and customer list intangible assets resulting from the Merger are assigned to reporting units solely for testing for impairment. The reconciliation of operating income to net income before income taxes is shown within the Consolidated Statements of Operations and therefore is not separately presented.


	Three Months Ended September 30
	Plates and Shapes		Flat Rolled and Non-Ferrous		Building Products			Corporate and Other			Total
2008:
Net sales	$	339.9	$	244.5	$	37.8		$	(4.5	)	$	617.7
Operating income (loss)		62.4		28.0		1.8			(7.2	)		85.0
Capital expenditures		2.7		0.9		—			0.4			4.0
Depreciation and amortization(1)		2.3		1.7		0.7			1.1			5.8
2007:
Net sales	$	225.3	$	205.6	$	41.7		$	(3.0	)	$	469.6
Operating income (loss)		23.2		12.5		1.1			(7.5	)		29.3
Capital expenditures		3.3		1.2		0.4			0.1			5.0
Depreciation and amortization(1)		2.1		1.1		0.5			1.9			5.6

	Nine Months Ended September 30
	Plates and Shapes		Flat Rolled and Non-Ferrous		Building Products			Corporate and Other			Total
2008:
Net sales	$	915.1	$	695.0	$	100.3		$	(10.6	)	$	1,699.8
Operating income (loss)		155.0		72.1		(6.4	)		(21.1	)		199.6
Capital expenditures		6.0		1.8		0.6			0.5			8.9
Depreciation and amortization(1)		6.9		5.4		2.5			3.4			18.2
2007:
Net sales	$	672.7	$	630.1	$	121.0		$	(10.7	)	$	1,413.1
Operating income (loss)		73.7		42.9		2.4			(24.8	)		94.2
Capital expenditures		11.6		2.6		1.4			0.4			16.0
Depreciation and amortization(1)		6.6		2.9		1.6			5.5			16.6

(1)	Includes depreciation expense reflected in cost of goods sold for the Building Products Group.

	FlagIntermediateHoldings, Inc.			MetalsUSA, Inc.			GuarantorSubsidiaries			Non-GuarantorSubsidiaries		Adjustments &Eliminations			Consolidated
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of assets		—			—			(7.0	)		—		—			(7.0	)
Acquisition costs, net of cash acquired								(45.5	)							(45.5	)
Dividends received		25.0			—			—			—		(25.0	)		—
Net cash provided by (used in) investing activities		25.0			—			(52.5	)		—		(25.0	)		(52.5	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on the ABL		—			102.6			—			—		—			102.6
(Repayments) on long-term debt		—			—			(0.2	)		—		—			(0.2	)
Issuance of common stock		—			—			—			—		—			—
Deferred financing costs and other		—			(1.0	)		—			—		—			(1.0	)
Dividends paid		(25.0	)		(25.0	)		—			—		25.0			(25.0	)
Net change in intercompany balances		—			(72.4	)		72.4			—		—			—
Net cash provided by (used) in financing activities		(25.0	)		4.2			72.2			—		25.0			76.4
NET INCREASE (DECREASE) IN CASH		—			9.3			(1.6	)		0.3		—			8.0
Cash, beginning of period		—			5.7			5.6			—		—			11.3
CASH, END OF PERIOD	$	—		$	15.0		$	4.0		$	0.3	$	—		$	19.3

FLAG INTERMEDIATE HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in millions, except share amounts)


	September 30, 2008		December 31, 2007
Total Assets:
Plates and Shapes	$	617.6	$	449.1
Flat Rolled and Non-Ferrous		397.9		330.3
Building Products		73.6		80.7
Corporate and Other		242.4		91.0

Consolidated	$	1,331.5	$	951.1

Goodwill:
Plates and Shapes	$	15.9	$	16.4
Flat Rolled and Non-Ferrous		20.3		20.9
Building Products		2.3		2.4
Corporate and Other		19.4		20.5

Consolidated	$	57.9	$	60.2

Changes in goodwill for the nine months ended September 30, 2008 are primarily due to the recognition of tax benefits.

We have implemented certain initiatives within our Building Products segment in response to the downturn in the housing and residential remodeling markets, including reductions in square footage under lease, standardization of sales center layouts, and manufacturing consolidation. During the first nine months of 2008, we closed five sales centers (Memphis, Tennessee, Overland, Missouri, Holly Hill, Florida, Harrisburg, Pennsylvania and Corona, California), in addition to our Houston, Texas manufacturing facility. In July 2008, we sold our Houston, Texas manufacturing facility for $4.9 in cash. We recognized a gain of $0.7 in the third quarter of 2008 related to this sale. Total facility closure costs charged to operating expense during the nine months ended September 30, 2008, net of the gain on the sale of the Houston plant, amounted to $4.0. We continue to evaluate various alternative strategies for our building products business.

Assets classified as held for sale as of September 30, 2008 are associated with two facilities within our metals service center business that were closed during the first quarter of 2007. We continue to serve the marketing areas of the closed facilities with our existing sales force by expanding the responsible territories of other facilities, and through the use of common carrier for product delivery.

13. Commitments and Contingencies

Letters of Credit

Letters of credit outstanding at September 30, 2008 consist of a letter of credit in the amount of $5.8 in conjunction with the IRB (see Note 8) and other letters of credit aggregating $9.4 (total letters of credit of $15.2 at September 30, 2008). Other letters of credit consist primarily of collateral support for our property and casualty insurance program. All letters of credit reduce the amount available to borrow under the ABL Facility.

Dividends Relating to 2007 Notes

See Note 8 for a discussion of the extent to which Metals USA Holdings is dependent on Flag Intermediate’s cash flows to service its debt.

~~ITEM~~FLAG 2.INTERMEDIATE ~~MANAGEMENT’S~~HOLDINGS ~~DISCUSSION~~CORPORATION AND ~~ANALYSIS~~SUBSIDIARIES ~~OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~This~~NOTES ~~section contains~~TO ~~statements~~UNAUDITED ~~that~~CONDENSED ~~constitute~~CONSOLIDATED ~~“forward-looking~~FINANCIAL ~~statements”~~STATEMENTS—(Continued) within the meaning of the Private Securities Litigation Reform Act of 1995. See disclosure presented on the inside of the front cover of this report for cautionary information with respect to such forward-looking statements. Readers should refer to “Risk Factors” included in the Form S-4 Registration Statement, as amended on August 2, 2006 and initially filed on March 31, 2006 for risk factors that may affect future performance.

~~Overview~~(in millions, except share amounts)

WeContingencies are a leading provider of value-added processed steel, aluminum and specialty metals and manufactured metal components. Approximately 86% of our operating income (excluding Corporate) is derived from our metals service center and distribution activities that are segmented into two groups, Plates and Shapes and Flat Rolled. The remaining 14% of our operating income (excluding Corporate) is derived from our Building Products Group that manufactures and distributes products primarily related to the residential remodeling industry. We purchase metal from primary producers that generally focus on large volume sales of unprocessed metals in standard configurations and sizes. In most cases, we perform the customized, value-added processing services required to meet the specifications provided by end-use customers. Our Plates and Shapes Group and Flat Rolled Group customers are in the machining, furniture, transportation equipment, power and process equipment, industrial/commercial construction/fabrication, consumer durables and electrical equipment businesses, as well as machinery and equipment manufacturers. Our Building Products Group customers are distributors and contractors engaged in the residential remodeling industry.

~~Matters~~From ~~Impacting~~time ~~Comparability~~to time, we are involved in a variety of ~~Results~~claims, lawsuits and other disputes arising in the ordinary course of business. We believe the resolution of these matters and the incurrence of their related costs and expenses should not have a material adverse effect on our consolidated financial position, results of operations, cash flows or liquidity.

~~The Merger with Flag Acquisition~~14. OnRelated ~~November 30,~~Party ~~2005,~~Transactions Flag Acquisition, a wholly-owned subsidiary of Flag Intermediate, merged with and into Metals USA, Inc., with Metals USA, Inc. being the surviving corporation. The Merger was consummated pursuant to an agreement and plan of merger by and among Metals USA, Inc., Metals USA Holdings and Flag Acquisition. As a result of the Merger, all of our issued and outstanding capital stock is held indirectly by Metals USA Holdings through Flag Intermediate, its wholly owned subsidiary. Flag Intermediate has no assets other than its investment in us, conducts no operations and is a guarantor of both our ABL facility and our Notes. Immediately prior to the closing date of the Merger, all outstanding shares of common stock were cancelled in exchange for a cash payment of $22.00 per share of common stock. Investment funds associated with Apollo own approximately 97% of the capital stock of Metals USA Holdings (or approximately 90% on a fully-diluted basis). The remainder of the capital stock of Metals USA Holdings is held by members of our management.

~~Although~~Upon completion of the Merger, ~~has~~Metals ~~not~~USA ~~affected~~Holdings ~~our~~entered ~~operations,~~into ita ~~has~~management ~~significantly~~agreement ~~affected~~with Apollo ~~our results~~under ofwhich ~~operations~~Apollo asor ~~reported~~its inaffiliates ~~our~~provide ~~financial~~us ~~statements.~~with Asmanagement aservices. ~~result~~Pursuant ofto the ~~Merger~~ agreement, ~~the~~Apollo ~~fair~~receives ~~value~~an annual management fee equal to $2.0, payable on March 15 of ~~inventories~~every year, ~~property~~starting ~~and~~on ~~equipment~~March 15, ~~and~~2006. ~~intangibles~~The ~~(customer~~management ~~lists)~~agreement ~~were~~will ~~increased~~terminate byon ~~$14.9~~December 31, ~~million~~2012, ~~$118~~unless terminated earlier by Apollo.6 ~~million~~Apollo ~~and~~elected to waive $220.25 ~~million~~of the annual management fee indefinitely, ~~respectively~~but reserved the right to revoke this waiver. The ~~fair~~payment ~~value~~obligation ofhas ~~deferred~~been ~~taxes~~recorded ~~and~~as ~~long-term~~a ~~liabilities~~current ~~were~~liability ~~increased~~(see byNote 7) at the present value of minimum future annual payments of $641.85. ~~million~~A ~~and~~discount $3rate of 6.1% ~~million~~was used in the determination of present value, ~~respectively.~~which ~~Our~~approximated ~~intangible~~our ~~assets~~incremental ~~(customer~~borrowing ~~lists)~~rate ~~will~~at bethe ~~amortized~~inception ~~over~~of ~~five~~the ~~years~~agreement. ~~using~~Deferred anmanagement ~~accelerated~~fees ~~amortization method~~of ~~which~~$8.6 ~~approximates~~were ~~their~~recorded ~~useful~~as ~~life~~a current asset, and ~~value~~are tobeing ~~us.~~amortized ~~Total~~on ~~acquisition~~a ~~costs~~straight-line ~~were~~basis ~~allocated~~over tothe term of the ~~acquired~~agreement. For ~~assets~~the three and ~~assumed~~nine ~~liabilities~~month ~~based~~periods ~~upon~~ended ~~estimates~~September 30, 2008 and 2007, amortization of ~~their~~deferred ~~respective~~management ~~fair~~fees ~~values~~was as$0.3, of$0.9, ~~the~~$0.3 ~~closing~~and ~~date~~$0.9, ofrespectively, ~~the~~with ~~Merger~~$0.1, ~~using valuation~~$0.3, $0.1 and ~~other~~$0.3 ~~studies~~recorded as interest expense and $0.2, $0.6, $0.2 and $0.6 recorded as administrative expense, respectively, during the periods.

The management agreement also provides that affiliates of Apollo will be entitled to receive a fee in connection with certain subsequent financing, acquisition, disposition and change of control transactions with a value of $25.0 or more, with such fee to be equal to 1% of the gross transaction value of any such transaction. In connection with the issuance of the 2006 Notes, Apollo was paid a fee of $1.5. Apollo elected to waive transaction fees of $3.0 payable in connection with the issuance of the 2007 Notes and $1.0 payable in connection with the exercise of the option to increase the Tranche A Commitments under the ABL facility in July 2008.

Upon a termination of the management agreement prior to December 31, 2012, Apollo will be entitled to receive the present value of (a) $14.0, less (b) the aggregate amount of management fees that were paid to it under the agreement prior to such termination, and less (c) management fees waived. Both the management agreement and transaction fee agreement contain customary indemnification provisions in favor of Apollo and its affiliates, as well as expense reimbursement provisions with respect to expenses incurred by Apollo and its affiliates in connection with its performance of services thereunder.

AsFLAG aINTERMEDIATE ~~result~~HOLDINGS ofCORPORATION ~~the~~AND ~~items~~SUBSIDIARIES ~~discussed below, operating income is not comparable for the periods listed below. Operating income includes charges which affect comparability between periods as follows:~~

	Three Months EndedJune 30,				Six Months EndedJune 30,
	2006		2005		2006		2005
	SuccessorCompany		PredecessorCompany		SuccessorCompany		PredecessorCompany
	(in millions)
Charges Included in Operating Income:
Inventory purchase adjustments (1)	$	—	$	—	$	10.8	$	—
Stock options and grant expense (2)		0.3		—		0.6		—
Additional depreciation as a result of increasing property and equipment to fair value (3)		1.2		—		2.4		—
Amortization of customer lists (4)		2.0		—		4.0		—
Management fees (5)		0.3		—		0.6		—

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(1)in ~~As a result of management’s analysis and evaluation of the replacement cost of inventory as of the closing of the Merger~~millions, aexcept ~~purchase~~share ~~adjustment~~amounts) of $14.9 million was recorded as of December 1, 2005. A total of $4.1 million of that amount was charged to cost of sales in December 2005 and $10.8 million charged to cost of sales in the first quarter of 2006.

~~(2) FAS 123 (R) was adopted in January 2005 by Metals USA Holdings Corp~~15., ~~the~~Comprehensive ~~parent~~Income ~~of Flag Intermediate. These amounts represent the stock options and grant expense pushed down from Metals USA Holdings Corp in 2006.~~

~~(3)~~The Asfollowing atable ~~result~~sets offorth ~~purchase~~comprehensive ~~accounting~~income, ~~and~~net ~~revaluing~~of ~~our~~applicable ~~long-lived~~taxes, ~~assets~~for bythe ~~$118.6~~three ~~million,~~and ~~depreciation~~nine onmonths aended ~~quarterly~~September 30, ~~basis~~2008 ~~was~~and ~~increased by $1~~2007.2 ~~million.~~

(4) As a result of purchase accounting and recording our customer lists at a fair value of $22.2 million, amortization on a quarterly basis was increased by $2.0 million.


	Three Months Ended September 30,					Nine Months Ended September 30,
	2008			2007		2008			2007
Net income	$	41.0		$	7.7	$	95.0		$	29.0
Other comprehensive income:
Foreign currency translation adjustments		(0.3	)		0.3		(0.4	)		1.1
Unrealized gains (losses) on derivatives		(0.9	)		—		3.2			—
Unrealized gains (losses) on investment securities		(0.1	)		—		(0.2	)		—

Total comprehensive income	$	39.7		$	8.0	$	97.6		$	30.1

(5) Includes accrued expenses related to the management agreement with Apollo.

Recent Acquisitions. On May 17, 2006, Metals USA, Inc. purchased all of the assets and business operations of Port City, located in Tulsa, Oklahoma, for approximately $41.3 million, which includes a $5.0 million contingent payout that may be made in 2009 or earlier, subject to certain performance criteria. Founded in 1977, Port City is a value-added processor of steel plate. Port City has experienced very strong sales growth over the past few years with sales in excess of $47 million in 2005. Port City uses cutting-edge technologies in laser, plasma and oxyfuel burning, braking and rolling, drilling and machining, and welding to service its customers. Port City’s range and depth of processing capabilities are highly complementary to the capital investments we have already made in the Plates and Shapes Group and we believe positions us to be the pre-eminent plate processor in the southern United States. Port City operates out of a 486,000 square foot facility and has over 110 full-time employees. Port City’s customers are predominately manufacturers of cranes and other heavy equipment, heat exchangers, and equipment specifically focused on the oil and gas industry. Port City has traditionally purchased metal from service centers and we believe we will gain immediate benefits by consolidating its metal needs into our overall purchasing process. We also expect to realize immediate benefits by selling Port City’s high-value-added products through our sales force and to our existing customer base. We believe Port City is an important addition to the south-central region of our Plates and Shapes Group.

OnFLAG ~~May 12,~~INTERMEDIATE ~~2006,~~HOLDINGS ~~Metals~~CORPORATION ~~USA,~~AND ~~Inc.~~SUBSIDIARIES purchased all of the assets and operations of Dura-Loc with one manufacturing facility located near Toronto, Ontario, Canada and a sales and distribution facility located in California for approximately $10.4 million Canadian dollars (or approximately U.S. $9.4 million). Dura-Loc was established in 1984 and, is one of the leading stone-coated metal roof manufacturers in North America. Dura-Loc is also the only manufacturer of such product located in the eastern half of North America, a market not yet fully developed for the high-end, stone-coated metal products we produce. Dura-Loc had sales of only $12.8 million Canadian dollars (or approximately U.S.$11.3 million) during calendar year 2005 utilizing only one product crew. We believe this acquisition gives us significant additional capacity located in a potentially high growth market. We have also determined that by transforming Dura-Loc’s production processes to our methodologies we can reduce Dura-Loc’s cost of production, further improving the benefits of the purchase. We believe the addition of Dura-Loc to our stone-coated metal roofing division, Gerard Roofing Technology, provides us with a more economic and efficient way to gain access to an expanded product mix and leverage the combined sales force and research and development personnel, thereby solidifying our position as one of the largest stone-coated metal roofing manufacturers in North America.

~~Overview of~~NOTES ~~Results~~TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~Net~~(in ~~sales. We derive the net sales of our Plates and Shapes and Flat Rolled Groups from the processing and sale of metal products to end-users including metal fabrication companies~~millions, ~~general~~except ~~contractors~~share ~~and~~amounts) OEMs. Pricing is generally based upon the underlying metal cost as well as a margin associated with customized value-added services as specified by the customer. The net sales of our Building Products Group are derived from the sales of finished goods to local distributors and general contractors who are generally engaged in the residential remodeling industry.

~~Cost of sales~~16. Our Plates and Shapes and Flat Rolled Groups follow the normal industry practice which classifies, within cost of sales, the underlying commodity cost of metal purchased in mill form and the cost of inbound freight charges together with thirdGuarantor/Non-~~party~~Guarantor ~~processing~~Subsidiary ~~cost,~~Financial ifInformation any. Generally, the cost of metal approximates 75% of net sales for the Plates and Shapes and Flat Rolled Groups. Cost of sales with respect to our Building Products Group includes the cost of raw materials, manufacturing labor and overhead costs, together with depreciation and amortization expense associated with property, buildings and equipment used in the manufacturing process. Amounts included within this caption may not be comparable to similarly titled captions reported by other companies.

~~Operating~~The ~~and~~following ~~delivery~~condensed ~~expense.~~consolidating ~~Our~~financial ~~operating~~information ~~and~~is ~~delivery expense reflects the cost incurred by our Plates and Shapes and Flat Rolled Groups~~ for ~~labor and facility costs associated with~~ the ~~value-added~~parent ~~metal~~company, ~~processing~~Flag ~~services that we provide. With respect to our Building Products Group~~Intermediate, ~~operating~~a ~~costs~~holding ~~are~~company ~~associated~~ with ~~the~~no ~~labor~~assets ~~and~~or ~~facility costs attributable to the distribution~~ operations and ~~warehousing~~Metals ~~of our finished goods at our service center facilities. Delivery expense reflects labor~~USA, ~~material~~a ~~handling~~management ~~and~~holding ~~other~~company ~~third~~which ~~party~~owns ~~costs~~100% ~~incurred~~of ~~with~~ the ~~delivery~~guarantor ofand ~~product~~non-guarantor ~~to customers~~subsidiaries. ~~Amounts included within this caption may not be comparable to similarly titled captions reported by other companies.~~

Selling, general and administrative expenses. Selling, general and administrative expenses include sales and marketing expenses, executive officers’ compensation, office and administrative salaries, insurance, accounting, legal, computer systems, and professional services and costs not directly associated with the processing, manufacturing, operating or delivery costs of our products. Amounts included within this caption may not be comparable to similarly titled captions reported by other companies.


As of September 30, 2008	Flag Intermediate Holdings Corporation		Metals USA, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Adjustments & Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—	$	172.3		$	0.5		$	0.2		$	—		$	173.0
Accounts receivable		—		—			275.8			2.0			—			277.8
Inventories		—		—			561.7			0.8			—			562.5
Deferred tax asset		—		22.0			—			—			—			22.0
Prepayments and other		—		1.0			6.2			0.1			—			7.3

Total current assets		—		195.3			844.2			3.1			—			1,042.6
Property and equipment, net		—		2.0			185.4			2.7			—			190.1
Assets held for sale, net		—		—			1.8			—			—			1.8
Intangible assets, net		—		3.2			11.9			1.2			—			16.3
Goodwill		—		19.4			36.2			2.3			—			57.9
Investment in subsidiaries, net		257.8		948.7			—			—			(1,206.5	)		—
Other assets, net		—		22.1			0.7			—			—			22.8

Total assets	$	257.8	$	1,190.7		$	1,080.2		$	9.3		$	(1,206.5	)	$	1,331.5

Liabilities and Stockholder’s Equity
Current liabilities:
Accounts payable	$	—	$	0.7		$	83.7		$	0.4		$	—		$	84.8
Accrued liabilities		—		50.7			24.6			0.3			—			75.6
Current portion of long-term debt		—		—			1.6			—			—			1.6

Total current liabilities		—		51.4			109.9			0.7			—			162.0
Long-term debt, less current portion		—		817.0			6.0			—			—			823.0
Deferred income tax liability		—		64.5			—			—			—			64.5
Intercompany payable (receivable)		—		(15.2	)		(30.0	)		45.2			—			—
Other long-term liabilities		—		15.2			8.8			0.2			—			24.2

Total liabilities		—		932.9			94.7			46.1			—			1,073.7

Commitments and contingencies
Stockholder’s equity:
Common stock, $.01 par value, 100 shares authorized, issued and outstanding at September 30, 2008		—		—			—			—			—			—
Additional paid-in capital		126.8		126.8			705.8			23.1			(855.7	)		126.8
Retained earnings		127.7		127.7			279.7			(60.3	)		(347.1	)		127.7
Accumulated other comprehensive income (loss)		3.3		3.3			—			0.4			(3.7	)		3.3

Total stockholder’s equity		257.8		257.8			985.5			(36.8	)		(1,206.5	)		257.8

Total liabilities and stockholder’s equity	$	257.8	$	1,190.7		$	1,080.2		$	9.3		$	(1,206.5	)	$	1,331.5

Depreciation and amortization. Depreciation and amortization expense represents the costs associated with property, buildings and equipment used throughout the company except for depreciation and amortization expense associated with the manufacturing assets employed by our Building Products Group, which is included within cost of sales.

~~Inventories.~~FLAG ~~Our~~INTERMEDIATE ~~inventories~~HOLDINGS ~~are~~CORPORATION ~~stated~~AND atSUBSIDIARIES the lower of cost or market and accounted for using a variety of methods including specific identification, average cost and the first-in first-out method of accounting. Rising steel prices result in inventory holding gains, as demonstrated in 2004, and declining prices result in inventory holding losses. Investors are cautioned that our historical inventory gain and loss experience is not necessarily a reliable indicator of our future inventory gains and losses.

~~Critical~~NOTES ~~Accounting~~TO ~~Policies~~UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~We believe that the estimates, assumptions and judgments involved~~ (in ~~the~~ ~~accounting policies described below have the greatest potential impact on our financial statements~~millions, soexcept weshare consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we used in applying critical accounting policies. Within the context of these critical accounting policies, we are not currently aware of any reasonably likely event that would result in materially different amounts) ~~being reported.~~

Accounts Receivable. We recognize revenue as product is shipped (risk of loss for our products passes at time of shipment), net of provisions for estimated returns. Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of trade accounts and notes receivable. Collections on our accounts receivable are made through several lockboxes maintained by our lenders. The ABL facility requires a lockbox arrangement, which in the absence of default, is controlled by Metals USA. Credit risk associated with concentration of cash deposits is low as we have the right of offset with our lenders for the substantial portion of our cash balances. Concentrations of credit risk with respect to trade accounts receivable are within several industries. Generally, credit is extended once appropriate credit history and references have been obtained. We perform ongoing credit evaluations of customers and set credit limits based upon reviews of customers’ current credit information and payment history. We monitor customer payments and maintain a provision for estimated credit losses based on historical experience and specific customer collection issues that we have identified. Provisions to the allowance for doubtful accounts are made monthly and adjustments are made periodically based upon our expected ability to collect all such accounts. Generally we do not require collateral for the extension of credit.


As of December 31, 2007	Flag Intermediate Holdings Corporation		Metals USA, Inc.		Guarantor Subsidiaries			Non-Guarantor			Adjustments & Eliminations			Consolidated
Assets
Current assets:
Cash	$	—	$	10.7	$	2.7		$	0.2		$	—		$	13.6
Accounts receivable		0.1		6.9		185.2			1.1			—			193.3
Inventories		—		—		408.5			1.3			—			409.8
Deferred tax asset		—		19.7		—			—			—			19.7
Prepayments and other		—		4.5		2.8			0.1			—			7.4

Total current assets		0.1		41.8		599.2			2.7			—			643.8
Property and equipment, net		—		2.1		197.2			2.8			—			202.1
Intangible assets, net		—		6.0		15.5			1.8			—			23.3
Goodwill		—		20.5		37.3			2.4			—			60.2
Investment in subsidiaries, net		167.6		802.3		—			—			(969.9	)		—
Other assets, net		—		21.6		0.1			—			—			21.7

Total assets	$	167.7	$	894.3	$	849.3		$	9.7		$	(969.9	)	$	951.1

Liabilities and Stockholder’s Equity
Current liabilities:
Accounts payable	$	—	$	1.2	$	73.9		$	0.2		$	—		$	75.3
Accrued liabilities		0.1		28.9		25.1			0.2			—			54.3
Current portion of long-term debt		—		—		2.3			—			—			2.3

Total current liabilities		0.1		30.1		101.3			0.4			—			131.9
Long-term debt, less current portion		—		555.5		7.6			—			—			563.1
Deferred income tax liability		—		67.4		—			—			—			67.4
Intercompany payable (receivable)		—		61.3		(105.3	)		44.0			—			—
Other long-term liabilities		—		12.4		8.6			0.1			—			21.1

Total liabilities		0.1		726.7		12.2			44.5			—			783.5

Commitments and contingencies
Stockholder’s equity:
Common stock, $.01 par value, 100 shares authorized, issued and outstanding at December 31, 2007		—		—		—			—			—			—
Additional paid-in capital		121.3		121.3		705.7			23.1			(850.1	)		121.3
Retained earnings		45.6		45.6		131.4			(59.0	)		(118.0	)		45.6
Accumulated other comprehensive loss		0.7		0.7		—			1.1			(1.8	)		0.7

Total stockholder’s equity		167.6		167.6		837.1			(34.8	)		(969.9	)		167.6

Total liabilities and stockholder’s equity	$	167.7	$	894.3	$	849.3		$	9.7		$	(969.9	)	$	951.1

Each quarter we consider all available information when assessing the adequacy of the provision for allowances, claims and doubtful accounts. Adjustments made with respect to the allowance for doubtful accounts often relate to improved information not previously available. Uncertainties with respect to the allowance for doubtful accounts are inherent in the preparation of financial statements. The rate of future credit losses may not be similar to past experience.

Inventories. Inventories are stated at the lower of cost or market. Our inventories are accounted for using a variety of methods including specific identification, average cost and the first-in first-out, or “FIFO,” method of accounting. We regularly review inventory on hand and record provisions for damaged and slow-moving inventory based on historical and current sales trends. Changes in product demand and our customer base may affect the value of inventory on hand which may require higher provisions for damaged and slow-moving inventory.

Adjustments made with respect to the inventory valuation allowance often relate to improved information not previously available. Uncertainties with respect to the inventory valuation allowance are inherent in the preparation of financial statements. The rate of future losses associated with damaged or slow moving inventory may not be similar to past experience.

~~Results~~FLAG ofINTERMEDIATE ~~Operations~~HOLDINGS CORPORATION AND SUBSIDIARIES

~~The~~NOTES ~~following~~TO ~~unaudited~~UNAUDITED ~~consolidated~~CONDENSED ~~financial~~CONSOLIDATED ~~information~~FINANCIAL ~~reflects~~STATEMENTS—(Continued) ~~our historical financial statements.~~

~~Consolidated~~(in ~~Results — Three Months Ended June 30~~millions, ~~2006~~except ~~Compared~~share toamounts) ~~June 30, 2005~~

	2006			%			2005			%
For the Three Months Ended September 30, 2008	FlagIntermediateHoldingsCorporation			MetalsUSA, Inc.				GuarantorSubsidiaries				Non-GuarantorSubsidiaries			Adjustments&Eliminations			Consolidated
	(In millions, except percentages)
Net sales	$	—		$	—			$	615.7			$	2.0		$	—		$	617.7
Net sales	$	458.2		100.0	%		$	426.8		100.0	%
Operating costs and expenses:
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)		~~343.4~~—		~~74.9~~	%—			~~336.6~~	444.9	~~78.9~~	%		1.5			—			446.4
Operating and delivery		~~43.5~~—		~~9.5~~	%0.1			~~37.9~~	48.3	~~8.9~~	%		0.2			—			48.6
Selling, general and administrative		~~30.1~~—		~~6.6~~	%1.0			~~24.7~~	32.2	~~5.8~~	%		0.1			—			33.3
Depreciation and amortization		~~4.6~~—		~~1.0~~	%1.1			~~0.9~~	4.1	~~0.2~~	%		0.1			—			5.3
Operating income		36.6		8.0	%			26.7		6.3	%
(Gain) loss on sale of property and equipment		—			—				(0.9	)			—			—			(0.9	)
Interest expense		12.9		2.8	%			3.2		0.7	%
Operating income (loss)		—			(2.2	)			87.1				0.1			—			85.0
Other (income) expense, net		(0.1	)	—				—		—
Other (income) expense:
Income before income taxes	$	23.8		5.2	%		$	23.5		5.5	%
Interest expense		—			12.7				0.1				—			—			12.8
Intercompany charges		—			(21.3	)			21.0				0.3			—			—
Equity in earnings of subsidiaries		(41.0	)		(65.6	)			—				—			106.6			—
Other (income) expense, net		—			—				0.2				—			—			0.2
Income (loss) before income taxes		41.0			72.0				65.8				(0.2	)		(106.6	)		72.0
Provision for income taxes		—			31.0				—				—			—			31.0
Net income (loss)	$	41.0		$	41.0			$	65.8			$	(0.2	)	$	(106.6	)	$	41.0

Net sales. Net sales increased $31.4 million, or 7.4%, from $426.8 million for the three months ended June 30, 2005 to $458.2 million for the three months ended June 30, 2006. The 2006 Acquisitions accounted for $11.7 million of the increase. The remaining increase of $19.7 million was primarily attributable to a 1.5% increase in average realized prices and by a 4.3% increase in volumes for our Flat Rolled and Plates and Shapes Product Groups offset by a net sales decrease for our Building Products Group by $2.3 million.

Cost of sales. Cost of sales increased $6.8 million, or 2.0%, from $336.6 million for the three months ended June 30, 2005, to $343.4 million for the three months ended June 30, 2006. The 2006 Acquisitions accounted for $6.5 million of the increase. The remaining increase of $0.3 million was primarily attributable to a 3.1% decrease in the average cost per ton partially offset by a 4.3% increase in volumes for our Flat Rolled and Plates and Shapes Product Groups. Cost of sales as a percentage of net sales decreased from 78.9% in 2005 to 74.9% in the same period in 2006.

Operating and delivery. Operating and delivery expenses increased $5.6 million, or 14.8%, from $37.9 million for the three months ended June 30, 2005 to $43.5 million for the three months ended June 30, 2006. The 2006 Acquisitions accounted for $2.3 million of the increase. The remaining increase of $3.3 million was primarily due to higher variable costs associated with increased shipments and higher freight costs due to rising fuel prices. As a percentage of net sales, operating and delivery expenses increased from 8.9% for the three months ended June 30, 2005 to 9.5% for the three months ended June 30, 2006.

Selling, general and administrative. Selling, general and administrative expenses increased $5.4 million, or 21.9%, from $24.7 million for the three months ended June 30, 2005 to $30.1 million for the three months ended June 30, 2006. The 2006 Acquisitions accounted for $0.7 million of the increase. The remaining increase of $4.7 million was due to higher salaries and incentive compensation, $1.1 million of personnel and advertising related costs to improve Building Products Group’s sales and service and expand its presence on a national basis, an increase in bad debt expense of $1.2 million of which $1.3 million related to our Flat Rolled Group, an increase of $0.3 related to management fees and a $0.3 million in compensation expense related to the outstanding options under SFAS 123(R). As a percentage of net sales, selling, general and administrative expenses increased from 5.8% for the three months ended June 30, 2005 to 6.6% for the three months ended June 30, 2006.

~~Depreciation~~FLAG ~~and~~INTERMEDIATE ~~amortization. Depreciation~~HOLDINGS ~~and~~CORPORATION ~~amortization~~AND ~~expense~~SUBSIDIARIES increased $3.7 million, from $0.9 million for the three months ended June 30, 2005 to $4.6 million for the three months ended June 30, 2006. The 2006 Acquisitions accounted for $0.3 million of the increase. Of the remaining increase of $3.4 million, $3.2 million resulted from the revaluation of our long-lived assets as a result of the Merger and $0.2 was due to capital investments in facilities and equipment placed in service throughout 2005 and the first quarter of 2006.

~~Operating~~NOTES ~~income. Operating~~TO ~~income~~UNAUDITED ~~increased~~CONDENSED ~~$9.9~~CONSOLIDATED ~~million,~~FINANCIAL ~~from~~STATEMENTS—(Continued) $26.7 million for the three months ended June 30, 2005 to $36.6 million for the three months ended June 30, 2006. The 2006 Acquisitions accounted for $1.9 million of the increase. The remaining increase in operating income resulted from a combination of higher average realized prices combined with lower average costs per ton offset partially by higher operating and delivery and selling, general and administrative costs. As a percentage of net sales, operating income increased from 6.3% for the three months ended June 30, 2005 to 8.0% for the three months ended June 30, 2006.

Interest expense. Interest expense increased $9.7 million, from $3.2 million for the three months ended June 30, 2005 to $12.9 million for the three months ended June 30, 2006. This increase was primarily a function of higher debt levels and, to a lesser extent, higher effective interest rates. Our capital structure was significantly different between the two periods due to the Merger that occurred on November 30, 2005. The 2006 Acquisitions and the $25 million dividend to stockholders paid on May 24, 2006 were financed from our ABL facility. At June 30, 2005, our debt consisted of a revolving credit agreement with an outstanding balance of $200.4 million and other debt totaling $7.5 million. At June 30, 2006, our debt consisted of $275.0 million (in ~~outstanding 11 1/8% Senior Secured Notes~~millions, ~~$294.0~~except ~~million~~share inamounts) ~~outstanding advances under our ABL facility, and $6.9 million in other debt.~~

Consolidated Results — Six Months Ended June 30, 2006 Compared to June 30, 2005


For the Three Months Ended September 30, 2007	Flag Intermediate Holdings Corporation			Metals USA, Inc.			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Adjustments & Eliminations			Consolidated
Net sales	$	—		$	—		$	467.9	$	1.7		$	—		$	469.6
Operating costs and expenses:
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)		—			—			361.9		1.3			—			363.2
Operating and delivery		—			—			43.4		0.3			—			43.7
Selling, general and administrative		—			1.1			26.9		0.2			—			28.2
Depreciation and amortization		—			1.6			3.5		0.1			—			5.2

Operating income (loss)		—			(2.7	)		32.2		(0.2	)		—			29.3
Other (income) expense:
Interest expense		—			14.2			0.2		—			—			14.4
Intercompany charges		—			(22.0	)		21.8		0.2			—			—
Equity in earnings of subsidiaries		(7.7	)		(9.8	)		—		—			17.5			—
Other (income) expense, net		—			(0.1	)		—		—			—			(0.1	)

Income (loss) before income taxes		7.7			15.0			10.2		(0.4	)		(17.5	)		15.0
Provision for income taxes		—			7.3			—		—			—			7.3

Net income (loss)	$	7.7		$	7.7		$	10.2	$	(0.4	)	$	(17.5	)	$	7.7

	2006			%		2005			%
	(In millions, except percentages)
Net sales	$	887.8		100.0	%	$	854.4		100.0	%
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)		684.4		77.1	%		670.4		78.5	%
Operating and delivery		85.2		9.6	%		75.7		8.9	%
Selling, general and administrative		57.3		6.5	%		49.0		5.7	%
Depreciation and amortization		8.8		1.0	%		1.6		0.2	%
Operating income		52.1		5.9	%		57.7		6.8	%
Interest expense		24.9		2.8	%		6.4		0.7	%
Other (income) expense, net		(0.2	)	—			(0.2	)	—
Income before income taxes	$	27.4		3.1	%	$	51.5		6.0	%

Net sales. Net sales increased $33.4 million, or 3.9%, from $854.4 million for the six months ended June 30, 2005 to $887.8 million for the six months ended June 30, 2006. The 2006 Acquisitions accounted for $11.7 million of the increase. The remaining increase of $21.7 million in sales was primarily attributable to a 1.8% decrease in average realized prices partially offset by a 4.9% increase in volumes for our Flat Rolled and Plates and Shapes Product Groups offset by a net sales decrease for our Building Products group by $1.2 million.

~~Cost~~FLAG ofINTERMEDIATE ~~sales. Cost~~HOLDINGS ofCORPORATION ~~sales~~AND ~~increased~~SUBSIDIARIES $14.0 million, or 2.1%, from $670.4 million for the six months ended June 30, 2005, to $684.4 million for the six months ended June 30, 2006. The 2006 Acquisitions accounted for $6.5 million of the increase and $10.8 million of the increase related to inventory purchase accounting. The remaining decrease in cost of sales was primarily attributable to a 3.4% decrease in the average cost per ton partially offset by an 4.9% increase in volumes for our Flat Rolled and Plates and Shapes Product Groups. Cost of sales as a percentage of net sales decreased from 78.5% in 2005 to 77.1% in the same period in 2006.

~~Operating~~NOTES ~~and delivery. Operating~~TO ~~and~~UNAUDITED ~~delivery~~CONDENSED ~~expenses~~CONSOLIDATED ~~increased~~FINANCIAL ~~$9.5~~STATEMENTS—(Continued) million, or 12.5%, from $75.7 million for the six months ended June 30, 2005 to $85.2 million for the six months ended June 30, 2006. The 2006 Acquisitions accounted for $2.3 million of the increase. The remaining increase of $7.2 was primarily due to higher labor costs and higher freight costs due to rising fuel prices. As a percentage of net sales, operating and delivery expenses increased from 8.9% for the six months ended June 30, 2005 to 9.6% for the six months ended June 30, 2006.

Selling, general and administrative. Selling, general and administrative expenses increased $8.3 million, or 16.9%, from $49.0 million for the six months ended June 30, 2005 to $57.3 million for the six months ended June 30, 2006. The 2006 Acquisitions accounted for $0.7 million of the increase. The remaining increase of $7.6 million was due to higher salaries and incentive compensation, $2.9 million of personnel and advertising related costs to improve the Building Products Group’s sales and service and expand its presence on a national basis, an increase (in ~~bad debt expense of $1.2 million of which $1.3 million related to our Flat Rolled Group~~millions, anexcept ~~increase~~share ~~of $0.6 million related to management fees and an increase of $0.6 million in compensation expense related to the outstanding options under SFAS 123(R~~amounts). As a percentage of net sales, selling, general and administrative expenses increased from 5.7% for the six months ended June 30, 2005 to 6.5% for the six months ended June 30, 2006. This percentage increase was primarily due to a larger growth in selling, general and administrative expenses as compared to net sales growth.

Depreciation and amortization. Depreciation and amortization increased $7.2 million, from $1.6 million for the six months ended June 30, 2005 to $8.8 million for the six months ended June 30, 2006. Of this increase, $6.4 million resulted from the revaluation of our long-lived assets as a result of the Merger, $0.5 million was due to capital investments in facilities and equipment placed in service throughout 2005 and the first quarter of 2006 and $0.3 million was due to increased depreciation related to the 2006 Acquisitions.


For the Nine Months Ended September 30, 2008	Flag Intermediate Holdings Corp.			Metals USA, Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Adjustments & Eliminations			Consolidated
Net sales	$	—		$	—		$	1,695.1		$	4.7		$	—		$	1,699.8
Operating costs and expenses:
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)		—			—			1,242.4			3.5			—			1,245.9
Operating and delivery		—			0.2			143.7			0.7			—			144.6
Selling, general and administrative		—			2.7			92.8			0.4			—			95.9
Depreciation and amortization		—			3.4			12.3			0.5			—			16.2
(Gain) loss on sale of property and equipment		—			—			(2.4	)		—			—			(2.4	)

Operating income (loss)		—			(6.3	)		206.3			(0.4	)		—			199.6
Other (income) expense:
Interest expense		—			40.5			0.3			—			—			40.8
Intercompany charges		—			(60.4	)		59.7			0.7			—			—
Equity in earnings of subsidiaries		(95.0	)		(145.0	)		—			—			240.0			—
Other (income) expense, net		—			—			0.2			—			—			0.2

Income (loss) before income taxes		95.0			158.6			146.1			(1.1	)		(240.0	)		158.6
Provision (benefit) for income taxes		—			63.6			—			—			—			63.6

Net income (loss)	$	95.0		$	95.0		$	146.1		$	(1.1	)	$	(240.0	)	$	95.0

Operating income. Operating income decreased $5.6 million, from $57.7 million for the six months ended June 30, 2005 to $52.1 million for the six months ended June 30, 2006. This decrease in operating income in 2006 included $18.4 million of costs related to the Merger and impact of purchase accounting and $1.2 million increase in bad debt expense partially offset by $1.9 million of operating income from the 2006 Acquisitions.

Interest expense. Interest expense increased $18.5 million, or 289.1% from $6.4 million for the six months ended June 30, 2005 to $24.9 million for the six months ended June 30, 2006. This increase was primarily a function of higher debt levels and, to a lesser extent, higher effective interest rates. Our capital structure was significantly different between the two periods due to the Merger that occurred on November 30, 2005, the 2006 Acquisitions financed from our availability on our ABL facility and the $25 million dividend to stockholders paid on May 24, 2006. At June 30, 2005, our debt consisted of a revolving credit agreement with an outstanding balance of $200.4 million and other debt totaling $7.5 million. At June 30, 2006, our debt consisted of $275.0 million in outstanding 11 1/8% Senior Secured Notes, $294.0 million in outstanding advances under our ABL facility, and $6.9 million in other debt.

~~Segment~~FLAG ~~Results~~INTERMEDIATE —HOLDINGS ~~Three~~CORPORATION ~~Months~~AND ~~Ended~~SUBSIDIARIES ~~June 30, 2006 Compared to June 30, 2005~~

	NetSales			OperatingCosts andExpenses		OperatingIncome(Loss)			CapitalSpending		TonsShipped (1)
2006:
Plates and Shapes	$	219.7		$	192.6	$	27.1		$	1.0	221
Flat Rolled		189.6			179.0		10.6			1.2	174
Building Products		54.0			47.3		6.7			1.0	—
Corporate and other		(5.1	)		2.7		(7.8	)		0.1	(5	)
Total	$	458.2		$	421.6	$	36.6		$	3.3	390
2005:
Plates and Shapes	$	171.6		$	155.1	$	16.5		$	3.6	183
Flat Rolled		205.7			197.3		8.4			0.6	190
Building Products		54.7			47.6		7.1			1.0	—
Corporate and other		(5.2	)		0.1		(5.3	)		0.4	(5	)
Total	$	426.8		$	400.1	$	26.7		$	5.6	368

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(~~1) Shipments are expressed~~ in ~~thousands~~millions, ofexcept ~~tons~~share ~~and~~amounts) ~~are not an appropriate measure for the Building Products Group.~~

Plates and Shapes. Net sales increased $48.1 million, or 28.0%, from $171.6 million for the three months ended June 30, 2005 to $219.7 million for the three months ended June 30, 2006. The 2006 Acquisition of Port City accounted for $10.1 million of the increase. The remaining increase of $38.0 million was primarily due to a 4.0% increase in the average sales price per ton and a 17.5% increase in shipments for the three months ended June 30, 2006 compared to the three months ended June 30, 2005.


For the Nine Months Ended September 30, 2007	Flag Intermediate Holdings Corp.			Metals USA, Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Adjustments & Eliminations			Consolidated
Net sales	$	—		$	—		$	1,407.4		$	5.7		$	—		$	1,413.1
Operating costs and expenses:
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)		—			—			1,079.3			3.9			—			1,083.2
Operating and delivery		—			—			132.9			0.7			—			133.6
Selling, general and administrative		—			3.2			82.7			0.5			—			86.4
Impairment of property and equipment		—			—			0.2			—			—			0.2
Depreciation and amortization		—			4.8			10.2			0.5			—			15.5

Operating income (loss)		—			(8.0	)		102.1			0.1			—			94.2
Other (income) expense:
Interest expense		—			43.6			0.3			—			—			43.9
Intercompany charges		—			(67.3	)		66.6			0.7			—			—
Equity in earnings of subsidiaries		(29.0	)		(34.6	)		—			—			63.6			—
Other (income) expense, net		—			(0.1	)		(0.1	)		0.1			—			(0.1	)

Income (loss) before income taxes		29.0			50.4			35.3			(0.7	)		(63.6	)		50.4
Provision for income taxes		—			21.4			—			—			—			21.4

Net income (loss)	$	29.0		$	29.0		$	35.3		$	(0.7	)	$	(63.6	)	$	29.0

Operating costs and expenses increased $37.5 million, or 24.2%, from $155.1 million for the three months ended June 30, 2006 to $192.6 million for the three months ended June 30, 2006. The 2006 Acquisition of Port City accounted for $8.4 million of the increase. The remaining increase of $29.1 million was attributable to the higher operating expenses primarily from increased shipments of 17.5% and increased raw material costs of 1.5%. Operating costs and expenses as a percentage of net sales decreased from 90.4% for the three months ended June 30, 2005 to 87.7% for the three months ended June 30, 2006.

Operating income increased by $10.6 million, from $16.5 million for the three months ended June 30, 2005 to $27.1 million for the three months ended June 30, 2006. The 2006 Acquisition of Port City accounted for $1.7 million of the increase. The remaining increase was attributable to significantly higher volumes and higher selling prices. Operating income as a percentage of net sales increased from 9.6% for the three months ended June 30, 2005 to 12.3% for the three months ended June 30, 2006.

Flat Rolled. Net sales decreased $16.1 million, or 7.8%, from $205.7 million for the three months ended June 30, 2005 to $189.6 million for the three months ended June 30, 2006. This decrease was primarily due to a 8.4% decrease in shipments partially offset by a 0.6% increase in the average sales price per ton for the three months ended June 30, 2006 compared to the three months ended June 30, 2005. Although prices were generally improving throughout the first and second quarters of 2006, the ferrous Flat Rolled business remained competitive and, as a result, we elected to reduce sales volume to maintain our level of profitability.

Operating costs and expenses decreased $18.3 million, or 9.3%, from $197.3 million for the three months ended June 30, 2005 to $179.0 million for the three months ended June 30, 2006. This decrease was attributable to a decrease in the cost of raw materials of 3.9% and to a decrease in volumes of 8.4%, offset partially by an increase in bad debt expense of $1.3 million. Operating costs and expenses as a percentage of net sales, decreased from 95.9% for the three months ended June 30, 2005 to 94.4% for the three months ended June 30, 2006.

~~Operating~~FLAG ~~income~~INTERMEDIATE ~~increased~~HOLDINGS byCORPORATION ~~$2.2~~AND ~~million,~~SUBSIDIARIES from $8.4 million for the three months ended June 30, 2005 to $10.6 million for the three months ended June 30, 2005. This increase was attributable to an increase in average realized prices and lower raw material costs, combined with our decision to reduce volume to maintain our level of profitability. This increase was offset partially by the increase in bad debt expense of $1.3 million. Operating income as a percentage of net sales increased from 4.1% for the three months ended June 30, 2005 to 5.6% for the three months ended June 30, 2006.

~~Building~~NOTES ~~Products. Net~~TO ~~sales~~UNAUDITED ~~decreased~~CONDENSED ~~$0.7~~CONSOLIDATED ~~million,~~FINANCIAL orSTATEMENTS—(Continued) 1.3%, from $54.7 million for the three months ended June 30, 2005 to $54.0 million for the three months ended June 30, 2006. The 2006 Acquisition of Dura-Loc accounted for $1.6 million of sales during the period. The remaining net sales decreased $2.3 million primarily due to Florida markets that have returned to normal volumes following a 2005 surge in post hurricane damage remediation.

~~Operating~~(in ~~costs and expenses decreased $0.3 million~~millions, orexcept ~~0.6%,~~share ~~from~~amounts) $47.6 million for the three months ended June 30, 2005 to $47.3 million for the three months ended June 30, 2006. The 2006 Acquisition of Dura-Loc accounted for $1.4 million of increased costs. Additionally, costs increased by $1.1 million related to personnel and advertising costs to improve Building Products Group’s sales and service and expand its presence on a national basis. The remaining operating costs and expenses decreased by $1.7 million, primarily due to lower sales volume. Operating costs and expenses as a percentage of net sales increased from 87.0% for the three months ended June 30, 2005 to 87.6% for the three months ended June 30, 2006.

Operating income decreased by $0.4 million, from $7.1 million for the three months ended June 30, 2005 to $6.7 million for the three months ended June 30, 2006. The 2006 Acquisition of Dura-Loc accounted for $0.2 million of operating income. Operating income as a percentage of net sales decreased from 13.0% for the three months ended June 30, 2005 to 12.4% for the three months ended June 30, 2006 primarily as a result of the additional cost to improve Building Products Group’s sales and services and expand its presence on a national basis.


For the Nine Months Ended September 30, 2008	Flag Intermediate Holdings Corporation			Metals USA, Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Adjustments & Eliminations			Consolidated
Cash flows from operating activities:
Net cash provided by (used in) operating activities	$	12.9		$	(13.5	)	$	(70.3	)	$	(1.2	)	$	(12.9	)	$	(85.0	)

Cash flows from investing activities:
Sale of assets		—			—			9.5			—			—			9.5
Purchase of assets		—			—			(8.9	)		—			—			(8.9	)

Net cash provided by investing activities		—			—			0.6			—			—			0.6

Cash flows from financing activities:
Borrowings on the ABL		—			959.5			—			—			—			959.5
Repayments on the ABL		—			(698.0	)		—			—			—			(698.0	)
Repayments on long-term debt		—			(1.5	)		(0.8	)		—			—			(2.3	)
Deferred financing costs and other		—			(2.5	)		—			—			—			(2.5	)
Net change in intercompany balances		—			(69.5	)		68.3			1.2			—			—
Dividends paid		(12.9	)		(12.9	)		—			—			12.9			(12.9	)

Net cash provided by (used in) financing activities		(12.9	)		175.1			67.5			1.2			12.9			243.8

Net increase (decrease) in cash and cash equivalents		—			161.6			(2.2	)		—			—			159.4
Cash and cash equivalents, beginning of period		—			10.7			2.7			0.2			—			13.6

Cash and cash equivalents, end of period	$	—		$	172.3		$	0.5		$	0.2		$	—		$	173.0

Corporate and other. This category reflects certain administrative costs and expenses management has not allocated to its industry segments. These costs include compensation for executive officers, insurance, professional fees for audit, tax and legal services and data processing expenses. The negative net sales amount represents the elimination of intercompany sales. The operating loss increased $2.5 million, from $5.3 million for the three months ended June 30, 2005 to $7.8 million for the three months ended June 30, 2006. This increase was primarily attributable to $2.0 million of amortization related to intangible assets (customer lists) recorded in 2005 as a result of the merger and to increased employee benefit costs.

~~Segment~~FLAG ~~Results~~INTERMEDIATE —HOLDINGS ~~Six~~CORPORATION ~~Months~~AND ~~Ended~~SUBSIDIARIES ~~June 30, 2006 Compared to June 30, 2005~~

	NetSales			OperatingCosts andExpenses			OperatingIncome(Loss)			CapitalSpending		TonsShipped (1)
2006:
Plates and Shapes	$	418.1		$	373.8		$	44.3		$	2.9	426
Flat Rolled		381.1			364.3			16.8			1.8	360
Building Products		99.5			93.2			6.3			2.1	—
Corporate and other		(10.9	)		4.4			(15.3	)		0.2	(11	)
Total	$	887.8		$	835.7		$	52.1		$	7.0	775
2005:
Plates and Shapes	$	348.3		$	312.3		$	36.0		$	4.5	364
Flat Rolled		418.1			396.3			21.8			1.1	381
Building Products		99.1			89.1			10.0			2.2	—
Corporate and other		(11.1	)		(1.0	)		(10.1	)		0.6	(12	)
Total	$	854.4		$	796.7		$	57.7		$	8.4	733

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(~~1) Shipments are expressed~~ in ~~thousands~~millions, ofexcept ~~tons~~share ~~and~~amounts) ~~are not an appropriate measure for the Building Products Group.~~

Plates and Shapes. Net sales increased $69.8 million, or 20.0%, from $348.3 million for the six months ended June 30, 2005 to $418.1 million for the six months ended June 30, 2006. The 2006 Acquisition of Port City accounted for $10.1 million of the increase. The remaining increase of $59.7 million was primarily due to a 1.5% increase in the average sales price per ton and a 15.4% increase in shipments for the six months ended June 30, 2006 compared to the six months ended June 30, 2005.


For the Nine Months Ended September 30, 2007	Flag Intermediate Holdings Corporation			Metals USA, Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Adjustments & Eliminations			Consolidated
Cash flows from operating activities:
Net cash provided by (used in) operating activities	$	16.5		$	14.0		$	84.5		$	(0.5	)	$	(16.5	)	$	98.0

Cash flows from investing activities:
Sales of assets		—			—			1.0			—			—			1.0
Purchase of assets		—			—			(16.0	)		—			—			(16.0	)
Acquisition costs, net of cash acquired		—			(38.4	)		—			—			—			(38.4	)

Net cash used in investing activities		—			(38.4	)		(15.0	)		—			—			(53.4	)

Cash flows from financing activities:
Borrowings on the ABL		—			337.0			—			—			—			337.0
Repayments on the ABL		—			(366.0	)		—			—			—			(366.0	)
Repayments on long-term debt		—			(0.3	)		(0.2	)		—			—			(0.5	)
Deferred financing costs and other		—			(1.7	)		—			—			—			(1.7	)
Net change in intercompany balances		—			69.1			(69.9	)		0.8			—			—
Dividends paid		(16.5	)		(16.5	)		—			—			16.5			(16.5	)

Net cash provided by (used) in financing activities		(16.5	)		21.6			(70.1	)		0.8			16.5			(47.7	)

Net increase (decrease) in cash		—			(2.8	)		(0.6	)		0.3			—			(3.1	)
Cash, beginning of period		—			10.9			3.1			0.2			—			14.2

Cash, end of period	$	—		$	8.1		$	2.5		$	0.5		$	—		$	11.1

Operating costs and expenses increased $61.5 million, or 19.7%, from $312.3 million for the six months ended June 30, 2005 to $373.8 million for the six months ended June 30, 2006. The 2006 Acquisition of Port City accounted for $8.4 million of the increase. The remaining increase of $53.1 million was primarily attributable to the higher volumes of 15.4%, higher cost of raw materials of 1.6% and additional costs of $4.9 million related to purchase accounting. Operating costs and expenses as a percentage of net sales decreased from 89.7% for the six months ended June 30, 2005 to 89.4% for the six months ended June 30, 2006.

Operating income increased by $8.3 million, from $36.0 million for the six months ended June 30, 2005 to $44.3 million for the six months ended June 30, 2006. The 2006 Acquisition of Port City accounted for $1.7 million of the increase. These results also included additional costs of $4.9 million related to purchase accounting. Operating income as a percentage of net sales increased from 10.3 % for the six months ended June 30, 2005 to 10.6% for the six months ended June 30, 2006.

Flat Rolled. Net sales decreased $37.0 million, or 8.8%, from $418.1 million for the six months ended June 30, 2005 to $381.1 million for the six months ended June 30, 2006. This decrease was primarily due to a 3.5% decrease in the average sales price per ton and a 5.5% decrease in shipments for the six months ended June 30, 2006 compared to the six months ended June 30, 2005. Although prices were generally improving throughout the first quarter of 2006, the ferrous Flat Rolled business remained competitive and, as a result, we elected to reduce sales volume to maintain our level of profitability.

~~Operating costs and expenses decreased $32.0 million, or 8.1%, from $396.3 million for the six months ended June~~ITEM ~~30, 2005 to $364~~2.3 ~~million~~MANAGEMENT’S ~~for~~DISCUSSION ~~the six months ended June 30, 2006. This decrease was mostly attributable to a decrease in the cost of raw materials of 5.1%, offset by a $4.0 million cost related to purchase accounting, and~~AND toANALYSIS aOF ~~decrease~~FINANCIAL inCONDITION ~~volumes~~AND ofRESULTS ~~5.5%%.~~OF ~~This~~OPERATIONS decrease was partially offset by an increase in bad debt expense of $1.3 million. Operating costs and expenses as a percentage of net sales, increased from 94.8% for the six months ended June 30, 2005 to 95.6% for the six months ended June 30, 2006. This percentage increase was primarily due to the increased cost of raw materials and the increase in bad debt expense.

~~Operating~~This ~~income~~section contains ~~decreased~~statements bythat ~~$5.0~~constitute “forward-looking ~~million,~~statements” ~~from~~within ~~$21.8~~the ~~million~~meaning ~~for~~of the ~~six~~Private ~~months~~Securities ~~ended~~Litigation ~~June 30,~~Reform ~~2005~~Act toof ~~$16~~1995.~~8 million for the six months ended June~~ ~~30,~~See ~~2006. This~~disclosure ~~decrease~~presented ~~was~~on ~~primarily attributable to smaller margins,~~ the ~~impact~~inside of the ~~$4.0~~front ~~million~~cover ~~cost~~of ~~related~~this toForm ~~purchase~~10-Q ~~accounting~~for ~~and~~cautionary ~~decreased~~information ~~shipments~~with inrespect ~~2006. This~~to ~~decrease was also impacted by the increase in bad~~such ~~debt~~forward-looking ~~expense of $1~~statements.3 Readers ~~million.~~should ~~Operating~~refer ~~income~~to as“Risk aFactors” ~~percentage~~included ofin ~~net~~our ~~sales~~Annual ~~decreased~~Report ~~from~~on ~~5.2%~~Form 10-K for the ~~six~~year ~~months~~ ended ~~June~~December 3031, ~~2005~~2007, ~~to 4.4%~~ for ~~the~~risk ~~six~~factors ~~months~~that ~~ended~~may ~~June 30,~~affect ~~2006~~future performance.

~~Building~~Overview Products. Net sales increased $0.4 million, or 0.4%, from $99.1 million for the six months ended June 30, 2005 to $99.5 million for the six months ended June 30, 2006. The 2006 Acquisition of Dura-Loc accounted for $1.6 million of sales during the period. The remaining net sales decreased $1.2 million primarily due to Florida markets that have returned to normal volumes following a 2005 surge in post hurricane damage remediation.

~~Operating~~All ~~costs~~references ~~and expenses increased $4.1 million, or 4.6%, from $89.1 million for the six months ended June 30, 2005~~ to ~~$93.2 million for~~ the ~~six~~“Company” include ~~months~~Flag ~~ended June 30~~Intermediate, 2006. The 2006 Acquisition of Dura-Loc accounted for $1.4 million of increased costs. The remaining increase of $2.7 million is attributable to a $3.3 million cost related to purchase accounting and increased costs of $2.9 million related to personnel and advertising costs to improve Building Products Group’s sales and service and expand its ~~presence~~wholly onowned asubsidiary ~~national basis.~~Metals ~~These~~USA, ~~increases were offset by lower volumes~~ and ~~related~~the ~~operating~~wholly ~~costs. Operating~~owned ~~costs~~subsidiaries ~~and expenses as a percentage~~ of ~~net~~Metals ~~sales increased from 89~~USA.9% ~~for the six months ended June 30, 2005 to 93.7% for the six months ended June 30, 2006 for the reasons discussed above.~~

~~Operating~~We ~~income~~believe ~~decreased~~that bywe ~~$3.7~~are a ~~million,~~leading ~~from~~provider ~~$10.0~~of ~~million~~value-added ~~for~~processed ~~the~~carbon ~~six~~steel, ~~months ended~~stainless ~~June 30~~steel, ~~2005~~aluminum toand ~~$6.3~~specialty ~~million~~metals, ~~for~~as well as manufactured metal components. For the ~~six~~nine months ended ~~June~~September 30, ~~2006. The~~2008, ~~2006~~approximately ~~Acquisition~~94% of ~~Dura-Loc~~our ~~accounted~~revenue ~~for~~was ~~$0.2~~derived ~~million~~from our ofmetals ~~operating~~service ~~income~~center and processing activities, which are segmented into two groups: Flat Rolled and Non-Ferrous Group and Plates and Shapes Group. The remaining ~~decrease~~portion of ~~$3.9~~our ~~million~~revenue iswas ~~primarily~~derived ~~due~~from toour ~~the~~Building ~~$3.3~~Products ~~million~~Group, which ~~cost~~principally manufactures and sells aluminum products related to ~~inventory~~the residential remodeling industry. We purchase ~~accounting,~~metal ~~the~~from ~~additional~~primary ~~costs~~producers tothat ~~improve~~generally ~~Building~~focus ~~Products~~on ~~Group’s~~large volume sales ~~and~~of ~~services~~unprocessed metals in standard configurations and ~~expand~~sizes. ~~its~~In most ~~presence~~cases, onwe aperform ~~national~~the ~~basis~~customized, ~~offset~~value-added processing services required to meet the specifications provided by ~~lower~~end-use ~~volumes~~customers. ~~Operating~~Our ~~income~~Plates asand aShapes ~~percentage~~Group ofand ~~net~~Flat ~~sales decreased~~Rolled ~~from~~and ~~10.1%~~Non-Ferrous ~~for~~Group customers are in the ~~six~~land ~~months~~and ~~ended~~marine transportation, ~~June 30~~energy, ~~2005~~aerospace, todefense, ~~6.3%~~electrical ~~for~~and ~~the~~appliance ~~six~~manufacturing, ~~months~~fabrication, ~~ended~~furniture, ~~June 30~~commercial construction, ~~2006~~and machinery and equipment industries. Our Building Products Group customers are primarily distributors and contractors engaged in the residential remodeling industry.

~~Corporate~~Matters ~~and other. This~~Impacting ~~category~~Comparability reflects certain administrative costs and expenses management has not allocated to its industry segments. These costs include compensation for executive officers, insurance, professional fees for audit, tax and legal services and data processing expenses. The negative net sales amount represents the elimination of ~~intercompany~~Results sales. The operating loss increased $5.2 million, from $10.1 million for the six months ended June 30, 2005 to $15.3 million for the six months ended June 30, 2006. This increase was primarily attributable to $4.0 million of amortization related to intangible assets (customer lists) recorded in 2005 as a result of the merger and to increased professional fees and employee benefit costs.

~~Liquidity~~2007 ~~and~~Acquisition ~~Capital Resources~~

~~Our~~On ~~primary~~July 2, 2007, ~~sources~~we purchased the business operations of ~~liquidity~~Lynch ~~are~~Metals for approximately $42.4 million. The purchase price was funded by borrowings under ~~our~~the ABL facility, ~~and~~$38.4 ~~our~~million ~~cash~~of ~~flow~~which ~~from~~was ~~operations. At~~paid ~~June 30,~~at ~~2006~~closing, ~~our~~and ~~borrowing~~approximately ~~availability was~~ $~~137.~~4.0 million of which was deferred and weis ~~had~~being ~~available~~paid ~~cash~~in various installments over a period of ~~$19~~two years from the closing date.~~3 million. Further,~~ ~~our~~The ~~debt~~excess asof athe ~~percentage~~aggregate purchase price over the estimated fair value of ~~total~~net ~~capitalization~~assets ~~(debt~~acquired ~~plus~~was ~~stockholders~~approximately ~~equity)~~$20.5 million, which was 82allocated to goodwill.3% atThe ~~June 30~~estimated fair value of accounts receivable, ~~2006~~inventories, ~~compared~~and toproperty 78and equipment acquired were $4.4 million, $4.2% atmillion ~~December 31~~and $1.8 million, ~~2005~~respectively. ~~Our~~ ~~borrowing~~The ~~availability~~estimated ~~fluctuates~~fair ~~daily~~value ~~with~~of ~~changes~~customer inlist and trade name intangible assets ~~eligible~~was ~~accounts~~$10.1 ~~receivables~~million and ~~inventory~~$3.3 million, ~~less~~respectively. ~~outstanding~~The ~~borrowings~~estimated ~~and~~fair ~~letters~~value of ~~credit. See~~accounts ~~“—Financing~~payable ~~Activities”~~and ~~below. At~~accrued ~~August 4,~~liabilities ~~2006,~~assumed wewas ~~had~~ $~~310~~2.03 million. ~~drawn~~In connection with the completion of the valuation of property and ~~borrowing~~equipment ~~availability~~in the second quarter of 2008, $~~119~~0.4 million was reclassified from goodwill to property and equipment. The results of operations for the Lynch Metals acquisition are included in the Company’s consolidated results of operations beginning July 2, 2007.

Lynch Metals is a value-added metal service center that focuses on specialty aluminum, with locations in New Jersey and California. Lynch Metals uses enhanced technologies in slitting, shearing, and cut-to-length to service the just-in-time requirements of its customers, who are predominately manufacturers of air/heat transfer products specifically focused on aerospace, automotive and industrial applications. This acquisition is an important strategic addition to our Flat Rolled and Non-Ferrous Group because it supports our continued shift in product mix from ferrous products to non-ferrous and stainless products and strengthens our non-ferrous presence in the strategic Northeast and Southern California regions. Lynch Metals’ product line and processing capabilities are highly complementary to our Flat Rolled and Non-Ferrous segment, and we expect to expand sales of Lynch Metals’ non-ferrous products into our existing geographic base, as well as expand sales of non-ferrous and stainless products into Lynch Metals’ geographic base.

~~Although~~Selected weOperational doInformation not produce any metal, our financial performance is affected by changes in metal prices. When metal prices rise, the prices at which we are able to sell our products generally increase over their historical costs; accordingly, our gross profit and our working capital (which consists primarily of accounts receivable and inventory) tend to increase in a rising price environment. Conversely, when metal prices fall, our gross profit and working capital tend to decrease. Our working capital (current assets less current liabilities) increased from $453.3 million at December 31, 2005 to $513.9 million at June 30, 2006.

~~Changes~~Net insales—We ~~metal~~derive ~~prices~~the ~~also~~net ~~affect~~sales ~~our liquidity because~~ of ~~the~~ ~~time difference between~~ our ~~payment~~Plates ~~for~~and ~~our~~Shapes ~~raw materials~~ and ~~our~~Flat ~~collection~~Rolled ofand ~~cash~~Non-Ferrous Groups from ~~our~~the ~~customers.~~processing ~~We sell our products~~ and ~~typically collect our accounts receivable within 45 days after the~~ sale; ~~however,~~of ~~we tend to pay for replacement materials (which are more expensive when~~ metal ~~prices~~products ~~are rising) over a much shorter period, primarily~~ to ~~benefit from early~~end-~~payment~~users ~~discounts~~including ~~that~~metal ~~are~~fabrication ~~substantially higher than our cost of incremental debt. As a result~~companies, ~~when metal prices are~~general ~~rising,~~contractors weand ~~tend~~OEMs. toPricing ~~draw~~is ~~more~~generally onbased ~~our~~upon ~~ABL facility to cover~~ the ~~cash~~underlying ~~flow cycle from material purchase to cash collection. When~~ metal ~~prices fall, we can replace our inventory at lower~~ cost ~~and,~~as ~~thus,~~well ~~generally~~as doa ~~not~~margin ~~need~~associated towith ~~access~~customized ~~our~~value-added ~~ABL~~services ~~facility~~ as ~~much~~specified toby ~~cover~~ the ~~cash flow cycle~~customer. WeThe ~~believe~~net ~~our~~sales ~~cash~~of ~~flow from operations, supplemented with the cash available under~~ our ~~ABL~~Building ~~facility~~Products ~~will~~Group ~~provide~~are ~~sufficient~~derived ~~liquidity~~from ~~to meet~~ the ~~challenges and obligations we face during the current metal~~sales ~~price~~of ~~environment.~~finished ~~Additionally,~~goods weprimarily ~~intend~~ to ~~look~~general ~~for~~contractors ~~value-added~~who ~~businesses~~are ~~that~~generally weengaged ~~can~~in ~~acquire~~the atresidential ~~reasonable~~remodeling ~~prices~~industry. ~~We intend to use cash flows from operations and excess cash available under our ABL facility to fund future acquisitions.~~

~~The~~Cost ~~following~~of sales—Our ~~discussion~~Plates ofand ~~the~~Shapes ~~principal~~and ~~sources~~Flat Rolled and ~~uses~~Non-Ferrous Groups follow the normal industry practice which classifies within cost of ~~cash~~sales ~~should~~the beunderlying ~~read~~commodity cost of metal purchased in ~~conjunction~~mill ~~with~~form, ~~our~~and ~~Unaudited~~the ~~Consolidated~~cost of inbound freight ~~Statements~~charges, together with third-party processing cost, if any. Generally, the cost of ~~Cash~~metal ~~Flows~~approximates ~~which~~75% ~~are~~of ~~set~~net ~~forth~~sales ~~under~~for ~~Item 1~~the Plates and Shapes and Flat Rolled and Non-Ferrous ~~“Financial~~Groups. ~~Statements~~Cost of sales for our Building Products Group includes the cost of raw materials, manufacturing labor and overhead costs, together with depreciation and amortization expense associated with property, buildings and equipment used in the manufacturing process.” Amounts included within this caption may not be comparable to similarly titled captions reported by other companies.

~~During~~Operating ~~the~~and ~~six~~delivery ~~months~~expense—Our ~~ended~~operating and delivery ~~June 30,~~expense ~~2006,~~reflects ~~net~~the ~~cash~~cost ~~used~~incurred inby ~~operating~~our ~~activities~~Plates ~~was~~and ~~$15.9~~Shapes ~~million. We~~and ~~had~~Flat ~~operating~~Rolled ~~income~~and ofNon-Ferrous ~~$52.1~~Groups ~~million~~for ~~during~~labor and facility costs associated with the ~~six~~value-added ~~months~~metal ~~ended~~processing ~~June 30,~~services ~~2006,~~that ~~$36~~we provide.4 ~~million~~With ofrespect ~~cash~~to ~~was~~our ~~used~~Building inProducts toGroup, operating ~~increase~~costs ~~inventories. During~~are associated with the ~~six months~~labor ~~ended~~and ~~June 30,~~facility ~~2005,~~costs ~~net~~attributable ~~cash~~to ~~provided~~warehousing byof ~~operating~~our ~~activities~~finished ~~was~~goods ~~$72~~at our service center facilities.4 ~~million~~Delivery expense reflects labor, ~~$61.1~~material ~~million~~handling ofand ~~cash~~other ~~was~~third ~~provided~~party bycosts aincurred ~~reduction~~with the delivery of ~~inventories~~product to customers. Amounts included within this caption may not be comparable to similarly titled captions reported by other companies.

~~Net~~Selling, ~~cash~~general ~~used~~and inadministrative ~~investing activities was $52.5 million for the six months ended June 30~~expenses—Selling, ~~2006~~general and ~~consisted~~administrative ofexpenses ~~$7.0~~include ~~million~~sales ~~of purchases of assets~~ and ~~the~~marketing ~~$45.5~~expenses, ~~million~~executive ~~for~~officers’ ~~the~~compensation, ~~purchase~~office ofand ~~two~~administrative ~~companies defined~~salaries, asinsurance, ~~the 2006 Acquisitions. These purchases were strategic acquisitions in our Plates and Shapes and Building products segments. For the six months ended June 30~~accounting, ~~2006~~legal, ~~the~~computer ~~most significant internal capital projects included the expansion of our non-ferrous Germantown~~systems, ~~Wisconsin facility~~ and ~~the~~professional ~~installation~~services ofand ~~new~~costs ~~processing~~not ~~equipment~~directly inassociated ~~our~~with ~~New Orleans facility. Net cash used in investing activities was $8.3 million for~~ the ~~six months ended June 30~~processing, ~~2005 and consisted of $8.4 million of purchases of assets~~manufacturing, ~~offset~~operating byor ~~sales~~delivery ofcosts ~~assets~~ of ~~$0.1~~our ~~million~~products. ~~For~~ ~~the~~Amounts ~~six months ended June 30, 2005, the most significant capital projects~~ included anwithin ~~expansion~~this ofcaption ~~our~~may ~~Greensboro,~~not ~~N.C.,~~be ~~facility and the installation of laser~~comparable ~~plate~~to ~~cutting~~similarly ~~capabilities~~titled incaptions ~~our~~reported ~~New~~by ~~Orleans~~other ~~facility~~companies.

~~Net~~Depreciation ~~cash~~and ~~provided~~amortization—Depreciation byand ~~financing~~amortization ~~activities~~expense represents ~~was $76.4 million for~~ the ~~six~~costs ~~months ended~~associated ~~June 30~~with property, ~~2006~~buildings and ~~consisted~~equipment ~~primarily~~used ofthroughout ~~net borrowings on~~ the ~~ABL~~company ~~facility~~except offor ~~$102.6~~depreciation ~~million~~ and ~~$25.0~~amortization ~~million~~expense ~~payment~~associated ofwith athe ~~cash~~manufacturing ~~dividend. Net~~assets ~~cash~~employed ~~used~~by inour ~~financing~~Building ~~activities~~Products ~~was~~Group, ~~$62.7~~which ~~million~~is ~~for the six months ended~~included ~~June 30,~~within ~~2005~~cost ~~and consisted primarily~~ of ~~net~~sales. ~~payments~~This oncaption ~~the~~also ~~revolving~~includes ~~credit~~amortization ~~facility~~ of ~~$52.6~~intangible ~~million and $10~~assets.1 ~~million of payments on other long-term debt.~~

Industry Trends

Metals Service Centers

The metals production and distribution industries have experienced unprecedented revenue and profit expansion over the last five years. Global demand for steel and other metals has grown at an extraordinary pace driven largely by new market development in China, Brazil, Russia, and India, as well as Europe in general. Over the last 5 years global demand has increased approximately 9% per year, on average. Through the first half of 2008, demand growth outpaced supply inputs creating upward cost pressure on commodity inputs such as ores, energy and transportation.

However, recent global and economic conditions are significantly less favorable compared with those experienced during the first half of 2008. The level of global economic activity has declined through the latter part of 2008, as the world’s major economies, including the U.S. and European region, are experiencing difficulties related to, in large part, the tightening of credit conditions globally. As interbank lending constricts, the cost of borrowing for the steel sector and steel-consuming industries is likely to increase. We believe that steel demand in most regions of the world will slow, and as a result, industry participants will be cautious about

the near-term outlook for metal prices. The timing of the effect that further price trends will have on the domestic steel market is difficult to predict, and any number of political or general economic factors could cause prices to decline.

Building Products

The current state of the housing and mortgage markets is causing significant contraction in the home improvement remodeling industry. According to Harvard University’s Joint Center for Housing Studies, spending on home remodeling dropped 5.6% for the second quarter of 2008, to $139.2 billion, compared with the same quarter of 2007. The center’s Leading Indicator of Remodeling Activity (LIRA) projects that homeowner improvement activity will continue to decline, falling by an annual rate of 11.1% by the first quarter of 2009. The LIRA measures and projects a portion of the U.S. home improvement market, namely spending by homeowners on property improvements. Research indicates that remodeling activity is pro-cyclical with both new residential construction and the broader economy, but remodeling lags homebuilding by several quarters. The high cyclicality of remodeling activity appears to be driven by discretionary improvements, similar to the products sold by our building products business, which are quite volatile. Improvement spending is expected to be much more cyclical and more sensitive to upturns and downturns in the general economy, whereas maintenance and repair spending is expected to be fairly stable over time. This has continued negative implications for our building products business, since remodeling activity lags homebuilding, and improvement remodeling lags overall remodeling activity.

We have implemented certain initiatives in response to the downturn in the housing and improvement remodeling markets primarily directed at systematic cost reduction and reducing manufacturing capacity to better match the addressable market. During 2007 we closed three sales centers and announced the future closure of four sales center locations as well as our manufacturing facility in Houston Texas. Consequently, production volumes were re-allocated to our Groveland, Florida and Buena Park, California manufacturing facilities. All closures were completed by April 2008. We continue to evaluate various alternative strategies for our building products business.

Product demand for the Company’s Building Products Group may be influenced by numerous factors such as interest rates, general economic conditions, consumer confidence and other factors beyond our control. Declines in existing home sales and improvement remodeling expenditures due to such factors could continue to significantly reduce the segment’s performance.

Critical Accounting Policies and Estimates

The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of this process forms the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We review our estimates and judgments on a regular, ongoing basis. Actual results may differ from these estimates due to changed circumstances and conditions.

The following accounting policies and estimates are considered critical in light of the potential material impact that the estimates, judgments and uncertainties affecting the application of these policies might have on the Company’s reported financial information.

Accounts Receivable—We generally recognize revenue as product is shipped (risk of loss for our products generally passes at time of shipment), net of provisions for estimated returns. Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of trade accounts and notes receivable.

Collections on our accounts receivable are made through several lockboxes maintained by our lenders. Credit risk associated with concentration of cash deposits is low as we have the right of offset with our lenders for a substantial portion of our cash balances. Concentrations of credit risk with respect to trade accounts receivable are within several industries. Generally, credit is extended once appropriate credit history and references have been obtained. We perform ongoing credit evaluations of customers and set credit limits based upon reviews of customers’ current credit information and payment history. We monitor customer payments and maintain a provision for estimated credit losses based on historical experience and specific customer collection issues that we have identified. Provisions to the allowance for doubtful accounts are made monthly and adjustments are made periodically based upon our expected ability to collect all such accounts. Generally we do not require collateral for the extension of credit.

Each month we consider all available information when assessing the adequacy of the provision for allowances, claims and doubtful accounts. Adjustments made with respect to the allowance for doubtful accounts often relate to improved information not previously available. Uncertainties with respect to the allowance for doubtful accounts are inherent in the preparation of financial statements. The rate of future credit losses may not be similar to past experience.

Inventories—Inventories are stated at the lower of cost or market. Our inventories are accounted for using a variety of methods including specific identification, average cost and the first-in, first-out method of accounting. We regularly review inventory on hand and record provisions for damaged and slow-moving inventory based on historical and current sales trends. Changes in product demand and our customer base may affect the value of inventory on hand which may require higher provisions for damaged and slow-moving inventory.

Results of Operations

The following unaudited consolidated financial information reflects our historical financial statements.

Consolidated Results—Three Months Ended September 30, 2008 Compared to September 30, 2007


	2008			%		2007			%
	(In millions, except percentages)
Net sales	$	617.7		100.0	%	$	469.6		100.0	%
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)		446.4		72.3	%		363.2		77.3	%
Operating and delivery		48.6		7.9	%		43.7		9.3	%
Selling, general and administrative		33.3		5.4	%		28.2		6.0	%
Depreciation and amortization		5.3		0.9	%		5.2		1.1	%
Gain on sale of property and equipment		(0.9	)	-0.1	%		—		—

Operating income		85.0		13.8	%		29.3		6.2	%
Interest expense		12.8		2.1	%		14.4		3.1	%
Other (income) expense, net		0.2		0.0	%		(0.1	)	0.0	%

Income before income taxes	$	72.0		11.7	%	$	15.0		3.2	%

Net sales. Net sales increased $148.1 million, or 31.5%, from $469.6 million for the three months ended September 30, 2007 to $617.7 million for the three months ended September 30, 2008. The increase was

primarily attributable to a 31.4% increase in average realized prices, in addition to an 3.2% increase in volumes for our Flat Rolled and Non-Ferrous and Plates and Shapes Product Groups, partially offset by a net sales decrease of $3.9 million for our Building Products Group.

Cost of sales. Cost of sales increased $83.2 million, or 22.9%, from $363.2 million for the three months ended September 30, 2007, to $446.4 million for the three months ended September 30, 2008. The increase was primarily attributable to a 21.8% increase in the average cost per ton, in addition to an 3.2% increase in volumes for our Flat Rolled and Non-Ferrous and Plates and Shapes Product Groups, partially offset by a $2.6 million decrease in cost of sales for our Building Products Group. Cost of sales as a percentage of net sales decreased from 77.3% for the third quarter of 2007 to 72.3% for the third quarter of 2008 as sales prices increased faster than the corresponding cost of material sold.

Operating and delivery. Operating and delivery expenses increased $4.9 million, or 11.2%, from $43.7 million for the three months ended September 30, 2007 to $48.6 million for the three months ended September 30, 2008. The increase was a result of higher variable costs associated with increased shipments. As a percentage of net sales, operating and delivery expenses decreased from 9.3% for the three months ended September 30, 2007 to 7.9% for the three months ended September 30, 2008.

Selling, general and administrative. Selling, general and administrative expenses increased $5.1 million, or 18.1%, from $28.2 million for the three months ended September 30, 2007 to $33.3 million for the three months ended September 30, 2008. Higher variable costs of $4.0 million associated with increased incentive compensation were the primary contributor to the period-over-period increase. As a percentage of net sales, selling, general and administrative expenses decreased from 6.0% for the three months ended September 30, 2007 to 5.4% for the three months ended September 30, 2008.

Depreciation and amortization. Depreciation and amortization expense increased $0.1 million, or 1.9%, from $5.2 million for the three months ended September 30, 2007 to $5.3 million for the three months ended September 30, 2008. The increase was primarily due to machinery and equipment additions to our Plates and Shapes Products Group, partially offset by lower amortization of customer list intangible assets recorded in connection with the acquisitions completed in May 2006 and the Merger.

Operating income. Operating income increased $55.7 million, or 190.1%, from $29.3 million for the three months ended September 30, 2007 to $85.0 million for the three months ended September 30, 2008. The increase was primarily a result of the increase in net sales discussed above. As a percentage of net sales, operating income increased from 6.2% for the three months ended September 30, 2007 to 13.8% for the three months ended September 30, 2008.

Interest expense. Interest expense decreased $1.6 million, or 11.1%, from $14.4 million for the three months ended September 30, 2007 to $12.8 million for the three months ended September 30, 2008. This decrease was primarily a function of lower average interest rates on our ABL facility. While the weighted average outstanding balance on our ABL facility increased $59.5 million for the three months ended September 30, 2008 versus the same period of 2007, the weighted average interest rate decreased from 6.76% for the three months ended September 30, 2007 to 3.93% for the three months ended September 30, 2008.

Consolidated Results—Nine Months Ended September 30, 2008 Compared to September 30, 2007


	2008			%		2007			%
	(In millions, except percentages)
Net sales	$	1,699.8		100.0	%	$	1,413.1		100.0	%
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)		1,245.9		73.3	%		1,083.2		76.7	%
Operating and delivery		144.6		8.5	%		133.6		9.5	%
Selling, general and administrative		95.9		5.6	%		86.4		6.1	%
Depreciation and amortization		16.2		1.0	%		15.5		1.1	%
Gain on sale of property and equipment		(2.4	)	-0.1	%		—		—
Impairment of property and equipment		—		—			0.2		0.0	%

Operating income		199.6		11.7	%		94.2		6.7	%
Interest expense		40.8		2.4	%		43.9		3.1	%
Other (income) expense, net		0.2		0.0	%		(0.1	)	0.0	%

Income before income taxes	$	158.6		9.3	%	$	50.4		3.6	%

Net sales. Net sales increased $286.7 million, or 20.3%, from $1,413.1 million for the nine months ended September 30, 2007 to $1,699.8 million for the nine months ended September 30, 2008. The Lynch Metals acquisition accounted for $18.6 million of increased sales for the period. The remaining increase of $268.1 million was primarily attributable to an 16.2% increase in average realized prices and a 5.4% increase in volumes for our Flat Rolled and Non-Ferrous and Plates and Shapes Product Groups partially offset by a net sales decrease of $20.7 million for our Building Products Group.

Cost of sales. Cost of sales increased $162.7 million, or 15.0%, from $1,083.2 million for the nine months ended September 30, 2007, to $1,245.9 million for the nine months ended September 30, 2008. The Lynch Metals acquisition accounted for $11.3 million of additional cost of sales for the period. The remaining increase of $151.4 million was primarily attributable to a 10.1% increase in the average cost per ton and a 5.4% increase in volumes for our Flat Rolled and Non-Ferrous and Plates and Shapes Groups partially offset by a decrease of $9.0 million in cost of sales for our Building Products Group. Cost of sales as a percentage of net sales decreased from 76.7% for the nine months ended September 30, 2007 to 73.3% for the same period in 2008.

Operating and delivery. Operating and delivery expenses increased $11.0 million, or 8.2%, from $133.6 million for the nine months ended September 30, 2007 to $144.6 million for the nine months ended September 30, 2008. The acquisition of Lynch Metals accounted for $0.8 million of additional operating and delivery expenses for the period. The remaining increase was a result of higher variable costs of $10.2 million associated with increased shipments. As a percentage of net sales, operating and delivery expenses decreased from 9.5% for the nine months ended September 30, 2007 to 8.5% for the nine months ended September 30, 2008.

Selling, general and administrative. Selling, general and administrative expenses increased $9.5 million, or 11.0%, from $86.4 million for the nine months ended September 30, 2007 to $95.9 million for the nine months ended September 30, 2008. The Lynch Metals acquisition accounted for $1.9 million of the increase while increased incentive compensation accounted for an additional $7.5 million of the increased selling, general and administrative expenses for the period. These increases were partially offset by a decrease in stock-based compensation expense of $3.0 million, an amount which was recognized in the first quarter of 2007 due to the accelerated vesting of stock options in connection with the January 2007 Dividend. As a percentage of net sales, selling, general and administrative expenses decreased from 6.1% for the nine months ended September 30, 2007 to 5.6% for the nine months ended September 30, 2008.

Depreciation and amortization. Depreciation and amortization increased $0.7 million, or 4.5%, from $15.5 million for the nine months ended September 30, 2007 to $16.2 million for the nine months ended September 30,

2008. The Lynch Metals acquisition accounted for $2.4 million of additional depreciation and amortization for the period. This increase was partially offset by a decrease of $1.7 million for the period, which resulted primarily from lower amortization of customer list intangible assets recorded in connection with the acquisitions completed in May 2006 and the Merger.

Operating income. Operating income increased $105.4 million, or 111.9%, from $94.2 million for the nine months ended September 30, 2007 to $199.6 million for the nine months ended September 30, 2008. The Lynch Metals acquisition contributed $2.2 million of operating income for the period. The remaining increase of $103.2 million resulted primarily from the increased net sales during the current period. As a percentage of net sales, operating income increased from 6.7% for the nine months ended September 30, 2007 to 11.7% for the nine months ended September 30, 2008.

Interest expense. Interest expense decreased $3.1 million, or 7.1%, from $43.9 million for the nine months ended September 30, 2007 to $40.8 million for the nine months ended September 30, 2008. The decrease was primarily due to lower average interest rates on our ABL facility. While the weighted average outstanding balance on our ABL facility increased $24.4 million for the nine months ended September 30, 2008 versus the same period of 2007, the weighted average interest rate decreased from 7.14% for the nine months ended September 30, 2007 to 4.44% for the nine months ended September 30, 2008.

Segment Results—Three Months Ended September 30, 2008 Compared to September 30, 2007


	Net Sales			Operating Costs and Expenses		Operating Income (Loss)			Capital Spending		Tons Shipped(1)
	(in millions, except tonnage)
2008:
Plates and Shapes	$	339.9		$	277.5	$	62.4		$	2.7	212
Flat Rolled and Non-Ferrous		244.5			216.5		28.0			0.9	151
Building Products		37.8			36.0		1.8			—	—
Corporate and other		(4.5	)		2.7		(7.2	)		0.4	(3	)

Total	$	617.7		$	532.7	$	85.0		$	4.0	360

2007:
Plates and Shapes	$	225.3		$	202.1	$	23.2		$	3.3	207
Flat Rolled and Non-Ferrous		205.6			193.1		12.5			1.2	144
Building Products		41.7			40.6		1.1			0.4	—
Corporate and other		(3.0	)		4.5		(7.5	)		0.1	(2	)

Total	$	469.6		$	440.3	$	29.3		$	5.0	349

(1)	Shipments are expressed in thousands of tons and are not an applicable measure for the Building Products Group.

Plates and Shapes. Net sales increased $114.6 million, or 50.9%, from $225.3 million for the three months ended September 30, 2007 to $339.9 million for the three months ended September 30, 2008. The increase was primarily attributable to a 47.3% increase in average realized prices, in addition to a 2.4% increase in shipments for the three months ended September 30, 2008, compared to the three months ended September 30, 2007.

Operating costs and expenses increased $75.4 million, or 37.3%, from $202.1 million for the three months ended September 30, 2007 to $277.5 million for the three months ended September 30, 2008. The increase was primarily attributable to a 37.4% increase in the average cost per ton, in addition to a 2.4% increase in shipments for the three months ended September 30, 2008, compared to the three months ended September 30, 2007.

Operating income increased by $39.2 million, or 169.0%, from $23.2 million for the three months ended September 30, 2007 to $62.4 million for the three months ended September 30, 2008. The increase primarily resulted from higher net sales which were driven by an increase in average realized prices, and to a lesser extent increased shipments, as discussed above. Operating income as a percentage of net sales increased from 10.3% for the three months ended September 30, 2007 to 18.4% for the three months ended September 30, 2008.

Flat Rolled and Non-Ferrous. Net sales increased $38.9 million, or 18.9%, from $205.6 million for the three months ended September 30, 2007 to $244.5 million for the three months ended September 30, 2008. The increase was primarily attributable to a 13.4% increase in average realized prices, in addition to a 4.9% increase in shipments for the three months ended September 30, 2008, compared to the three months ended September 30, 2007. Sales of non-ferrous metals accounted for 37.9% of the segment’s sales product mix for the third quarter of 2008, compared to 52.6% for the third quarter of 2007.

Operating costs and expenses increased $23.4 million, or 12.1%, from $193.1 million for the three months ended September 30, 2007 to $216.5 million for the three months ended September 30, 2008. The remaining increase was primarily attributable to an increase in the average cost per ton of 6.3% in addition to an increase in volume of 4.9%. Operating costs and expenses as a percentage of net sales decreased from 93.9% for the three months ended September 30, 2007 to 88.5% for the three months ended September 30, 2008.

Operating income increased by $15.5 million, or 124.0%, from $12.5 million for the three months ended September 30, 2007 to $28.0 million for the three months ended September 30, 2008. The increase was primarily attributable to the increase in sales volumes discussed above. Operating income as a percentage of net sales increased from 6.1% for the three months ended September 30, 2007 to 11.5% for the three months ended September 30, 2008.

Building Products. Net sales decreased $3.9 million, or 9.4%, from $41.7 million for the three months ended September 30, 2007 to $37.8 million for the three months ended September 30, 2008. The sales decrease was driven by lower home improvement remodeling activity. Consumer spending on residential remodeling has decreased dramatically due to the depreciation of homes, lower limits on home equity loans and decreased access to affordable credit for homeowners and residential remodeling contractors. These factors, in addition to lower sales of new and previously owned homes, have led to significant contraction in the remodeling industry and negative growth in our Building Products Group.

Operating costs and expenses decreased $4.6 million, or 11.3%, from $40.6 million for the three months ended September 30, 2007 to $36.0 million for the three months ended September 30, 2008. The decrease was primarily due to lower sales volume and a decrease in variable costs related to lower market demand. Operating costs and expenses as a percentage of net sales decreased from 97.4% for the three months ended September 30, 2007 to 95.2% for the three months ended September 30, 2008.

Operating income increased by $0.7 million, or 63.6%, from $1.1 million for the three months ended September 30, 2007 to $1.8 million for the three months ended September 30, 2008. The increase was primarily attributable to a $0.7 million gain on the sale of the segment’s Houston, Texas manufacturing facility, in addition to the decline in operating costs and expenses discussed above. Operating income as a percentage of net sales increased from 2.6% for the three months ended September 30, 2007 to 4.8% for the three months ended September 30, 2008.

Corporate and other. This category reflects certain administrative costs and expenses management has not allocated to its industry segments. These costs include compensation for executive officers, insurance, professional fees for audit, tax and legal services and data processing expenses. The negative net sales amount represents the elimination of intercompany sales. The operating loss decreased $0.3 million, or 4.0%, from $7.5 million for the three months ended September 30, 2007 to $7.2 million for the three months ended September 30, 2008.

Segment Results—Nine Months Ended September 30, 2008 Compared to September 30, 2007


	Net Sales			Operating Costs and Expenses		Operating Income (Loss)			Capital Spending		Tons Shipped(1)
	(in millions, except tonnage)
2008:
Plates and Shapes	$	915.1		$	760.1	$	155.0		$	6.0	672
Flat Rolled and Non-Ferrous		695.0			622.9		72.1			1.8	483
Building Products		100.3			106.7		(6.4	)		0.6	—
Corporate and other		(10.6	)		10.5		(21.1	)		0.5	(8	)

Total	$	1,699.8		$	1,500.2	$	199.6		$	8.9	1,147

2007:
Plates and Shapes	$	672.7		$	599.0	$	73.7		$	11.6	626
Flat Rolled and Non-Ferrous		630.1			587.2		42.9			2.6	467
Building Products		121.0			118.6		2.4			1.4	—
Corporate and other		(10.7	)		14.1		(24.8	)		0.4	(8	)

Total	$	1,413.1		$	1,318.9	$	94.2		$	16.0	1,085

(1)	Shipments are expressed in thousands of tons and are not an appropriate measure for the Building Products Group.

Plates and Shapes. Net sales increased $242.4 million, or 36.0%, from $672.7 million for the nine months ended September 30, 2007 to $915.1 million for the nine months ended September 30, 2008. The increase was primarily attributable to a 26.7% increase in average realized prices, in addition to a 7.3% increase in shipments for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.

Operating costs and expenses increased $161.1 million, or 26.9%, from $599.0 million for the nine months ended September 30, 2007 to $760.1 million for the nine months ended September 30, 2008. The increase was primarily attributable to a 20.3% increase in the average cost per ton, in addition to a 7.3% increase in shipments for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007. Operating costs and expenses as a percentage of net sales decreased from 89.0% for the nine months ended September 30, 2007 to 83.0% for the nine months ended September 30, 2008.

Operating income increased by $81.3 million, or 110.3%, from $73.7 million for the nine months ended September 30, 2007 to $155.0 million for the nine months ended September 30, 2008. The increase was primarily attributable to the increase in net sales and the decrease in operating costs and expenses as a percentage of net sales, as discussed above. Operating income as a percentage of net sales increased from 11.0% for the nine months ended September 30, 2007 to 16.9% for the nine months ended September 30, 2008.

Flat Rolled and Non-Ferrous. Net sales increased $64.9 million, or 10.3%, from $630.1 million for the nine months ended September 30, 2007 to $695.0 million for the nine months ended September 30, 2008. The Lynch Metals acquisition contributed $18.6 million of additional net sales for the nine month period ended September 30, 2008. The remaining increase was primarily due to a 4.5% increase in average realized prices in addition to a 2.8% increase in shipments for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. Sales of non-ferrous metals accounted for 41.9% of the segment’s sales product mix for the nine months ended September 30, 2008, compared to 48.8% for the same period of 2007.

Operating costs and expenses increased $35.7 million, or 6.1%, from $587.2 million for the nine months ended September 30, 2007 to $622.9 million for the nine months ended September 30, 2008. The acquisition of Lynch Metals accounted for $16.4 million of additional operating costs and expenses for the nine months ended September 30, 2008. The remaining increase of $19.3 million was attributable to an increase in shipments of

2.8% in addition to an increase in the cost of raw materials of 0.6% for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. Operating costs and expenses as a percentage of net sales decreased from 93.2% for the nine months ended September 30, 2007 to 89.6% for the nine months ended September 30, 2008.

Operating income increased by $29.2 million, or 68.1%, from $42.9 million for the nine months ended September 30, 2007 to $72.1 million for the nine months ended September 30, 2008. The Lynch Metals acquisition contributed $2.2 million of operating income for the nine months ended September 30, 2008. The balance of the increase was primarily attributable to the increase in net sales discussed above. Operating income as a percentage of net sales increased from 6.8% for the nine months ended September 30, 2007 to 10.4% for the nine months ended September 30, 2008.

Building Products. Net sales decreased $20.7 million, or 17.1%, from $121.0 million for the nine months ended September 30, 2007 to $100.3 million for the nine months ended September 30, 2008. Declines in the home improvement remodeling market, which were impacted by the continued downturn in the housing sector, contributed to the period-over-period net sales decrease for our Building Products Group.

Operating costs and expenses decreased $11.9 million, or 10.0%, from $118.6 million for the nine months ended September 30, 2007 to $106.7 million for the nine months ended September 30, 2008. The decrease was due to lower operating costs and expenses associated with lower sales volumes, in addition to certain initiatives the segment has taken in response to the downturn in the housing and home improvement remodeling markets, including reductions in square footage under lease, standardization of sales center layouts, and manufacturing consolidation. Despite the decrease in sales volumes, operating costs and expenses as a percentage of net sales increased from 98.0% for the nine months ended September 30, 2007 to 106.4% for the nine months ended September 30, 2008. The increase in operating costs as a percentage of net sales is due in part to additional costs incurred during the first nine months of 2008 related to the closure of underperforming sales center locations and the discontinuance of certain product lines, as management has continued to focus on cost reduction in order to mitigate the impact of lower operating levels resulting from the market downturn. In July 2008, we sold our Houston, Texas manufacturing facility for $4.9 million in cash. We recognized a gain of $0.7 in the third quarter of 2008 related to this sale. Total facility closure costs charged to operating expense during the nine months ended September 30, 2008, net of the gain on the sale of the Houston plant, amounted to $4.0 million.

Operating income (loss) decreased by $8.8 million, or 366.7%, from income of $2.4 million for the nine months ended September 30, 2007 to a loss of $(6.4) million for the nine months ended September 30, 2008. The decrease was primarily attributable to the decline in net sales discussed above, which exceeded the rate of decline in operating costs and expenses. Operating income (loss) as a percentage of net sales decreased from 1.9% for the nine months ended September 30, 2007 to (6.4)% for the nine months ended September 30, 2008.

Corporate and other. This category reflects certain administrative costs and expenses management has not allocated to its industry segments. These costs include compensation for executive officers, insurance, professional fees for audit, tax and legal services and data processing expenses. The negative net sales amount represents the elimination of intercompany sales. The operating loss decreased $3.7 million, or 14.9%, from $24.8 million for the nine months ended September 30, 2007 to $21.1 million for the nine months ended September 30, 2008. This decrease was primarily attributable to $3.0 million of higher stock-based compensation expense incurred during the nine months ended September 30, 2007, due to the accelerated vesting of stock options in connection with the January 2007 dividend paid by Metals USA Holdings to its stockholders.

Liquidity and Capital Resources

Our primary sources of short-term liquidity are borrowings under the ABL facility and our cash flow from operations. We believe these resources will be sufficient to meet our working capital and capital expenditure requirements for the next year.

In operating our business, we need to finance our investment in working capital. Our ABL facility is the principal means by which we finance our investment in working capital (e.g., raw materials such as metal, which

are crucial to operating our business) and therefore our ABL facility is crucial to our ability to purchase inventory. We recently increased the size of the ABL facility (see “Financing Activities – The ABL facility” below) given its importance to us as a means to access additional capital. Access to the ABL facility and the cost of borrowing under it are constrained by certain covenants contained in the loan and security agreement governing the ABL facility and the indentures governing the Metals USA Notes and the 2007 Notes. These covenants are each based on Adjusted EBITDA, as discussed more fully below (see also “Financing Activities – Covenant Compliance” below).

The FCCR is also an important measure of our liquidity and affects our ability to take certain actions, including paying dividends to our stockholders, making acquisitions and incurring additional debt. In addition, the applicable interest rates associated with the ABL facility are determined by the FCCR (see “Financing Activities – The ABL facility – Interest Rate and Fees” and “Financing Activities – Covenant Compliance” below).

The ability to implement strategic “bolt-on” acquisitions is one of our key strategies, and our ability to incur additional debt is a necessary element to support this strategy. The indentures governing the Metals USA Notes and the 2007 Notes contain covenants that restrict our ability to take certain actions, such as incurring additional debt, if we are unable to meet defined Adjusted EBITDA to fixed charges and consolidated total debt ratios (each, as defined). See “Financing Activities – Covenant Compliance” below for further discussion of our restrictive covenants.

During September 2008, we borrowed approximately $160.0 million on the ABL facility in response to concerns about credit markets. As of September 30, 2008, we had eligible collateral of $618.7 million, $542.0 million in outstanding advances, $15.2 million in open letters of credit and $61.5 million of additional borrowing capacity. As of September 30, 2008, we had $173.0 million of available cash and cash equivalents. Our borrowing availability fluctuates daily with changes in eligible accounts receivables and inventory, less outstanding borrowings and letters of credit. See Financing Activities below.

We generally meet long-term liquidity requirements, the repayment of debt and investment funding needs, through additional borrowings under the ABL facility and the issuance of debt securities. At September 30, 2008, our long-term debt consisted of $542.0 million of outstanding borrowings on the ABL facility, $275.0 million principal amount of the Metals USA Notes, an Industrial Revenue Bond with $5.7 million principal amount outstanding and $0.3 million in vendor financing and purchase money notes.

With respect to long-term liquidity, we believe that we will be able to meet our working capital, capital expenditures and debt service obligations. Our ability to meet long-term liquidity requirements is subject to obtaining additional debt and/or equity financing. Decisions by lenders and investors to enter into such transactions with us will depend upon a number of factors, such as our historical and projected financial performance, compliance with the terms of our current credit agreements, industry and market trends, the availability of capital, and the relative attractiveness of alternative lending or investment opportunities.

Although we do not produce any metal, our financial performance is affected by changes in metal prices. When metal prices rise, the prices at which we are able to sell our products generally increase over their historical costs; accordingly, our working capital (which consists primarily of accounts receivable and inventory) tends to increase in a rising price environment. Conversely, when metal prices fall, our working capital tends to decrease. Our working capital (current assets less current liabilities) increased from $511.9 million at December 31, 2007 to $880.6 million at September 30, 2008.

Changes in metal prices also affect our liquidity because of the time difference between our payment for our raw materials and our collection of cash from our customers. We sell our products and typically collect our accounts receivable within 45 days after the sale; however, we tend to pay for replacement materials (which are more expensive when metal prices are rising) over a much shorter period, primarily to benefit from early-payment discounts that are substantially higher than our cost of incremental debt. As a result, when metal prices are rising, we tend to draw more on the ABL facility to cover the cash flow cycle from material purchase to cash

collection. When metal prices fall, we can replace our inventory at lower cost and, thus, generally do not need to access the ABL facility as much to cover the cash flow cycle. We believe our cash flow from operations, supplemented with the cash available under the ABL facility, will provide sufficient liquidity to meet the challenges and obligations we face during the current metal price environment. Additionally, we intend to look for value-added businesses that we can acquire at reasonable prices. We intend to use cash flows from operations and excess cash available under the ABL facility to fund future acquisitions.

The following discussion of the principal sources and uses of cash should be read in conjunction with our Unaudited Condensed Consolidated Statements of Cash Flows which are set forth under Item 1—“Financial Statements.”

During the nine months ended September 30, 2008, net cash used in operating activities was $85.0 million. This amount represents net income, adjusted for costs that did not involve cash flows for the period and gains on the sale of property and equipment, of $114.4 million, in addition to changes in operating assets and liabilities that resulted in a cash outflow of $199.4 million for the period, an amount that was primarily attributable to increases in accounts receivable and inventories, partially offset by increases in accounts payable and accrued liabilities. During the nine months ended September 30, 2007, net cash provided by operating activities was $98.0 million. This amount represents net income, adjusted for costs that did not involve cash flows for the period, of $49.5 million, offset by changes in operating assets and liabilities that resulted in a cash inflow of $48.5 million for the period, an amount that was primarily attributable to decreases in inventories and increases in accounts payable and accrued liabilities, partially offset by an increase in accounts receivable.

Net cash provided by investing activities was $0.6 million for the nine months ended September 30, 2008, and consisted of proceeds from sales of assets of $9.5 million partially offset by $8.9 million of purchases of assets. For the nine months ended September 30, 2008, the most significant internal capital project was the expansion of our New Orleans Plates and Shapes facility. Net cash used in investing activities was $53.4 million for the nine months ended September 30, 2007, and consisted primarily of $38.4 million of acquisition costs incurred in connection with the Lynch Metals acquisition, in addition to $16.0 million of purchases of assets, partially offset by proceeds from sales of assets of $1.0 million. For the nine months ended September 30, 2007, the most significant internal capital project was the expansion of our New Orleans Plates and Shapes facility.

Net cash provided by financing activities was $243.8 million for the nine months ended September 30, 2008, and consisted primarily of net borrowings on the ABL facility of $261.5 million, partially offset by $2.3 million of repayments of long-term debt, $2.5 million of deferred financing costs, and dividends paid to Metals USA Holdings of $12.9 million. Net cash used in financing activities was $47.7 million for the nine months ended September 30, 2007, and consisted primarily of net repayments on the ABL facility of $29.0 million and dividends paid to Metals USA Holdings of $16.5 million, in addition to deferred financing cost incurred of $1.7 million.

Adjusted EBITDA

EBITDA represents net income before interest, income taxes, depreciation and amortization. Adjusted EBITDA (as defined by the loan and security agreement governing the ABL facility and the indentures governing the Metals USA Notes and the 2007 Notes) is defined as EBITDA further adjusted to exclude certain non-cash, non-recurring and realized (or in the case of the indentures, expected) future cost savings directly related to prior acquisitions. EBITDA and Adjusted EBITDA are not defined terms under GAAP. Neither EBITDA nor Adjusted EBITDA should be considered an alternative to operating income or net income as a measure of operating results or an alternative to cash flow as a measure of liquidity. There are material limitations associated with making the adjustments to our earnings to calculate EBITDA and Adjusted EBITDA and using these non-GAAP financial measures as compared to the most directly comparable GAAP financial measures. For instance, EBITDA and adjusted EBITDA do not include:

•

interest expense, and, because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and ability to generate revenue;

•

depreciation and amortization expense, and, because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue; and

•

income tax expense, and because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and ability to operate.

We present EBITDA because we consider it an important supplemental measure of our performance and believe it is frequently used by our investors and other interested parties, as well as by our management, in the evaluation of companies in our industry, many of which present EBITDA when reporting their results. In addition, EBITDA provides additional information used by our management and board of directors to facilitate internal comparisons to historical operating performance of prior periods. Further, management believes EBITDA facilitates their operating performance comparisons from period to period because it excludes potential differences caused by variations in capital structure (affecting interest expense), tax positions (such as the impact of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting depreciation expense).

We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors about the performance of the business, and we are required to reconcile net income to Adjusted EBITDA to demonstrate compliance with debt covenants. Management uses Adjusted EBITDA as a key indicator to evaluate performance of certain employees.

Reconciliation of Net Income to EBITDA and Adjusted EBITDA


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008		2007
	(in millions)
Net income	$	41.0		$	7.7		$	95.0	$	29.0
Depreciation and amortization(1)		5.8			5.6			18.2		16.6
Interest expense		12.8			14.4			40.8		43.9
Provision for income taxes		31.0			7.3			63.6		21.4
Other (income) expense		0.2			(0.1	)		0.2		(0.1	)

EBITDA		90.8			34.9			217.8		110.8
Covenant defined adjustments:
Facilities closure(2)		(0.7	)		0.2			4.0		0.2
Stock options and grant expense(3)		0.3			0.8			0.9		4.5
Management fees(4)		0.3			0.3			0.9		0.9

Adjusted EBITDA(5)	$	90.7		$	36.2		$	223.6	$	116.4

Fixed charge coverage ratio numerator(6)	$	210.1		$	96.9		$	210.1	$	96.9
Fixed charge coverage ratio denominator(6)	$	65.4		$	78.0		$	65.4	$	78.0
Fixed charge coverage ratio(6)		3.21			1.24			3.21		1.24

(1)	Includes depreciation for Building Products that is included in cost of sales.

(2)	This amount represents charges in the Building Products Group for the closure of six facilities during 2008 and two facilities during the first nine months of 2007.

(3)	Non-cash stock option and stock grant expense.

(4)	Includes accrued expenses related to the management agreement we have with Apollo.

(5)	As defined by the loan and security agreement governing the ABL facility. Given the wide variety of capital structures used to finance working capital in our industry, we believe that Adjusted EBITDA is a useful tool in addition to net income to evaluate our financial condition.

(6)	These amounts represent the FCCR numerator, the FCCR denominator, and the FCCR, each as defined by the ABL facility.

Financing Activities

The ABL Facility

~~Overview.~~ The ABL facility ~~provides~~permits ~~for borrowings, subject to a borrowing base calculation, of up to $450.0 million and will enable~~ us to borrow ~~and~~on ~~repay~~a ~~funds~~revolving asbasis ~~needed. The ABL facility was initially comprised of $415.0 million of Tranche A Commitments and $35.0 million of Tranche A-1 Commitments. While the~~through ~~Tranche A-1 Commitments remain outstanding~~November 30, ~~the borrowing base is subject to greater advance rates than would otherwise be in effect~~2011. ASubstantially ~~permanent~~all ~~reduction~~ of ~~the~~our ~~maximum~~subsidiaries ~~Tranche~~are ~~A-1~~borrowers ~~commitments~~under ~~to $25.0 million occurred on June 1, 2006, with a corresponding permanent increase to $425.0 million in~~ the ~~Tranche A commitments, leaving the total~~ ABL facility ~~unchanged~~.

On June 8, 2007, we executed the June 2007 amendment to the ABL facility, which increased the commitment from $450.0 million to $525.0 million, comprised of $500.0 million of Tranche A Commitments and $25.0 million of Tranche A-1 Commitments. Additionally, the June 2007 amendment reduced the borrowing cost on the Tranche A facility by 25 basis points, reduced the borrowing cost on the Tranche A-1 facility by 75 basis points and gave us the option to increase the Tranche A Commitments by $100.0 million. The June 2007 amendment did not have any impact on our covenant compliance. Costs incurred in connection with the June 2007 amendment totaled $1.6 million, and are being amortized over the existing term of the ABL facility, which expires November 30, 2011.

On July 1, 2008, we executed our option to increase the Tranche A Commitments by $100.0 million, which increased the total commitment from $525.0 million to $625.0 million. All other existing terms under the ABL facility remained unchanged. Costs incurred to exercise the option to increase the ABL facility totaled $2.4 million, and are being amortized over the existing term of the ABL facility.

Borrowing Base. The maximum availability under the ABL facility is based on eligible receivables and eligible inventory, subject to certain reserves. Our borrowing availability fluctuates daily with changes in eligible receivables and inventory, less outstanding borrowings and letters of credit. The borrowing base is equal to the lesser of (a) the aggregate amount of the Tranche A Commitments and the Tranche A-1 Commitments and (b) the sum of:

•

85% of the net amount of eligible accounts receivable;

• the lesser of (x) 70% of the lesser of the original cost or market value of eligible inventory and (y) 90% of the net orderly liquidation value of eligible inventory; and

• at all times prior to the termination of the Tranche A-1 Commitments, the sum of 5% of the net amount of eligible accounts receivable and 5% of the net orderly liquidation value of eligible inventory.

• prior to May 31, 2006, the sum of 5% of the net amount of eligible accounts receivable and 10% of the net orderly liquidation value of eligible inventory; or

• thereafter, the sum of 5% of the net amount of eligible accounts receivable and 5% of the net orderly liquidation value of eligible inventory.

Initial borrowings under the ABL facility were used to repay the outstanding amounts drawn under our existing revolving credit facility and to fund other costs and expenses related to the Merger. The loan and security agreement governing the ABL facility provides for up to $15.0 million of swing-line loans and up to $100.0 million for the issuance of letters of credit. Both the face amount of any outstanding letters of credit and any swing-line loans will reduce borrowing availability under the ABL facility on a dollar-for-dollar basis.

During September 2008, we borrowed approximately $160.0 million on the ABL facility in response to concerns about credit markets. As of ~~June~~ September 30, ~~2006~~2008, we had eligible collateral of $~~451~~618.97 million, $~~294~~542.0 million in outstanding advances, $1815.52 million in open letters of credit and $~~137~~61.45 million inof additional borrowing capacity. As of September 30, 2008, we had $173.0 million of available cash and cash equivalents.

WeIn January 2007, Metals USA Holdings used ~~$36.2~~the ~~million~~net ~~and~~proceeds from the issuance of the 2006 Notes, as well as $98.32 million of ~~funds~~additional ~~from~~borrowings under the ABL facility, to ~~acquire~~pay ~~the~~a ~~net~~cash ~~assets~~dividend of ~~Port~~approximately ~~City~~$144.8 ~~and~~million ~~Dura-Loc~~to its stockholders, ~~respectively~~to make a cash payment (partially in lieu of the cash dividend) of $4.2 ~~Due~~million to ~~these~~its vested ~~increased~~stock ~~borrowings~~option ~~under~~holders, and to pay fees and expenses related to the ~~ABL~~issuance ~~facility~~of the 2006 Notes, ~~our~~including ~~interest~~a ~~expense~~$1.5 ismillion ~~expected~~transaction fee to ~~increase~~Apollo.

~~Guarantees~~On ~~and~~July 2, ~~Security.~~2007, ~~Substantially all~~we ofpurchased ~~our~~the ~~subsidiaries~~business ~~are~~operations ~~defined~~of asLynch ~~“borrowers”~~Metals ~~under~~for ~~such~~approximately ~~agreement~~$42.4 million. The ~~obligations~~purchase ~~under~~price ~~the~~was ~~ABL~~funded ~~facility are guaranteed~~ by ~~Flag~~borrowings ~~Intermediate~~under ~~and~~the ~~certain~~ABL ~~of our future domestic subsidiaries and are secured (i) on a first-priority lien basis by our~~facility, ~~the~~$38.4 ~~other~~million ~~borrowers’~~of ~~and~~which ~~the~~was ~~guarantors’~~paid ~~accounts,~~at ~~inventory~~closing, ~~cash~~ and ~~proceeds~~approximately $4.0 ~~and~~million ~~products~~ of ~~the~~which ~~foregoing~~is deferred and ~~certain~~will ~~assets~~be ~~related~~paid ~~thereto~~in ~~and~~various ~~(ii) on~~installments over a ~~second-priority~~period ~~lien basis by substantially all~~ of ~~our,~~two ~~the~~years ~~other~~from ~~borrowers’ and~~ the ~~guarantors’~~closing ~~other assets, subject to certain exceptions and permitted liens~~date.

~~Interest~~50 Rate and Fees. Interest is calculated based upon a margin (established within a specific pricing grid for loans utilizing Tranche A Commitments) over reference rates. The marginal rates vary with our financial performance as measured by the fixed charge coverage ratio. The fixed charge coverage ratio is determined by dividing (i) the sum of Adjusted EBITDA (as defined by the loan and security agreement governing the ABL facility) minus income taxes paid in cash minus non-financed capital expenditures by (ii) the sum of certain distributions paid in cash, cash interest expense and scheduled principal reductions on debt.

~~The~~Also ~~interest~~in ~~rates~~July ~~with respect to loans utilizing the Tranche A Commitments are~~2007, atMetals ~~our~~USA ~~option, (i) the~~Holdings ~~higher~~issued of$300.0 ~~(a) the~~million ~~prime~~initial ~~rate~~aggregate ~~of Credit Suisse in effect at its~~ principal ~~office~~amount inof ~~New York City and (b)~~ the 2007 ~~federal funds effective rate plus 0~~Notes.~~5%;~~ ~~plus,~~The innet ~~each~~proceeds ~~case,~~from ~~an applicable margin ranging between 0.25% and 0.00% as determined in accordance with~~ the ~~loan~~issuance ~~agreement~~of ~~or (ii)~~ the ~~rate~~2007 ~~(as adjusted) at which Eurodollar deposits for one~~Notes, ~~two,~~as ~~three,~~well ~~six~~as ~~or,~~approximately if$8.3 ~~available,~~million ~~nine~~of oradditional ~~twelve~~borrowings ~~months,~~under asthe ~~selected~~ABL ~~by us~~facility, bywere ~~reference~~used to redeem the ~~British~~2006 ~~Bankers’ Association~~Notes ~~Interest Settlement Rates~~ (for ~~deposits~~approximately in$150.0 ~~dollars,~~million plus anaccrued ~~applicable~~and ~~margin~~unpaid interest ~~ranging~~of ~~between~~approximately 1$5.~~25%~~4 ~~and~~million), ~~2.00%~~to aspay ~~determined~~a incash ~~accordance~~dividend ~~with~~of ~~the~~approximately ~~loan and security agreement governing the ABL facility~~$130.3 ~~The~~million ~~interest rates with respect~~ to ~~loans~~ ~~utilizing~~its ~~the Tranche A-1 Commitments are~~stockholders, atwhich ~~our~~include ~~option,~~Apollo ~~(i) the~~and ~~higher~~certain ofmembers ~~(a) the prime rate~~ of ~~Credit~~management, ~~Suisse~~to inmake ~~effect~~a atcash ~~its~~payment ~~principal~~(partially ~~office~~ in ~~New~~lieu ~~York~~of ~~City~~the ~~and~~cash (bdividend) ~~the~~ ~~federal funds effective rate plus 0.5%; in each case~~of ~~plus~~approximately ~~an applicable margin of (1) initially, 1~~$9.~~75% and (~~2~~) after~~ ~~the~~million ~~first~~to ~~adjustment~~its ~~date~~stock ~~under~~option ~~the ABL facility~~holders, ~~1.50% or (ii) the rate (as adjusted) at~~ which ~~Eurodollar~~include ~~deposits~~certain ~~for~~members ~~one,~~of ~~two,~~our ~~three~~management, ~~six~~and ~~or,~~to ifpay ~~available,~~fees ~~nine~~and ~~or twelve~~expenses ~~months,~~related ~~as selected by us, by reference~~ to the ~~British~~offering ~~Bankers’ Association Interest Settlement Rates for deposits in dollars, plus an applicable margin~~ of ~~(a) initially, 3.75% and (b) after~~ the ~~first~~2007 ~~adjustment date under the ABL facility, 3~~Notes.~~50%.~~

AGuarantees ~~commitment~~and ~~fee~~Security. isSubstantially ~~payable~~all onof ~~any~~our ~~unused~~subsidiaries ~~commitments~~are defined as “borrowers” under the loan and security agreement governing the ABL facility. The obligations under the ABL facility are guaranteed by Flag Intermediate and certain of ~~0.25%~~our domestic subsidiaries and are secured (i) ~~per~~on ~~annum.~~a ~~The~~first-priority ~~applicable~~lien basis by our, the other borrowers’ and the ~~base~~guarantors’ ~~rate~~accounts, inventory, cash and proceeds and products of the ~~effective~~foregoing ~~LIBOR~~and ~~rate~~certain ~~were~~assets ~~8.25%~~related thereto and ~~5.48%,~~(ii) on ~~respectively~~a second-priority lien basis by substantially all of our, atthe ~~June 30~~other borrowers’ and the guarantors’ other assets, ~~2006~~subject to certain exceptions and permitted liens.

~~Certain~~Interest ~~Covenants.~~Rate ~~The~~and ~~ABL facility~~Fees. ~~contains~~Interest ~~customary~~is ~~representations,~~calculated ~~warranties~~based ~~and~~upon ~~covenants~~a asmargin (established within a ~~precondition~~specific topricing ~~lending,~~grid ~~including~~for aloans ~~material~~utilizing ~~adverse~~Tranche ~~change~~A inCommitments) ~~the~~over ~~business,~~reference ~~limitations~~rates. onThe ~~our~~marginal ~~ability~~rates tovary ~~incur~~with orour ~~guarantee~~financial ~~additional~~performance ~~debt,~~as ~~subject~~measured toby ~~certain~~the ~~exceptions, pay~~FCCR. ~~dividends,~~The orFCCR ~~make~~is ~~redemptions~~determined ~~and~~by ~~repurchases,~~dividing ~~with~~(i) the ~~respect~~sum toof Adjusted ~~capital~~EBITDA ~~stock,~~(as ~~create~~defined orby ~~incur~~the ~~certain~~loan ~~liens,~~and ~~make~~security ~~certain~~agreement ~~loans~~governing orthe ~~investments,~~ABL ~~make~~facility) ~~acquisitions~~minus orincome ~~investments,~~taxes ~~engage~~paid in ~~mergers,~~cash ~~acquisitions,~~minus ~~asset~~non-financed ~~sales~~capital ~~and~~expenditures ~~sale~~by ~~lease-back transactions,~~(ii) the ~~and~~sum ~~engage~~of in certain ~~transactions~~distributions ~~with~~paid ~~affiliates.~~in ~~In addition~~cash, ~~the~~cash ~~ABL~~interest ~~facility~~expense ~~requires~~and scheduled aprincipal ~~lock-box~~reductions ~~arrangement~~on debt, ~~which~~and inis calculated based on such amounts for the ~~absence~~most ofrecent ~~default,~~period isof ~~controlled~~four byconsecutive usfiscal quarters.

The ~~most~~interest ~~significant~~rates ofwith respect to loans utilizing the Tranche A Commitments are, at our ~~affirmative~~option, ~~negative~~(i) the higher of (a) the prime rate of Credit Suisse in effect at its principal office in New York City and ~~subjective~~(b) the ~~covenants~~federal funds ~~under~~effective rate plus 0.5%; plus, in each case, an applicable margin ranging between -0.25% and -0.50% as determined in accordance with the loan and security agreement governing the ABL facility ~~are:~~ or (iii) the ~~maintenance~~rate of(as aadjusted ~~borrowing~~for ~~base~~statutory reserves) ~~availability~~for ofEurodollar atdeposits ~~least~~for ~~$45.0~~one, ~~million~~two, three, six or, if ~~such~~agreed ~~required~~to ~~borrowing~~by ~~base~~all ~~availability~~lenders isunder ~~not~~the ~~maintained~~loan and security agreement, nine or twelve months, as selected by us, by reference to the ~~maintenance~~British ofBankers’ Association Interest Settlement Rates, plus an applicable margin ranging between 1.00% and 1.75% as determined in accordance with the ~~fixed~~loan ~~charge~~and ~~coverage~~security ~~ratio~~agreement governing the ABL facility. The interest rates with respect to loans utilizing the Tranche A-1 Commitments are, at our option, (iii) ~~restrictions~~the onhigher ~~additional indebtedness~~of (a) the prime rate of Credit Suisse in effect at its principal office in New York City and (~~iii~~b) ~~restrictions~~the onfederal ~~liens,~~funds ~~guarantees~~effective ~~and~~rate ~~quarterly~~plus ~~dividends~~0.5%; ~~There~~in ~~are~~each nocase ~~limitations~~plus ~~with~~an ~~respect~~applicable tomargin ~~capital~~of ~~expenditures~~0.75% Asor ~~long~~(ii) the rate (as ~~our~~adjusted ~~borrowing~~for ~~availability~~statutory isreserves) ~~$45.0~~for ~~million~~Eurodollar ordeposits ~~greater~~for one, wetwo, dothree, ~~not~~six ~~have~~or, if agreed to ~~maintain~~by ~~a minimum~~all ~~fixed~~lenders ~~charge~~under ~~coverage~~the ~~ratio.~~loan ~~Should~~and ~~borrowing~~security ~~availability~~agreement, ~~fall~~nine ~~below~~or ~~$45.0~~twelve ~~million~~months, weas ~~must~~selected ~~maintain~~by aus, ~~fixed~~by ~~charge~~reference ~~coverage~~to ~~ratio~~the ofBritish ~~1.0~~Bankers’ Association toInterest 1Settlement Rates, plus an applicable margin of 2.075%.

~~Additionally,~~A ~~payments~~commitment tofee ~~affiliates~~is ~~are~~payable ~~limited~~on toany ~~the~~unused ~~greater~~commitments ofunder ~~$3.0 million or 3% of Adjusted EBITDA (as defined in~~ the ~~loan and security agreement governing the~~ ABL facility) ~~provided~~of ~~borrowing availability equals at least $25.~~0.25% per ~~million~~annum. ~~Further,~~The ~~distributions~~applicable inbase ~~respect~~rate ofand ~~capital stock are limited to~~ the ~~payment~~effective ofLIBOR uprate ~~to $25.0 million, plus $5.0 million~~ for ~~each~~the ~~full~~Tranche ~~fiscal~~A ~~quarter~~Commitments ~~(with~~and ~~any~~Tranche ~~amount~~A-1 ~~not~~Commitments ~~used~~were ~~in any fiscal quarter being permitted to be used in succeeding fiscal quarters), plus 50~~5.00% ofand ~~cumulative consolidated net income~~4.05%, ~~or if a loss~~respectively, ~~minus~~as ~~100%~~ of ~~the amount thereof~~September 30, plus 100% of the aggregate net proceeds received by us from certain sales and issuances of capital stock or from certain capital contributions, of dividends in any fiscal quarter provided that borrowing availability is greater than $502008.0 ~~million.~~

Certain Covenants. The ~~Notes~~ABL facility contains customary representations, warranties and covenants as a precondition to lending, including a material adverse change in the business, limitations on our ability to incur or guarantee additional debt, subject to certain exceptions, pay dividends, or make redemptions and repurchases, with respect to capital stock, repay debt, create or incur certain liens, make certain loans or investments, make acquisitions or investments, engage in mergers, acquisitions, asset sales and sale lease-back transactions, and engage in certain transactions with affiliates. In addition, the ABL facility requires a lock-box arrangement, which, as long as borrowing availability is greater or equal to $45.0 million and in the absence of default, is controlled by Metals USA. As long as our borrowing availability is greater than or equal to $45.0 million, we do not have to maintain a minimum FCCR. Should borrowing availability fall below $45.0 million, we must maintain an FCCR of at least 1.0 to 1.0.

On51 the closing date of the Merger, we received approximately $268.0 million of net cash proceeds from the sale of $275.0 million of Notes, after deducting discounts and estimated expenses of the offering. Interest on the Notes accrue at the rate of 11 1/8% per annum and will be payable semiannually in arrears on June 1 and December 1 and commenced on June 1, 2006. We will pay interest on overdue principal at 1% per annum in excess of the above rate and will pay interest on overdue installments of interest at such higher rate to the extent lawful.

~~On August 7~~Additionally, ~~2006,~~payments weto ~~commenced~~affiliates anare ~~exchange~~limited ~~offer~~ to ~~exchange~~ the ~~privately~~greater ~~placed~~of ~~Notes~~$3.0 ~~for~~million or 3% of Adjusted EBITDA ~~substantially~~(as ~~identical~~defined ~~Notes~~in ~~registered~~the ~~under~~loan and security agreement governing the ~~Securities~~ABL ~~Act~~facility) ofprovided ~~1933~~borrowing availability equals at least $25.0 ~~The~~million. ~~exchange~~Further, ~~offer~~distributions isin ~~currently~~respect ~~scheduled~~of capital stock are limited to ~~expire~~the atpayment ~~5:00~~of pup to $25.m0 million, plus $5.0 million for each full fiscal quarter (with any amount not used in any fiscal quarter being permitted to be used in succeeding fiscal quarters), ~~New~~plus ~~York~~50% ~~City~~of ~~time~~cumulative consolidated net income, onor ~~September 5~~if a loss, ~~2006~~minus 100% of the amount thereof, plus 100% of the aggregate net proceeds received by us from certain sales and issuances of capital stock or from certain capital contributions, of dividends in any fiscal quarter provided that borrowing availability is greater than $50.0 million and the FCCR is at least 1.0 to 1.0.

AsThe ABL facility contains events of ~~June 30~~default with respect to: default in payment of principal when due, ~~2006~~default in the payment of interest, wefees ~~were~~or inother ~~compliance~~amounts ~~with~~after ~~all~~a specified grace period, material breach of the ~~debt~~representations or warranties, default in the performance of specified covenants, ~~including~~failure ~~those~~to make any payment when due under any indebtedness with a principal amount in excess of ~~the~~a ~~loan~~specified ~~and~~amount, certain bankruptcy events, certain ERISA violations, invalidity of certain security ~~agreement~~agreements ~~governing~~or guarantees, material judgments, or a change of control. In the ~~ABL facility~~event ~~and~~of default the ~~indenture~~agreement ~~governing~~may permit the ~~Notes.~~lenders ~~Both~~to: (i) restrict the ~~loan~~account ~~and~~or ~~security~~refuse ~~agreement~~to ~~governing~~make revolving loans; (ii) cause customer receipts to be applied against borrowings under the ABL facility causing the Company to suffer a rapid loss of liquidity and the ~~indenture~~ability to ~~governing~~operate on a day-to-day basis; (iii) restrict or refuse to provide letters of credit; or ultimately: (iv) terminate the ~~Notes~~commitments ~~contain~~and ~~restrictions~~the asagreement; or (v) declare any or all obligations to be immediately due and payable if such default is not cured in the ~~payment~~specified ofperiod ~~dividends~~required. AsAny ofpayment ~~June 30,~~default ~~2006,~~or acceleration under the ~~most restrictive~~ABL offacility ~~these~~would ~~covenants~~also result in a default under the ~~maximum~~Metals ~~amount~~USA Notes that would provide the holders of ~~dividends~~the ~~that~~Metals ~~could~~USA beNotes ~~paid~~with ~~was~~the ~~$24.7~~right ~~million~~to demand immediate repayment.

WeInterest ~~believe~~Rate Swaps. In February 2008, $250.0 million notional amount of outstanding borrowings under the ~~cash~~ABL ~~flow~~facility were swapped from a floating LIBOR-based rate to a fixed rate. The swaps entitle us to receive quarterly payments of interest at a floating rate indexed to the three-month LIBOR and pay a fixed rate that ranges from 2.686% to ~~operations~~2.997%, ~~supplemented~~converting bya portion of the ~~cash~~outstanding ~~available~~borrowings ~~under~~on ~~the~~our ABL facility from a floating rate obligation to a fixed rate obligation. We recognized a pretax loss of $2.4 million in earnings (interest expense) during the nine months ended September 30, ~~will~~2008, bewhich ~~sufficient~~was due to ~~enable~~the uschange in fair value of the interest rate swap derivatives previous to ~~meet~~their ~~our~~qualification ~~debt~~for ~~service~~hedge accounting treatment. Other pretax realized gains and ~~operational~~losses ~~obligations~~from asderivatives ~~they~~which ~~come~~were ~~due~~recognized in earnings during the nine months ended September 30, 2008, subsequent to qualification for hedge accounting treatment, amounted to $0.2 million of additional interest expense. These gains and losses effectively offset changes in the cost of the Company’s hedged exposure, and no amount of such gains and losses resulted from hedge ineffectiveness, nor was any component of these gains and losses excluded from the Company’s assessment of hedge effectiveness. The fair value of the Company’s interest rate swaps was $2.7 million at ~~least~~September 30, 2008, with $1.6 million classified as other current assets and $1.1 million classified as other noncurrent assets in the ~~next~~consolidated ~~twelve~~balance ~~months~~sheet.

The Metals USA Notes

On the closing date of the Merger, we received approximately $268.0 million of net cash proceeds from the sale of $275.0 million in aggregate principal amount of the Metals USA Notes, after deducting expenses of the offering. Interest on the Metals USA Notes accrues at the rate of 11¹/8% per annum and is payable semiannually in arrears on June 1 and December 1 and commenced on June 1, 2006. The Metals USA Notes will mature on December 1, 2015. We may redeem some or all of the Metals USA Notes at any time on or after December 1, 2010, at a predetermined redemption price plus accrued and unpaid interest and additional interest, if any, to the applicable redemption date. In addition, on or prior to December 1, 2008, we may redeem up to 35% of the aggregate principal amount of the Metals USA Notes with the net proceeds of certain equity offerings. If we experience a change of control and we do not redeem the Metals USA Notes, we will be required to make an offer to repurchase the Metals USA Notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.

We will pay interest on overdue principal at 1% per annum in excess of the above rate and will pay interest on overdue installments of interest at such higher rate to the extent lawful. The indenture governing the Metals USA Notes contains the covenants described under “Covenant Compliance” below.

The Metals USA Notes indenture contains certain customary events of default, including (subject, in some cases, to customary cure periods thresholds) defaults based on (1) the failure to make payments under the Metals USA indenture when due, (2) breach of covenants, (3) cross-defaults to other material indebtedness, (4) bankruptcy events and (5) material judgments. We were in compliance with all covenants as of September 30, 2008.

2007 Notes

On July 10, 2007, Metals USA Holdings issued $300.0 million initial aggregate principal amount of the 2007 Notes due July 1, 2012. The 2007 Notes were issued at an initial issue price of 97% of the principal amount thereof, and original issue discount is being amortized to interest expense over the life of the 2007 Notes. The 2007 Notes are senior unsecured obligations that are not guaranteed by any of Metals USA Holdings’ subsidiaries. As such, the 2007 Notes are structurally subordinated to all indebtedness and other liabilities (including trade payables) of Metals USA Holdings’ subsidiaries.

The initial five interest payments on the 2007 Notes were paid solely in cash. Metals USA Holdings must make an election regarding whether subsequent interest payments will be made in cash or through PIK Interest prior to the start of the applicable interest period. For any interest period thereafter, Metals USA Holdings may elect to pay interest (1) entirely in cash or (2) entirely by increasing the principal amount of the 2007 Notes or issuing new 2007 Notes (“PIK Interest”), or (3) on 50% of the outstanding principal amount of the 2007 Notes in cash and on 50% of the outstanding principal amount of the 2007 Notes by increasing the principal amount of the outstanding 2007 Notes or by issuing new 2007 Notes (“Partial PIK Interest”). Cash interest on the 2007 Notes will accrue at a rate per annum, reset quarterly, equal to LIBOR plus a spread of 6.00%, which increases by 0.25% to 6.25% in year 2, by 0.50% to 6.50% in year 3, and by 0.75% to 6.75% in year 4. In the event PIK Interest is paid on the 2007 Notes after the first four interest periods, the then-applicable margin over LIBOR on the 2007 Notes would increase by 0.75% for each period in which PIK Interest is paid. If Metals USA Holdings elects to pay any PIK Interest, Metals USA Holdings will increase the principal amount on the 2007 Notes or issue new 2007 Notes in an amount equal to the amount of PIK Interest for the applicable interest payment period to holders of the 2007 Notes on the relevant record date. Interest is payable quarterly in arrears on January 1, April 1, July 1 and October 1. PIK Interest notes, resulting from the conversion of interest into PIK notes, when paid will be treated as an operating activity in Metals USA Holdings’ Consolidated Statements of Cash Flows in accordance with SFAS 95.


For the Year Ending	Estimated Cash Interest Expense		Estimated PIK Interest Expense
2008 (remaining three months)	$	6.6	$	7.3
2009	$	26.7	$	28.9
2010	$	28.5	$	30.8
2011	$	31.5	$	33.8
2012	$	24.7	$	26.3

Flag Intermediate provided funds to Metals USA Holdings to fund the initial five quarterly interest payments on the 2007 Notes, which were paid on October 1, 2007, January 2, 2008, April 1, 2008, July 1, 2008, and October 1, 2008 and which totaled $7.7 million, $8.4 million, $8.1 million, $6.5 million and $6.6 million, respectively.

The terms of the ABL facility, as well as the indenture governing the Metals USA Notes, restrict Flag Intermediate and certain of its subsidiaries from making payments or transferring assets to Metals USA Holdings, including dividends, loans, or distributions. Such restrictions include prohibition of dividends in an event of default and limitations on the total amount of dividends paid to Metals USA Holdings. In the event these agreements do not permit Flag Intermediate to provide Metals USA Holdings with sufficient distributions to fund interest and principal payments on the 2007 Notes when due, Metals USA Holdings may default on its notes unless other sources of funding are available. Amounts available under these restricted payment provisions amounted to $75.3 million under the indenture governing the Metals USA Notes and $130.4 million under the loan and security agreement governing the ABL facility as of September 30, 2008.

Our affiliates, which include Apollo Management V L.P. (“Apollo Management” and together with its affiliated investment entities “Apollo”), as well as our Chief Executive Officer and our Chief Financial Officer, have purchased a portion of our 2007 Notes in the market. As of September 30, 2008, the amount of outstanding 2007 Notes held by our affiliates was $91.4 million, $90.9 million of which were held by Apollo, with the remainder held by the executive officers referred to above. From time to time, depending upon market, pricing and other conditions, as well on cash balances and liquidity, we, our subsidiaries or affiliates may seek to purchase or sell additional indebtedness of us or our affiliates. Any such future purchases or sales may be made in the open market, privately negotiated transactions, tender offers or otherwise.

On February 26, 2008, Metals USA Holdings exchanged $216.0 million aggregate principal amount of the $300.0 million aggregate principal amount privately placed 2007 Notes for substantially identical 2007 Notes registered under the Securities Act of 1933, as amended.

Covenant compliance

Our ~~Fixed Charge Coverage Ratio (“~~FCCR”) as defined by the ABL facility is calculated based on a numerator consisting of Adjusted EBITDA less cash taxes and capital expenditures, and a denominator consisting of interest expense and certain distributions, and is calculated based on such amounts for the most recent period of four consecutive fiscal quarters. As of ~~June~~September 30, ~~2006~~2008, ~~this~~our FCCR was 13.21 ~~as compared to a required FCCR of 1~~.~~00.~~ As of ~~June~~September 30, ~~2006~~2008, we had $~~137~~61.45 million of additional borrowing capacity under the ABL facility. Failure to comply with the FCCR covenant of the ABL facility can result in limiting our long-term growth prospects by hindering our ability to incur future indebtedness or grow through acquisitions.

~~Fixed~~The ~~charges~~indenture ~~are~~governing ~~defined~~the asMetals ~~interest~~USA ~~expense~~Notes ~~excluding~~contain ~~the~~covenants ~~amortization~~that orrestrict ~~write-off~~our ofability ~~deferred~~to ~~financing~~take ~~costs.~~certain ~~Adjusted~~actions, ~~EBITDA~~such ~~is defined~~ as ~~EBITDA~~incurring ~~further~~additional ~~adjusted~~debt toand making ~~exclude~~ certain ~~non-cash~~acquisitions, ~~non-recurring~~if ~~and realized~~we orare ~~expected~~unable ~~future~~to ~~cost~~meet ~~savings~~defined ~~directly~~Adjusted ~~related~~EBITDA to ~~prior~~Fixed ~~acquisitions.~~

September 30, 2008

Notional Amount

Fair Value

Interest rate swaps

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