The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and accompanying notes contained herein and our consolidated financial statements, accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2007. The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under Item 1A (Risk Factors) in our Annual Report on Form 10-K. The following section is qualified in its entirety by the more detailed information, included in our financial statements and the notes thereto, which appears elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are a leading U.S. steel service center with over 53 years of experience. Our primary focus is on the direct sale and distribution of large volumes of processed carbon, coated and stainless flat-rolled sheet, coil and plate products. We act as an intermediary between steel producers and manufacturers that require processed steel for their operations. We serve customers in most carbon steel consuming industries, including manufacturers and fabricators of transportation and material handling equipment, construction and farm machinery, storage tanks, environmental and energy generation, automobiles, food service and electrical equipment, military vehicles and equipment, as well as general and plate fabricators and steel service centers. We distribute our products primarily through a direct sales force.
We operate as a single business segment with 16 strategically-located processing and distribution facilities in Connecticut, Georgia, Illinois, Iowa, Michigan, Minnesota, North Carolina, Ohio, Pennsylvania and South Carolina. This geographic footprint allows us to focus on regional customers and larger national and multi-national accounts, primarily located throughout the midwestern, eastern and southern United States.
We sell a broad range of steel products, many of which have different gross profits and margins. Products that have more value-added processing generally have a greater gross profit and higher

margins. Accordingly, our overall gross profit is affected by, among other things, product mix, the amount of processing performed, the availability of steel, volatility in selling prices and material purchase costs. We also perform toll processing of customer-owned steel, the majority of which is performed by our Michigan operation. We sell certain products internationally, primarily in Puerto Rico and Mexico. All international sales and payments are made in United States dollars. Recent international sales have been immaterial to our consolidated financial results.
Our results of operations are affected by numerous external factors including, but not limited to, general and global business, economic, monetary and political conditions, competition, steel pricing and availability, energy and transportation prices, pricing and availability of raw materials used in the production of steel, inventory held in the supply chain, customer demand for steel, customers' ability to manage their credit line availability and layoffs or work stoppages by our own, our suppliers' or our customers' personnel. The steel industry also continues to be affected by the global consolidation of our suppliers, competitors and end-use customers.
At June 30, 2008, we employed approximately 1,200 people, of which approximately 200 of the hourly plant personnel at our Minneapolis and Detroit facilities are represented by four separate collective bargaining units. A collective bargaining agreement covering approximately five Detroit maintenance workers was extended to July 31, 2009. Collective bargaining agreements covering Minneapolis and other Detroit employees expire in 2009 and subsequent years. We have never experienced a work stoppage and we believe that our relationship with employees is good. However, any prolonged work stoppages by our personnel represented by collective bargaining units could have a material adverse impact on our business, financial condition, results of operations and cash flows.

Critical Accounting Policies
This discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from these estimates under different assumptions or conditions. On an ongoing basis, we monitor and evaluate our estimates and assumptions.
For further information regarding the accounting policies that we believe to be critical accounting policies and that affect our more significant judgments and estimates used in preparing our consolidated financial statements, see Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2007.

Results of Operations
The following table sets forth certain income statement data for the three and
six months ended June 30, 2008 and 2007 (dollars are shown in thousands):

                                      For the Three Months Ended June 30,                              For the Six Months Ended June 30,
                                      2008                            2007                            2008                            2007
                                            % of net                        % of net                        % of net                        % of net
                                $             sales             $             sales             $             sales             $             sales
Net sales                  $ 363,514          100.0 %      $ 277,413          100.0 %      $ 638,389          100.0 %      $ 536,818          100.0 %

Gross profit (1)             102,933           28.3 %         55,684           20.1 %        169,201           26.5 %        103,058           19.2 %

Operating expenses (2)        55,604           15.3 %         39,813           14.4 %        100,645           15.8 %         77,777           14.5 %

Operating income           $  47,329           13.0 %      $  15,871            5.7 %      $  68,556           10.7 %      $  25,281            4.7 %

(1) Gross profit is calculated as net sales less the cost of materials sold, exclusive of depreciation.

(2) Operating expenses are calculated as total costs and expenses less the cost of materials sold.

Tons sold increased 5.1% to 353 thousand in the second quarter of 2008 from 336 thousand in the second quarter of 2007. Tons sold in the second quarter of 2008 included 320 thousand from direct sales and 33 thousand from toll processing, compared with 297 thousand direct tons and 39 thousand toll tons in the comparable period of last year. Tons sold increased 3.3% to 669 thousand in the first six months of 2008 from 648 thousand in the first six months of 2007. Tons sold in the first six months of 2008 included 600 thousand direct tons and 69 thousand from toll processing, compared with 570 thousand direct tons and 78 thousand toll tons in the comparable period last year. Tons sold in the third quarter of 2008 are expected to be lower than second quarter 2008 levels due to normal seasonal patterns.
Net sales increased 31.0% to $363.5 million in the second quarter of 2008 from $277.4 million in the second quarter of 2007. Net sales increased 18.9% to $638.4 million in the first six months of 2008 from $536.8 million in the first six months of 2007. Total average selling prices for the second quarter of 2008 increased 24.6% over selling prices in the second quarter of 2007 and increased 18.0% over the selling prices in the first quarter of 2008.
As a percentage of net sales, gross profit (exclusive of depreciation) increased to 28.3% in the second quarter of 2008 from 20.1% in the second quarter of 2007. For the first six months of 2008, gross margins increased to 26.5% from 19.2% in the first six months of 2007. Higher selling prices and higher gross margin levels were primarily the result of higher steel prices from

steel producers that have been passed through to our customers. Carbon steel prices increased significantly during the first half of 2008. While we have generally been successful in passing through steel producers' price increases to our customers, we can provide no assurance that we will be successful in passing through future price increases. We expect steel producers to continue increasing the price of carbon steel in the third quarter of 2008; however, the price increases are expected to be at a slower rate than experienced during the first half of 2008. As we purchase higher priced inventory from steel suppliers in the second half of 2008, our gross margin levels could decrease from levels experienced in the second quarter of 2008.
Operating expenses in the second quarter of 2008 increased $15.8 million from the second quarter of 2007. Operating expenses in the first six months of 2008 increased $22.8 million from the first six months of 2007. Higher operating expenses in the first half of 2008 were primarily attributable to increased levels of variable incentive compensation associated with higher levels of profitability, increased distribution expense resulting from higher fuel costs and increased warehouse and processing expense associated with higher levels of value-added services provided to our customers. As a percentage of net sales, operating expenses increased to 15.3% for the second quarter of 2008 from 14.4% in the comparable 2007 period. Operating expenses increased to 15.8% for the first six months of 2008, compared to 14.5% during the first six months of 2007. Interest and other expense on debt totaled $160 thousand for the second quarter of 2008 compared to $853 thousand for the second quarter of 2007. Interest and other expense on debt totaled $187 thousand for the first six months of 2008, compared to $1.9 million for the first six months of 2007. The decrease in interest expense was primarily attributable to lower overall borrowings and borrowing rates, and the capitalization of interest into certain long-term capital projects. Our effective borrowing rate, exclusive of deferred financing fees and commitment fees, for the first six months of 2008 was 4.4% compared to 6.9% in the first six months of 2007.
For the second quarter of 2008, income before income taxes totaled $47.2 million compared to $15.0 million in the second quarter of 2007. For the first six months of 2008, income before taxes totaled $68.4 million, compared to $23.4 million in the first six months of 2007. An income tax provision of 37.5% was recorded for the first six months of 2008, compared to a provision of 37.2% for the first six months of 2007. We expect the effective tax rate to approximate 37% to 38% for the remainder of 2008. Income taxes paid totaled $20.0 million and $6.0 million for the first six months of 2008 and 2007, respectively.

Net income for the second quarter of 2008 totaled $29.6 million or $2.70 per diluted share, compared to net income of $9.4 million or $.88 per diluted share for the second quarter of 2007. Net income for the first six months of 2008 totaled $42.8 million or $3.93 per diluted share, compared to net income of $14.7 million or $1.37 per diluted share for the first six months of 2007. Liquidity and Capital Resources
Our principal capital requirements include funding working capital needs, purchasing, upgrading and acquiring processing equipment, facilities and other businesses and paying dividends. We use cash generated from operations, leasing transactions and our revolving credit facility to fund these requirements. Working capital at June 30, 2008 totaled $245.0 million, a $53.9 million increase from December 31, 2007. Significant working capital changes included a $58.7 million increase in inventories and a $47.3 million increase in accounts receivable, partially offset by a $36.0 million increase in accounts payable (including outstanding checks). The fluctuations in inventories, accounts receivable and accounts payable are primarily attributable to higher steel prices and higher net sales.
For the six months ended June 30, 2008, we used $20.1 million of net cash from operations, of which $50.1 million of cash flow was generated from cash earnings and $70.2 million was used for working capital.
During the first six months of 2008, we spent $14.0 million on capital expenditures. We have a 2008 capital spending plan of approximately $40 million to further our value-added strategies in both existing and new facilities, equipment and technologies. In April 2008, we announced our intention to construct a new facility in Sumter, South Carolina. The facility is expected to be completed by the end of 2008 and involves the construction and equipping of a 100,000 square foot building at a total investment of approximately $10 million. A new stretcher-leveler cut-to-length line for our Minneapolis coil facility is now operational. In July 2008, we announced the purchase of land and a building to house a new satellite facility in Dover, Ohio with a total investment of approximately $5 million. We are also continuing the process of implementing a new single information system to replace the existing systems we currently use.

During the first six months of 2008, we generated $30.0 million from financing activities, which primarily consisted of $15.3 million of borrowings under our revolving credit facility.
In July 2008, our Board of Directors approved an increase of $.01 per share on our regular quarterly dividend to $.05 per share. Our Board of Directors also approved a special non-recurring dividend of $1.00 per share. Both dividends are payable on September 15, 2008 to shareholders of record as of September 1, 2008. Previously, our Board of Directors approved dividends of $.04 per share, which were paid on March 17, 2008 and June 16, 2008. We expect to make regular dividend distributions in the future, subject to the availability of cash and continuing determination by our Board of Directors that the payment of dividends remains in the best interest of our shareholders.
Our secured bank-financing agreement is a revolving credit facility collateralized by our accounts receivable, inventories and substantially all of our property and equipment. Borrowings are limited to the lesser of a borrowing base, comprised of eligible receivables and inventories, or $130 million in the aggregate. A May 2008 amendment extended the maturity date of the credit facility to December 15, 2011, with annual extensions at the banks' option. The credit facility requires us to comply with various covenants, the most significant of which include: (i) minimum availability of $10 million, tested monthly; (ii) a minimum fixed charge coverage ratio of 1.25, and a maximum leverage ratio of 1.75, which are tested quarterly; (iii) restrictions on additional indebtedness; and (iv) limitations on dividends, capital expenditures and investments. At June 30, 2008, we had approximately $97 million of availability under our credit facility and we were in compliance with our covenants. The credit facility also contains an accordion feature which allows us to add up to $25 million of additional revolver capacity in certain circumstances.
Substantially higher steel prices in 2008 have, and will continue to, require increased working capital levels. We believe that funds available under our credit facility and lease arrangement proceeds, together with funds generated from operations, will be sufficient to provide us with the liquidity necessary to fund anticipated working capital requirements, capital expenditure requirements and our dividend declarations over at least the next 12 months. In the future, we may, as part of our business strategy, acquire and dispose of other companies in the same or complementary lines of business, or enter into and exit strategic alliances and joint ventures.

Accordingly, the timing and size of our capital requirements are subject to change as business conditions warrant and opportunities arise. Forward-Looking Information
This Quarterly Report on Form 10-Q and other documents we file with the SEC contain various forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, business, our beliefs and management's assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, conferences, webcasts, phone calls and conference calls. Words such as "may," "will," "anticipate," "should," "intend," "expect," "believe," "estimate," "project," "plan," "potential," and "continue," as well as the negative of these terms or similar expressions are intended to identify forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those implied by such statements including, but not limited to those set forth in Item 1A (Risk Factors), as found in our Annual Report on Form 10-K for the year ended December 31, 2007, and the following:
• general and global business, economic, monetary and political conditions;

• competitive factors such as availability and pricing of steel, industry inventory levels and rapid fluctuations in customer demand and steel pricing;

• the cyclicality and volatility within the steel industry;

• the ability of customers (especially those that may be highly leveraged, those in the domestic automotive industry and those with inadequate liquidity) to absorb future steel price increases and/or maintain their credit availability during periods of rapidly increasing steel prices;

• customer, supplier, and competitor consolidation, bankruptcy or insolvency;

• layoffs or work stoppages by our own or our suppliers' or customers' personnel;

• the availability and costs of transportation and logistical services;

• equipment malfunctions or installation delays;

• the amounts and successes of our capital investments, including the construction of a new facility in Sumter, South Carolina and the start-up of our new satellite facility in Dover, Ohio;

• the successes of our strategic efforts and initiatives to increase sales volumes, maintain cash turnover, maintain or improve inventory turns, reduce costs and improve customer service;

• the adequacy of our information technology and business system software;

• the successful implementation of our new enterprise-wide information system;

• the timing and outcome of OLP's efforts and ability to liquidate its remaining assets; and

• our ability to pay regular quarterly cash dividends and the amounts and timing of any future dividends.

Should one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, intended expected, believed, estimated, projected or planned. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to republish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof, except as otherwise required by law.
Item 3. Qualitative and Quantitative Disclosures About Market Risk During the past several years, the base price of carbon flat-rolled steel has fluctuated significantly. Higher raw material costs for steel producers could cause the price of steel to increase. We have witnessed unprecedented steel producer price increases during 2008. While we have generally been successful in the past in passing on producers' price increases and surcharges to our customers, there is no guarantee that we will be able to pass on price increases to our customers in the future. Rising prices also increase the working capital requirements for us and our customers. Some customers may not have sufficient credit lines or liquidity to absorb significant increases in the price of steel. Declining or flattening prices could reduce our gross profit margin percentages to levels that are lower than our historical levels or our 2008 levels. Higher inventory levels held by us, other steel service centers, or end-use customers could cause competitive pressures that could also reduce gross margins.

Approximately 8.6% of our net sales in the first six months of 2008 were directly to automotive manufacturers or manufacturers of automotive components and parts. The automotive industry experiences significant fluctuations in demand based on numerous factors such as general economic conditions and consumer confidence. The automotive industry is also subject, from time to time, to labor work stoppages. The domestic automotive industry, which has experienced a number of bankruptcies, is currently involved in significant restructuring and labor contract negotiations, which has resulted in lower production volumes. Certain customers in this industry represent an increasing credit risk. Inflation generally affects us by increasing the cost of employee wages and benefits, transportation services, processing equipment, energy and borrowings under our credit facility. General inflation has not had a material effect on our financial results during the past two years; however, we have experienced increased distribution expenses as a result of higher fuel costs. When raw material prices increase, competitive conditions will influence how much of the steel price increase can be passed on to our customers. When raw material prices decline, customer demands for lower cost product result in lower selling prices. Declining steel prices have generally adversely affected our net sales and net income, while increasing steel prices generally favorably affect net sales and net income.
We are exposed to the impact of interest rate changes and fluctuating steel prices. We have not entered into any interest rate or steel commodity hedge transactions for speculative purposes or otherwise.
Our primary interest rate risk exposure results from variable rate debt. If interest rates in the future were to increase 100 basis points (1.0%) from June 30, 2008 rates and, assuming no change in total debt from June 30, 2008 levels, the additional annual interest expense to us would be approximately $320 thousand. We currently do not hedge our exposure to variable interest rate risk. However, we do have the option to enter into 30- to 180-day fixed base rate Euro loans under the credit facility.