SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(Mark One)


xANNUALREPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934




FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007




OR




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


EXCHANGE
ACT OF 1934




FOR
THE TRANSITION PERIOD FROM ____________  TO
_______________




COMMISSION
FILE NUMBER 1-3920





NORTH
AMERICAN GALVANIZING & COATINGS, INC.


(Exact
name of registrant as specified in its charter)




Delaware


(State or
other jurisdiction of incorporation or organization)




71-0268502


(I.R.S.Employer Identification
No.)





5314 South Yale Avenue, Suite 1000,Tulsa, Oklahoma
74135


(Address
of principal executive offices)(Zip Code)




(918) 494-0964


(Registrant's
telephone number, including area code)





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






TITLE OF EACH
      CLASS
            NAME OF EACH EXCHANGE ON WHICH
      REGISTEREDCommon Stock, $.10
      par value
            NASDAQ Stock
      Market




Securities
registered pursuant to Section 12(g) of the Act: None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes o  No x


Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes o  No x





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 o





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).




Large
      accelerated filer o
              Accelerated
      filer x
              Non-accelerated
      filer o


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





The
aggregate market value of Common Stock held by non-affiliates on June 30, 2007
was approximately $86.5 million.  As of  February 18, 2008
there were 12,368,960 shares of North American Galvanizing & Coatings, Inc.
Common Stock, $.10 par value, outstanding.





Documents
Incorporated by Reference




Portions
of the registrant's definitive proxy statement to be filed not later than 120
days after the end of the fiscal year covered by this report are incorporated by
reference in Part III.







NORTH
AMERICAN GALVANIZING & COATINGS, INC.




Annual
Report Pursuant to Section 13 or 15(d)


of
the Securities Exchange Act of 1934


For
the Fiscal Year Ended December 31, 2007






TABLE
OF CONTENTS




PAGEFORWARD
      LOOKING STATEMENTS OR INFORMATION
              2PART
      IItem
      1.
              Business
              3Item
      1A.
              Risk
      Factors
              6Item
      1B.
              Unresolved
      Staff Comments
              8Item
      2.
              Properties
              8Item
      3.
              Legal
      Proceedings
              9Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              10PART
      IIItem
      5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              10Item
      6.
              Selected
      Financial Data
              12Item
      7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
              12Item
      7A.
              Quantitative
      and Qualitative Disclosures About Market Risk
              12Item
      8.
              Financial
      Statements and Supplementary Data
              12Item
      9.
              Changes
      in Disagreements with Accountants on Accounting and Financial
      Disclosure
              12Item
      9A.
              Controls
      and Procedures
              12Item
      9B.
              Other
      Information
              13PART
      IIIItem
      10.
              Directors,
      Executive Officers and Corporate Governance
              14Item
      11.
              Executive
      Compensation
              14Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              14Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              14Item
      14.
              Principal
      Accounting Fees and Services
              14PART
      IVItem
      15.
              Exhibits,
      Financial Statement Schedules
              14


1


FORWARD
LOOKING STATEMENTS OR INFORMATION




Certain
statements in this Annual Report on Form 10-K, including information set forth
under the caption “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” constitute “Forward-Looking Statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements are
typically punctuated by words or phrases such as “anticipates,” “estimate,”
“should,” “may,” “management believes,” and words or phrases of similar import.
The Company cautions investors that such forward-looking statements included in
this Form 10-K, or hereafter included in other publicly available documents
filed with the Securities and Exchange Commission, reports to the Company’s
stockholders and other publicly available statements issued or released by the
Company involve significant risks, uncertainties, and other factors which could
cause the Company’s actual results, performance (financial or operating) or
achievements to differ materially from the future results, performance
(financial or operating) or achievements expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences could include, but are not limited to, changes in demand, prices,
the raw materials cost of zinc and the cost of natural gas; changes in economic
conditions of the various markets the Company serves, as well as the other risks
detailed herein and in the Company’s reports filed with the Securities and
Exchange Commission. The Company believes that the important factors set forth
in the Company’s cautionary statements in Exhibit 99 to this Form 10-K could
cause such a material difference to occur and investors are referred to Exhibit
99 for such cautionary statements.




2


PART
I




ITEM
1. BUSINESS




The
Company’s corporate headquarters are located in Tulsa, Oklahoma. As used in this
report, except where otherwise stated or indicated by the context, North
American Galvanizing (the “Company” and the “Registrant”) means North American
Galvanizing & Coatings, Inc. and its consolidated subsidiary. At the
Company’s Annual Meeting held May 14, 2003, stockholders approved an amendment
of the Company’s certificate of incorporation to change the Company’s name from
Kinark Corporation to North American Galvanizing & Coatings, Inc., effective
July 1, 2003. The former Kinark Corporation was incorporated under the laws of
the State of Delaware in January 1955.




North
American Galvanizing is a manufacturing services holding company currently
conducting business in galvanizing and coatings through its wholly-owned
subsidiary, North American Galvanizing Company and its wholly-owned subsidiaries
(“NAGC”). Formed in 1996, NAGC merged with Rogers Galvanizing Company (“Rogers”)
in 1996 and Boyles Galvanizing Company (“Boyles”) in 1997, with NAGC as the
surviving company. Rogers was acquired by the Company in 1996 and Boyles was
acquired in 1969.




On
February 28, 2005, NAGalv-Ohio, Inc., a Delaware corporation and indirect
subsidiary of the Company, purchased the hot-dip galvanizing assets of Gregory
Industries, located in Canton, Ohio.




Available
Information




The
Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, the Statements of Beneficial Ownership of Securities on
Forms 3, 4 and 5 for Directors and Officers of the Company and all amendments to
such reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, are available free of charge at the Securities
and Exchange Commission ("SEC") website at www.sec.gov.  The Company's
website at www.nagalv.com contains a link to the SEC website.  The
Company has also posted on the website its (1) Corporate Governance
Guidelines; (2) Code of Business Conduct and Ethics and, (3) the Company’s
charters for the Audit Committee, the Compensation Committee, and the Corporate
Governance and Nominating Committee.





Galvanizing




The
Company conducts a service, galvanizing and coating operations, through its NAGC
subsidiary. NAGC is principally engaged in hot dip galvanizing of metal products
and components fabricated and owned by its customers. All of NAGC’s revenue is
generated from the value-added galvanizing and coating of customer-owned
products. NAGC galvanizes iron and steel products by immersing them in molten
zinc. This bonding process produces an alloyed metal surface that provides an
effective barrier (“cathodic protection”) against oxidation and corrosion from
exposure to the elements, for up to 50 years. Additional coating services
provided by NAGC include sandblasting, quenching, metalizing (flame sprayed),
centrifuge spinner galvanizing, Corrocote Classic II painting and
INFRASHIELDsm Coating.




Plants




NAGC
operates 11 galvanizing plants in seven states. These strategically located
plants enable NAGC to compete effectively by providing galvanizing to
manufacturers representing a broad range of basic industries throughout the mid
and south-central United States, and beyond. Its galvanizing plants are located
in Tulsa, Oklahoma; Kansas City, Missouri; St. Louis, Missouri; Nashville,
Tennessee; Louisville, Kentucky; Denver, Colorado; Canton, Ohio; Hurst, Texas
and Houston, Texas.


3


In
January 2008, NAGC opened the Technical Center located in Tulsa, Oklahoma. The
Technical Center houses the company's engineering department and offers
customers expanded technical service and guidance on their product design and
performance criteria as they pertain to hot dip galvanizing.  In
addition, the Technical Center is focused on internal company support activities
and projects to enhance plant operating efficiencies, reduce energy usage and
improve product quality.




In
February 2005, NAGC’s new indirect subsidiary, NAGalv-Ohio, Inc. purchased the
hot-dip galvanizing assets of the galvanizing facility located in Canton, Ohio,
listed above. The Canton facility operates two hot-dip galvanizing lines
featuring 52-foot and 16-foot kettles to handle a broad range of steel
structures.




In
January 2003, NAGC expanded services at its Nashville, Tennessee facility with
the installation of a centrifuge spinner line to galvanize small product and
threaded materials.




In the
fourth quarter of 2002, NAGC began operations at its galvanizing plant in St.
Louis, Missouri. This facility features a 51-foot kettle, providing the largest
galvanizing capacity in the St. Louis region.




In the
third quarter of 2002, at certain of its plants, NAGC introduced
INFRASHIELDsm
coating, aspecialty multi-part
polymer coating system designed to be applied over hot dip galvanized material.
The resultant superior corrosion protection offered by combining cathodic
protection with a non-conductive coating is applicable to many environments that
have unique corrosion issues.




Raw
Material




Zinc, the
primary raw material and largest cost component in the Company’s galvanizing
process, is the fourth most widely used metal in the world.  Its
resistance to non-acidic atmospheric corrosion means that zinc is instrumental
in prolonging the life of buildings, vehicles, ships and steel goods and
structures of every kind.  Accordingly, galvanizing accounts for more
than half of all present day applications of zinc.  During 2006 and
2007, there have been no major supply disruptions in the zinc
market.  Concentrate production is growing steadily, reflecting a
combination of mine reactivations, and brown- and greenfield
expansion.




Over the
past several years the market price of zinc, as quoted on the London Metal
Exchange (“LME”), has been volatile.  During 2006, the LME spot price
of zinc was as high as $2.10 per pound, and as low as $.87 per pound. During
2007, the LME spot price of zinc was as high as $1.93 per pound and as low as
$1.00 per pound, ending the year at $1.04.




Customers




NAGC’s
ten largest customers, on a combined basis, accounted for approximately 37% of
the Company’s consolidated sales in 2007, compared with 36% in 2006. The backlog
of orders at NAGC is generally nominal due to the short turn-around time
requirement of customers which is generally demanded in the galvanizing
industry.




Principal
Markets




The
galvanizing process provides effective corrosion protection of fabricated steel
which is used in numerous markets such as petrochemical, highway and
transportation, energy, utilities, communications, irrigation, pulp and paper,
waste water treatment, food processing, recreation and the manufacture of
original equipment.




The
Company maintains a sales and service network coupled with its galvanizing
plants, supplemented by national account business development at the corporate
level. In 2007, NAGC galvanized steel products for approximately 1,700 customers
nationwide.


4


All of
the Company’s sales are generated for domestic customers whose end markets are
principally in the United States. The Company markets its galvanizing and
coating services directly to its customers and does not utilize agents or
distributors. Although hot dip galvanizing is considered a mature service
industry, the Company is actively engaged in developing new markets through
participation in industry trade shows, metals trade associations and
presentation of technical seminars by its national marketing service
team.




Hot dip
galvanizing is highly competitive. NAGC competes with other publicly and
privately owned independent galvanizing companies, captive galvanizing
facilities operated by manufacturers, and alternative forms of corrosion
protection such as paint. The type and number of competitors vary throughout the
geographic areas in which NAGC does business. Competition is driven primarily by
price, rapid turn-around service time, and the quality of the finished
galvanized product. Management believes that the broad geographic disbursement
of its galvanizing plants and the reliable quality of its service enables NAG to
compete on a favorable basis. The Company continues to develop and implement
operating and market strategies to maintain its competitive position and to
develop new markets, as demonstrated by the purchase of the hot-dip galvanizing
assets of a galvanizing facility in Canton, Ohio (2005), as well as expanded
service capabilities at its existing plants.




Our
management does not generally consider our business to be seasonal due to the
breadth and diversity of markets served.  NAGC’s average galvanizing
volume per operating day was approximately the same for each calendar quarter in
2007 and 2006.  Sales volumes typically are lower in the fourth
quarter by approximately 3% due to a higher number of non-operating
days.




Environmental




The
Company’s facilities are subject to environmental legislation and regulation
affecting their operations and the discharge of wastes. The cost of compliance
with such regulations was approximately $1.9 million and $1.3 million in 2007
and 2006, respectively, for the disposal and recycling of wastes generated by
the galvanizing operations. Year-to-date 2007 costs include a one-time charge of
$.35 million related to Lake River environmental site assessment costs recorded
in the first quarter of 2007.





Employee
Relations




NAGC’s
labor agreement with the United Steel, Paper and Forestry, Rubber,
Manufacturing, Energy Allied Industrial and Service Workers International Union
covering production workers at its Tulsa galvanizing plants expired during
2006.  The union ratified a two-year extension of the expiring
agreement, with minor modifications, extending the expiration date of the
agreement to October 31, 2008.  The extension of the agreement brought
employee contributions to the group health plan more closely in line with
contributions made by non-union employees of the Company.




The
United Steel, Paper and Forestry, Rubber, Manufacturing, Energy Allied
Industrial and Service Workers International Union represented the labor force
at the galvanizing facility purchased in Canton, Ohio in February 2005. At the
time of purchase, NAGalv-Ohio, Inc. did not assume the existing labor agreement
and implemented wage and benefit programs similar to those at the Company’s
other galvanizing facilities.  In the fourth quarter of 2006,
negotiations with the union were finalized.  The union ratified an
agreement effective from November 13, 2006 to November 12, 2009.  The
agreement contains wage and benefit programs similar to those implemented in
February, 2005.  Nationwide, the Company’s total employment was 386
and 368 persons at December 31, 2007 and 2006, respectively.


5


ITEM
1A. RISK FACTORS




In
addition to important factors described elsewhere in this report, North American
Galvanizing cautions current and potential investors that the following risk
factors, among others, sometimes have affected, and in the future could affect,
the Company’s actual results and could cause such results during fiscal 2008,
and beyond, to differ materially from those expressed in any forward-looking
statements made by or on behalf of North American Galvanizing.  If any of
the following risks actually occurs, our business, financial condition or
results of operations could be materially adversely affected and you may lose
all of your investment.




Galvanizing is a
business sensitive to economic downturns, which could cause our revenues to
decrease.  NAGC is principally engaged in hot dip galvanizing of
metal products and components fabricated by its customers. All of the Company’s
revenue is generated from the value-added galvanizing and coating of its
customer’s products. NAGC galvanizes iron and steel products by immersing them
in molten zinc. This bonding process produces an alloyed metal surface that
provides an effective barrier (“cathodic protection”) against oxidation and
corrosion from exposure to the elements, for up to 50 years. The galvanizing
process provides effective corrosion protection of fabricated steel which is
used in numerous markets such as petrochemical, highway and transportation,
energy, utilities, communications, irrigation, pulp and paper, waste water
treatment, food processing, recreation and the manufacture of original
equipment. The demand for these products and, in turn, for our galvanizing, is
dependent on the general economy, the industries listed, and other factors
affecting domestic goods activity.  If there is a reduction in demand,
there could be a material adverse effect on price levels, the quantity of
galvanizing services provided by us and our revenues.




The price
volatility and availability of raw material and natural gas could reduce the
Company’s profits.  Purchased zinc and natural gas, combined,
represent the largest portion of cost of goods sold.  The price and
availability of zinc and natural gas that is used in the galvanizing process is
highly competitive and cyclical.  The following factors, most of which are
beyond the Company’s control, affect the price of zinc and natural
gas:




•
            supply
      and demand factors;


•
            freight
      costs and transportation
availability;


•
            inventory
      levels;


•
            trade
      duties and taxes; and


•
            labor
      disputes.






In
response to increase in costs, the Company may seek to maintain its profit
margin by attempting to increase the price of its services, but may not be
successful in passing these price increases through to its
customers.





The Company’s
business, operating results and financial condition could be impacted by future
acquisitions or by a lack of potential acquisition candidates.From time to time, the Company evaluates potential acquisition
opportunities to support and strengthen its business.  NAGC may not be
able to locate suitable acquisition candidates, acquire candidates on acceptable
terms or integrate acquired businesses successfully.  In addition,
NAGC may be required to incur additional debt and contingent liabilities, or to
issue shares of its common stock in order to consummate future
acquisitions.  Such issuances might have a dilutive effect on current
equity holders.


6


Difficulties in
integrating potential acquisitions could adversely affect the Company’s
business, operating results and financial condition.  The process of
integrating acquired businesses effectively involves the following
risks:




•
            assimilating
      operations and products may be unexpectedly
  difficult;


•
            management’s
      attention may be diverted from other business
  concerns;


•
            the
      Company may enter markets in which it has limited or no direct experience;
      and•
            the
      Company may lose key employees of an acquired
  business.




The Company may
not have sufficient management resources if there is turnover in key
personnel.  Providing a competitive service acceptable in
quality and price requires a management team that is technically skilled in
providing galvanizing services.  In past years, the Company has
downsized administrative and management positions as a result of cost-cutting
initiatives.  Lack of management resources could impact the Company’s
ability to operate and compete in the galvanizing industry.





The addition of
hot-dip galvanizing capacity could reduce demand for galvanizing services and
adversely affect revenues.  Galvanizing is a highly competitive
business with relatively low barriers to entry.  NAGC competes with
other galvanizing companies, captive galvanizing facilities operated by
manufacturers and alternate forms of corrosion protection such as
paint.  Excessive capacity in hot-dip galvanizing could have a
material adverse effect on price levels and the quantity of galvanized services
provided by the Company.





Various
governmental regulations and environmental risks applicable to the galvanizing
business may require the Company to take actions which will adversely affect its
results of operations.The Company’sbusiness is subject to numerous
federal, state, provincial, local and foreign laws and regulations, including
regulations with respect to air emissions, storm water and the generation,
handling, storage, transportation, treatment and disposal of waste
materials.  Although NAGC believes it is in substantial compliance with all
applicable laws and regulations, legal requirements are frequently changed and
subject to interpretation, and the presently unpredictable ultimate cost of
compliance with these requirements could affect operations.  The Company
may be required to make significant expenditures to comply with governmental
laws and regulations.  Existing laws or regulations, as currently
interpreted or reinterpreted in the future, or future laws or regulations, could
have a material adverse effect on the results of operations and financial
condition.





North American
Galvanizing & Coatings, Inc. is involved in a lawsuit concerning a former
subsidiary’s operation of a storage terminal in violation of environmental
laws.  In 2004, attorneys for the Metropolitan Water Reclamation
District of Greater Chicago (the “Water District”) filed a complaint in District
Court, naming North American Galvanizing & Coatings, Inc. as an added
defendant. This Complaint seeks enforcement of an August 12, 2004 default
judgment in the amount of $1,810,463.34 against a former subsidiary of the
Company, Lake River Corporation and Lake River Holding Company,
Inc.  The default judgment is in connection with the operation of a
storage terminal by Lake River Corporation in violation of environmental laws.
The Complaint asserts that prior to the sale of Lake River Corporation, North
American Galvanizing directly operated the Lake River facility. The Water
District seeks to have the Court pierce the corporate veil of Lake River
Corporation and enforce the default judgment order of August 12, 2004 against
the Company.  In December 2004, the Water District filed a Third
Amended complaint in the litigation, adding two claims: (1) a common law claim
for nuisance; and (2) a claim under the federal Resource Conservation and
Recovery Act, in which the Water District argues that the Company is responsible
for conditions on the plaintiff’s property that present an “imminent and
substantial endangerment to human health and the environment.” In January 2005,
the Company filed a partial motion to dismiss the Third Amended Complaint. On
April 12, 2005, the Court issued an order denying in part and granting in part
the Company’s partial motion to dismiss plaintiff’s third amended
complaint.  The Company filed an appeal with the Seventh Circuit Court
of Appeals requesting dismissal of the sole CERCLA claim contained in the Third
Amended


7


Complaint
that was not dismissed by the United States District Court’s April 12, 2005
order.  On January 17, 2007, the Seventh Circuit affirmed the judgment
of the United States District Court, stating that the Water District has a right
of action under CERCLA.





On April
11, 2007, the Company entered into an Agreement in Principle establishing terms
for a conditional settlement. Under the terms of the Agreement in Principle, the
Company has agreed to fund 50% of the cost, up to $350,000, to enroll the site
in the Illinois Voluntary Site Remediation Program.  These funds will
be used to prepare environmental reports for approval by the Illinois
Environmental Protection Agency.  The parties’ shared objective is to
obtain a “no further remediation determination” from the Illinois EPA based on a
commercial / industrial cleanup standard.  If the cost to prepare
these reports equals or exceeds $700,000, additional costs above $700,000
($350,000 per party) will be borne 100% by the Water District.





If a
remediation plan is required based on the site assessment, the Company has also
agreed to fund 50% of the cost to implement the remediation plan, up to a
maximum of $1 million.  If the cost to implement the plan is projected
to exceed $2 million, then the Water District will have the option to terminate
the Agreement in Principle and resume the litigation.  The Water
District will have to choose whether to accept or reject the $1 million funding
commitment from the Company before accepting any payments from the Company for
implementation of the remediation plan.  The Company cannot determine
whether any cleanup is required or if any final cleanup cost is likely to exceed
$2 million until additional data has been collected and analyzed in connection
with the environmental reports.  If the Water District elects to
accept the maximum funding commitment, the Company has also agreed to remove
certain piping and other equipment from one of the parcels.  The cost
to remove the piping is estimated to be between $35,000 and
$60,000.





Although
the boards of both the Water District and the Company have approved the
Agreement in Principle, the agreement of the parties must be embodied in a
formal settlement agreement.  The parties have been working diligently
since April 11, 2007 but have not yet reached a final agreement.





The
Company has recorded a liability for $350,000 related to the Water District
claim in recognition of its currently known and estimable funding commitment
under the Agreement in Principle.  In the event that the Water
District rejects the funding commitment described above, the potential claim
could exceed the amount of the previous default judgment.  As neither
a site evaluation nor a remediation plan has been developed, the Company is
unable to make a reasonable estimate of the amount or range of further loss, if
any, that could result.  Such a liability, if any, could have a
material adverse effect on the Company’s financial condition, results of
operations, or liquidity.




ITEM
1B. UNRESOLVED STAFF COMMENTS




No
unresolved staff comments were open as of the date of this report, March 7,
2008.




ITEM
2. PROPERTIES




NAGC
operates hot dip galvanizing plants located in Ohio, Oklahoma, Missouri, Texas,
Colorado, Tennessee and Kentucky. One of the Company’s plants, located in Kansas
City, Missouri is leased under terms which give NAGC the option to extend the
lease for up to 15 years. NAGC’s galvanizing plants average 20,000 square feet
in size, with the largest approximately 55,000 square feet, and it operates zinc
kettles ranging in length from 16 to 62 feet. The Company owns all of its
galvanizing plants, except for the plant noted above.  All of the
Company’s owned galvanizing plants are pledged as collateral to a bank pursuant
to a credit agreement scheduled to expire May 16, 2012, under which the Company
is provided a $25 million revolving credit facility with future increases of up
to an aggregate principal amount of $10 million at the discretion of the
lender.


8


The
Company’s headquarters office is located in Tulsa, Oklahoma, in approximately
4,600 square feet of office space leased through February,
2009.




ITEM
3. LEGAL PROCEEDINGS




On August
30, 2004, the Company was informed by counsel for the Metropolitan Water
Reclamation District of Greater Chicago (the “Water District”) that the Water
District had, on August 25, 2004 filed a Second Amended Complaint in the United
States District Court, Northern District of Illinois, Eastern Division, naming
North American Galvanizing & Coatings, Inc. (formerly known as Kinark
Corporation) as an added defendant. Counsel for the Water District also gave the
Company notice of the Water District’s intent to file (or amend the Complaint to
include) a Citizens Suit under the Resource Compensation and Recovery Act
(“RCRA”) against North American Galvanizing & Coatings, Inc., pursuant to
Section 7002 of RCRA, 42 U.S.C. Section 6972. This Second Amended Complaint
seeks enforcement of an August 12, 2004 default judgment in the amount of
$1,810,463.34 against Lake River Corporation and Lake River Holding Company,
Inc. in connection with the operation of a storage terminal by Lake River
Corporation in violation of environmental laws. Lake River Corporation conducted
business as a subsidiary of the Company until September 30, 2000, at which time
Lake River Corporation was sold to Lake River Holding Company, Inc. and ceased
to be a subsidiary of the Company. The Second Amended Complaint asserts that
prior to the sale of Lake River Corporation, the Company directly operated the
Lake River facility and, accordingly, seeks to have the Court pierce the
corporate veil of Lake River Corporation and enforce the default judgment order
of August 12, 2004 against the Company. The Company denied the assertions set
forth in the Water District’s Complaint and on November 13, 2004 filed a partial
motion for dismissal of the Second Amended Complaint.





In
December 2004, the Water District filed a Third Amended complaint in the
litigation, adding two claims: (1) a common law claim for nuisance; and (2) a
claim under the federal Resource Conservation and Recovery Act, in which the
Water District argues that the Company is responsible for conditions on the
plaintiff’s property that present an “imminent and substantial endangerment to
human health and the environment.” In January 2005, the Company filed a partial
motion to dismiss the Third Amended Complaint. On April 12, 2005, the Court
issued an order denying in part and granting in part the Company’s partial
motion to dismiss plaintiff’s third amended complaint.  The Company
filed an appeal with the Seventh Circuit Court of Appeals requesting dismissal
of the sole CERCLA claim contained in the Third Amended Complaint that was not
dismissed by the United States District Court’s April 12, 2005
order.  On January 17, 2007, the Seventh Circuit affirmed the judgment
of the United States District Court, stating that the Water District has a right
of action under CERCLA.





On April
11, 2007, the Company entered into an Agreement in Principle establishing terms
for a conditional settlement. Under the terms of the Agreement in Principle, the
Company has agreed to fund 50% of the cost, up to $350,000, to enroll the site
in the Illinois Voluntary Site Remediation Program.  These funds will
be used to prepare environmental reports for approval by the Illinois
Environmental Protection Agency.  The parties’ shared objective is to
obtain a “no further remediation determination” from the Illinois EPA based on a
commercial / industrial cleanup standard.  If the cost to prepare
these reports equals or exceeds $700,000, additional costs above $700,000
($350,000 per party) will be borne 100% by the Water District.





If a
remediation plan is required based on the site assessment, the Company has also
agreed to fund 50% of the cost to implement the remediation plan, up to a
maximum of $1 million.  If the cost to implement the plan is projected
to exceed $2 million, then the Water District will have the option to terminate
the Agreement in Principle and resume the litigation.  The Water
District will have to choose whether to accept or reject the $1 million funding
commitment from the Company before accepting any payments from the Company for
implementation of the remediation plan.  The Company cannot determine
whether any cleanup is required or if any final cleanup cost is likely to exceed
$2 million until additional data has been collected and analyzed in connection
with the environmental reports.  If the Water District elects to
accept the maximum funding


9


commitment,
the Company has also agreed to remove certain piping and other equipment from
one of the parcels.  The cost to remove the piping is estimated to be
between $35,000 and $60,000.





Although
the boards of both the Water District and the Company have approved the
Agreement in Principle, the agreement of the parties must be embodied in a
formal settlement agreement.  The parties have been working diligently
since April 11, 2007 but have not yet reached a final agreement.





The
Company has recorded a liability for $350,000 related to the Water District
claim in recognition of its currently known and estimable funding commitment
under the Agreement in Principle.  In the event that the Water
District rejects the funding commitment described above, the potential claim
could exceed the amount of the previous default judgment.  As neither
a site evaluation nor a remediation plan has been developed, the Company is
unable to make a reasonable estimate of the amount or range of further loss, if
any, that could result.  Such a liability, if any, could have a
material adverse effect on the Company’s financial condition, results of
operations, or liquidity.





NAGC was
notified in 1997 by the Illinois Environmental Protection Agency (“IEPA”) that
it was one of approximately 60 potentially responsible parties (“PRPs”) under
the Comprehensive Environmental Response, Compensation, and Liability
Information System (“CERCLIS”) in connection with cleanup of an abandoned site
formerly owned by Sandoval Zinc Co., an entity unrelated to NAGC.  The
estimated timeframe for resolution of the IEPA contingency is
unknown.  The IEPA has yet to respond to a proposed work plan
submitted in August 2000 by a group of the PRPs or suggest any other course of
action, and there has been no activity in regards to this issue since 2001.
Until the work plan is approved and completed, the range of potential loss or
remediation, if any, is unknown, and in addition, the allocation of potential
loss between the 60 PRPs is unknown and not reasonably
estimable.  Therefore, the Company has no basis for determining
potential exposure and estimated remediation costs at this time and no liability
has been accrued.





The lease
term of a galvanizing facility located in Tulsa, Oklahoma, occupied by
Reinforcing Services, Inc. (“RSI”), a subsidiary of North American Galvanizing
Company, expired July 31, 2003 and was not renewed. RSI exercised an option to
purchase the facility, and the landlord contested the Company’s right to
exercise the option. RSI filed a lawsuit against the landlord seeking
enforcement of the right to exercise the option and requested a summary judgment
in its favor.  The court ruled in favor of RSI and as a result, RSI
purchased the facility on June 29, 2007.




North
American Galvanizing & Coatings, Inc. and its subsidiary are parties to a
number of other lawsuits which are not discussed herein.  Management
of the Company, based upon their analysis of known facts and circumstances and
reports from legal counsel, does not believe that any such matter will have a
material adverse effect on the results of operations, financial conditions or
cash flows of the Company.




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




No
matters were submitted to a vote of stockholders during the fourth quarter of
2007.




PART
II




ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES




Stock
Information




The
Company’s common stock traded under the symbol “NGA” on the American Stock
Exchange through August 1, 2007 and under the same three-digit symbol on the
NASDAQ Stock Market beginning August 2, 2007. The Company does not expect to pay
a dividend on its common stock and has not done so in the past.


10


The
Company expects to continue that policy in order to reinvest earnings to support
and expand its business operations. The Company’s board of directors may review
the dividend policy in the future, recognizing that dividends may be a desirable
form of return on the investment made by many of its stockholders. Stockholders
of record at February 19, 2008 numbered approximately 1,187.




The board
of directors declared a three-for-two stock split effected by a stock dividend
for all shareholders of record on May 24, 2007, payable on June 8, 2007. All
share and per share data (except par value) have been adjusted to reflect the
effect of the stock split for all periods presented. In addition, the number of
shares of common stock issuable upon the exercise of outstanding stock options
and the vesting of other stock awards, as well as the number of shares of common
stock reserved for issuance under our share-based compensation plans, were
proportionately increased in accordance with the terms of those respective
agreements and plans.




Quarterly
Stock Prices




First
            Second
            Third
            Fourth2006High
            $   2.00
            $    4.21
            $   
       5.85
            $   4.90Low
            $   1.34
            $    1.87
            $   
       2.94
            $   3.442007High
            $   4.00
            $   11.97
            $   10.19
            $   9.63Low
            $   2.96
            $   
       3.34
            $   
       5.00
            $   5.90




Issuer
Purchases of Equity Securities




Total
            
            
            ApproximateNumber
      of
            
            
            Dollar
      ValueShares
            
            
            of
      SharesTotal
            
            
            
            
            
            Purchased
            
            
            that
      May YetNumber
      of
            
            
            Average
            
            
            as
      Part of
            
            
            be
      PurchasedPeriod
            
            Shares
            
            
            Price
      Paid
            
            
            Publicly
            
            
            Under(from/to)
            
            Purchased
            
            
            per
      Share
            
            
            Announced
      Plan
            
            
            the
      PlanMay
      1, 2007 - May 31, 2007
            
            
            75
            
            
            $
            10.85
            
            
            
            199,569
            
            
            $
            761,027August
      1, 2007 - August 31, 2007
            
            
            28,500
            
            
            $
            5.36
            
            
            
            228,069
            
            
            $
            608,128Total
            
            
            28,575
            
            
            $
            5.38
            
            
            
            228,069
            
            
            $
            608,128




In August
1998, the Board of Directors authorized $1,000,000 for a share repurchase
program for shares to be purchased in private or open market transactions.
Unless terminated earlier by resolution of the Board of Directors, the program
will expire when the Company has purchased shares with an aggregate purchase
price of no more than $1,000,000.





11





The
information required by this item concerning securities authorized for issuance
under equity compensation plans appears under the heading “Equity Compensation
Plan Information in the Company’s Proxy Statement (the “2008 Proxy Statement”)
or the Company’s Annual Report to Shareholders (the “2007 Annual Report”) for
its annual meeting of stockholders to be held on May 2, 2008 and is incorporated
herein by reference.




ITEM
6. SELECTED FINANCIAL DATA




The
selected financial data for years 2003 through 2007 are presented on page FS-34
of this Annual Report on Form 10-K.




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




The index
to Management’s Discussion and Analysis of Financial Condition and Results of
Operations is presented on page 19 of this Annual Report on Form
10-K.




ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Management’s
discussion of quantitative and qualitative disclosures about market risk is
presented on page FS-11.




ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




The index
to Financial Statements and Supplementary Data is presented on pages 14-15 of
this Annual Report on Form 10-K.




ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE




None.




ITEM
9A. CONTROLS AND PROCEDURES




(a)
            Evaluation
      of disclosure controls and
procedures.




Under
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as of the end of the period covered by this
Annual Report on Form 10-K (the “Evaluation Date”); and whether any change has
occurred in the Company’s internal control over financial reporting pursuant to
Exchange Act Rules 13a-15(d) and 15d-15(d).  Based on this evaluation,
our principal executive officer and principal financial officer concluded as of
the Evaluation Date that our disclosure controls and procedures were
effective.




(b)
            Management’s
      report on internal control over financial
  reporting.




Management’s
report on internal control over financial reporting, which appears on page FS-13
of this Annual Report, is incorporated herein by reference.


12




(c)
            Changes
      in internal control over financial
reporting.




There was
no change in our internal control over financial reporting that occurred in the
fourth quarter of 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




ITEM
9B. OTHER INFORMATION




None.






























13


PART
Ill




ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE




The
information contained under the headings “Directors and Executive Officers,” and
“Company Information Available on Website” in the 2008 Proxy Statement is
incorporated herein by reference.




ITEM
11. EXECUTIVE COMPENSATION




The
information required by this item appears in the 2008 Proxy Statement under the
headings “Compensation of Directors and Executive Officers” and “Compensation
Plans” and is incorporated herein by reference. Information regarding the
Company’s stock option plans appears herein on pages FS-22 to FS-24, Footnotes
to Consolidated Financial Statements.




ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS




The
information required by this item concerning security ownership of certain
beneficial owners and management appears in the 2008 Proxy Statement under the
heading “Security Ownership of Principal Stockholders and Management” and is
incorporated herein by reference.




ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE




The
information required by this item concerning certain relationships and related
transactions and director independence appears in the 2008 Proxy Statement under
the heading “Certain Relationships and Related Transactions and Director
Independence” and is incorporated herein by reference.




ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES




Information
required by this item is incorporated herein by reference from the 2008 Proxy
Statement under the caption “Independent Public Accountants.”






PART
IV




ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES




The
following documents are filed as part of this report:




(1) 
FINANCIAL STATEMENTS


Reports
      of Independent Registered Public Accounting Firm
              FS-13
      to FS-15Consolidated
      Balance Sheets at December 31, 2007 and 2006
              FS-16Consolidated
      Statements of Income and Comprehensive Incomefor
      the Years Ended December 31, 2007, 2006 and 2005
              FS-17Consolidated
      Statements of Cash Flows for the Years EndedDecember
      31, 2007, 2006 and 2005
              FS-18Consolidated
      Statements of Stockholders’ Equity for the YearsEnded
      December 31, 2007, 2006 and 2005
              FS-19Notes
      to Consolidated Financial Statements
              FS-20
      to FS-32


14


(2) 
FINANCIAL STATEMENT SCHEDULES




Schedule
      II – Valuation and Qualifying Accounts
            17




All
schedules omitted are inapplicable or the information required is included
in either
the consolidated financial statements or the related notes to the
consolidated financial
statements.




(3) 
EXHIBITS




The
Exhibits filed with or incorporated by reference into this report are listed in
the following
Index to Exhibits.




15


EXHIBIT
INDEX




No.
            Description3.1
            Restated
      Certificate of Incorporation of Kinark Corporation, as amended on June 6,
      1996 (incorporated by reference to Exhibit 3.1 of the Company’s
      Pre-Effective Amendment No. 1 to Registration Statement on Form S-3,
      Registration No. 333-4937, filed with the Commission on June 7,
      1996).




3.2
            Amended
      and Restated Bylaws of Kinark Corporation (incorporated by reference to
      Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q dated March 31,
      1996)




10.1
            Credit
      Agreement, dated May 17, 2007, between North American Galvanizing &
      Coatings, Inc., a Delaware corporation, and Bank of America, N.A., a
      national banking association.




10.2**
            2004
      Incentive Stock Plan, as amended (incorporated by reference to the
      Company’s Form 8-K filed with the Commission on October 3,
      2006).




10.2.1**
            Form
      of Stock Option Agreement (incorporated by reference to the Company’s Form
      8-K filedwith the Commission on March 18,
2005).




10.2.2**
            Schedule
      A to Stock Option Agreement (incorporated by reference to the Company’s
      Form8-Kfiled with the Commission on March 18,
  2005).




10.3**
            Director
      Stock Unit Program, as amended (incorporated by reference to the Company’s
      Form 8-K filed with the Commission on February 17,
  2006).




21.*
            Subsidiaries
      of the Registrant.




23.*
            Consent
      of Independent Registered Public Accounting
  Firm.




24.1***
            Power
      ofattorney
      from Directors:Linwood J. Bundy,
      Ronald J. Evans, Gilbert L. Klemann, II, Patrick J. Lynch, Joseph J.
      Morrow and John H. Sununu.




31.1*
            Certification
      pursuant to Section 302 of the Sarbanes, Oxley Act of
  2002.




31.2*
            Certification
      pursuant to Section 302 of the Sarbanes, Oxley Act of
  2002.




32*.
            Certifications
      pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the
      Sarbanes-Oxley Act of 2002.




99*
            Cautionary
      Statements by the Company Regarding Forward Looking
      Statements.




* Filed
Herewith.
 **  Indicates
management contract or compensation plan.


***
Included on the signature page of this report.


16


SCHEDULE
II






VALUATION
AND QUALIFYING ACCOUNTS






Years
Ended December 31, 2007, 2006 and 2005:


Balance
      at
              
              
              
              
              
              
              
              
              BalanceBeginning
              
              
              
              
              
              
              
              
              at
      EndDescription
              
              of
      Year
              
              
              Additions
              
              
              Deductions
              
              
              of
      YearAllowance
      for doubtful receivables and credit memos(deducted
      from accounts receivable)2007
              
              $
              197,000.00
              
              
              $
              15,000.00
              
              
              $
              58,000.00
              
              
              $
              154,000.002006
              
              $
              124,000.00
              
              
              $
              100,000.00
              
              
              $
              27,000.00
              
              
              $
              197,000.002005
              
              
              257,000.00
              
              
              
              29,000.00
              
              
              
              162,000.00
              
              
              
              124,000.00


17


SIGNATURES




Pursuant
to the requirements of Section 13 and 15(d) of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, as duly authorized.




NORTH AMERICAN
      GALVANIZING
                & COATINGS, INC.(Registrant)Date:
      March 7, 2008
              By:
              /s/ Beth
      B. HoodBeth
      B. HoodVice
      President and Chief
      Financial Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below on March 6, 2008, by the following persons on behalf of the
Registrant and in the capacities indicated.




/s/ Joseph J. Morrow*
              Joseph
      J. Morrow, Non-Executive
              Chairman
      of the Board
              
              /s/ Ronald J. Evans*
                
                Ronald
      J. Evans, President and
                Chief
      Executive Officer (Principal
                Executive
      Officer), and Director
            /s/
      Patrick J. Lynch*
              Patrick J. Lynch, Director
              
              /s/ Gilbert L. Klemann, II*
              Gilbert L. Klemann, II
              
              /s/ John H. Sununu*
              John H. Sununu, Director/s/ Beth B. Hood
              Beth
      B. Hood, Vice President,
              Chief
      Financial Officer (Principal
              Financial
      and Accounting Officer),
              and
      Secretary/s/ Linwood J. Bundy*
              Linwood
      J. Bundy, Director




*Beth B.
Hood, by signing her name hereto, does hereby sign this Annual Report on Form
10-K on behalf of each of the directors and officers of the Registrant after
whose typed names asterisks appear pursuant to powers of attorney duly executed
by such directors and officers and filed with the Securities and Exchange
Commission as exhibits to this report.






By:/s/ Beth B. Hood
              Beth
      B. Hood, Attorney-in-fact




18


INDEX
TO MANAGEMENT’S DISCUSSION AND ANALYSIS, CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA






PageManagement’s
      Discussion and Analysis
            FS-1
      to FS-11Management’s
      Report on Internal Control over Financial Reporting
            FS-12Reports
      of Independent Registered Public Accounting Firm
            FS-13
      to FS-15Consolidated
      Balance Sheets
            FS-16Consolidated
      Statements of Income and Comprehensive Income
            FS-17Consolidated
      Statements of Cash Flows
            FS-18Consolidated
      Statements of Stockholders’ Equity
            FS-19Notes
      to Consolidated Financial Statements
            FS-20
      to FS-32Quarterly
      Results
            FS-33Selected
      Financial Data
            FS-34





19


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




General




North
American Galvanizing (“NAGC”) is a leading provider of corrosion protection for
iron and steel components fabricated and owned by its customers. Hot dip
galvanizing is the process of applying a zinc coating to fabricated iron or
steel material by immersing the material in a bath consisting primarily of
molten zinc.




Overview




The
Company’s galvanizing plants offer a broad line of services including centrifuge
galvanizing for small threaded products, sandblasting, chromate quenching,
polymeric coatings, and proprietary INFRASHIELDsm Coating
Application Systems for polyurethane protective linings and coatings over
galvanized surfaces. The Company’s structural and chemical engineers provide
customized assistance with initial fabrication design, project estimates and
steel chemistry selection.




The
Company’s galvanizing and coating operations are composed of eleven facilities
located in Colorado, Kentucky, Missouri, Ohio, Oklahoma, Tennessee and Texas.
These facilities operate galvanizing kettles ranging in length from 16 feet to
62 feet, and have lifting capacities ranging from 12,000 pounds to 40,000
pounds.




The
Company maintains a sales and service network coupled with its galvanizing
plants, supplemented by national account business development at the corporate
level. In 2007, the Company galvanized steel products for approximately 1,700
customers nationwide.





All of
the Company’s sales are generated for customers whose end markets are
principally in the United States.  The Company markets its galvanizing
and coating services directly to its customers and does not utilize agents or
distributors.  Although hot dip galvanizing is considered a mature
service industry, the Company is actively engaged in developing new markets
through participation in industry trade shows, metals trade associations and
presentation of technical seminars by its national marketing service
team.





Hot dip
galvanizing provides metals corrosion protection for many product applications
used in commercial, construction and industrial markets. The Company’s
galvanizing can be found in almost every major application and industry that
requires corrosion protection where iron or steel is used, including the
following end user markets:




·
            highway
      and transportation




·
            power
      transmission and distribution




·
            wireless
      and telecommunications




·
            utilities




·
            petrochemical
      processing




·
            industrial
      grating




·
            infrastructure
      – buildings, airports, bridges and power
  generation




·
            wastewater
      treatment




·
            fresh
      water storage and transportation




FS-1


·
            pulp
      and paper




·
            pipe
      and tube




·
            food
      processing




·
            agricultural
      (irrigation systems)




·
            recreation
      (boat trailers, marine docks, stadium
scaffolds)




·
            bridge
      and pedestrian handrail, and




·
            original
      equipment manufactured products, including general
      fabrication.




As a
value-added service provider, the Company’s revenues are directly influenced by
the level of economic activity in the various end markets that it serves.
Economic activity in those markets that results in the expansion and/or
upgrading of physical facilities (i.e., construction) may involve a time-lag
factor of several months before translating into a demand for galvanizing
fabricated components. Despite the inherent seasonality associated with large
project construction work, the Company maintains a relatively stable revenue
stream throughout the year by offering fabricators, large and small, reliable
and rapid turn-around service.




The
Company records revenues when the galvanizing processes and inspection utilizing
industry-specified standards are completed. The Company generates all of its
operating cash from such revenues, and utilizes a line of credit secured by its
underlying accounts receivable and zinc inventory to facilitate working capital
needs.




Each of
the Company’s galvanizing plants operates in a highly competitive environment
underscored by pricing pressures, primarily from other public and
privately-owned galvanizers and alternative forms of corrosion protection, such
as paint. The Company’s long-term response to these challenges has been a
sustained strategy focusing on providing a reliable quality of galvanizing to
standard industry technical specifications and rapid turn-around time on every
project, large and small. Key to the success of this strategy is the Company’s
continuing commitment and long-term record of reinvesting earnings to upgrade
its galvanizing facilities and provide technical innovations to improve
production efficiencies; and to construct new facilities when market conditions
present opportunities for growth. The Company is addressing long-term
opportunities to expand its galvanizing and coatings business through programs
designed to increase industry awareness of the proven, unique benefits of
galvanizing for metals corrosion protection. Each of the Company’s independently
operated galvanizing plants is linked to a centralized system involving sales
order entry, facility maintenance and operating procedures, quality assurance,
purchasing and credit and accounting that enable each plant to focus on
providing galvanizing and coating services in the most cost-effective
manner.




The
principal raw materials essential to the Company’s galvanizing and coating
operations are zinc and various chemicals which are normally available for
purchase in the open market.




Key
Indicators




Key
industries which historically have provided the Company some indication of the
potential demand for galvanizing in the near-term, (i.e., primarily within a
year) include highway and transportation, power transmission and distribution,
telecommunications and the level of quoting activity for regional metal
fabricators. In general, growth in the commercial/industrial sectors of the
economy generates new construction and capital spending which ultimately impacts
the demand for galvanizing.




Key
operating measures utilized by the Company include new orders, zinc inventory,
tons of steel galvanized, revenue, pounds and labor costs per hour, zinc usage
related to tonnage galvanized, and lost-time safety


FS-2


performance.
These measures are reported and analyzed on various cycles, including daily,
weekly and monthly.




The
Company utilizes a number of key financial measures to evaluate the operations
at each of its galvanizing plants, to identify trends and variables impacting
operating productivity and current and future business results, which include:
return on capital employed, sales, gross profit, fixed and variable costs,
selling and general administrative expenses, operating cash flows, capital
expenditures, interest expense, and a number of ratios such as profit from
operations and accounts receivable turnover. These measures are reviewed by the
Company’s operating and executive management each month, or more frequently, and
compared to prior periods, the current business plan and to standard performance
criteria, as applicable.




Key
Developments




The
Company has reported a number of developments supporting its strategic program
to reposition its galvanizing business in the national market.




In
January 2008, NAGC opened the Technical Center located in Tulsa, Oklahoma. The
Technical Center houses the company's engineering department and offers
customers expanded technical service and guidance on their product design and
performance criteria as they pertain to hot dip galvanizing.  In
addition, the Technical Center is focused on internal company support activities
and projects to enhance plant operating efficiencies, reduce energy usage and
improve product quality.




On
February 28, 2005, NAGalv-Ohio, Inc., a subsidiary of North American Galvanizing
Company, purchased the hot-dip galvanizing assets of a galvanizing facility
located in Canton, Ohio.  The transaction was structured as an asset
purchase, pursuant to an Asset Purchase Agreement dated February 28, 2005 by and
between NAGalv-Ohio, Inc., and the privately owned Gregory Industries, Inc. for
all of the plant, property, and equipment of Gregory Industries’
after-fabrication hot dip galvanizing operation.  Operating results of
the purchased galvanizing assets are included in the Company’s financial
statements commencing from the date of purchase on February 28,
2005.




This
strategic expansion provides NAGC an important, established customer base of
major fabricators serving industrial, OEM, and highway markets as well as
residential and commercial markets for lighting poles. Canton’s 52 foot long
dipping kettle is designed to handle large steel structures, such as bridge
beams, utility poles and other steel structural components that require
galvanizing for extended-life corrosion protection. The Canton plant also
processes small parts used in construction, such as nuts and anchor rods, in a
dedicated facility with a smaller 16 foot dipping kettle and a spinner
operation.




In
January 2003, the Company opened its St. Louis galvanizing plant, replacing a
smaller plant at the same location. This larger facility is providing NAGC a
strategic base for extending its geographic area of service. A 51-foot kettle at
this facility provides the largest galvanizing capacity in the St. Louis region.
In 2004, production tonnage at St. Louis more than doubled compared to
production at the plant it replaced.




In
January 2003, the Company expanded services at its Nashville galvanizing plant
with the announced installation of a state-of-the-art spinner line to galvanize
small products, including bolts and threaded material.


FS-3


Results
of Operations




The
following table shows the Company’s results of operations:




(Dollars
      in thousands)Year
      Ended December 31,2007
            
            
            2006
            
            
            2005%
      of
            
            
            
            
            
            %
      of
            
            
            
            
            
            %
      ofAmount
            
            
            Sales
            
            
            Amount
            
            
            Sales
            
            
            Amount
            
            
            SalesSales
            
            $
            88,396
            
            
            
            100.0
            %
            
            $
            74,054
            
            
            
            100.0
            %
            
            $
            47,870
            
            
            
            100.0
            %Cost
      of sales
            
            
            60,329
            
            
            
            68.2
            %
            
            
            54,662
            
            
            
            73.8
            %
            
            
            35,969
            
            
            
            75.1
            %Selling,
      general andadministrative
      expenses
            
            
            9,143
            
            
            
            10.3
            %
            
            
            8,058
            
            
            
            10.9
            %
            
            
            7,196
            
            
            
            15.0
            %Depreciation
      andamortization
            
            
            3,519
            
            
            
            4.0
            %
            
            
            2,975
            
            
            
            4.0
            %
            
            
            2,532
            
            
            
            5.3
            %Operating
      income
            
            
            15,405
            
            
            
            17.4
            %
            
            
            8,359
            
            
            
            11.3
            %
            
            
            2,173
            
            
            
            4.5
            %Interest
      expense
            
            
            553
            
            
            
            0.6
            %
            
            
            867
            
            
            
            1.2
            %
            
            
            1,074
            
            
            
            2.2
            %Interest
      income
            
            
            (81
            )
            
            
            (0.1
            )%
            
            
            (62
            )
            
            
            (0.1
            )%Other
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Income
      from operationsbefore
      income taxes
            
            
            14,933
            
            
            
            16.9
            %
            
            
            7,554
            
            
            
            10.2
            %
            
            
            1,099
            
            
            
            2.3
            %Income
      tax expense
            
            
            5,701
            
            
            
            6.4
            %
            
            
            3,019
            
            
            
            4.1
            %
            
            
            455
            
            
            
            1.0
            %Net
      income
            
            $
            9,232
            
            
            
            10.4
            %
            
            $
            4,535
            
            
            
            6.1
            %
            
            $
            644
            
            
            
            1.3
            %





2007
COMPARED TO 2006




Sales--Sales for the year ended
December 31, 2007 increased 19.4% over the prior year due to increased sales
prices in response to increases in zinc costs..  The average selling
price for 2007 was 22.8% higher than the average selling price for
2006.  Although the price of zinc and galvanizing declined in the
second half of 2007, the Company’s ability to capitalize on high quality, timely
customer service and the generally high demand for galvanizing services have
provided for an increase in sales prices.





Volumes
for 2007 were 2.8% lower than 2006.  Lower volumes are a result of the
Company’s review and acceptance of customer orders only at adequate margin
levels and the scheduled shutdown of the Canton plant to replace the kettle and
furnace during the month of July, 2007.




Cost of Goods
Sold--  The increase in cost of goods sold from 2006 to 2007
was mainly to due to an increase in zinc costs of 19.1%.  Although the
average LME zinc cost for both 2007 and 2006 was the same, the Company’s zinc
cost for the first half of 2006 was lower than the market at that time due to
the favorable impact from forward purchases of zinc.  The Company’s
labor costs increased 10.7% from 2006 to 2007 due to wage and incentive pay
increases and increased overtime pay.  Other plant overhead costs
increased 11% from 2006 to 2007, but include a one-time charge of $.35 million
related to Lake River environmental site assessment costs recorded in the first
quarter of 2007.  Without the Lake River charge, the increase in plant
overhead costs would


FS-4


have been
6%.  While total cost of sales increased year-over-year, as a
percentage of sales it decreased compared to 2006 due primarily to the decline
in the cost of zinc during the second half of 2007 as discussed in Sales,
above.





Selling, General
and Administrative (SG&A) Expenses--SG&A increased $1.1
million, or 13.4%, in 2007 compared to the prior year, but decreased as a
percentage of revenues from 10.9% in 2006 to 10.3% in 2007.  Increases
were due to increases in personnel costs, primarily non-cash share-based
compensation, and legal, audit and tax services expenses, including expenses
related to compliance with Sarbanes-Oxley 404.





Depreciation
Expense--Depreciation expense for
2007 increased $.6 million over the prior year, of which $.4 million was due to
a 2006 change in depreciation method for two newer galvanizing
facilities.  2007 reflects a full year under the new method compared
to six months under the new method in 2006.  The Company previously
used the units of production method for machinery and equipment at these
facilities.  Effective July 1, 2006, the Company changed to the
straight-line method.





Operating
Income--
For the year ended December 31, 2007, operating income was $15.4 million,
compared to $8.4 million for 2006.  The increase in operating income
is due to the factors described above.





Income
Taxes--The
Company’s effective income tax rates for 2007 and 2006 were 38.2% and 40.0%,
respectively.   The effective tax rates differ from the federal
statutory rate primarily due to state income taxes and minor adjustments to
previous tax estimates based on actual tax returns filed.





Net
Income--For
2007, the Company reported net income of $9.2 million compared to net income of
$4.5 million for 2006.  The increase in net income is due to the
factors described above.




2006
Compared to 2005




Sales---Sales
for the year ended December 31, 2006 increased 55% over the prior year due to a
higher average sales price and a 10% increase in volume.  Sales prices
have increased in response to increases in zinc costs.  In 2006,
average selling prices for galvanizing and related coating services increased
41% over 2005.  The London Metals Exchange (LME) market price for zinc
in 2006 averaged $1.49 per pound, compared to $.63 per pound in 2005,
representing a 137% increase.





A general
improvement in hot-dip galvanizing demand due to increased commercial spending
and higher construction activity led to the volume increase in 2006 compared to
2005.  The Canton, Ohio galvanizing facility was purchased on February
28, 2005.  The results for 2006 include a full year for Ohio versus
only 10 months included in 2005 results.  The impact of Ohio revenues
on total revenues, when comparing variances from 2006 to 2005, is
minimal.





Cost of
Sales---The increase in cost of sales from 2005 to 2006 resulted mainly
from an increase in zinc costs and a 10% increase in volume. Forward purchases
of zinc at prices lower than current market during the first six months of 2006
reduced cost of sales by $2.9 million.  Other items impacting cost of
sales include decreased utility costs, $.4 million, and decreased labor costs,
$.2 million, offset by an increase in plant overhead, primarily repairs and
maintenance, $.7 million.





Selling, General
and Administrative (SG&A) Expenses--- SG&A increased $.9 million,
or 12.0%, from 2005 to 2006, but decreased as a percent of revenues from 15% in
2005 to 10.9% in 2006.  The increase is due to increases in personnel
costs, $.6 million, board of director fees $.2 million, information technology
and outsourced services related to Sarbanes-Oxley 404 compliance efforts, $.2
million, legal fees related to the Lake River litigation, $.1 million, and other
increases, $.1 million, offset by reductions in shareholder services, $.2
million, and decrease in audit and tax expenses, $.1 million.


FS-5


Depreciation
Expense--- Depreciation expense for 2006 increased $.4 million from 2005,
resulting primarily from a change in depreciation method for two newer
galvanizing facilities.  The Company previously used the units of
production method for machinery and equipment at these
facilities.  Effective July 1, 2006, the Company changed to the
straight-line method.





Operating
Income---Operating income increased $6.2 million from 2005 to
2006.  The increase in operating income is due to the factors
described above.





Interest Expense
and Interest Income--- Interest expense decreased $.2 million from 2006
to 2005, due to decreased debt outstanding resulting from the payment of
long-term debt obligations and the August 31, 2006 payment of the subordinated
notes payable.  In 2006, the Company recorded interest income of $.1
million resulting from investing excess cash in short-term investments,
primarily overnight repurchase agreements.





Income
Taxes--- The Company’s effective income tax rates for 2006 and 2005 were
40.0% and 41.4%, respectively.  The effective tax rates differ from
the federal statutory rate primarily due to state income taxes and minor
adjustments to previous tax estimates based on actual tax returns
filed.





Net
Income--- For 2006, the Company reported net income of $4.5 million
compared to net income of $.6 million for 2005.  The increase in net
income is primarily a result of the increase in revenues due to increases in
sales price and volume.




Liquidity
and Capital Resources




The
Company’s cash flow from operations and borrowings under credit facilities have
consistently been adequate to fund its current facilities working capital and
capital spending requirements.  During 2007 and 2006, operating cash
flow and borrowings under credit facilities have been the primary sources of
liquidity.  The Company monitors working capital and planned capital
spending to assess liquidity and minimize cyclical cash flow.





Cash flow
from operating activities was $14.5 million in 2007 and $6.6 million in
2006.  In 2007, cash flow from operating activities reflected higher
net income and a $.8 million cash inflow from other operating assets and
liabilities.  In 2006, cash flow from operating activities reflected a
net cash outflow of $.7 million from other operating assets and
liabilities.





Capital
expenditures for equipment and upgrade of existing galvanizing facilities
totaled $4.4 million in 2007 and $1.4 million in 2006.  The increase
reflects the Company’s commitment to invest cash flow in improving plant
operations.  The Company expects base capital expenditures for 2008 to
approximate $4.0 million.





In 2007,
cash used in financing activities totaled $9.1 million, including net payments
on long-term obligations and bonds of $9.4 million and purchase of common stock
for the treasury of $.1 million, offset by proceeds and tax benefit from stock
option exercises of $.4 million.  Cash used in financing activities
for the year ended December 31, 2006 totaled $4.5 million primarily due to the
payment on long-term obligations of $4.7 million and early redemption of the
$1.0 million in subordinated notes payable scheduled to mature in February of
2007, offset by $.8 million received from the exercise of stock
options.





On May
17, 2007, the Company entered into a new credit agreement between the Company as
borrower and Bank of America, N.A. as administrative agent, swing line lender
and letter of credit issuer.  The existing credit agreement, scheduled
to expire on February 28, 2008, was cancelled, and the term loan of $3.5 million
was prepaid without any penalty.





The new
credit agreement provides for a revolving credit facility in the aggregate
principal amount of $25 million with future increases of up to an aggregate
principal amount of $10 million at the discretion of the


FS-6


lender.  The
credit facility matures on May 16, 2012, with no principal payments required
before the maturity date and no prepayment penalty.  The purpose of
the new facility is to refinance a former credit agreement, term debt, and bond
debt, provide for issuance of standby letters of credit, acquisitions, and for
other general corporate purposes.





At
December 31, 2007, the Company had unused borrowing capacity of  $24.8
million, based on no borrowings outstanding under the revolving credit facility,
and $0.2 million of letters of credit to secure payment of current and future
workers’ compensation claims.





Substantially
all of the Company’s accounts receivable, inventories, fixed assets and the
common stock of its subsidiary are pledged as collateral under the agreement,
and the credit agreement is secured by a full and unconditional guaranty from
NAGC.  The credit agreement provides for an applicable margin ranging
from 0.75% to 2.00% over LIBOR and commitment fees ranging from 0.10% to 0.25%
depending on the Company’s Funded Debt to EBITDA Ratio (as defined). If the
Company had borrowings outstanding under the revolving credit facility at
December 31, 2007, the applicable margin would have been 0.75% and the variable
interest rate including the applicable margin would have been 5.615%.





The
credit agreement requires the Company to maintain compliance with covenant
limits for leverage ratio, asset coverage ratio, and a basic fixed charge
coverage ratio.  At December 31, 2007, the Company was in compliance
with the covenants.  The actual financial ratios compared to the
required ratios, were as follows:  Leverage Ratio – actual 0.0 versus
maximum allowed of 3.25; Asset Coverage Ratio – actual 2809.7 vs. minimum
required of 1.5; Basic Fixed Charge Coverage Ratio – actual 6.8 versus minimum
required of 1.00.





The
Company has various commitments primarily related to vehicle and equipment
operating leases, capital lease obligations, facilities operating leases, and
zinc purchase commitments. The Company’s off-balance sheet contractual
obligations at December 31, 2007, consist of $.4 million for vehicle and
equipment operating leases, $1.5 million for zinc purchase commitments, and $.7
million for long-term operating leases for galvanizing and office
facilities.  The various leases for galvanizing facilities, including
option renewals, expire from 2015 to 2017. The vehicle leases expire annually on
various schedules through 2012. NAGC periodically enters into fixed price
purchase commitments with domestic and foreign zinc producers to purchase a
portion of its requirements for its hot dip galvanizing operations; commitments
for the future delivery of zinc can be for up to one year.




The
Company expects to fund these commitments with cash generated from operations
and continuation of existing bank credit agreements as they mature. The
Company’s contractual obligations and commercial commitments as of December 31,
2007, are as follows (in thousands):




Less
      than
            
            
            1-3
            
            
            4-5
            
            
            More
      thanTotal
            
            
            One
      Year
            
            
            Years
            
            
            Years
            
            
            5
      YearsFacilities
      operating leases
            
            $
            653
            
            
            $
            208
            
            
            $
            262
            
            
            $
            72
            
            
            $
            111Vehicle
      and equipment operating leases
            
            
            374
            
            
            
            214
            
            
            
            158
            
            
            
            2
            
            
            
            —Zinc
      purchase commitments
            
            
            1,519
            
            
            
            1,519
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
      contractual cash obligations
            
            $
            2,546
            
            
            $
            1,941
            
            
            $
            420
            
            
            $
            74
            
            
            $
            111Other
      contingent commitment:Letters
      of credit
            
            $
            164
            
            
            $
            164
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Water
      District Claim*




* The
Company has recorded a liability for $350,000 related to the Water District
claim in recognition of its currently known and estimable funding commitment
under the Agreement in Principle.  The Company is unable to make a
reasonable estimate as to when this commitment will be paid.


FS-7


Share
Repurchase Program




In August
1998, the Board of Directors authorized the Company to repurchase up to
$1,000,000 of its common stock in private or open market transactions. In 2007,
the Company repurchased 28,575 shares at an average price per share of $5.38,
bringing the total number of shares repurchased through December 31, 2007 to
228,069 at an average price of $1.72 per share totaling $391,872. The number of
shares repurchased and average price was adjusted to reflect the Company’s
three-for-two stock split effected in the form of a stock dividend on June 8,
2007.




Environmental
Matters




The
Company’s facilities are subject to environmental legislation and regulations
affecting their operations and the discharge of wastes. The cost of compliance
with such regulations was approximately $1.9 million, $1.4 million, and $1.1
million in 2007, 2006 and 2005, respectively, for the disposal and recycling of
wastes generated by the galvanizing operations. Year-to-date December 2007 costs
include a one-time charge of $.35 million related to Lake River environmental
site assessment costs recorded in the first quarter of 2007.





On August
30, 2004, the Company was informed by counsel for the Metropolitan Water
Reclamation District of Greater Chicago (the “Water District”) that the Water
District had, on August 25, 2004 filed a Second Amended Complaint in the United
States District Court, Northern District of Illinois, Eastern Division, naming
North American Galvanizing & Coatings, Inc. (formerly known as Kinark
Corporation) as an added defendant. Counsel for the Water District also gave the
Company notice of the Water District’s intent to file (or amend the Complaint to
include) a Citizens Suit under the Resource Compensation and Recovery Act
(“RCRA”) against North American Galvanizing & Coatings, Inc., pursuant to
Section 7002 of RCRA, 42 U.S.C. Section 6972. This Second Amended Complaint
seeks enforcement of an August 12, 2004 default judgment in the amount of
$1,810,463.34 against Lake River Corporation and Lake River Holding Company,
Inc. in connection with the operation of a storage terminal by Lake River
Corporation in violation of environmental laws. Lake River Corporation conducted
business as a subsidiary of the Company until September 30, 2000, at which time
Lake River Corporation was sold to Lake River Holding Company, Inc. and ceased
to be a subsidiary of the Company. The Second Amended Complaint asserts that
prior to the sale of Lake River Corporation, the Company directly operated the
Lake River facility and, accordingly, seeks to have the Court pierce the
corporate veil of Lake River Corporation and enforce the default judgment order
of August 12, 2004 against the Company. The Company denied the assertions set
forth in the Water District’s Complaint and on November 13, 2004 filed a partial
motion for dismissal of the Second Amended Complaint.





In
December 2004, the Water District filed a Third Amended complaint in the
litigation, adding two claims: (1) a common law claim for nuisance; and (2) a
claim under the federal Resource Conservation and Recovery Act, in which the
Water District argues that the Company is responsible for conditions on the
plaintiff’s property that present an “imminent and substantial endangerment to
human health and the environment.” In January 2005, the Company filed a partial
motion to dismiss the Third Amended Complaint. On April 12, 2005, the Court
issued an order denying in part and granting in part the Company’s partial
motion to dismiss plaintiff’s third amended complaint.  The Company
filed an appeal with the Seventh Circuit Court of Appeals requesting dismissal
of the sole CERCLA claim contained in the Third Amended Complaint that was not
dismissed by the United States District Court’s April 12, 2005
order.  On January 17, 2007, the Seventh Circuit affirmed the judgment
of the United States District Court, stating that the Water District has a right
of action under CERCLA.





On April
11, 2007, the Company entered into an Agreement in Principle establishing terms
for a conditional settlement. Under the terms of the Agreement in Principle, the
Company has agreed to fund 50% of the cost, up to $350,000, to enroll the site
in the Illinois Voluntary Site Remediation Program.  These funds will
be used to prepare environmental reports for approval by the Illinois
Environmental Protection Agency.  The parties’ shared objective is to
obtain a “no further remediation determination” from the Illinois EPA based on


FS-8


a
commercial / industrial cleanup standard.  If the cost to prepare
these reports equals or exceeds $700,000, additional costs above $700,000
($350,000 per party) will be borne 100% by the Water District.





If a
remediation plan is required based on the site assessment, the Company has also
agreed to fund 50% of the cost to implement the remediation plan, up to a
maximum of $1 million.  If the cost to implement the plan is projected
to exceed $2 million, then the Water District will have the option to terminate
the Agreement in Principle and resume the litigation.  The Water
District will have to choose whether to accept or reject the $1 million funding
commitment from the Company before accepting any payments from the Company for
implementation of the remediation plan.  The Company cannot determine
whether any cleanup is required or if any final cleanup cost is likely to exceed
$2 million until additional data has been collected and analyzed in connection
with the environmental reports.  If the Water District elects to
accept the maximum funding commitment, the Company has also agreed to remove
certain piping and other equipment from one of the parcels.  The cost
to remove the piping is estimated to be between $35,000 and
$60,000.  Although the boards of both the Water District and the
Company have approved the Agreement in Principle, the agreement of the parties
must be embodied in a formal settlement agreement, which is currently in
process.





The
Company has recorded a liability for $350,000 related to the Water District
claim in recognition of its currently known and estimable funding commitment
under the Agreement in Principle.  In the event that the Water
District rejects the funding commitment described above, the potential claim
could exceed the amount of the previous default judgment.  As neither
a site evaluation nor a remediation plan has been developed, the Company is
unable to make a reasonable estimate of the amount or range of further loss, if
any, that could result.  Such a liability, if any, could have a
material adverse effect on the Company’s financial condition, results of
operations, or liquidity.





NAGC was
notified in 1997 by the Illinois Environmental Protection Agency (“IEPA”) that
it was one of approximately 60 potentially responsible parties (“PRPs”) under
the Comprehensive Environmental Response, Compensation, and Liability
Information System (“CERCLIS”) in connection with cleanup of an abandoned site
formerly owned by Sandoval Zinc Co., an entity unrelated to NAGC.  The
estimated timeframe for resolution of the IEPA contingency is
unknown.  The IEPA has yet to respond to a proposed work plan
submitted in August 2000 by a group of the PRPs or suggest any other course of
action, and there has been no activity in regards to this issue since 2001.
Until the work plan is approved and completed, the range of potential loss or
remediation, if any, is unknown, and in addition, the allocation of potential
loss between the 60 PRPs is unknown and not reasonably
estimable.  Therefore, the Company has no basis for determining
potential exposure and estimated remediation costs at this time and no liability
has been accrued.





The
Company is committed to complying with all federal, state and local
environmental laws and regulations and using its best management practices to
anticipate and satisfy future requirements. As is typical in the galvanizing
business, the Company will have additional environmental compliance costs
associated with past, present, and future operations. Management is committed to
discovering and eliminating environmental issues as they arise. Because of the
frequent changes in environmental technology, laws and regulations management
cannot reasonably quantify the Company’s potential future costs in this
area.




Critical
Accounting Policies




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires that management
apply accounting policies and make estimates and assumptions that affect results
of operations and the reported amounts of assets and liabilities. The following
areas are those that management believes are important to the financial
statements because they require significant judgment and
estimation.




Revenue
Recognition—Revenue is recognized when earned and realized or realizable
in accordance with Staff Accounting Bulletin (SAB) 104. This includes satisfying
the following criteria:  the arrangement with


FS-9


the
customer is evident, through the receipt of a purchase order or a written
agreement; the sales price is fixed or determinable; coating services have been
completed, including inspection by the Company according to American Society for
Testing and Materials (“ASTM”) standards; and collectibility is reasonably
assured.  The Company does not accept title to customers’ products,
thus, revenue does not include the value of the customers’
products.  Although most customers make arrangements for
transportation, if the Company makes transportation arrangements, freight and
shipping billed to customers is included in sales, and the cost of freight and
shipping is included in cost of sales.




Inventories—Inventories
are stated at the lower of cost (LIFO basis) or market. Since substantially all
of the Company’s inventory is raw zinc used in the galvanizing of customers’
products, market value is based on an estimate of the value added to the cost of
raw zinc as a result of the galvanizing service.




Self-Insurance
Reserves—The reserves for the self-insured portion of workers
compensation and health insurance coverage are based on historical data and
current trends. Estimates for claims incurred and incurred but not reported
claims are included in the reserves. These estimates may be subject to
adjustment if the Company’s actual claims are significantly different than its
historical experience. The Company has obtained insurance coverage for medical
claims exceeding $75,000 and workers’ compensation claims exceeding $150,000 per
occurrence, respectively, and has implemented safety training and other programs
to reduce workplace accidents.




Impairment of
Long-Lived Assets—The Company reviews long-lived assets for impairment
using forecasts of future cash flows to be generated by those assets. These cash
flow forecasts are based upon expected tonnage to be galvanized and the margin
to be earned by providing that service to customers. These assumptions are
susceptible to the actions of competitors and changes in economic conditions in
the industries and geographic markets the Company serves.




Environmental—The
Company expenses or capitalizes, where appropriate, environmental expenditures
that relate to current operations as they are incurred. Such expenditures are
expensed when they are attributable to past operations and are not expected to
contribute to current or future revenue generation. The Company records
liabilities when remediation or other environmental assessment or clean-up
efforts are probable and the cost can be reasonably estimated.




Goodwill—Pursuant
to the provisions of SFAS No. 141, “Business Combinations” and SFAS No. 142,
“Goodwill and Other Intangible Assets,” which requires management to estimate
the fair value of the Company’s reporting units, the Company conducts an annual
impairment test of goodwill during the second quarter of each year unless
circumstances arise that require more frequent testing. The determination of
fair value is dependent upon many factors including, but not limited to,
management’s estimate of future cash flows of the reporting units and discount
rates. Any one of a number of future events could cause management to conclude
that impairment indicators exist and that the carrying value of these assets
will not be recovered. The Company completed the annual impairment test of
goodwill for 2007 and concluded goodwill was not impaired.




New Accounting
Standards—The Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes”, or FIN 48, on January 1, 2007.
FIN 48 clarifies whether or not to recognize assets or liabilities for tax
positions taken that may be challenged by a taxing authority.The Company files income
tax returns in the U.S. federal jurisdiction and various state jurisdictions.
With few exceptions, the Company is no longer subject to U.S. federal and state
income tax examinations by tax authorities for years before 2003. In the second
quarter of 2006, the Internal Revenue Service (IRS) commenced an
examination of the Company’s Federal income tax return for 2004 and subsequently
added years 2003 and 2005 to the examination.  This examination was
completed in the second quarter of 2007 resulting in a required tax payment of
$266,000, primarily due to timing differences of deductions taken in prior year
returns.


FS-10


Upon the
adoption of FIN 48, and as of December 31, 2007, the Company conducted an
evaluation of all open tax years in all jurisdictions, including an evaluation
of the potential impact of additional state taxes being assessed by
jurisdictions in which the Company does not currently consider itself liable.
Based on this evaluation, the Company did not identify any uncertain tax
positions. In connection with the adoption of FIN 48, the Company will include
future interest and penalties, if any, related to uncertain tax positions as a
component of its provision for taxes.




In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements.
The Company adopted the provisions of SFAS 157 on January 1, 2008;
the  adoption had no impact on the Company’s financial position,
consolidated results of operations or cash flows.




In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans (“SFAS 158”). The Company
has no defined benefit or other postretirement plans; accordingly, SFAS 158 has
no impact on the Company’s financial position, consolidated results of
operations or cash flows.




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  permits entities to choose to
measure many financial instruments and certain other items at fair value. The
Company adopted the provisions of SFAS 159 on January 1, 2008;
the  adoption had no impact on the Company’s financial position,
consolidated results of operations or cash flows.




In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements –an amendment of ARB No. 51 (“SFAS
160”). A noncontrolling interest, sometimes called a minority interest, is the
portion of equity in a subsidiary not attributable, directly or indirectly, to a
parent. The statement is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. Earlier adoption is
prohibited.  The Company currently has no noncontrolling
interests,  thus the adoption of FAS 160 is expected to have no impact
on the Company’s financial position, consolidated results of operations or cash
flows.




Quantitative
and Qualitative Disclosures About Market Risks




The
Company’s operations include managing market risks related to changes in
interest rates and zinc commodity prices.




Interest Rate
Risk— Changing interest rates will affect interest paid on the Company’s
variable rate debt.  The Company does not have any variable rate debt
as of December 31, 2007.




Zinc Price
Risk—NAGC periodically enters into fixed price purchase commitments for
physical delivery with domestic and foreign zinc producers to purchase a portion
of its zinc requirements for its hot dip galvanizing operations. Commitments for
the future delivery of zinc, typically up to one year, reflect rates quoted on
the London Metals Exchange. At December 31, 2007 and 2006, the aggregate fixed
price commitments for the procurement of zinc were approximately $1.5 million
and $.8 million, respectively. With respect to the zinc fixed price purchase
commitments, a hypothetical decrease of 10% in the market price of zinc from the
December, 2007 and 2006 levels would represent potential lost gross margin
opportunity of approximately $.15 million and $.08 million,
respectively.




The
Company’s financial strategy includes evaluating the selective use of derivative
financial instruments to manage zinc and interest costs. As part of its
inventory management strategy, the Company expects to continue evaluating
hedging instruments to minimize the impact of zinc price fluctuations. The
Company’s current zinc forward purchase commitments are considered derivatives,
but the Company has elected to account for these purchase commitments as normal
purchases.


FS-11


MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING




The
Management of North American Galvanizing Company (the “Company”) and its
wholly-owned subsidiaries are responsible for establishing and maintaining
adequate internal control over financial reporting. The Company’s internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles. Internal control over financial reporting
includes policies and procedures that: (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial
statements.




All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective may not
prevent or detect misstatements.




The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2007. In making this
assessment, the Company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control-Integrated Framework.




Management’s
assessment included an evaluation of such elements as the design and operating
effectiveness of key financial reporting controls, process documentation,
accounting policies, and overall control environment. Based on this assessment,
the Company’s management has concluded that the Company’s internal control over
financial reporting as of December 31, 2007 was effective.









/s/Ronald J. Evans
                Ronald
      J. Evans
              /s/Beth
      B. Hood
                Beth
      B. HoodPresident
      and
              Vice
      President andChief
      Executive Officer
              Chief
      Financial Officer
  FS-12


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
the Board of Directors and Stockholders of


North
American Galvanizing & Coatings, Inc.




We have
audited the internal control over financial reporting of North American
Galvanizing & Coatings, Inc. and subsidiary (the "Company") as of December
31, 2007, based on criteria established in Internal Control — Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.  The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over
Financial Reporting.  Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our
audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances.  We believe
that our audit provides a reasonable basis for our opinion.




A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.  A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.




Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis.  Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.




In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on the criteria
established in Internal
Control — Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission.


FS-13


We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedule as of and for the year ended December 31, 2007 of
the Company and our report dated March 7, 2008 expressed an unqualified opinion
on those financial statements and the financial statement schedule listed in the
Index at Item 15.




/s/
Deloitte & Touche LLP




Tulsa,
Oklahoma


March 7,
2008


FS-14


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
the Board of Directors and Stockholders of




North
American Galvanizing & Coatings, Inc.




We have
audited the accompanying consolidated balance sheets of North American
Galvanizing & Coatings, Inc. and subsidiary (the “Company”) as of December
31, 2007 and 2006, and the related consolidated statements of income,
stockholders’ equity and cash flows for each of the three years in the period
ended December 31, 2007. Our audits also included the financial statement
schedule listed in the Index at Item 15. These financial statements and the
financial statement schedule are the responsibility of the Company’s management.
Our responsibility is to express an opinion on the financial statements and the
financial statement schedule based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.




In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of North American Galvanizing & Coatings,
Inc. and subsidiary at December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.




As
discussed in Note 1 to the accompanying consolidated financial statements,
effective January 1, 2006 the Company adopted Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment.




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 7, 2008 expressed an unqualified
opinion on the Company's internal control over financial reporting.







/s/
Deloitte & Touche LLP




Tulsa,
Oklahoma


March 7,
2008


FS-15
 
 NORTH
AMERICAN GALVANIZING & COATINGS, INC.
 CONSOLIDATED
BALANCE SHEETS


(In
      thousands, except per share amounts)December
      31,
            
            
            December
      31,ASSETS
            
            2007
            
            
            2006CURRENT
      ASSETS:Cash
            
            $
            2,966
            
            
            $
            1,979Trade
      receivables—less allowances of $154 for 2007 and $197 for
    2006
            
            
            10,294
            
            
            
            13,032Inventories
            
            
            6,399
            
            
            
            6,755Prepaid
      expenses and other assets
            
            
            1,096
            
            
            
            836Deferred
      tax asset—net
            
            
            741
            
            
            
            784Total
      current assets
            
            
            21,496
            
            
            
            23,386PROPERTY,
      PLANT AND EQUIPMENT—AT COST:Land
            
            
            2,167
            
            
            
            2,167Galvanizing
      plants and equipment
            
            
            41,337
            
            
            
            36,84343,504
            
            
            
            39,010Less—allowance
      for depreciation
            
            
            (22,413
            )
            
            
            (18,894
            )Construction
      in progress
            
            
            1,396
            
            
            
            1,019Total
      property, plant and equipment—net
            
            
            22,487
            
            
            
            21,135GOODWILL
            
            
            3,448
            
            
            
            3,448OTHER
      ASSETS
            
            
            141
            
            
            
            242TOTAL
      ASSETS
            
            $
            47,572
            
            
            $
            48,211LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Current
      maturities of long-term obligations
            
            $
            1
            
            
            $
            778Current
      portion of bonds payable
            
            
            —
            
            
            
            830Trade
      accounts payable
            
            
            5,296
            
            
            
            7,879Accrued
      payroll and employee benefits
            
            
            1,513
            
            
            
            1,103Accrued
      taxes
            
            
            1,112
            
            
            
            762Other
      accrued liabilities
            
            
            2,910
            
            
            
            2,738Total
      current liabilities
            
            
            10,832
            
            
            
            14,090DEFERRED
      TAX LIABILITY—Net
            
            
            697
            
            
            
            802LONG-TERM
      OBLIGATIONS
            
            
            14
            
            
            
            3,318BONDS
      PAYABLE
            
            
            —
            
            
            
            4,435Total
      liabilities
            
            
            11,543
            
            
            
            22,645COMMITMENTS
      AND CONTINGENCIES (NOTES 8 AND 9)STOCKHOLDERS’
      EQUITY (all shares for all periods adjusted for three-for-two stocksplit
      on June 8, 2007):Common
      stock—$.10 par value, 18,000,000 shares authorized:Issued—12,366,754
      shares in 2007 and  12,314,887 in 2006
            
            
            1,237
            
            
            
            821Additional
      paid-in capital
            
            
            14,549
            
            
            
            14,061Retained
      earnings
            
            
            20,310
            
            
            
            11,078Common
      shares in treasury at cost— 12,590 in 2007 and 147,379 in
    2006
            
            
            (67
            )
            
            
            (394
            )Total
      stockholders’ equity
            
            
            36,029
            
            
            
            25,566TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            47,572
            
            
            $
            48,211See
      notes to consolidated financial statements.




FS-16
 
 NORTH AMERICAN GALVANIZING & COATINGS,
INC.
 CONSOLIDATED
STATEMENTS OF INCOME


(In
      thousands, except per share amounts)Years
      Ended December 312007
            
            
            2006
            
            
            2005SALES
            
            $
            88,396
            
            
            $
            74,054
            
            
            $
            47,870COSTS
      AND EXPENSES:Cost
      of sales
            
            
            60,329
            
            
            
            54,662
            
            
            
            35,969Selling,
      general and administrative expenses
            
            
            9,143
            
            
            
            8,058
            
            
            
            7,196Depreciation
      and amortization
            
            
            3,519
            
            
            
            2,975
            
            
            
            2,532Total
      costs and expenses
            
            
            72,991
            
            
            
            65,695
            
            
            
            45,697OPERATING
      INCOME
            
            
            15,405
            
            
            
            8,359
            
            
            
            2,173Interest
      expense
            
            
            553
            
            
            
            867
            
            
            
            1,074Interest
      income
            
            
            (81
            )
            
            
            (62
            )
            
            
            —INCOME
      BEFORE INCOME TAXES
            
            
            14,933
            
            
            
            7,554
            
            
            
            1,099INCOME
      TAX EXPENSE
            
            
            5,701
            
            
            
            3,019
            
            
            
            455NET
      INCOME
            
            $
            9,232
            
            
            $
            4,535
            
            
            $
            644NET
      INCOME PER COMMON SHARE, all periods adjusted for three-for-two stock
      split on June 8, 2007 (Note 1):Net
      incomeBasic
            
            $
            0.75
            
            
            $
            0.40
            
            
            $
            0.06Diluted
            
            $
            0.72
            
            
            $
            0.39
            
            
            $
            0.05See
      notes to consolidated financial statements.




FS-17
 
 NORTH
AMERICAN GALVANIZING & COATINGS, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
      thousands, except per share amounts)Years
      Ended December 312007
            
            
            2006
            
            
            2005OPERATING
      ACTIVITIES:Net
      income
            
            $
            9,232
            
            
            $
            4,535
            
            
            $
            644(Loss)/Gain
      on disposal of assets
            
            
            —
            
            
            
            (6
            )
            
            
            (2
            )Depreciation
            
            
            3,519
            
            
            
            2,975
            
            
            
            2,532Deferred
      income taxes
            
            
            (62
            )
            
            
            (786
            )
            
            
            583Non-cash
      share-based compensation
            
            
            531
            
            
            
            99
            
            
            
            —Non-cash
      directors’ fees
            
            
            429
            
            
            
            459
            
            
            
            245Changes
      in operating assets and liabilities:Accounts
      receivable—net
            
            
            2,738
            
            
            
            (6,224
            )
            
            
            (1,207
            )Inventories
      and other assets
            
            
            197
            
            
            
            (512
            )
            
            
            164Accounts
      payable, accrued liabilities and other
            
            
            (2,092
            )
            
            
            6,029
            
            
            
            3,681Cash
      provided by operating activities
            
            
            14,492
            
            
            
            6,569
            
            
            
            6,640INVESTING
      ACTIVITIES:Capital
      expenditures
            
            
            (4,430
            )
            
            
            (1,414
            )
            
            
            (1,016
            )Proceeds
      from sale of fixed assets
            
            
            —
            
            
            
            5
            
            
            
            29Payment
      for purchase of Gregory Industries' galvanizing operation
            
            
            —
            
            
            
            —
            
            
            
            (4,188
            )Cash
      used in investing activities
            
            
            (4,430
            )
            
            
            (1,409
            )
            
            
            (5,175
            )FINANCING
      ACTIVITIES:Payments
      on long-term obligations
            
            
            (18,954
            )
            
            
            (20,143
            )
            
            
            (22,452
            )Proceeds
      from long-term obligations
            
            
            14,873
            
            
            
            16,089
            
            
            
            22,313Payment
      on bonds
            
            
            (5,265
            )
            
            
            (669
            )
            
            
            (693
            )Tax
      benefit realized from stock options exercised and stock units
      distributed
            
            
            232
            
            
            
            350
            
            
            
            —Proceeds
      from exercise of stock options
            
            
            194
            
            
            
            771
            
            
            
            —Purchase
      of treasury stock
            
            
            (153
            )
            
            
            (3
            )
            
            
            —Cash
      paid for fractional shares pursuant to stock split effected by stock
      dividend
            
            
            (2
            )
            
            
            —
            
            
            
            —Payment
      of subordinated notes payable
            
            
            —
            
            
            
            (1,000
            )
            
            
            —Proceeds
      from exercise of warrants
            
            
            —
            
            
            
            57
            
            
            
            —Proceeds
      from sale of treasury stock
            
            
            —
            
            
            
            —
            
            
            
            100Cash
      used in financing activities
            
            
            (9,075
            )
            
            
            (4,548
            )
            
            
            (732
            )INCREASE
      IN CASH AND CASH EQUIVALENTS
            
            
            987
            
            
            
            612
            
            
            
            733CASH
      AND CASH EQUIVALENTS:Beginning
      of year
            
            
            1,979
            
            
            
            1,367
            
            
            
            634End
      of year
            
            $
            2,966
            
            
            $
            1,979
            
            
            $
            1,367CASH
      PAID DURING THE YEAR FOR:Interest
            
            $
            494
            
            
            $
            880
            
            
            $
            1,014Income
      taxes (net of refunds of $432 in 2005)
            
            $
            5,604
            
            
            $
            3,419
            
            
            $
            (390
            )NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Acquisitions
      of fixed assets under capital lease obligations
            
            $
            —
            
            
            $
            363
            
            
            $
            —Acquisitions
      of fixed assets included in accounts payable at period end
            
            $
            441
            
            
            $
            464
            
            
            $
            —See
      notes to consolidated financial statements.




FS-18
 
 NORTH
AMERICAN GALVANIZING & COATINGS, INC.
  CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 FOR
EACH OF THE THREE YEARS ENDED DECEMBER 31, 2007, 2006 AND
2005


(In
      thousands, except per share amounts)Common
      Stock
            
            
            Additional$.10
      Par Value
            
            
            Paid-in
            
            
            Retained
            
            
            Treasury
      StockShares
            
            
            Amount
            
            
            Capital
            
            
            Earnings
            
            
            Shares
            
            
            Amount
            
            
            TotalBALANCE—January
      1, 2005
            
            
            8,209,925
            
            
            $
            819
            
            
            $
            17,252
            
            
            $
            5,899
            
            
            
            1,412,913
            
            
            $
            (5,661
            )
            
            $
            18,309Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            644
            
            
            
            —
            
            
            
            —
            
            
            
            644Other
            
            
            
            
            
            
            2
            
            
            
            (2
            )Stock
      units for Director Stock Unit Program
            
            
            —
            
            
            
            —
            
            
            
            245
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            245Treasury
      stock purchased
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (64
            )
            
            
            —
            
            
            
            —Treasury
      stock issued
            
            
            —
            
            
            
            —
            
            
            
            (104
            )
            
            
            —
            
            
            
            50,000
            
            
            
            204
            
            
            
            100BALANCE—January
      1, 2006
            
            
            8,209,925
            
            
            $
            821
            
            
            $
            17,391
            
            
            $
            6,543
            
            
            
            1,362,977
            
            
            $
            (5,457
            )
            
            $
            19,298Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,535
            
            
            
            —
            
            
            
            —
            
            
            
            4,535Stock
      units for Director Stock Unit Program
            
            
            —
            
            
            
            —
            
            
            
            459
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            459Incentive
      Stock Plan Compensation
            
            
            —
            
            
            
            —
            
            
            
            99
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            99Purchase
      of common stock for the treasury
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            735
            
            
            
            (3
            )
            
            
            (3
            )Issuance
      of treasury shares for Director StockUnit Program transactions,
      including tax benefit
            
            
            —
            
            
            
            —
            
            
            
            (1,006
            )
            
            
            —
            
            
            
            (259,001
            )
            
            
            1,036
            
            
            
            30Issuance
      of treasury shares for warranttransactions, net of shares tendered
      for payment
            
            
            —
            
            
            
            —
            
            
            
            (2,324
            )
            
            
            —
            
            
            
            (594,635
            )
            
            
            2,381
            
            
            
            57Issuance
      of treasury shares for stock optiontransactions, net of
      shares tendered for payment and including tax
benefit
            
            
            —
            
            
            
            —
            
            
            
            (558
            )
            
            
            —
            
            
            
            (411,823
            )
            
            
            1,649
            
            
            
            1,091BALANCE—January
      1, 2007
            
            
            8,209,925
            
            
            $
            821
            
            
            $
            14,061
            
            
            $
            11,078
            
            
            
            98,253
            
            
            $
            (394
            )
            
            $
            25,566Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            9,232
            
            
            
            —
            
            
            
            —
            
            
            
            9,232Stock
      split effected by a three for two stockdividend, including cash
      paid for fractional shares
            
            
            4,118,200
            
            
            
            411
            
            
            
            (413
            )
            
            
            —
            
            
            
            184
            
            
            
            —
            
            
            
            (2
            )Issuance
      of  common stock for DirectorStock Unit
      Program
            
            
            31,129
            
            
            
            4
            
            
            
            (4
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Issuance
      of  common stock for stock optiontransactions, including
      tax benefit
            
            
            7,500
            
            
            
            1
            
            
            
            52
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            53Incentive
      Stock Plan Compensation
            
            
            —
            
            
            
            —
            
            
            
            531
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            531Stock
      units for Director Stock Unit Program
            
            
            —
            
            
            
            —
            
            
            
            429
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            429Issuance
      of treasury shares for stock optiontransactions, including tax
      benefit
            
            
            —
            
            
            
            —
            
            
            
            63
            
            
            
            —
            
            
            
            (77,500
            )
            
            
            310
            
            
            
            373Issuance
      of treasury shares for Director StockUnit Program transactions,
      including tax benefit
            
            
            —
            
            
            
            —
            
            
            
            (170
            )
            
            
            —
            
            
            
            (36,897
            )
            
            
            170
            
            
            
            —Purchase
      of common stock for the treasury
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            28,550
            
            
            
            (153
            )
            
            
            (153
            )BALANCE—December
      31, 2007
            
            
            12,366,754
            
            
            $
            1,237
            
            
            $
            14,549
            
            
            $
            20,310
            
            
            
            12,590
            
            
            $
            (67
            )
            
            $
            36,029See
      notes to consolidated financial statements.




FS-19


NORTH
AMERICAN GALVANIZING AND COATINGS, INC.






NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
Ended December 31, 2007, 2006 and 2005




Description
of Business




North
American Galvanizing & Coatings, Inc. (“North American Galvanizing” or the
“Company”) is engaged in hot dip galvanizing and coatings for corrosion
protection of customer-owned fabricated steel products through its wholly owned
subsidiary, North American Galvanizing Company (“NAGC”). NAGC provides metals
corrosion protection with 11 regionally located galvanizing plants. The Company
grants unsecured credit to its customers on terms standard for this industry,
typically net 30 to 45 days.




(1)
Summary of Significant Accounting Policies




Principles of
Consolidation—The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary. All inter-company transactions
are eliminated in consolidation.




Estimates—The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the balance
sheet dates and the reported amounts of revenues and expenses for each of the
years. Actual results will be determined based on the outcome of future events
and could differ significantly from the estimates.




Cash and Cash
Equivalents—Cash and cash equivalents include interest bearing deposits
with original maturities of three months or less.




Inventories—Inventories
consist of raw zinc “pigs,” molten zinc in galvanizing kettles and other
chemicals and materials used in the galvanizing process. Inventories are stated
at the lower of cost or market with market value based on estimated realizable
value from the galvanizing process. Zinc cost is determined on a last-in
first-out (“LIFO”) basis. Other inventories are valued primarily on an average
cost basis. Inventories consist of the following:




(Dollars
      in thousands)2007
            
            
            2006Zinc
            
            $
            5,873
            
            
            $
            5,679Other
            
            
            526
            
            
            
            1,076$
            6,399
            
            
            $
            6,755




Had the
Company used first-in-first-out (“FIFO”) basis for valuing its zinc inventories,
at December 31, 2007 and 2006 inventories would have been higher by
approximately $8,307,000 and $11,979,000, respectively. The Company’s LIFO
inventories represented approximately 92% of total inventories at December 31,
2007 and 84% of total inventories at December 31, 2006. Raw zinc replacement
cost based on year-end market prices was $11,414,000 and $19,380,000 at December
31, 2007 and 2006, respectively. In 2005, inventory quantities were reduced,
resulting in liquidation of LIFO inventory layers which increased the Company’s
net income by approximately $39,000.


FS-20


In
November 2004, the FASB issued SFAS No. 151, Inventory Costs-An Amendment of ARB
No. 43, Chapter 4(“SFAS No. 151”).  SFAS 151 amends
the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage).  SFAS 151 was adopted by NAGC
on January 1, 2006 and had no material impact on its consolidated results of
operations, financial condition and cash flows.





Goodwill—Goodwill
represents the excess of purchase price over the fair value of net assets
acquired in business combinations. Goodwill is not amortized but is reviewed at
least annually for impairment. Management selected May 31 as the date of its
annual goodwill impairment test. Based upon the impairment test performed as of
May 31, 2007, management determined that goodwill was not impaired.




Depreciation and
Amortization—Plant and equipment, including assets under capital leases,
are depreciated on the straight-line basis over their estimated useful lives,
generally at rates of 3% to 6% for buildings and 10% to 20% for equipment,
furnishings, and fixtures.




Environmental
Expenditures—The Company expenses or capitalizes, where appropriate,
environmental expenditures that relate to current operations as they are
incurred. Such expenditures are expensed when they are attributable to past
operations and are not expected to contribute to current or future revenue
generation. The Company records liabilities when remediation or other
environmental assessment or clean-up efforts are probable and the cost can be
reasonably estimated.




Long-Lived
Assets—Long-lived assets and certain intangibles to be held and used or
disposed of are reviewed for impairment on an annual basis or when events or
circumstances indicate that such impairment may have occurred. The Company has
determined that no impairment loss need be recognized for the years ended
December 31, 2007, 2006 or 2005.




Self-Insurance—The
Company is self-insured for workers’ compensation and certain health care claims
for its active employees. The Company carries excess insurance providing
coverage for medical claims exceeding $75,000 and workers’ compensation claims
exceeding $150,000 per occurrence, respectively. The reserves for workers’
compensation benefits and health care claims represent estimates for reported
claims and for claims incurred but not reported using loss development factors.
Such estimates are generally based on historical trends and risk assessment
methodologies; however, the actual results may vary from these estimates since
the evaluation of losses is inherently subjective and susceptible to significant
changing factors.




Revenue
Recognition—Revenue is recognized when earned and realized or realizable
in accordance with Staff Accounting Bulletin (SAB) 104. This includes satisfying
the following criteria:  the arrangement with the customer is evident,
through the receipt of a purchase order or a written agreement; the sales price
is fixed or determinable; coating services have been completed, including
inspection by the Company according to American Society for Testing and
Materials (“ASTM”) standards; and collectibility is reasonably
assured.  The Company does not accept title to customers’ products,
thus, revenue does not include the value of the customers’
products.  Although most customers make arrangements for
transportation, if the Company makes transportation arrangements, freight and
shipping billed to customers is included in sales, and the cost of freight and
shipping is included in cost of sales.




Derivative
Financial Instruments—The Company has previously utilized commodity
collar contracts as derivative instruments which are intended to offset the
impact of potential fluctuations in the market price of zinc. The Company had no
derivative instruments that were required to be reported at fair value at
December 31, 2007 and 2006, and did not utilize derivatives during the years
ended December 31, 2007, 2006 or 2005, except for the zinc forward purchase
commitments, which are accounted for as normal purchases (see Note
8).


FS-21


Stock
Options— The Company adopted Statement of Financial Accounting Standards
No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”) under the modified
prospective method on January 1, 2006.  Under the “modified
prospective” method, compensation cost is recognized in the financial statements
beginning with the effective date, based on the requirements of SFAS No. 123(R)
for all share-based payments granted after that date, and based on the
requirements of Statement of Financial Accounting Standards No.123, “Accounting
for Stock Based Compensation” (“SFAS No. 123”) for all unvested awards granted
prior to the effective date of SFAS No. 123(R).





SFAS No.
123(R) eliminates the intrinsic value measurement method of accounting in APB
Opinion 25 and generally requires measuring the cost of the employee services
received in exchange for an award of equity instruments based on the fair value
of the award on the date of the grant. The standard requires grant date fair
value to be estimated using either an option-pricing model which is consistent
with the terms of the award or a market observed price, if such a price exists.
Such costs must be recognized over the period during which an employee is
required to provide service in exchange for the award. The standard also
requires estimating the number of instruments that will ultimately be issued,
rather than accounting for forfeitures as they occur.





The
compensation cost for stock options was $531,000 for the year ended December 31,
2007 and $99,000 for the year ended December 31, 2006.  No tax benefit
was recognized for the incentive stock plan compensation cost.  There
was no share-based compensation cost capitalized during 2006 or
2007.





Prior to
2006, the Company accounted for its stock option plans in accordance with
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees”, under which no compensation cost was recognized for stock option
awards.  Had compensation cost for the Company’s stock option plans
been determined according to the methodology of SFAS No. 123, the Company’s pro
forma net earnings and basic and diluted earnings per share for the year ended
December 31, 2005 would have been as follows:


Year
      Ended December 31,(Dollars in Thousands, Except
      per Share Amounts)
              
              2005Net
      Income, as reported
              
              $
              644Deduct:  Total
      stock-based employee compensation expensedetermined
      under fair value based methods, net of tax
              
              $
              (63
              )Pro
      forma net income
              
              $
              581Earnings
      per share, as adjusted to reflect the three-for-two stock split on June 8,
      2007:Basic
      – as reported
              
              $
              .06Basic
      – pro forma
              
              $
              .05Diluted
      – as reported
              
              $
              .05Diluted
      – pro forma
              
              $
              .05




The fair
value of options granted under the Company’s stock option plans was estimated
using the Black-Scholes option-pricing model with the following assumptions
used:




Years
      Ended December 31Dollars
      in Thousands, Except per Share Amounts
              2007
              2006
              2005Volatility
              66%
              54%
              47%Discount
      Rate
              4.6%
              4.7%
              4.2%Dividend
      Yield
              —
              —
              —Fair
      Value, as adjusted to reflect the three-for-two stock
split
              $2.36
              $1.00
              $0.99
  FS-22
 Income
Taxes—Net deferred income tax assets and liabilities on the consolidated
balance sheet reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes and the benefit of net operating loss
and other tax credit carry-forwards. Valuation allowances are established
against deferred tax assets to the extent management believes it is more likely
than not that the assets will not be realized. No valuation allowance was
considered necessary at December 31, 2007 and 2006.




The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes”, or FIN 48, on January 1, 2007. FIN 48 clarifies
whether or not to recognize assets or liabilities for tax positions taken that
may be challenged by a taxing authority.The Company files income
tax returns in the U.S. federal jurisdiction and various state jurisdictions.
With few exceptions, the Company is no longer subject to U.S. federal and state
income tax examinations by tax authorities for years before 2003. In the second
quarter of 2006, the Internal Revenue Service (IRS) commenced an
examination of the Company’s Federal income tax return for 2004 and subsequently
added years 2003 and 2005 to the examination.  This examination was
completed in the second quarter of 2007 resulting in a required tax payment of
$266,000, primarily due to timing differences of deductions taken in prior year
returns.





Upon the
adoption of FIN 48, and as of December 31, 2007, the Company conducted an
evaluation of all open tax years in all jurisdictions, including an evaluation
of the potential impact of additional state taxes being assessed by
jurisdictions in which the Company does not currently consider itself liable.
Based on this evaluation, the Company did not identify any uncertain tax
positions. In connection with the adoption of FIN 48, the Company will include
future interest and penalties, if any, related to uncertain tax positions as a
component of its provision for taxes.




Equity—The
board of directors declared a three-for-two stock split effected by a stock
dividend for all shareholders of record on May 24, 2007, payable on June 8,
2007. All share and per share data (except par value) have been adjusted to
reflect the effect of the stock split for all periods presented. In addition,
the number of shares of common stock issuable upon the exercise of outstanding
stock options and the vesting of other stock awards, as well as the number of
shares of common stock reserved for issuance under our share-based compensation
plans, were proportionately increased in accordance with the terms of those
respective agreements and plans.




(2)
Business Expansion – Purchase of Assets




On
February 28, 2005, NAGalv-Ohio, Inc., a subsidiary of North American Galvanizing
Company, purchased certain galvanizing assets of Gregory Industries, Inc.,
located in Canton, Ohio, for a cash purchase price of $3.7 million plus
approximately $0.5 million in purchase related expenses. The purchase expands
the service area of North American Galvanizing into the northeast region of the
United States. The results of the operations of NAGalv-Ohio, Inc. have been
included in the consolidated financial statements since February 28,
2005.  Goodwill of less than $0.1 million was recognized in the
purchase.





The net
purchase price was allocated as follows:


Current
      assets
              $1.8
      millionNet
      property, plant & equipment
              2.3Goodwill
              0.1Purchase price
              $4.2million


Pro-forma
unaudited results of operations of the Company for the year ended December 31,
2005, prepared as if the purchase had taken place at the beginning of the
period, would have been as follows:


FS-23


Year
      Ended
                December
      31,(Dollars
      in Thousands, Except per Share Amounts)
              
              2005Sales
              
              $
              48,974Pro
      forma net income
              
              
              467Earnings
      per share, as adjusted to reflect the three-for-two stock split on June 8,
      2007:Basic
              
              $
              .05Diluted
              
              $
              .04


(3)
Stock Compensation Plans




At
December 31, 2007 the Company has two share-based compensation plans, which are
shareholder-approved, the 2004 Incentive Stock Plan and the Director Stock Unit
Program (Note 11).  The Company’s 2004 Incentive Stock Plan (the Plan)
permits the grant of share options and shares to its employees and directors for
up to 1,875,000 shares of common stock, as adjusted to reflect the three-for-two
stock split on June 8, 2007.  The Company believes that such awards
better align the interests of its employees and directors with those of its
shareholders.  Option awards are granted with an exercise price equal
to the market price of the Company’s stock at the date of grant; those option
awards vest based on 4 years of continuous service and have 10-year contractual
terms.





For the
years ended December 31, 2007 and 2006, the Company issued stock options for
502,500 shares at $3.47 per share, and 251,250 shares at $1.43 per share,
respectively, as adjusted to reflect the three-for-two stock
split.  The fair value of options which became fully vested during
2007 and 2006 was $464,000 and $32,550, respectively.  The intrinsic
value of options exercised during 2007 and 2006 was $657,000  and
$1,479,000, respectively.




Number of
                Shares
              Weighted Average
                Exercise PriceOutstanding,
      December 31, 2005 (777,500 exercisable)
              
              
              1,070,000
              
              
              $
              1.41Granted
              
              
              251,250
              
              
              
              1.43Exercised
              
              
              (620,625
              )
              
              
              1.46Surrendered/expired/cancelled
              
              
              (60,000
              )
              
              
              1.61Outstanding,
      December 31, 2006 ( 267,500  exercisable)
              
              
              640,625
              
              
              $
              1.35Granted
              
              
              502,500
              
              
              3.47Exercised
              
              
              (127,500
              )
              
              1.53Surrendered/expired/cancelled
              
              
              —
              
              
              —Outstanding,
      December 31, 2007 (343,437  exercisable)
              
              
              1,015,625
              
              
              $
              2.37





Information
about stock options as of December 31, 2007:




Options
      Outstanding
            
            
            Options
      ExercisableWeighted-
            
            
            
            
            
            
            
            
            Weighted-Weighted-
            
            
            Average
            
            
            
            
            
            Weighted-
            
            
            AverageAverage
            
            
            Remaining
            
            
            
            
            
            Average
            
            
            RemainingRange
      of
            
            
            Number
      of
            
            
            Exercise
            
            
            Contractual
            
            
            Number
      of
            
            
            Exercise
            
            
            ContractualExercise
      Prices
            
            
            Shares
            
            
            Price
            
            
            Life
      (Years)
            
            
            Shares
            
            
            Price
            
            
            Life
      (Years)$
            0.70
      to $1.00
            
            
            
            132,500
            
            
            $
            0.84
            
            
            
            4.3
            
            
            
            132,500
            
            
            $
            0.84
            
            
            
            4.3$
            1.13
      to $1.40
            
            
            
            283,125
            
            
            
            1.36
            
            
            
            7.4
            
            
            
            105,937
            
            
            
            1.32
            
            
            
            6.4$
            1.61
      to $1.90
            
            
            
            82,500
            
            
            
            1.68
            
            
            
            7.3
            
            
            
            —
            
            
            
            —
            
            
            
            —$
            2.04
      to $3.47
            
            
            
            517,500
            
            
            
            3.43
            
            
            
            8.9
            
            
            
            105,000
            
            
            
            3.27
            
            
            
            7.91,015,625
            
            
            $
            2.37
            
            
            
            7.8
            
            
            
            343,437
            
            
            $
            1.73
            
            
            
            6.0




FS-24


As of
December 31, 2007, the total compensation cost related to nonvested awards not
yet recognized was $934,000 which is expected to be recognized over a weighted
average period of 2.6 years. The aggregate intrinsic value of options
outstanding and options exercisable was $3,755,000 and $1,491,000, respectively,
at December 31, 2007.




(4)
Earnings Per Share Reconciliation




For
      the Year
              
              Income
      (Loss)
              
              
              Shares
              
              
              Per
      ShareEnded
      December 31
              
              (Numerator)
              
              
              (Denominator)
              
              
              Amount2007Net
      income
              
              $
              9,232,000
              
              
              
              —
              
              
              $
              —Basic
      EPS
              
              
              —
              
              
              
              12,307,235
              
              
              
              0.75Effect
      of dilutive stockoptions
              
              
              —
              
              
              
              463,650
              
              
              
              (0.03
              )Diluted
      EPS
              
              $
              9,232,000
              
              
              
              12,770,885
              
              
              $
              0.722006Net
      income
              
              $
              4,535,000
              
              
              
              —
              
              
              $
              —Basic
      EPS
              
              
              —
              
              
              
              11,322,858
              
              
              
              0.40Effect
      of dilutive stockoptions
              
              
              —
              
              
              
              349,583
              
              
              
              (0.01
              )Diluted
      EPS
              
              $
              4,535,000
              
              
              
              11,672,441
              
              
              $
              0.392005Net
      income
              
              $
              644,000
              
              
              
              —
              
              
              $
              —Basic
      EPS
              
              
              —
              
              
              
              10,324,973
              
              
              
              0.06Effect
      of dilutive stockoptions
      and warrants
              
              
              —
              
              
              
              1,087,454
              
              
              
              (0.01
              )Diluted
      EPS
              
              $
              644,000
              
              
              
              11,412,427
              
              
              $
              0.05
  The
number of options excluded from the calculation of diluted earnings per share
due to the option price exceeding the share market price is 442,500, at December
31, 2005.  At December 31, 2007 and 2006, there are no options
excluded from the calculation of diluted earnings per share due to the option
price exceeding the share market price.


FS-25


(5)
Long-Term Obligations





(Dollars
      in thousands)December
      312007
              
              
              2006Term
      loan
              
              $
              —
              
              
              $
              3,751Revolving
      line of credit
              
              
              —
              
              
              
              —Capital
      lease obligations
              
              
              —
              
              
              
              328Other
              
              
              15
              
              
              
              17$
              15
              
              
              $
              4,096Less
      current portion
              
              
              (1
              )
              
              
              (778
              )$
              14
              
              
              $
              3,318


On May
17, 2007, the Company entered into a new credit agreement between the Company as
borrower and Bank of America, N.A. as administrative agent, swing line lender
and letter of credit issuer.  The existing credit agreement, scheduled
to expire on February 28, 2008, was cancelled, and the term loan of $3.5 million
was prepaid without any penalty.





The new
credit agreement provides for a revolving credit facility in the aggregate
principal amount of $25 million with future increases of up to an aggregate
principal amount of $10 million at the discretion of the lender.  The
credit facility matures on May 16, 2012, with no principal payments required
before the maturity date and no prepayment penalty.  The purpose of
the new facility is to refinance a former credit agreement, term debt, and bond
debt, provide for issuance of standby letters of credit, acquisitions, and for
other general corporate purposes.





At
December 31, 2007, the Company had unused borrowing capacity of  $24.8
million, based on no borrowings outstanding under the revolving credit facility,
and $0.2 million of letters of credit to secure payment of current and future
workers’ compensation claims.





Substantially
all of the Company’s accounts receivable, inventories, fixed assets and the
common stock of its subsidiary are pledged as collateral under the agreement,
and the credit agreement is secured by a full and unconditional guaranty from
NAGC.  The credit agreement provides for an applicable margin ranging
from 0.75% to 2.00% over LIBOR and commitment fees ranging from 0.10% to 0.25%
depending on the Company’s Funded Debt to EBITDA Ratio (as defined). If the
Company had borrowings outstanding under the revolving credit facility at
December 31, 2007, the applicable margin would have been 0.75% and the variable
interest rate including the applicable margin would have been 5.615%.





The
credit agreement requires the Company to maintain compliance with covenant
limits for leverage ratio, asset coverage ratio, and a basic fixed charge
coverage ratio.  At December 31, 2007, the Company was in compliance
with the covenants.  The actual financial ratios compared to the
required ratios, were as follows:





Leverage
Ratio – actual 0.0 versus maximum allowed of 3.25; Asset Coverage Ratio – actual
2809.7 vs. minimum required of 1.5; Basic Fixed Charge Coverage Ratio – actual
6.8 versus minimum required of 1.0.





Aggregate
maturities of long-term debt of $15,000 are payable as follows: $1,000 (2008),
$1,000 (2009), $1,000 (2010), $1,000 (2011), $1,000 (2012) and $10,000
(thereafter).


FS-26


(6) Bonds
Payable




During
the first quarter of 2000, the Company issued $9,050,000 of Harris County
Industrial Development Corporation Adjustable Rate Industrial Development Bonds,
Series 2000 (the “Bonds”). The Bonds were senior to other debt of the Company.
All of the bond proceeds, which were held in trust by Bank One Trust Company,
N.A. (“Trustee”), were used by NAG for the purchase of land and construction of
a hot dip galvanizing plant in Harris County, Texas. The galvanizing plant was
completed and began operation in the first quarter of 2001.




The
Internal Revenue Service reviewed the Harris County Industrial Development
Corporation Adjustable Rate Industrial Development Bonds and compliance with the
Internal Revenue Code section (IRC) 144(a)(4)(ii)’s dollar limitation on capital
expenditures within a relevant period.  The IRS review concerned
whether two operating leases commencing in January 2001 were conditional sales
contracts, not true leases, according to Revenue Ruling 55-540. As a result of
the review, during 2006 the Company recorded an estimated liability of $145,000
and in March, 2007, the Company entered into a settlement agreement (the
“Closing Agreement”) with the Harris County Industrial Development Corporation
and the Commissioner of the Internal Revenue Service (“IRS”). Pursuant to the
terms of the Closing Agreement, the Company made a payment to the IRS of
$101,260 in settlement of the issues referenced above.  Furthermore,
the Company agreed to redeem all outstanding Bonds on or before July 2, 2007 and
subsequently redeemed the bonds on July 2, 2007.  The Company used
proceeds from the new five-year credit facility to redeem the bonds, as
specifically contemplated in the agreement.




(7)
Subordinated Debt




In
February 2006, the Company offered the noteholders of its $1 million
subordinated promissory notes the opportunity to extend the maturity date one
year to February 17, 2007.  The extension, which was offered on a
voluntary basis, was 100% subscribed.  The notes were issued with
warrants to purchase 666,666 shares of common stock of the
Company.  All of the warrants were exercised by the holders during the
third quarter of 2006, at the exercise price of $.856 per share.  On
August 31, 2006, North American Galvanizing & Coatings, Inc. prepaid the $1
million subordinated promissory notes due to mature in February of
2007.




(8)
Commitments




The
Company leases its headquarters office and certain manufacturing buildings and
equipment under non-cancelable operating leases. The Company also leases certain
facilities to third parties under non-cancelable operating leases. These
operating leases generally provide for renewal options and periodic rate
increases and are typically renewed in the normal course of business. Lease
expense was $1,122,000 in 2007, $1,003,000 in 2006, and $1,006,000 in
2005.




Minimum
annual rental commitments at December 31, 2007 are payable as
follows:




(Dollars
      in thousands)Operating
      Leases2008
              
              $
              4222009
              
              
              2462010
              
              
              1192011
              
              
              552012
              
              
              38Thereafter
              
              
              147$
              1,027
  FS-27
 The
Company has commitments with domestic and foreign zinc producers to purchase
zinc used in its hot dip galvanizing operations. Commitments for the future
delivery of zinc reflect rates then quoted on the London Metals Exchange and are
not subject to price adjustment. These zinc purchase commitments are considered
to be derivatives and are accounted for as normal purchases. At December 31,
2007, aggregate commitments for the procurement of zinc at fixed prices were
$1,519,000. The Company reviews these fixed price contracts for losses using the
same methodology employed to estimate the market value of its zinc
inventory.




(9)
Contingencies




On August
30, 2004, the Company was informed by counsel for the Metropolitan Water
Reclamation District of Greater Chicago (the “Water District”) that the Water
District had, on August 25, 2004 filed a Second Amended Complaint in the United
States District Court, Northern District of Illinois, Eastern Division, naming
North American Galvanizing & Coatings, Inc. (formerly known as Kinark
Corporation) as an added defendant. Counsel for the Water District also gave the
Company notice of the Water District’s intent to file (or amend the Complaint to
include) a Citizens Suit under the Resource Compensation and Recovery Act
(“RCRA”) against North American Galvanizing & Coatings, Inc., pursuant to
Section 7002 of RCRA, 42 U.S.C. Section 6972. This Second Amended Complaint
seeks enforcement of an August 12, 2004 default judgment in the amount of
$1,810,463.34 against Lake River Corporation and Lake River Holding Company,
Inc. in connection with the operation of a storage terminal by Lake River
Corporation in violation of environmental laws. Lake River Corporation conducted
business as a subsidiary of the Company until September 30, 2000, at which time
Lake River Corporation was sold to Lake River Holding Company, Inc. and ceased
to be a subsidiary of the Company. The Second Amended Complaint asserts that
prior to the sale of Lake River Corporation, the Company directly operated the
Lake River facility and, accordingly, seeks to have the Court pierce the
corporate veil of Lake River Corporation and enforce the default judgment order
of August 12, 2004 against the Company. The Company denied the assertions set
forth in the Water District’s Complaint and on November 13, 2004 filed a partial
motion for dismissal of the Second Amended Complaint.





In
December 2004, the Water District filed a Third Amended complaint in the
litigation, adding two claims: (1) a common law claim for nuisance; and (2) a
claim under the federal Resource Conservation and Recovery Act, in which the
Water District argues that the Company is responsible for conditions on the
plaintiff’s property that present an “imminent and substantial endangerment to
human health and the environment.” In January 2005, the Company filed a partial
motion to dismiss the Third Amended Complaint. On April 12, 2005, the Court
issued an order denying in part and granting in part the Company’s partial
motion to dismiss plaintiff’s third amended complaint.  The Company
filed an appeal with the Seventh Circuit Court of Appeals requesting dismissal
of the sole CERCLA claim contained in the Third Amended Complaint that was not
dismissed by the United States District Court’s April 12, 2005
order.  On January 17, 2007, the Seventh Circuit affirmed the judgment
of the United States District Court, stating that the Water District has a right
of action under CERCLA.





On April
11, 2007, the Company entered into an Agreement in Principle establishing terms
for a conditional settlement. Under the terms of the Agreement in Principle, the
Company has agreed to fund 50% of the cost, up to $350,000, to enroll the site
in the Illinois Voluntary Site Remediation Program.  These funds will
be used to prepare environmental reports for approval by the Illinois
Environmental Protection Agency.  The parties’ shared objective is to
obtain a “no further remediation determination” from the Illinois EPA based on a
commercial / industrial cleanup standard.  If the cost to prepare
these reports equals or exceeds $700,000, additional costs above $700,000
($350,000 per party) will be borne 100% by the Water District.





If a
remediation plan is required based on the site assessment, the Company has also
agreed to fund 50% of the cost to implement the remediation plan, up to a
maximum of $1 million.  If the cost to implement the plan is projected
to exceed $2 million, then the Water District will have the option to terminate
the Agreement in Principle and resume the litigation.  The Water
District will have to choose whether to accept or reject the $1


FS-28


million
funding commitment from the Company before accepting any payments from the
Company for implementation of the remediation plan.  The Company does
not believe that it can determine whether any cleanup is required or if any
final cleanup cost is likely to exceed $2 million until additional data has been
collected and analyzed in connection with the environmental
reports.  If the Water District elects to accept the maximum funding
commitment, the Company has also agreed to remove certain piping and other
equipment from one of the parcels.  The cost to remove the piping is
estimated to be between $35,000 and $60,000.





Although
the boards of both the Water District and the Company have approved the
Agreement in Principle, the agreement of the parties must be embodied in a
formal settlement agreement.  The parties have been working diligently
since April 11, 2007 but have not yet reached a final agreement.





The
Company has recorded a liability for $350,000 related to the Water District
claim in recognition of its currently known and estimable funding commitment
under the Agreement in Principle.  In the event that the Water
District rejects the funding commitment described above, the potential claim
could exceed the amount of the previous default judgment.  As neither
a site evaluation nor a remediation plan has been developed, the Company is
unable to make a reasonable estimate of the amount or range of further loss, if
any, that could result.  Such a liability, if any, could have a
material adverse effect on the Company’s financial condition, results of
operations, or liquidity.





NAGC was
notified in 1997 by the Illinois Environmental Protection Agency (“IEPA”) that
it was one of approximately 60 potentially responsible parties (“PRPs”) under
the Comprehensive Environmental Response, Compensation, and Liability
Information System (“CERCLIS”) in connection with cleanup of an abandoned site
formerly owned by Sandoval Zinc Co., an entity unrelated to NAGC.  The
estimated timeframe for resolution of the IEPA contingency is
unknown.  The IEPA has yet to respond to a proposed work plan
submitted in August 2000 by a group of the PRPs or suggest any other course of
action, and there has been no activity in regards to this issue since 2001.
Until the work plan is approved and completed, the range of potential loss or
remediation, if any, is unknown, and in addition, the allocation of potential
loss between the 60 PRPs is unknown and not reasonably
estimable.  Therefore, the Company has no basis for determining
potential exposure and estimated remediation costs at this time and no liability
has been accrued.





The
Company is committed to complying with all federal, state and local
environmental laws and regulations and using its best management practices to
anticipate and satisfy future requirements. As is typical in the galvanizing
business, the Company will have additional environmental compliance costs
associated with past, present and future operations. Management is committed to
discovering and eliminating environmental issues as they arise. Because of
frequent changes in environmental technology, laws and regulations management
cannot reasonably quantify the Company’s potential future costs in this
area.




North
American Galvanizing & Coatings, Inc. and its subsidiary are parties to a
number of other lawsuits and environmental matters which are not discussed
herein.  Management of the Company, based upon their analysis of known
facts and circumstances and reports from legal counsel, does not believe that
any such matter will have a material adverse effect on the results of
operations, financial conditions or cash flows of the Company




(10)
Treasury Stock




In 2007,
the Company issued 77,500 shares from Treasury for stock option transactions and
36,897 shares from Treasury for the Director Stock Unit Program transactions
(Note 11).  During 2006, the Company issued shares from Treasury for
the following transactions:  594,635 shares issued for warrant
exercises, 411,823 shares issued for stock option exercises, and 259,001 shares
issued for the Director Stock Unit Program.  During 2005, the Company
issued 50,000 shares from Treasury.


FS-29


In August
1998, the Board of Directors authorized the Company to repurchase up to
$1,000,000 of its common stock in private or open market transactions. In 2007,
the Company repurchased 28,575 shares at an average price per share of $5.38,
bringing the total number of shares repurchased through December 31, 2007 to
228,069 at an average price of $1.72 per share totaling $391,872.




(11) Director Stock Unit
Program




At the
Company’s Annual Meeting held July 21, 2004, stockholders approved a Director
Stock Unit Program (“Program”).  Under the Program, effective January
1, 2005, each non-management director is required to defer at least 50%
($17,500) of his or her annual fee, and may elect to defer 75% ($26,250) or 100%
($35,000) of the annual fee.  The director must make the annual
deferral decision before the start of the year. Amounts deferred under the
Program are converted into a deferred Stock Unit grant under the Company’s 2004
Incentive Stock Plan at the average of the closing prices for a share of the
Company’s Common Stock for the 10 trading days before the quarterly director fee
payment dates.




To
encourage deferral of fees by non-management directors, the Company makes a
matching Stock Unit grant ranging from 25% to 75% of the amount deferred by the
director as of the same quarterly payment dates.




Under the
Program, the Company automatically defers from the management director’s salary
a dollar amount equal to 50% ($17,500) of the director fees for outside
directors.  The management director may elect to defer an amount equal
to 75% ($26,250) or 100% ($35,000) of the director fees for non-management
directors from his or her compensation, and the Company matches deferrals by the
management director with Stock Units at the same rate as it matches deferrals
for non-management directors.





Deliveries
of the granted stock are made five calendar years following the year for which
the deferral is made subject to acceleration upon the resignation or retirement
of the director or a change in control.





All of
the Company’s Outside Directors elected to defer 100% of the annual board fee
for both 2007 and 2006, and the Company’s chief executive officer and Inside
Director elected to defer a corresponding amount of his salary in 2007 and
2006.  During 2007, fees and salary deferred by the Directors
represented a total of 78,218 stock unit grants valued at $5.48 per stock unit,
adjusted for the three-for-two stock split.  During 2006, fees and
salary deferred by the Directors represented a total of 219,242 stock unit
grants valued at $2.09 per stock unit, adjusted for the three-for-two stock
split.




(12)
Certain Relationships and Related Transactions




A
subsidiary of North American Galvanizing Company (NAGalv-Ohio, Inc.) purchased
the after-fabrication hot dip galvanizing assets of Gregory Industries, Inc.
located in Canton, Ohio on February 28, 2005.  Gregory Industries,
Inc. is a manufacturer of products for the highway industry.  T.
Stephen Gregory, appointed a director of North American Galvanizing &
Coatings, Inc. on June 22, 2005 is the chief executive officer, chairman of the
board, and a shareholder of Gregory Industries, Inc.  Mr. Gregory
resigned his position as director of the Company in December,
2007.  Total sales to Gregory Industries, Inc. for the years ended
December 31, 2007, 2006, and 2005 were approximately $1,297,000, $1,982,000, and
$1,486,000, respectively.  The amount due from Gregory Industries,
Inc. included in trade receivables at December 31, 2007, 2006, and 2005 was
$142,000, $278,000, and $254,000, respectively.


FS-30


(13)
Income Taxes




The
provision for income taxes consists of the following:




(Dollars
      in thousands)Year
      Ended December 312007
            
            
            2006
            
            
            2005Current
            
            $
            5,763
            
            
            $
            2,233
            
            
            $
            254Deferred
            
            
            (62
            )
            
            
            786
            
            
            
            201Income
      tax expense
            
            $
            5,701
            
            
            $
            3,019
            
            
            $
            455




The
reconciliation of income taxes at the federal statutory rate to the Company’s
effective tax rate is as follows:




(Dollars
      in thousands)Year
      Ended December 312007
              
              
              2006
              
              
              2005Federal
      taxes at statutory rate
              
              $
              5,126
              
              
              $
              2,568
              
              
              $
              374State
      tax net of federal benefit
              
              
              575
              
              
              
              296
              
              
              
              32Other
              
              
              —
              
              
              
              155
              
              
              
              49Taxes
      at effective tax rate
              
              $
              5,701
              
              
              $
              3,019
              
              
              $
              455
  The tax
effects of significant items comprising the Company’s net deferred tax asset
(liability) consist of the following:




(Dollars
      in thousands)Year
      Ended December 312007
            
            
            2006Deferred
      tax assets:Items
      not currently deductible
            
            $
            741
            
            
            $
            784741
            
            
            
            784Deferred
      tax liabilities:Differences
      between book and taxbasis
      of property
            
            $
            697
            
            
            $
            80244
            
            
            
            (18
            )




(14)
Employee Benefit Plan




The
Company offers one of two 401(k) defined contribution plans to its eligible
employees.  In 2005, a newly-created defined contribution plan was
offered to NAGalv-Ohio, Inc. employees, formerly covered by a bargaining
contract with Gregory Industries, Inc.  All other employees not
covered by a bargaining contract become eligible to enroll in the existing
benefit plan after one year of service with the Company. Aggregate Company
contributions under these benefit plans were $333,000 in 2007, $292,000 in 2006,
and $261,000 in 2005. Assets of the defined contribution plan consisted of
short-term investments, intermediate bonds, long-term bonds and listed
stocks.


FS-31


(15) Fair Value of
Financial Instruments




The
carrying value of financial instruments included in current assets and
liabilities approximates fair value. The fair value of the Company’s long-term
debt is estimated to approximate carrying value based on the borrowing rates
currently available to the Company for loans with similar terms and average
maturities.




(16)
Union Contracts




NAGC’s
labor agreement with the United Steel, Paper and Forestry, Rubber,
Manufacturing, Energy Allied Industrial and Service Workers International Union
covering production workers at its Tulsa galvanizing plants expired October 31,
2006.  The union ratified a two-year extension of the expiring
agreement, with minor modifications, extending the expiration date of the
agreement to October 31, 2008.  The extension of the agreement brought
employee contributions to the group health plan more closely in line with
contributions made by non-union employees of the Company.




The
United Steel, Paper and Forestry, Rubber, Manufacturing, Energy Allied
Industrial and Service Workers International Union represented the labor force
at the galvanizing facility purchased in Canton, Ohio in February 2005. At the
time of purchase, NAGalv-Ohio, Inc. did not assume the existing labor agreement
and implemented wage and benefit programs similar to those at the Company’s
other galvanizing facilities.  In the fourth quarter of 2006,
negotiations with the union were finalized.  The union ratified an
agreement effective from November 13, 2006 to November 12, 2009.  The
agreement contains wage and benefit programs similar to those implemented in
February, 2005.




(17) Segment
Disclosures




The
Company’s sole business is hot dip galvanizing and coatings, which is conducted
through its wholly owned subsidiary, North American Galvanizing
Company.


FS-32


QUARTERLY
RESULTS (UNAUDITED)




Quarterly
results of operations for the years ended December 31, 2007 and 2006 were as
follows:




(Dollars
      in thousands except per share amounts)200731-Mar
            
            
            30-Jun
            
            
            30-Sep
            
            
            31-Dec
            
            
            TotalSales
            
            $
            23,499
            
            
            $
            23,121
            
            
            $
            21,541
            
            
            $
            20,235
            
            
            $
            88,396Operating
      Income
            
            $
            4,085
            
            
            $
            3,630
            
            
            $
            3,937
            
            
            $
            3,753
            
            
            $
            15,405Net
      Income
            
            $
            2,346
            
            
            $
            2,206
            
            
            $
            2,513
            
            
            $
            2,167
            
            
            $
            9,232Income
      Per Common Share, adjusted for three-for-two stock splitBasic
      *
            
            $
            0.19
            
            
            $
            0.18
            
            
            $
            0.21
            
            
            $
            0.18
            
            
            $
            0.75Diluted
      *
            
            $
            0.19
            
            
            $
            0.17
            
            
            $
            0.20
            
            
            $
            0.17
            
            
            $
            0.72




*
Individual quarterly amounts do not add to the total due to
rounding.


(Dollars
      in thousands except per share amounts)200631-Mar
            
            
            30-Jun
            
            
            30-Sep
            
            
            31-Dec
            
            
            TotalSales
            
            $
            15,411
            
            
            $
            18,227
            
            
            $
            20,155
            
            
            $
            20,261
            
            
            $
            74,054Operating
      Income
            
            $
            1,927
            
            
            $
            2,630
            
            
            $
            2,085
            
            
            $
            1,717
            
            
            $
            8,359Net
      Income
            
            $
            982
            
            
            $
            1,443
            
            
            $
            1,104
            
            
            $
            1,006
            
            
            $
            4,535Income
      Per Common Share, adjusted for three-for-two stock
    splitBasic
      *
            
            $
            0.09
            
            
            $
            0.13
            
            
            $
            0.09
            
            
            $
            0.08
            
            
            $
            0.40Diluted
      *
            
            $
            0.09
            
            
            $
            0.12
            
            
            $
            0.09
            
            
            $
            0.08
            
            
            $
            0.39




*
Individual quarterly amounts do not add to the total due to
rounding.





FS-33


SELECTED
FINANCIAL DATA




The
following is a summary of selected financial data of the Company:




(Dollars
      in thousands except per share amounts)For
      the Years Ended December 31,
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Sales
              
              $
              88,396
              
              
              $
              74,054
              
              
              $
              47,870
              
              
              $
              35,822
              
              
              $
              33,200Operating
      Income
              
              $
              15,405
              
              
              $
              8,359
              
              
              $
              2,173
              
              
              $
              1,390
              
              
              $
              495Percent
      of sales
              
              
              17.4
              %
              
              
              11.3
              %
              
              
              4.5
              %
              
              
              3.9
              %
              
              
              1.5
              %Net
      Income (Loss)
              
              $
              9,232
              
              
              $
              4,535
              
              
              $
              644
              
              
              $
              403
              
              
              $
              (1,013
              )Basic
      Earnings (Loss) per common share *
              
              $
              0.75
              
              
              $
              0.40
              
              
              $
              0.06
              
              
              $
              0.04
              
              
              $
              (0.10
              )Diluted
      Earnings (Loss) per common share *
              
              $
              0.72
              
              
              $
              0.39
              
              
              $
              0.05
              
              
              $
              0.03
              
              
              $
              (0.10
              )Capital
      Expenditures
              
              $
              4,430
              
              
              $
              1,414
              
              
              $
              1,016
              
              
              $
              1,230
              
              
              $
              901Depreciation
      and Amortization
              
              $
              3,519
              
              
              $
              2,975
              
              
              $
              2,532
              
              
              $
              2,701
              
              
              $
              2,880Weighted
      Average Shares Outstanding *  **
              
              
              12,770,885
              
              
              
              11,672,441
              
              
              
              11,412,426
              
              
              
              11,236,793
              
              
              
              11,156,684At
      December 31,
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Working
      Capital
              
              $
              10,664
              
              
              $
              9,296
              
              
              $
              7,026
              
              
              $
              8,621
              
              
              $
              6,607Total
      Assets
              
              $
              47,572
              
              
              $
              48,211
              
              
              $
              41,055
              
              
              $
              37,114
              
              
              $
              37,367Long-Term
      Obligations
              
              $
              14
              
              
              $
              7,753
              
              
              $
              12,275
              
              
              $
              14,257
              
              
              $
              14,351Stockholders’
      Equity
              
              $
              36,029
              
              
              $
              25,566
              
              
              $
              19,298
              
              
              $
              18,309
              
              
              $
              17,885Book
      Value Per Share *
              
              $
              2.92
              
              
              $
              2.10
              
              
              $
              1.88
              
              
              $
              1.80
              
              
              $
              1.76Common
      Shares Outstanding *
              
              
              12,325,986
              
              
              
              12,167,508
              
              
              
              10,270,422
              
              
              
              10,195,518
              
              
              
              10,174,706
  *  All
periods adjusted for three-for-two stock split on June 8, 2007.
  **     Weighted
average shares outstanding include the dilutive effect of stock options and
warrants, if applicable.


FS-34