**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 20-F**

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

**SECURITIES EXCHANGE ACT OF 1934**

**Forthe fiscal year ended November 26, 2005**

Commission file number:#000-29506

**NOVAMERICAN STEEL INC.**

(Exact Name of Registrantas Specified in its Charter)

**Canada**

(Jurisdiction ofIncorporation or Organization)

**6001 Irwin Street, LaSalle, Québec, Canada H8N 1A1**

(Address of PrincipalExecutive Offices)

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

**NONE**

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

**Common Shares, withoutnominal or par value**

(Title of Class)

Securities for which thereis a reporting obligation pursuant to Section 15(d) of the Act:

**NONE**

Indicate the number of outstanding shares of each ofthe issuer’s classes of capital or common stock as of November 26, 2005.

| **10,156,226** | ** ** | **Common Shares**    |
|----------------|------------|----------------------|
| **-0-**        | ** ** | **Preferred Shares** |

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

| Yes   o |   | No   x  |   |   |   |
|-------------------|--------|------------------------|--------|--------|--------|

 

If this report is an annual or transition report,indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or 15(d) of the Securities Exchange Act of1934. 

| Yes   o |   | No   x  |   |   |   |
|-------------------|--------|------------------------|--------|--------|--------|

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

| Yes   x |   | No   o  |   |   |   |
|-------------------|--------|------------------------|--------|--------|--------|

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b of the Exchange Act. (Check one): 

| Large Accelerated Filer   o |   | Accelerated Filer   o |   | Non-Accelerated Filer   x |
|---------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

Indicateby check mark which financial statement item the registrant has elected tofollow.

| Item 17   o |   | Item 18   x | ** ** |
|-----------------------|--------|-----------------------|------------|

If thisis an annual report, indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act). 

| Yes   o |   | No   x  |   |   |   |
|-------------------|--------|------------------------|--------|--------|--------|

 

 

----

**TABLE OF CONTENTS**

| Item                                      | ** ** | ** **                                                                    | **Caption** | ** ** | ** ** | **Page** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------------------------|-------------|------------|------------|----------|------------|
| Statement on  Forward Looking Information |       |                                                                          | 3           |       |       |
| ** **                                | ** ** | **Part I**                                                               | ** **  |       |       |     |       |
| 1                                         |       | Identity of  Directors, Senior Management and Advisers                        |        |       | 3          |     |       |
| 2                                         |       | Offer  Statistics and Expected Timetable                                      |        |       | 3          |     |       |
| 3                                         |       | Key Information                                                               |        |       | 4          |     |       |
| 4                                         |       | Information on the  Company                                                   |        |       | 11         |     |       |
| 5                                         |       | Operating and  Financial Review and Prospects                                 |        |       | 23         |     |       |
| 6                                         |       | Directors, Senior Management and Employees                                    |        |       | 32         |     |       |
| 7                                         |       | Major  Shareholders and Related Party Transactions                            |        |       | 37         |     |       |
| 8                                         |       | Financial Information                                                         |        |       | 38         |     |       |
| 9                                         |       | The Offer and Listing                                                         |        |       | 38         |     |       |
| 10                                        |       | Additional  Information                                                       |        |       | 40         |     |       |
| 11                                        |       | Quantitative  and Qualitative Disclosures About Market Risk                   |        |       | 47         |     |       |
| 12                                        |       | Description of  Securities Other Than Equity Securities                       |        |       | 48         |     |       |
|                                      | ** ** | **Part II**                                                              |        |       |       |     |       |
| 13                                        |       | Defaults,  Dividend Arrearages and Delinquencies                              |        |       | 49         |     |       |
| 14                                        |       | Material  Modifications to the Rights of Security Holders and Use of Proceeds |        |       | 49         |     |       |
| 15                                        |       | Controls and  Procedures                                                      |        |       | 49         |     |       |
| 16A                                       |       | Audit Committee  Financial Expert                                             |        |       | 49         |     |       |
| 16B                                       |       | Code of Ethics                                                                |        |       | 49         |     |       |
| 16C                                       |       | Principal  Accountant Fees and Services                                       |        |       | 49         |     |       |
| 16D                                       |       | Exemptions from  the Listing Standards for Audit Committees                   |        |       | 50         |     |       |
| 16E                                       |       | Purchases of  Equity Securities by the Issuer and Affiliated Purchasers       |        |       | 50         |     |       |
|                                      | ** ** | **Part III**                                                             |        |       |       |     |       |
| 17                                        |       | Financial Statements                                                          |        |       | 51         |     |       |
| 18                                        |       | Financial Statements                                                          |        |       | 52         |     |       |
| 19                                        |       | Exhibits                                                                      |        |       | 80         |     |       |
| Signatures                                |       |                                                                          | 81          |       |       |

 

----

**STATEMENTON FORWARD-LOOKING INFORMATION**

Except for the statements of historical fact containedherein, the information under the headings “Information on the Company,” “Item5 Operating and Financial Review and Prospects,” “Quantitative and QualitativeDisclosures about Market Risk” and elsewhere in this Form 20-FAnnual Report constitutes “forward-looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995. When used in thisdocument, the words “anticipate,” “expect,” “believe,” “estimate,” “project”and similar expressions are intended to identify forward-looking statements.Such statements are subject to certain risks, uncertainties and assumptions,including those identified in the section captioned “Key Information—RiskFactors.” Should one or more of these risks or uncertainties materialize, orshould underlying assumptions prove incorrect, actual results may varymaterially from those anticipated, expected, believed, estimated or projected.We undertake no obligation to publicly release, furnish or file the result ofany revision to the forward-looking statements herein that may be made toreflect events or circumstances after the date hereof or to reflect theoccurrence of unanticipated events.

**PART I**

**ITEM 1**                   IDENTITYOF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

**Notapplicable.**

**ITEM 2**                   OFFERSTATISTICS AND EXPECTED TIMETABLE

**Notapplicable.**

3

----

**ITEM 3**                   KEYINFORMATION

**Selected Financial Data**

Theselected financial data presented below, other than references to tons sold andprocessed, have been derived from our consolidated financial statements for thefive years ended November 26, 2005, which were audited by Raymond ChabotGrant Thornton LLP, Chartered Accountants. The selected financial datapresented below should be read in conjunction with, and are qualified in theirentirety by the information contain under the heading  “Operating and Financial Review andProspects,” the consolidated financial statements and the other financialinformation included elsewhere in this document. All financial data presentedis expressed in U.S. dollars. 

| ** **                                            | ** ** | **Years Ended **(a)                                                                                                                                                            | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Nov. 26,  2005**                                                                                                                                                                  | ** ** | **Nov. 27,  2004** | ** ** | **Nov. 29,  2003** | ** ** | **Nov. 30,  2002** | ** ** | **Nov. 24,  2001** | ** ** |
| ** **                                            | ** ** | **(In thousands of U.S. dollars, except share and per share data,  percentages and tons sold and processed)** | ** ** |
| **Statement of Operations Data:**                     |       |                                                                                                                                                                                     |       |   |   |   |   |   |   |   |   |
| Net sales                                             |       | $                                                                                                                                                                                        | 834,689    |   | $ | 768,627 |   | $ | 507,067 |   | $ | 465,501 |   | $ | 417,029 |   |
| Cost of sales                                         |       | 664,134                                                                                                                                                                                  |       | 543,503 |   | 400,825 |   | 351,229 |   | 322,057 |   |
| Gross margin                                          |       | 170,555                                                                                                                                                                                  |       | 225,124 |   | 106,242 |   | 114,272 |   | 94,972 |   |
| Operating expenses                                    |       | 110,469                                                                                                                                                                                  |       | 107,237 |   | 83,228 |   | 79,720 |   | 76,674 |   |
| Operating income                                      |       | 60,086                                                                                                                                                                                   |       | 117,887 |   | 23,014 |   | 34,552 |   | 18,298 |   |
| Interest expense                                      |       | 3,892                                                                                                                                                                                    |       | 4,886 |   | 5,144 |   | 5,062 |   | 6,455 |   |
| Share in income of joint  ventures                    |       | (720                                                                                                                                                                                     | )          | (312 | ) | (545 | ) | (708 | ) | (74 | ) |
| Income before income  taxes                           |       | 56,914                                                                                                                                                                                   |       | 113,333 |   | 18,415 |   | 30,198 |   | 11,917 |   |
| Income taxes                                          |       | 19,976                                                                                                                                                                                   |       | 40,422 |   | 5,333 |   | 10,080 |   | 3,903 |   |
| Net income                                            |       | $                                                                                                                                                                                        | 36,938     |   | $ | 72,911 |   | $ | 13,082 |   | $ | 20,118 |   | $ | 8,014 |   |
| Basic income per share (b)                            |       | $                                                                                                                                                                                        | 3.70       |   | $ | 7.51 |   | $ | 1.35 |   | $ | 2.07 |   | $ | 0.83 |   |
| Diluted income per share (b)                          |       | $                                                                                                                                                                                        | 3.58       |   | $ | 7.35 |   | $ | 1.35 |   | $ | 2.07 |   | $ | 0.83 |   |
| Operating income per  share                           |       | $                                                                                                                                                                                        | 6.01       |   | $ | 12.14 |   | $ | 2.37 |   | $ | 3.56 |   | $ | 1.89 |   |
| Weighted average number  of common shares outstanding |       | 9,993,337                                                                                                                                                                                |       | 9,707,270 |   | 9,700,000 |   | 9,700,000 |   | 9,700,000 |   |

 

| ** **                            | ** ** | **Years Ended **(a)                                                                                                                                                            | ** ** |
|---------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Nov. 26,  2005**                                                                                                                                                                  | ** ** | **Nov. 27,  2004** | ** ** | **Nov. 29,  2003** | ** ** | **Nov. 30,  2002** | ** ** | **Nov. 24,  2001** | ** ** |
| ** **                            | ** ** | **(In thousands of U.S. dollars, except share and per share data,  percentages and tons sold and processed)** | ** ** |
| **Other  Data:**                      |       |                                                                                                                                                                                     |       |   |   |   |   |   |   |   |   |
| EBITDA (c)                            |       | $                                                                                                                                                                                        | 70,742     |   | $ | 126,879 |   | $ | 30,521 |   | $ | 41,488 |   | $ | 24,391 |   |
| Depreciation and  amortization        |       | $                                                                                                                                                                                        | 9,936      |   | $ | 8,680 |   | $ | 6,962 |   | $ | 6,228 |   | $ | 6,019 |   |
| Capital  expenditures                 |       | $                                                                                                                                                                                        | 5,359      |   | $ | 9,056 |   | $ | 25,140 |   | $ | 13,512 |   | $ | 9,279 |   |
| Dividends paid                        |       | –                                                                                                                                                                                   |       | – |   | – |   | – |   | – |   |
| Gross margin                          |       | 20.4                                                                                                                                                                                     | %          | 29.3 | % | 21.0 | % | 24.5 | % | 22.8 | % |
| Operating margin                      |       | 7.2                                                                                                                                                                                      | %          | 15.3 | % | 4.5 | % | 7.4 | % | 4.4 | % |
| Tons sold and  processed (unaudited): |       |                                                                                                                                                                                     |       |   |   |   |   |   |   |   |   |
| Direct sales                          |       | 913,000                                                                                                                                                                                  |       | 914,000 |   | 870,000 |   | 867,000 |   | 773,000 |   |
| Toll processing                       |       | 1,009,000                                                                                                                                                                                |       | 901,000 |   | 794,000 |   | 737,000 |   | 667,000 |   |
|                                  |       | 1,922,000                                                                                                                                                                                |       | 1,815,000 |   | 1,664,000 |   | 1,604,000 |   | 1,440,000 |   |

 

4

----

 

| ** **              | ** ** | **Nov. 26,  2005**                                | ** ** | **Nov. 27,  2004** | ** ** | **Nov. 29,  2003** | ** ** | **Nov. 30,  2002** | ** ** | **Nov. 24,  2001** | ** ** |
|-------------------------|------------|--------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **              | ** ** | **(In thousands of U.S. dollars)** | ** ** |
| **Balance Sheet Data:** |       |                                                   |       |                    |       |                    |       |                    |       |                    |       |
| Current assets          |       | $                                                      | 321,208    |                    | $          | 312,666                 |       | $                       | 189,709    |                    | $          | 164,775 |   | $ | 140,548 |   |
| Current  liabilities    |       | 106,803                                                |       | 132,435                 |       | 101,603                 |       | 77,970                  |       | 64,494                  |       |
| Working capital         |       | 214,405                                                |       | 180,231                 |       | 88,106                  |       | 86,805                  |       | 76,054                  |       |
| Total assets            |       | 441,583                                                |       | 436,667                 |       | 312,656                 |       | 271,705                 |       | 236,962                 |       |
| Total debt              |       | 47,536                                                 |       | 65,063                  |       | 76,525                  |       | 73,073                  |       | 74,684                  |       |
| Net assets              |       | 276,959                                                |       | 230,708                 |       | 145,715                 |       | 119,867                 |       | 99,668                  |       |
| Share capital           |       | 34,791                                                 |       | 29,609                  |       | 28,404                  |       | 28,404                  |       | 28,404                  |       |
|                         |            |                                                        |            |                         |            |                         |            |                         |            |                         |            |  |  |  |  |  |

----

(a)              Our fiscal year end is the last Saturday of November. Thefiscal years ended November 26, 2005, November 27, 2004, November 29,2003 and November 24, 2001 included 52 weeks of operations, whereas thefiscal year ended November 30, 2002 included 53 weeks of operations.

(b)             Basic income per share is based upon the weightedaverage number of common shares outstanding and diluted income per share isbased on the weighted average number of common shares outstanding plus theeffects of dilutive stock options.

(c)              “EBITDA” is a non-GAAP financial measurecalculated by adding to net income for each year the amounts for income taxes,interest expense, depreciation and amortization. EBITDA is a measure commonlyused in the steel industry and is presented to enhance the understandingof  our results of operations. EBITDA maybe useful to compare our results to those of other companies in the industry onthe same basis. In addition, it is a measure commonly required by lenders indetermining compliance with financial covenants. EBITDA is not a measurement offinancial performance under U.S. GAAP and may not be comparable to othersimilarly titled measures of other companies. EBITDA should not be consideredas an alternative to operating or net income (as determined in accordance withU.S. GAAP) as an indicator of our performance or as an alternative to cashflows from operating activities (as determined in accordance with U.S. GAAP) asa measure of liquidity.

**Thefollowing is a reconciliation of net income to EBITDA:**

| ** **                     | ** ** | **Years Ended **(1)                          | ** ** |
|--------------------------------|------------|--------------------------------------------------------|------------|
| ** **                     | ** ** | **Nov. 26,  2005**                                | ** ** | **Nov. 27,  2004** | ** ** | **Nov. 29,  2003** | ** ** | **Nov. 30,  2002** | ** ** | **Nov. 24,  2001** | ** ** |
| ** **                     | ** ** | **(In thousands of U.S. dollars)** | ** ** |
| Net income                     |       |                                                   | $          | 36,938 |   |   | $ | 72,911 |   |   | $ | 13,082 |   |   |   | $ | 20,118 |   |   |   | $ | 8,014 |   |   |
| Income taxes                   |       |                                                   | 19,976     |   |   | 40,422 |   |   | 5,333 |   |   |   | 10,080 |   |   |   | 3,903 |   |   |
| Interest expense               |       |                                                   | 3,892      |   |   | 4,866 |   |   | 5,144 |   |   |   | 5,062 |   |   |   | 6,455 |   |   |
| Depreciation and  amortization |       |                                                   | 9,936      |   |   | 8,680 |   |   | 6,962 |   |   |   | 6,228 |   |   |   | 6,019 |   |   |
| EBITDA                         |       |                                                   | $          | 70,742 |   |   | $ | 126,879 |   |   | $ | 30,521 |   |   |   | $ | 41,488 |   |   |   | $ | 24,391 |   |   |

----

(1)            Our fiscal year end is the last Saturdayof November. The fiscal years ended November 26, 2005, November 27,2004, November 29, 2003 and November 24, 2001 included 52 weeks ofoperations, whereas the fiscal year ended November 30, 2002 included 53weeks of operations.

5

----

**Risk Factors**

*You shouldcarefully consider the following risks and uncertainties which may have amaterial effect on our business, results of operations and financial condition.*

**The prices we payfor steel and other raw materials, and the prices we are able to charge ourcustomers for our products, may fluctuate due to a number of factors beyond ourcontrol, which could negatively impact the prices of our products, reduce ourmargins of profitability, and weaken our financial condition**

The principal raw material used in our operations isflat rolled carbon steel which we typically purchase from steel producers. Thesteel industry as a whole is cyclical. At times pricing and availability ofsteel can be volatile due to numerous factors beyond our control, includinggeneral, regional and international economic conditions, production levels,competition, import duties and tariffs and currency exchange rates.

As a steel service center, we generally maintainsubstantial inventories of steel to accommodate the short lead times andjust-in-time delivery requirements of our customers. Accordingly, we purchasesteel in an effort to maintain our inventory at levels that we believe to beappropriate to satisfy the anticipated needs of our customers based uponhistorical buying practices, contracts with customers and market conditions. Wegenerally purchase steel at prevailing market prices in effect at the time weplace our orders. When raw material prices increase, competitive conditionswill influence how much of the steel price increase can be passed on by us toour customers. When raw material prices are decreasing, we face the challengeof selling the inventory that we acquired at a relatively higher cost at thedecreasing prices. Thus, decreases in raw material prices could result in lowersale prices and lower margins for our products.

In recent years, our steel suppliers have beensignificantly impacted by the shortage of raw materials resulting inunprecedented cost increases affecting scrap, coke, iron ore and energy. Thistogether with a number of additional factors, including the strength of thegeneral economy, the increased consolidation of North American steel producersand the demands for steel from the Asian markets has affected the availabilityand prices of flat rolled carbon steel. In January 2004, North Americansteel producers implemented raw material surcharges to offset these costs.  Accordingly, our  raw material costs increased and,whenever  possible, we passed on thesurcharges to our customers. During 2005 however,most steel producersincorporated these surcharges into their all-inclusive price per product. Wemay not be able to pass on these price increases to our customers in thefuture.

The occurrence of one ormore of the above events could negatively impact in the prices of our products,reduce our margins or profitability, and weaken our financial condition.

**Ourbusiness may be affected by the cyclicality of the industries that purchase ourproducts. Reduced demand from any one of these industries could result in loweroperating income and profitability**

Certain of our products are sold to industries,including the automotive industry, that experience significant fluctuations indemand based on general economic conditions, seasonality and other factorsbeyond our control. As a result we may not be able to increase or maintain ourlevel of sales or prices in periods of economic stagnation or downturn.

Sales of our products foruse in the automotive industry accounted for approximately 26.5% of our netsales in fiscal 2005 and approximately 21.4% of our net sales in fiscal 2004.Such sales include sales directly to the automobile manufacturers and to theircomponent and parts suppliers as well as to manufacturers supplying theautomotive “after market” components and parts. The automobile industryexperiences fluctuation in demand based on numerous factors such as generaleconomic conditions and consumer confidence. The automobile industry is alsosubject, from time to time, to labor problems, which may result in reduceddemand for our products during work stoppages.

6

----

**Wemay not be able to grow our business in the future or to manage our expansioneffectively**

Historically, we have managed to grow our businessinternally and through acquisitions. In the future, we may not be able toidentify and capture growth opportunities and therefore we may not be able togrow our business at the rate we did in the past or at all. Any new facility oroperation or any future acquisitions, if completed, may not be profitable.

In addition, the expansion of an existing facility orthe construction of a new facility could hinder our results of operations dueto the impact of start-up costs and the potential for underutilization in thestart-up phase of a facility. Acquisitions could result in unforeseendifficulties in integrating the acquired businesses with our existing businessand could divert a disproportionate amount of management time and attention.The incurrence of additional indebtedness to pay for expansion costs oracquisition costs could harm our liquidity and financial stability. Moreover,any issuance by us of common shares to effect acquisitions could result indilution to our shareholders. Although we frequently evaluate potentialacquisitions, we currently have no understandings, agreements or commitments tomake any acquisitions.

**Our results ofoperations may be impacted and adversely affected by fluctuations in foreignexchange rates**

We are subject to exchange rate fluctuations that arebeyond our control. Some of our revenues are derived from sales made byCanadian subsidiaries into the United States, which are denominated in U.S.dollars, and converted into Canadian dollars based upon the average monthlyexchange rate at the time of sale. If we are not able to successfully hedge ourcurrency exposure, changes in the rate of exchange between the Canadian dollarand the U.S. dollar may negatively impact our results of operations and cashflow. See “Quantitative and Qualitative Disclosures About Market Risk.”

**Our Canadianoperations subject us to currency translation risk which could cause ourreported results to fluctuate significantly from period to period**

We receive a material portion of our revenue from ourCanadian operations and as such our primary functional currency is the Canadiandollar. However, for each reporting period we translate the results ofoperations and financial condition into United States dollars. Therefore, ourreported results of operations and financial condition are subject to changesin the exchange relationship between the two currencies. For example, as therelationship of the Canadian dollar strengthens against the U.S. dollar, ourrevenue, as reported, is favorably affected and conversely expenses areunfavorably affected. Fluctuations in the relative values of  the U.S. dollar and the Canadian dollar couldnegatively affect our results of operations and assets and liabilities asreported in our financial statements.

**We could incursubstantial costs in order to comply with, or to address any violations under,environmental laws that could significantly increase our operating expenses andreduce our operating income**

The nature of our business may expose us toenvironmental liability claims, even if such claims are without merit. One ofour subsidiaries, American Steel and Aluminum Corporation, or American Steel,was named as one of 19 defendants in an action brought in October 2001 bytwo private parties under the Comprehensive Environmental Response Compensationand Liability Act*,* or**CERCLA, to recover costs incurred and tobe incurred in connection with a waste disposal facility in Cumberland, RIwhich has been categorized as a Superfund site by federal authorities. Thecomplaint was subsequently amended twice to add additional defendants,aggregating to a total of 57 defendants. The plaintiffs claim that we areliable based upon alleged shipments to the site by American Steel, prior to itsacquisition by us in 1996. The plaintiffs have identified over 100 potentiallyresponsible parties, or PRPs. Additionally, the Environmental ProtectionAgency, or EPA, has issued claim notice letters to 63 parties, some of whichare defendants in the lawsuit. We did receive, on or about April 25, 2003,an EPA claim letter seeking reimbursement of costs incurred and to be incurredat the site. American Steel responded to the claim by 

7

----

denying liability for thesite, but is also working with other PRPs to evaluate its options for resolvingthe matter. The plaintiffs seek recovery of investigative expenses incurred andto be incurred, together with a declaration of liability for all futureremediation costs at the site. We do not believe it is currently possible toestimate our share, if any, of such investigative expenses or futureremediation costs with reasonable certainty. The defendants have formed a PRPcommittee (in which we are participating) to monitor the site investigation. Webelieve that we have meritorious defenses against the claims raised in theaction and we intend to defend our position vigorously should the litigationproceed. However, we may not prevail should the litigation proceed and anysignificant loss could reduce our earnings.

In addition, our processing centers and manufacturingfacilities are subject to many federal, state, provincial and local laws andregulations in the United States and Canada relating to the protection of theenvironment. We have made, and will continue to make, expenditures to remain incompliance with such laws and regulations. We believe that our facilities arein material compliance with these laws and regulations, as such currentlyexist, and we do not believe that continued compliance with such existing lawsand regulations will have an adverse effect on our results of operations orfinancial condition. However, we cannot predict the environmental laws orregulations that may be enacted in the future or how existing or future lawsand regulations will be administered or interpreted. Compliance with morestringent laws or regulations, as well as more vigorous enforcement policies ofthe regulatory agencies or stricter interpretations of existing laws andregulations, may require additional expenditures by us which could varysubstantially from those currently anticipated.

Certain of the facilities that we occupy have been inoperation for many years and, over such time, we and the prior owners oroperators of such properties may have generated and disposed of wastes whichare or may be considered hazardous. Accordingly, it is possible that additionalenvironmental liabilities may arise in the future as a result of any such wastegeneration and disposal.

**We depend on oursenior management team and the loss of any member could prevent us fromimplementing our business strategy**

The success of ourbusiness is dependent upon the management and leadership of D. Bryan Jones, ourchairman and chief executive officer, and certain other members of our seniormanagement team. In addition, our decentralized corporate structure requiresthat each of our facility managers perform important management and leadershipfunctions. The loss of any of these individuals or our inability to attract,retain and maintain additional personnel could adversely affect our ability toconduct, manage and grow our business. We may not be able to retain ourexisting senior management personnel or to attract additional qualifiedpersonnel.

**Ourbusiness is highly competitive and increased competition could reduce our salesand profitability**

The principal markets thatwe serve are highly competitive. We compete on a regional basis with steelservice centers and, to a certain degree, primary steel producers andintermediate steel processors. We have different competitors for each of ourproducts and within each region that we serve. Certain of these competitorshave financial and operating resources in excess of our financial and operatingresources. Although we have been able to successfully compete in the past wemay  not be able to continue to do so.Increased competition could harm our net sales and profitability in the future.

**Ouroperations may be impacted by future labor negotiations or work stoppages**

Certain of our employeesat 11 of our 23 facilities are organized by the United Steelworkers, theTeamsters, the Sheet Metal Workers and independent employees associations,representing in the aggregate approximately 317 of our 1,089 employees. Ourlabor contracts expire on staggered dates. The labor contract with the UnitedSteelworkers covering 76 employees at our Granby, Québec facility has expiredon February 21, 2006 and is currently being renegotiated. The laborcontract with the Teamsters 

8

----

covering30 employees at one of our LaSalle, Québec facilities will expire on December 1,2006. Widespread work stoppages could have a direct negative impact on ourability to conduct business, continue production, and on our earnings.

**Wemay incur additional risks as we continue to borrow money**

Our indebtedness may increase as we continue to borrowunder existing or future credit arrangements in order to finance greenfieldprojects, expansion activities, future acquisitions and as we continue toborrow for our general corporate purposes. Risks of increased indebtednessinclude greater sensitivity to adverse economic conditions, the potential inabilityto fund future working capital, acquisitions, capital expenditures and othergeneral corporate requirements, limits on our flexibility in planning for, orreacting to, changes in our business and the steel industry, limits on futureborrowings under our existing or future credit arrangements, which could affectour ability to pay our indebtedness or to fund our other liquidity needs, theinability to generate sufficient funds to cover required interest payments, andrestrictions on our ability to refinance our indebtedness on commerciallyreasonable terms.

**Restrictive loancovenants may limit our ability to develop greenfield projects or to pursueacquisitions**

Certain of our creditfacilities contain covenants restricting or limiting our ability to, amongother things, incur additional indebtedness, pay dividends or make otherrestricted payments, dispose of or create a charge or lien on our assets, andmake capital expenditures and other investments. These restrictions may limitour ability to develop greenfield projects, pursue acquisitions and achieve ourgrowth strategies.

**Weare dependent on our subsidiaries**

We have no direct business operations other than ourownership of the share capital of our subsidiaries. As a holding company, weare dependent on dividends, interest payments, management fees or otherinter-company transfers of funds from our subsidiaries to enable us to meet ourdirect obligations. Our credit facilities restrict the payment to us ofdividends and interest from our subsidiaries under certain conditions.

If our customers, which are primarily North Americanmanufacturing and industrial companies, relocate operations or outsourcefunctions overseas, we could lose their business

Our customer base islocated in the United States and Canada and consists primarily of manufacturingand industrial companies. We do not currently operate facilities outside ofNorth America. Therefore, in the event our customers relocate productionoperations or outsource particular functions overseas, we could lose theirbusiness, which could have an adverse effect on our results of operations andfinancial condition.

**Itmay be difficult to trade our common shares**

Although our common sharesare registered under the Securities Exchange Act of 1934 and quoted on theNasdaq National Market, at times in the past there was a limited volume oftrading of our common shares. Accordingly, investors may not be able to rapidlydivest a portion of their common shares or liquidate their investment shouldthey desire to do so.

9

----

**Themarket price for our common shares may be volatile**

At times in thepast, there has been substantial volatility in the market price for our commonshares. In addition, the market price of our common shares could fluctuatesubstantially in the future in response to a number of factors, including thefollowing:

·       ourresults of operations or the results of operations of other companies in thesteel processing industry;

·       changesin general conditions in the economy, the financial markets or the steel processingindustry, including changes in the demand for steel;

·       changesin financial estimates or recommendations by stock market analysts regarding usor our competitors;

·       announcementsby us or our competitors of significant acquisitions; and

·       increasesin raw material costs and various other costs.

In addition, in recent years, the stock market ingeneral has experienced extreme price and volume fluctuations. This volatilityhas had a significant effect on the market prices of securities issued by manycompanies for reasons unrelated to their operating performance. These broadmarket fluctuations may result in a decrease of our share price, regardless ofour results of operations.

**Future sales of ourcommon shares could depress the market price of our common shares and diminishthe value of your investment**

**Future sales of our common sharescould result in a decrease of the prevailing market price of our common shares,especially if our existing shareholders were to sell a large number of commonshares, or if we were to issue a large number of our common shares. Moreover,the perception in the public market that our existing shareholders might selladditional common shares could depress the market for our common shares.**

**Our principalshareholders have the ability to exert significant control in matters requiringa shareholder vote and could delay, deter or prevent a change in control**

Approximately 68.1% of our outstanding common sharesare beneficially owned by certain of our officers and directors. As a result,these officers and directors have and will collectively retain the power toelect our entire board of directors and to determine the outcome of any othermatters submitted to our shareholders for approval.

Through the foregoing persons continued concentrationof voting power, they could delay, deter or prevent a change of control of ourcompany or other business combinations that might otherwise be beneficial toour other shareholders. In deciding how to vote on such matters, such personsmay be influenced by interests that conflict with yours.

**The staggerednature of our board of directors, as well as our articles of incorporation,could delay, deter or prevent a change of control**

Our board of directors currently consists of sevenmembers. Our articles of incorporation provide for our board of directors to bedivided into three groups, with staggered three-year terms. As a result, onlyone group of directors will be elected at each annual meeting of ourshareholders. Further, our articles of incorporation authorize our board ofdirectors to appoint, between annual meetings of shareholders, one or moreadditional directors who would hold office for a term expiring not later thanthe close of our following annual meeting of shareholders (unless such appointeddirectors are then elected as directors by our shareholders), provided that thetotal number of directors so appointed may not exceed one third of the numberof directors elected at the previous annual meeting of our shareholders.

10

----

The staggered nature ofour board of directors and our board’s ability to appoint one or moreadditional directors may make it more difficult for our shareholders to replaceour board of directors and may have the effect of deterring hostile takeoversor preventing or delaying changes in control of our company that mightotherwise be beneficial to our shareholders.

**We do not intend to pay dividends**

We have never declared orpaid dividends on our common shares in the past, and we do not anticipatepaying cash dividends on our common shares for the foreseeable future. Atpresent, we intend to retain any future earnings to finance our operations andexpansion.

**ITEM 4**                INFORMATIONON THE COMPANY

**Historyand Development of the Company**

Novamerican Steel Inc. wasincorporated on April 4, 1997 under the Canada Business Corporations Act.Our registered office, principal place of business and principal executiveoffices are located at 6001 Irwin Street, LaSalle, Québec, Canada H8N 1A1.Our telephone number at the principal executive offices is (514) 335-6682.

Following ourincorporation, a reorganization of the various operations wholly-owned orcontrolled by D. Bryan Jones, our chairman and chief executive officer, orScott B. Jones, our  president andsecretary and the son of D. Bryan Jones, occurred pursuant to which we becamethe holding company for two main operating groups: (i) our Canadianaffiliates, consisting of Nova Steel Ltd., Nova Tube Inc., Cresswell IndustriesInc.) (formerly Cresswell Roll Forming Inc.), Argo Steel Ltd., Nova TubeOntario Inc., Nova Steel Processing Centre Ltd. and Delta Tube and Company,Limited, and (ii) our U.S. affiliates, consisting of Integrated SteelIndustries, Inc., a U.S. holding company, American Steel and AluminumCorporation, Nova Tube and Steel, Inc. and Nova Tube Indiana, LLC.

Nova Steel Ltd. wasestablished as a processor of hot-rolled carbon steel in 1979. In 1983, NovaSteel Ltd. acquired and installed its first tube mill in Montréal. In 1987,this operation became Nova Steel Ltd.’s (60%) contribution to a joint venture,Delta Tube and Company, Limited, for the toll rolling of tubing, with IspatSidbec Inc (now Mittal Canada Inc.) (40%). In 1985, the majority of the sharesof Cresswell Industries Inc., a roll forming, stamping and manufacturingbusiness in Québec, were acquired. In 1989, Argo Steel Ltd., a processor ofhot-rolled, cold-rolled and galvanized steel products was established inMontréal with a 50.9% interest at the time. This expansion was followed in October 1991with the establishment of Metco Steel Inc. (now part of Nova Steel Ltd.) Thisoperation is a processor of carbon steel plate and plate coil in our LaSallefacility.

In July 1991, NovaTube Inc. acquired a tube mill operation in Baie d’Urfé, Québec and, in May 1996,Nova Tube Ontario Inc. was established with the installation of a tube mill inMississauga, Ontario specifically designed to meet the needs of high pressurehydroforming for the automotive industry.

American Steel, which wasfounded in 1962 and which we acquired in August 1996, operates in ninelocations in the Northeastern and Mid-Atlantic United States. American Steel isa distributor of steel, aluminum and stainless steel products including hot andcold-rolled carbon steel, aluminum, stainless steel, alloy and coated productsin sheet, coil, bar, shapes, tubular and plate forms.

On November 7, 1997,we completed our initial public offering of 2,200,000 shares of our commonstock and, at such time, our shares of common stock were listed on Nasdaq wherethey continue to trade under the symbol, “TONS”.

In December 1998, we,through our then 50.9% owned subsidiary, Argo Steel Ltd., acquired the assetsof a steel slitting operation and established a processing center in Brampton,Ontario where we installed a .134” X 75” blanking line.

11

----

During 1998, we also builta processing facility in Stoney Creek, Ontario, Nova Steel Processing CentreLtd. and installed a 400,000 ton per year pickling line together with a new200,000 ton per year slitting line. Both the pickling line and the slittingline were commissioned and went into full production during the first quarterof 1999. A second slitting line installed in 2000 has been in full productionsince 2001.

During 2000, NovamericanTube Holdings, Inc., a wholly-owned subsidiary of Integrated SteelIndustries, Inc., formed a joint venture with Bethlehem Steel Corporation,or Bethlehem, under the corporate name BethNova Tube, LLC, or BethNova, toproduce steel tubing for use in hydroforming of automobile and truck components.This state-of-the-art tube manufacturing facility in Jeffersonville, IN wascompleted in 2001 and began ramping up production in the fourth quarter of thatsame year. The bulk of the tube production at this facility is dedicated to DanaCorporation, a major automotive parts supplier, which has built a newhydroforming plant near Elizabethtown, KY. On October 15, 2001, Bethlehemfiled for protection under Chapter 11 of the United States Bankruptcy Code andon February 6, 2003, sold substantially all of its assets, including itsinterest in the joint venture, to International Steel Group, Inc., or ISG.In June 2003, we purchased ISG’s 50% interest in the BethNova jointventure for $4,100,000 and renamed the now wholly-owned subsidiary, Nova TubeIndiana, LLC.

In November 2000, webuilt a new tubing facility, operated by Nova Tube and Steel, Inc. inMorrisville, PA. The structural tube mill began production in November 2000and is capable of producing hollow structural sections (HSS) up to 6” x 6” x 3¤8”.The heavy gauge slitter and cut-to-length line were completed in November 2001and were in full production throughout 2002.

In 2002, through asubsidiary, we acquired all of the minority interest in Argo Steel Ltd. Theacquisition was financed by internal sources of funds.

During 2002, the premisesleased by Nova Tube Ontario Inc. in Mississauga, Ontario were expanded by40,000 square feet. This enabled us to install additional equipment costingapproximately $400,000 which was financed by internal sources of funds. We planto make further equipment upgrades at this facility to increase capacity andthese will also be financed by internal sources of funds.

Atthe end of 2004, we completed the construction of a 160,000 square footfacility in LaSalle (Montréal), Québec. This new manufacturing and processing facility includes an in-linetemper mill and cut-to-length line and became operational in early 2005. This plant replaces our facility at Dorval,Québec and one of our facilities at Lachine, Québec. The mill includes arotary shear for continuous operation and precision cut-to-length tolerances,and is capable of leveling and temper-rolling 40 ton coils up to 1⁄2” thick by 72”wide. The temper mill is also capable of processing coils up to 80,000 minimumyield and creating elongations of up to 3%. The mill and cut-to-length linejoin our previously announced 1⁄2” x 72” wide slitter that has been operatingsince our second quarter of fiscal 2004. In addition to these new pieces ofequipment, we have upgraded, rebuilt and transferred two existing lines, a 1⁄4” x60” slitter and a 1⁄4” x 72” cut-to-length line, to bring the total number oflines in the new LaSalle facility to four, with the result that the newfacility has an annual slitting and leveling capacity of over 400,000 tons.  The cost of this project was approximately$20.2 million, which was financed by a combination of new debt for the land andbuilding and internal sources of funds.

The new facility inLaSalle was built to reorganize and restructure three of our facilities. Whilehistorically all three facilities processed and sold hot-rolled coil and plate,now only the LaSalle facility undertakes these operations. The LaSalle facilityhas taken the place of two of the previous three operating locations. Webelieve that by consolidating the operations into one facility, we will seeimproved inventory management of hot-rolled products, and capacity increases,production improvements and reduced manpower requirements from the new andupgraded equipment. Furthermore, since the new LaSalle facility is located nextto our Delta Tube operation, we also expect that this will result in quickertransfer of slit coils to the tube mill and less transport equipment. Webelieve these operating efficiencies, new 

12

----

equipment,and administrative and logistical advantages will result in significant costsavings as the production levels at this facility continue to increase.

**Business Overview**

We are a well-establishedsteel service center, processor and tubing manufacturer. We operate from 11locations in the Northeastern, Mid-Atlantic and Mid-Western United States andfrom 12 locations in the Canadian provinces of Québec and Ontario. Sinceinception, we have grown our business internally through identifying and capturingniche opportunities in steel manufacturing and processing, and throughselective acquisitions. This has enabled us to become a multi-facility,multi-process provider of value-added services in several processing andgeographic niches. For example, based on our knowledge of the industry, webelieve that we are one of three producers in North America of hydroformquality tubing used by the automotive industry, and one of two independentpicklers in Canada. We have also recently installed a new in-line temper millin our LaSalle, Québec facility, which we believe make us the only independentprovider of this high-precision service in Canada.

We process and distributecarbon steel, stainless steel and aluminum products and operate as anintermediary between primary metal producers and the manufacturers that requireprocessed metal, often on a just-in-time delivery basis. We produce steeltubing in various sizes for use in the structural and automotive markets(including tubing used in hydroforming). We also produce roll formed steelsections and manufacture heavy equipment parts and accessories. Our flat rolledprocessing capabilities include pickling, slitting, blanking, leveling,temper-rolling and cutting-to-length to precise customer specifications. Additionally,we perform many of these processing services for customers who provide theirown steel, referred to in the industry as toll processing. For a detaileddescription of our steel processing services, see “Products and Services.”

In fiscal 2005, we had netsales of $834.7 million, operating income of $60.1 million and net income of$36.9 million. Since our initial public offering in 1997, our total tons soldand processed have grown from 829,000 tons in 1997 to 1,922,000 tons in 2005,which represents a compound annual growth rate of 11.1%, and our shareholdersequity has grown from $60.8 million in 1997 to $277.0 million in 2005, whichrepresents a compound annual growth rate of 20.9%.

Sinceour initial public offering in 1997, we have completed the five greenfieldprojects described below, each of which involved the acquisition of land,construction of facilities from the ground up and installation of variousmachinery and equipment:

·       Mississauga,Ontario (1997): Upon completion, this state-of-the art tube manufacturingfacility became one of the first facilities in Canada, to our knowledge, toprovide hydroform quality tubing to be used by the automotive industry. Inaddition, we developed at this facility in-line capabilities to cut toprecision lengths, finish, test and package tubing. We have since includedthese capabilities in the design of our subsequent tubing facilities.

·       StoneyCreek, Ontario (1999): This facility contains what we believe is one of onlytwo independent pickling operations in Canada. As compared to picklingoperations owned by steel mills, we believe that we generally operate with alower cost structure. This enables us to handle customer orders in quantitiessmaller than those which would be economical for integrated steel producers. Webegan commercial production at this facility in February 1999, nine monthsafter breaking ground. In fiscal 2005, we processed approximately 640,000 tonsthrough the pickling line, which is approximately 51% higher than themanufacturer’s annual rated capacity of 425,000 tons for this line.

·       Morrisville,Pennsylvania (2000): Prior to completion of this facility, we had served theNortheastern United States structural tube market from our Montréal facility.However, based on sustained demand for our structural tube products, we wereable to justify construction of this facility which commenced operations in2000.

13

----

·       Jeffersonville,Indiana (2001): This specially designed tube manufacturing facility producestubing for use in the hydroforming of automobile and light truck components.

·       LaSalle,Québec (2004): We recently completed this new facility to include newtemper-rolling equipment, as well as slitting and cut-to-length equipment toconsolidate certain of our operations and to achieve cost efficiencies.

We believe that thesegreenfield projects have allowed us to grow profitability by lowering our costsof production while expanding our value-added processing and manufacturingcapabilities. We plan to continue to grow internally by pursuing futuregreenfield projects as additional opportunities in our markets arise.

Our business strategy isfocused on profitable growth, higher margins and lower costs of production,providing value-added processing capabilities and expanding our range ofservices and customer base.

Weintend to achieve our objectives by continuing to focus on:

·       *Providing value-added products and services*.We intend to continue to seek out further niche opportunities in order toprovide our customers with additional services not generally available in ourmarkets.

·       *Pursuing internal growth through greenfield projects*.We intend to pursue internal growth opportunities that we anticipate willprovide attractive returns to our shareholders. We believe that our emphasis ongrowth through greenfield projects has enabled us to extend our corporateculture into all of our new facilities, which in turn allows us to reduce ourcosts of production.

·       *Developing technological improvements*. We intend to continuefully utilizing and, where possible, expanding the capabilities of ourequipment by using new technology together with our experience and expertise.This has enabled us to consistently increase the rated capacity of many of ourfacilities and reduce our costs of production and increase customersatisfaction. This has also enabled us to work with our customers to developand efficiently manufacture innovative value-added products.

·       *Seeking joint ventures and appropriately priced acquisitions*.We will also continue to pursue opportunities to broaden our product range andcustomer base through joint ventures and selective acquisitions. We believe ourrecord of success with joint ventures and our strong financial conditionposition us to find and act on additional opportunities of this type. Weconsider acquisition opportunities that are in line with our business strategyand that, in general, appear to be appropriately priced, immediately accretiveand with strong local management.

Webelieve that we have the following competitive strengths that will facilitatethe implementation of our business strategy:

·       *Ability to identify and capitalize on unique market opportunities*.Our chief executive officer, D. Bryan Jones, and our senior management teamhave an excellent record of identifying new market opportunities that, combinedwith our financial position and greenfield experience, allow us to reactquickly and capitalize on these new opportunities as they arise. Ourinitiatives in tubing for hydroforming, pickling and temper-rolling reflect thisability.

·       *Strategically located facilities*. Ourfacilities are strategically located to efficiently serve our broad customerbase throughout the Northeastern and Mid-Atlantic United States and CentralCanadian markets. Most of our customers are located within a 250-mileradius of our facilities which allows us to operate an efficient deliverysystem capable of handling a high volume of short lead-time orders.Additionally, the location of our facilities minimizes the freight costsassociated with obtaining steel supply.

14

----

·       *Management depth and experience*. Oursenior management team has extensive industry experience and a demonstratedrecord of success. In addition, our service centers and processing facilitiesare managed on a decentralized, entrepreneurial basis, which provides our localmanagers the flexibility to respond to changing local market conditions.

·       *Long-standing supplier relationships*. As alarge purchaser of steel, we have developed long-standing relationships withcertain primary producers of steel in the United States, Canada and abroad. Webelieve that these relationships, together with our increasing volume ofpurchases, enhance our ability to obtain quality steel at competitive pricesand on a timely basis even during periods of tight supply.

·       *Commitment to quality and customer service*.Our commitment to customer service, together with our just-in-time deliverycapabilities permit us to satisfy the needs of our customers and allows us toprovide quick and reliable service while maintaining our high qualitystandards. Our level of quality is exemplified by our ability to successfullymeet the exacting standards of our customers, including those in the automotiveand equipment manufacturing industries.

·       *Effective management information systems*.We have reliable and scalable management information systems that help us tooperate our business efficiently, including bar coding technology which enablesus to monitor and allocate inventory among our operations. Our systems provideinformation with respect to the buying patterns of our customers and enable usto properly monitor our inventory turnover rates. We are continually pursuingopportunities to streamline the cost and time associated with customer andsupplier communications, including electronic data interchange.

·       *Strong financial position*. Our strongfinancial position and track record of continued profitability allows us tomaintain and enhance our relationships with suppliers and customers. Thestrength of our balance sheet also furthers our ability to borrow funds onfavorable terms in the event of an appropriate investment or acquisitionopportunity that requires and justifies the incurrence of long or short-termdebt financing.

**Products andServices**

Ourservices include the following traditional service center processes:

·       slitting:the cutting of steel to specified widths along the length of steel coil;

·       leveling:a process used to flatten shape deficiencies in steel coil; and

·       cutting-to-length:involves cutting steel across the width of steel coil.

Ourservices also include higher value-added processes, which process and transformsteel to specified lengths, widths and shapes pursuant to specific customerorders, including the following:

·       rollforming: flat rolled coils can be pre-punched, in-line welded and formed intosophisticated shapes for specific purposes;

·       blanking:the cutting of steel into specific shapes with close tolerances; and

·       plateburning: the process of cutting steel, typically in excess of one inch thick,into specific shapes and sizes.

In addition, we haverecently expanded our services to include temper-rolling. Temper-rolling is anin-line process that improves the surface finish and flatness of cut-to-lengthsheet and plate and that eliminates coil memory or springback.

15

----

Adistinctive aspect of our company is our focus on pickling and tubingoperations:

·       picklingis an in-line process for cleaning hot-rolled steel coils of rust, scale anddirt. Currently, we believe that we  areone of only two independent picklers in Canada, and

·       tubingis a process by which flat rolled coils are formed into circular, oval, squareor rectangular shapes and the seams are electric resistance welded.

·       Ourtubing operations are presently structured as follows:

·        fivemills, of which three are located in Canada and two are located in the UnitedStates;

·        amajority of our tube production is hollow structural sections, or HSS, tubing;and

·        our tube mills inMississauga, Ontario, and Jeffersonville, Indiana, were constructed specificallyto meet the needs of high pressure hydroforming for the automotive industry andinclude in-line precision cutting, finishing, testing and packagingcapabilities. Hydroforming is an innovative technology used in the manufactureof certain automotive parts which involves the application of water at highpressure to form and shape steel tubes. This reduces the cost and the weight ofa steel component.

**Suppliers**

We purchase flat rolledsteel for processing from a number of North American and international primarysteel producers in quantities that we believe are efficient for such producers.We concentrate on developing relationships with high-quality North Americanintegrated steel mills and mini-mills, as well as international primary steelproducers and on becoming a valued customer of such producers. We are a majorcustomer of flat rolled coil for some of our principal suppliers but are notdependent on any one supplier. This enables us to maintain continued sources ofsupply at what we believe are competitive prices. We believe the accessibilityand proximity of our facilities to major steel producers, together with ourstrong balance sheet, will continue to be an important factor in ourmaintaining good relationships with them.

The steel industry as awhole is cyclical and at times pricing and availability can be volatile due tonumerous factors beyond our control, including general, regional andinternational economic conditions, production levels, competition, importduties and tariffs and currency exchange rates.

**Sales and Marketing**

Each of our sales anddistribution operations maintains its own sales and marketing staff to servethe specific local needs of our customers. Our combined sales force consists of125 salaried inside and outside sales representatives of which 25 arecommissioned representatives. Our sales efforts are focused primarily on directcustomer contact. We believe that management selling is essential to our salesand marketing success. Consequently, our managers and product managers, as wellas our president and our various vice presidents are all active in externalsales. We feel that our commitment to quality, service and just-in-timedelivery has enhanced our ability to build and maintain strong customerrelationships.

**Customers and Distribution**

In fiscal 2005, we processed steel for sale toapproximately 6,900 customers. Our diversified customer and geographic baseserves to reduce our exposure to fluctuations in business and economic cyclesin particular industries and regions. In fiscal 2005, our top 20 customersaccounted for less than 31.6% of total net sales and no single customeraccounted for more than 7.0% of total net sales. Our major customers includeautomotive parts manufacturers and stampers, other steel service centers,general fabricators and manufacturers of transportation equipment, materialhandling equipment, electrical components, appliances, storage tanks, railwaycars, ship building material, construction and heavy 

16

----

equipment and agriculturalequipment. Our sales to automobile manufacturers and their suppliers combinedwith our sales to manufacturers supplying the automotive “after market”components and parts in fiscal 2005 accounted for approximately 26.5% of totalnet sales and our sales to other steel service centers accounted forapproximately 17.1% of total net sales.

Our facilities are strategically located to serve ourbroad customer base, which is largely located in the Northeastern andMid-Atlantic United States, as well as Central Canada. These strategiclocations allow us to operate an efficient delivery system capable of handlinga high volume of short lead-time orders. We transport most of our productsdirectly to customers via our own fleet of trucks, through independent truckingfirms and through a logistics company owned by one of our directors. See “MajorShareholders and Related Party Transactions—Related Party Transactions.”

Thefollowing table sets forth the net sales of our Canadian and U.S. affiliatesfor the past three fiscal years:

| ** **           | ** ** | **Nov. 26,  2005**                                | ** ** | **Nov. 27,  2004** | ** ** | **Nov. 29,  2003** | ** ** |
|----------------------|------------|--------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **           | ** ** | **(In thousands of U.S. dollars)** | ** ** |
| Canadian  affiliates |       | $                                                      | 489,879    |                    | $          | 419,532                 |       | $ | 281,803 |   |
| U.S. affiliates      |       | 344,810                                                |       | 349,095                 |       | 225,264                 |       |
|                 |       | $                                                      | 834,689    |                    | $          | 768,627                 |       | $ | 507,067 |   |

 

Due to the impact ofseasons and climate in the regions we predominantly serve, demand for certainof our products may fluctuate during the winter months.

**Management Information Systems**

We maintain managementinformation systems, including bar coding systems, which monitor and allocateinventory among our operations. In particular, the inventory system at AmericanSteel provides information to all sales and management personnel on a real timebasis which enables them to offer a wide range of products to their customerson a timely basis without the need to maintain an inventory of the full productline at all locations. Further, our systems generally provide information withrespect to the buying patterns of our customers. Most of our systems have beendeveloped specifically for the management of our particular operations, such asour processing and tubing operations. We have designed our systems to provideus with the ability to adapt quickly to our customers’ needs. We activelypursue opportunities to streamline the cost and time associated with customerand supplier communications, including electronic data interchange. We are alsoconstantly making improvements to our systems to ensure maximum efficiency,security and scalability for our future needs.

**Quality Standards**

Our quality control systems establish controls andprocedures covering all aspects of our products from the time the material isordered by us through its receipt, production and shipment to our customers.These controls and procedures encompass periodic supplier audits, inspectioncriteria, traceability and certification. From time to time, we havesuccessfully undergone quality audits by certain of our larger customers. Todate, ten of Nova’s facilities and American Steel’s Auburn, Massachusettsfacility have obtained ISO 9001 certification, a universal industrial qualitycontrol standard set by the International Organization for Standardization. Ourremaining facilities are seeking ISO certification. Furthermore, three of ourfacilities located in Ontario and our facility in Jeffersonville, Indiana haveachieved certification under QS 9000, which is the quality standard establishedby and for the North American automotive industry.

17

----

We provide a variety ofprocessing services which have undergone considerable evolution in the area ofquality assurance to meet the stringent demands of our customers, and inparticular, the Ontario automotive market. Nova and American Steel have establishedthemselves as quality suppliers by consistently meeting the requirements oftheir respective customers’ quality control audits.

**Competition**

We compete with otherregional and national steel service centers, single location service centersand, to a certain degree, primary steel producers and intermediate steelprocessors on a regional basis. We have different competitors for each of ourproducts and within each geographic region. We compete on the basis of price,product selection and availability, customer service, quality and geographicproximity. Certain of our competitors have financial and operating resources inexcess of our financial and operating resources.

**Environmental**

Our facilities are subjectto comprehensive and frequently changing federal, state, provincial and locallaws and regulations in the United States and Canada relating to the protectionof the environment, including those related to air emissions, wastewaterdischarges, treatment, storage and disposal of hazardous substances and othermaterials and wastes, occupational health and safety, and in general, theemissions of pollutants into the environment.

We believe that we are inmaterial compliance with all currently applicable environmental laws andregulations. We do not anticipate any material expenditure to meetenvironmental requirements and do not believe that continued compliance withsuch existing laws and regulations will have a material adverse effect on ouroperations or financial condition. However, we cannot predict the environmentallaws or regulations that may be enacted in the future or how existing or futurelaws and regulations will be administered or interpreted. Compliance with morestringent laws or regulations, as well as more vigorous enforcement policies ofthe regulatory agencies or stricter interpretations of existing laws andregulations, may require additional expenditures by us which could varysubstantially from those currently anticipated.

Our subsidiary AmericanSteel was named as one of 19 defendants in an action brought in October 2001by two private parties under the Comprehensive Environmental ResponseCompensation and Liability Act*,*or**CERCLA, to recover costsincurred and to be incurred in connection with a waste disposal facility inCumberland, RI, which has been categorized as a Superfund site by federalauthorities. The complaint was subsequently amended twice to add additionaldefendants, aggregating to a total of 57 defendants. The plaintiffs claim thatwe are liable based upon alleged shipments to the site by American Steel, priorto its acquisition by us in 1996. The plaintiffs have identified over 100potentially responsible parties, or PRPs, and the Environmental ProtectionAgency, or EPA, has issued claim notice letters to 63 parties, some of whichare defendants in the lawsuit. We also received, on or about April 25,2003, an EPA claim letter seeking reimbursement of costs incurred and to beincurred at the site. American Steel responded to the claim by denyingliability for the site, but was also working with other PRPs to evaluate itsoptions for resolving the matter. The plaintiffs seek recovery of investigativeexpenses incurred and to be incurred, together with a declaration of liabilityfor all future remediation costs at the site. We do not believe it is currentlypossible to estimate our share, if any, of such investigative expenses orfuture remediation costs with reasonable certainty. The defendants have formeda PRP committee (in which we are participating) to monitor the site investigation.We believe that we have meritorious defenses against the claims raised in theaction and we intend to defend our position vigorously should the litigationproceed. However, we cannot provide assurances that we will prevail should thelitigation proceed and any significant loss could have a material adverseeffect on our financial results.

Certain of the facilitiesthat we occupy have been in operation for many years and, over such time, weand the prior owners or operators of such properties may have generated anddisposed of wastes which are 

18

----

or maybe considered hazardous. Accordingly, it is possible that additionalenvironmental liabilities may arise in the future as a result of any such wastegeneration and disposal.

**Legal Proceedings**

In addition to the claimsmentioned in the “Environmental” section above, we are a party to various legalactions that we believe are ordinary in nature and incidental to the operationof our business. In our opinion, the outcome of these additional proceedings isnot likely to have a material adverse effect upon our business, results ofoperations or financial condition.

**GovernmentRegulation**

In addition toenvironmental laws and regulations our operations are governed by many otherlaws and regulations, including, without limitation, those relating toworkplace safety and employee health. In addition, our subsidiaries andaffiliates own and lease trucks for transporting products at variousfacilities. The operation and maintenance of these vehicles is governed by varioussafety regulations. We believe that we are in compliance with these laws andregulations in all material respects and we do not believe that continuedcompliance with such laws and regulations will have a material adverse effecton our business, results of operations or financial condition.

**OrganizationalStructure**

We are the holding companyfor two main operating groups: (i) our Canadian affiliates, consisting ofNova Steel Ltd., Nova Tube Inc., Cresswell Industries Inc (formerly CresswellRoll Forming Inc.), Argo Steel Ltd., Nova Tube Ontario Inc., Nova SteelProcessing Centre Ltd. and Delta Tube and Company, Limited; and (ii) ourU.S. affiliates, consisting of Integrated Steel Industries, Inc., a U.S.holding company, American Steel and Aluminum Corporation, Nova Tube and Steel, Inc.and Nova Tube Indiana, LLC.

Thefollowing chart illustrates the organization of our subsidiaries and theircountry of organization:

****

(a)     50%voting interest.

19

----

**Property, Plants and Equipment**

Thefollowing chart describes each of our Canadian operations:

| Subsidiary/Location                                                       | ** ** | ** **                                                                                                                                 | ** ** | **Description of Operations and Products**                                                                                                            | ** ** | **Title**                        |
|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|
| **Nova Steel Ltd.****/**LaSalle, Québec                              |       | ·  160,000 sq. ft

·  Temper mill

·  Two cut-to-length lines

·  Two slitting lines               |       | ·  Hot-rolled, hot-rolled pickled and oiled and  tubing                                                                                     |       | Owned                            |
| **Nova Steel Ltd./**Dorval, Québec                                   |       | ·  75,500 sq. ft

·  Two slitting lines

·  Multi-blanking line                                              |       | ·  Hot-rolled, hot-rolled pickled and oiled and  cold-rolled products and tubing                                                            |       | Leased to May 31, 2006(a)   |
| **Nova Steel Ltd./**Cambridge, Ontario                                    |       | ·  49,100 sq. ft

·  Two slitting lines                                                                                |       | ·  Hot-rolled, hot-rolled pickled and oiled,  cold-rolled and coated slit coils                                                             |       | Leased to Nov. 30, 2009(a)  |
| **Delta Tube and Company, Limited/**LaSalle, Québec (60%  owned**)** |       | ·  100,000 sq. ft

·  HSS tube mill, up to 5” x 5” x 1/4”                                               |       | ·  Toll rolling of HSS tubing for Nova and pipe  for Mittal Canada Inc.                                                                     |       | Owned                            |
| **Nova Tube Inc./**Baie d’Urfé, Québec                     |       | ·  47,100 sq. ft

·  Hot-rolled tube mill up to 3” O.D.                                                           |       | ·  Toll rolling of tubing for Nova for the  structural market                                                                               |       | Leased to May 31, 2008(a)   |
| **Nova Tube Ontario Inc./**Mississauga, Ontario                           |       | ·  90,000 sq. ft

·  Cold-rolled tube mill up to 4” O.D.                                                          |       | ·  High quality mechanical tubing targeting  hydroformed automobile components and other automotive and general  manufacturing applications |       | Leased to April 30, 2007(a) |
| **Nova Steel Processing Centre Ltd./**Stoney Creek, Ontario               |       | ·  171,000 sq. ft

·  Pickling line

·  Two slitting lines                                                   |       | ·  Pickling and slitting of coils on a toll  rolling basis                                                                                  |       | Owned                            |
| **Argo Steel Ltd./**Lachine, Québec                                  |       | ·  53,000 sq. ft

·  Slitting line

·  Cut-to-length line

·  Blanking line

·  Shearing |       | ·  Hot-rolled, cold-rolled and galvanized  products for general manufacturing applications                                                  |       | Leased to March 31, 2006    |
| **Argo Steel Ltd./**Brampton, Ontario                                     |       | ·  63,100 sq. ft

·  Precision multi-blanking line

·  Slitting line                                         |       | ·  Hot-rolled, cold-rolled and galvanized  products for general manufacturing applications                                                  |       | Leased to Nov. 30, 2008(a)  |

20

----

 

| **Cresswell Industries Inc.**(b)**/**Granby, Québec     |   | ·  144,000 sq. ft

·  15 roll forming lines

·  Seven punch presses

·  Stamping and manufacturing

·  In-line welding

·  Electrostatic powder coating |   | ·  Variety of sophisticated roll formed  sections on customer demand

·  Pallet racking |   | Owned                           |
|--------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------|--------|---------------------------------|
| **Cresswell Industries Inc.**(b)**/**St. Hubert, Québec |   | ·  118,300 sq. ft                                                                                                                                                                                         |   | ·  Front loader buckets                                                                           |   | Leased to Dec. 31, 2011(a) |
| **Cresswell Industries Inc.**(b)**/**Shawinigan, Québec |   | ·  16,000 sq. ft

·  Five punch presses

·  Stamping

·  Assembly                                                                                                           |   | ·  Hardwood flooring nails, nailers and  accessories                                              |   | Leased to Feb. 28, 2009    |

 

(a)     Indicatesa facility leased from a related party. See “Major Shareholders and RelatedParty Transactions.”

(b)    Formerly, Cresswell Roll Forming Inc.

Thefollowing chart describes our two tubing facilities in the United States:

| Subsidiary/Location                                | ** ** | ** **                                                                                                                                                                 | ** ** | **Description of Operations and Products**                                                               | ** ** | **Title** |
|----------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|-----------|
| **Nova Tube and Steel, Inc./**Morrisville, PA |       | ·  163,300 sq. ft

·  HSS tube mill up to 6” x 6” x 3/8”

·  Heavy gauge slitter

·  Heavy gauge cut-to-length line |       | ·  Hot-rolled HSS tubing up to 6” square

·  Hot-rolled sheet and plate coil    |       | Owned     |
| **Nova Tube Indiana, LLC/**Jeffersonville, IN      |       | ·  108,000 sq. ft

·  Mechanical tube mill up to 7” O.D.                                                                                          |       | ·  High quality mechanical tubing targeting  hydroformed automobile and truck frame components |       | Owned     |

 

Thefollowing chart describes each of our other nine operations in the UnitedStates: 

| Subsidiary/Location            | ** ** | ** **                                                                 | ** ** | **Description of Operations and Products**                                                                                                     | ** ** | **Title** |
|--------------------------------|------------|----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|
| **American Steel/**Albany, NY  |       | ·  40,000 sq. ft

·  Shearing

·  Bar sawing |       | ·  All carbon steel products and galvanized  sheet

·  Stainless steel and aluminum products

·  Tubing and pipe |       | Owned     |
| **American Steel/**Ashland, VA |       | ·  45,000 sq. ft

·  Shearing

·  Bar sawing |       | ·  All carbon steel products and galvanized  sheet

·  Stainless steel and aluminum products

·  Tubing and pipe |       | Owned     |

21

----

 

| **American Steel/**Auburn, MA     |   | ·  105,000 sq. ft

·  Four slitting lines

·  Leveling and cut-to-length line

·  Blanking line |   | ·  Supplier of cold-rolled and high carbon  strip steel

·  Processing of coated sheets and bright  finished materials

·  Processing of cold-rolled, galvanized,  aluminum and stainless coils to supply sheets to all our divisions |   | Owned |
|-----------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------|
| **American Steel/**Cumberland, RI |   | ·  49,000 sq. ft

·  Shearing

·  Bar sawing                                                              |   | ·  All carbon steel products and galvanized  sheet

·  Stainless steel and aluminum products

·  Tubing and pipe                                                                                                                      |   | Owned |
| **American Steel/**Harrisburg, PA |   | ·  104,000 sq. ft

·  Shearing

·  Bar sawing                                                             |   | ·  All carbon steel products and galvanized  sheet

·  Stainless steel and aluminum products

·  Tubing and pipe                                                                                                                      |   | Owned |
| **American Steel/**Hartford, CT   |   | ·  36,000 sq. ft

·  Shearing

·  Bar sawing                                                              |   | ·  All carbon steel products and galvanized  sheet

·  Stainless steel and aluminum products

·  Tubing and pipe                                                                                                                      |   | Owned |
| **American Steel/**Norwood, MA    |   | ·  55,000 sq. ft

·  Shearing

·  Bar sawing                                                              |   | ·  All carbon steel products and galvanized  sheet

·  Stainless steel and aluminum products

·  Tubing and pipe                                                                                                                      |   | Owned |
| **American Steel/**Portland, ME   |   | ·  59,000 sq. ft

·  Shearing

·  Bar sawing                                                              |   | ·  All carbon steel products and galvanized  sheet

·  Stainless steel and aluminum products

·  Tubing and pipe                                                                                                                      |   | Owned |
| **American Steel/**Syracuse, NY   |   | ·  53,000 sq. ft

·  Shearing

·  Bar sawing                                                              |   | ·  All carbon steel products and galvanized  sheet

·  Stainless steel and aluminum products

·  Tubing and pipe                                                                                                                      |   | Owned |

 

The lease of our facility located in Lachine, Québec,expires on March 31, 2006. We do not plan to extend this lease. Substantiallyall the assets of certain of our subsidiaries are subject to blanket liens forthe benefit of certain lenders.

Each of the above facilities is fully utilized.

22

----

**ITEM 5**                   OPERATINGAND FINANCIAL REVIEW AND PROSPECTS

*You should read this discussion together with ourconsolidated financial statements and the related notes and other financialinformation included elsewhere in this annual report.*

**Overview**

Our operations historically have been conducted underthe management philosophy of D. Bryan Jones, our founder and chief executiveofficer. We were incorporated on April 4, 1997 as part of a reorganizationin order to consolidate the operations of American Steel and AluminumCorporation, or American Steel, and Nova Steel Ltd., or Nova, under one holdingcompany.

Our consolidated financial statements include theaccounts and transactions of our U.S. affiliates and our Canadian affiliates athistorical cost, except that all material intercompany balances andtransactions have been eliminated. All references to our fiscal years and tothose of our subsidiaries and affiliates are to fiscal years ended on the lastSaturday of November.

We sell products in Canada and the United States. Allour sales and payments are made in either Canadian dollars or U.S. dollars andwe conduct our operations generally on the basis of short-term orders. Ourcustomers typically release orders on a just-in-time basis and generally useone week forecasts for placement of orders, which are subject to frequentadditions and cancellations. Because our firm orders are so variable and havesuch short lead times, backlog, in the traditional sense, at any point in timeis not a meaningful indicator of the trend in our overall business or ourfuture performance. Our results of operations are affected by numerous externalfactors, such as general economic and political conditions, competition andsteel pricing and availability.

We have grown our business internally and throughacquisitions to become a multi-facility, multi-process steel service center. Wehave achieved additional growth through developing value-added services inprocessing and geographic niches. We are one of three producers in NorthAmerica of hydroform quality tubing used by the automotive industry, and one oftwo independent picklers in Canada. We also have recently installed a newin-line temper mill, which makes us the only independent provider of thishigh-precision service in Canada. We have been profitable in each year since wecommenced operations in 1979, except for a loss of less than $200,000 in 1990.Our total tons sold and processed and our shareholders’ equity grew from 1997to 2005 at a compound annual rate of 11.1% and 20.9% respectively.

Through our subsidiaries, we sell a broad range ofproducts, many of which have different gross margins. Products that haveundergone more value-added processing, as well as manufactured products,generally have a higher gross margin. Toll processing generally results inlower selling prices per ton but higher gross margins as a percentage of netsales than direct sales. Accordingly, our overall gross margin is affected byproduct mix and the amount of toll processing performed, as well as volatilityin selling prices and material purchase costs. Net sales include direct salesand toll processing revenues. Cost of goods sold includes raw material,freight-in and labor costs.

Our accounts receivable, as recorded on our balancesheet, typically reflect invoices which are dated within three months prior to,and which are unpaid at, the date of the balance sheet. The amount of ouraccounts receivable as recorded on our balance sheet will therefore reflect therecent increasing or decreasing trends in selling prices as well as in salesvolumes. Similarly, our inventories, which we seek to turn as frequently aspossible and which we report on a first-in first-out basis, will reflect recentinventory replacement costs. As our inventory replacement costs increase ordecrease, based on similar inventory volumes, our inventories as recorded onour balance sheet will increase or decrease accordingly. Our inventories atyear end will reflect the current pricing for steel, whereas net sales for theyear reflect pricing through the full twelve month period. Where there is aperiod during which steel prices rise, as was the case through fiscal 2004,based on similar volumes inventories tend to increase at a greater rate thansales. 

23

----

Similarly where this is aperiod during which steel prices decrease, as was the case through the firstthree quarters of fiscal 2005, based on similar volumes, inventories tend todecrease at a greater rate than sales.

While the steel service center industry is largely aregional business, it can be affected by the broader industrial markets. Duringthe first half of 2005, and as a result of inventory corrections brought aboutby high inventories at both the North American steel producer and steel servicecenters, and due to the realignment of North American Steel prices with worldsteel prices, we experienced some reduction in selling prices. However towardsthe end of our third quarter and in our fourth quarter of fiscal 2005, as theNorth American steel industries and our inventories were reduced to more normallevels, we experienced a reversal of the downward trend in steel prices. Webelieve that the current prices for steel are in a more sustainable range dueto the impact of the current costs of scrap, iron ore, coke and energy on the globaland North American steel producers and due to a currently stable economicclimate. We have observed that most North American Steel producers who, webelieve, had implemented raw material surcharges in January 2004 to coverthe unprecedented increases in their raw materials and to overcome contractedprices, have during 2005, rolled these surcharges into a new base pricingstructure. See “Risk Factors—”.  Theprices we pay for steel and other raw materials, and the prices we are able tocharge our customers for our products, may fluctuate due to a number of factorsbeyond our control, which could adversely affect our operating results,” and “RiskFactors—Our business may be affected by the cyclicality of the industries thatpurchase our products. Reduced demand from one or more of these industriescould result in lower operating income and profitability.”

In the past few years and continuing into 2006, wehave noticed a trend of consolidation of steel producers, a trend which webelieve will continue in the North American and global markets. For example, inthe period from 2003 to 2005, five formerly independent North American steelsuppliers merged into a single operating business. We believe that this type ofconsolidation will have the effect of stabilizing pricing in the industry. Wealso believe that the increasing demands for steel from the Asian markets,particularly China, will continue to influence steel prices. Accordingly, we believeit is unlikely that in the foreseeable future prices will return to the levelsthat prevailed during the years prior to 2004.

We operate as an intermediary between steel producersand our customers. As indicated above, increasing or decreasing trends in steelprices will impact our accounts receivable and inventories, and thereby ourworking capital and liquidity. Our commitments for metal purchases aregenerally at prevailing market prices in effect at the time we place our orders.During periods of increasing prices, we face increased working capital demandsas we sell off lower priced inventory but must purchase steel at the increasingprices. Similarly, when prices are decreasing, we face the challenge of sellingthe inventory that we acquired at a relatively higher cost, as we replace ourinventory at the decreasing prices. We believe that funds available under ourcredit facilities together with the funds from our operations will besufficient to provide us with the liquidity necessary to fund our anticipatedworking capital requirements and capital expenditure requirements over the next12 months. See “—Liquidity and Capital Resources.”

Significant short-termincreases in prices can have, depending upon economic conditions a dampeningeffect on demand. In the future, we may not be able to pass on these surchargesand price increases to our customers, which could have a material adverseeffect on our business, results of operations and financial condition in one ormore future reporting periods. Certain of our customers paid the additionalamounts related to the surcharges in fiscal 2004 under protest. All such caseswere resolved without any material effect on our statement of operations forfiscal 2005.

24

----

**Selected Results of Operations**

Wehave set forth in the following table for each of the periods presented certainstatement of operations data expressed as a percentage of net sales.

| ** **                         | ** ** | **Years Ended**        | ** ** |
|------------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **November 26,  2005** | ** ** | **November 27,  2004** | ** ** | **November 29,  2003** | ** ** |
| Net sales                          |       |                        | 100.0      | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Cost of sales                      |       |                        | 79.6       |   |   |   | 70.7 |   |   |   | 79.0 |   |   |
| Gross margin                       |       |                        | 20.4       |   |   |   | 29.3 |   |   |   | 21.0 |   |   |
| Operating  expenses                |       |                        | 13.2       |   |   |   | 13.9 |   |   |   | 16.5 |   |   |
| Operating income                   |       |                        | 7.2        |   |   |   | 15.4 |   |   |   | 4.5 |   |   |
| Interest expense                   |       |                        | 0.5        |   |   |   | 0.6 |   |   |   | 1.0 |   |   |
| Share in income  of joint ventures |       |                        | (0.1       | ) |   |   | (0.0 | ) |   |   | (0.1 | ) |   |
| Income before  income taxes        |       |                        | 6.8        |   |   |   | 14.8 |   |   |   | 3.6 |   |   |
| Income taxes                       |       |                        | 2.4        |   |   |   | 5.3 |   |   |   | 1.1 |   |   |
| Net income                         |       |                        | 4.4        | % |   |   | 9.5 | % |   |   | 2.5 | % |   |

 

**Fiscal 2005 Compared to Fiscal 2004**

In fiscal 2005, our net sales increased by $66.1million, or 8.6%, to $834.7 million, compared with $768.6 million infiscal 2004. During the first half of fiscal 2005, the North American steelindustry experienced a period of reducing prices as the steel market reacted toexcess inventories and an increase in imports. By the end of our third quarter,with inventories throughout the industry in general at much lower levels, thisdownward trend in prices was reversed and there was evidence of improvingshipments and margins. Our tons sold and processed increased by 5.9% to 1,922,000tons in 2005 from 1,815,000 tons in fiscal 2004. Our tons sold and processed in2005 includes 913,000 tons from direct sales and 1,009,000 tons from tollprocessing, compared with 914,000 tons from direct sales and 901,000 tons fromtoll processing in 2004.  The change inthe Canada/U.S. exchange rate on the conversion to U.S. dollars of the netsales of our Canadian subsidiaries on the consolidated financial statements forour fiscal year 2005 had a positive impact of approximately 4.3% on our net sales,which represents an amount of $35.6 million.

We believe that any comparison between fiscal 2005 and2004 should be made in light of certain exceptional factors which impacted steelpricing in 2004, notably the rapid increase in North American and world steelprices brought about by significant demand from China, significant increases inthe costs of raw materials to the steel producers, and the consolidation of anumber of North American producers. We believe also  that, as the steel market adjusted to thesefactors during fiscal 2005, steel prices adjusted to more sustainable levelsthan those experienced in fiscal 2004. Our margins in fiscal 2005 reflect  the impact of moving from the exceptionalcircumstances experienced in 2004 to these new pricing levels. Due to the costsof raw materials to steel producers throughout the world, we do not expect thatpricing will return to the lower levels experienced in years prior to 2004. Ourgross margin decreased from $225.1 million to $170.6 million in fiscal 2004,and as a percentage of net sales from 29.3% in fiscal 2004 to 20.4% in fiscal2005.

Our operating costs as a percentage of net salesdecreased to 13.2% of sales from 14.0% in fiscal 2004. The decrease inpercentage was attributable to our higher net sales. In absolute dollars ouroperating expenses increased by $3.2 million. However, the impact of the changein the Canada/U.S. exchange rate on the conversion to U.S. dollars of theoperating expenses of our Canadian subsidiaries on the consolidated financialstatements for the fiscal 2005 amounts to approximately $4.9 million.

25

----

In fiscal 2005, our interest expense decreased by $1.0million, or 20.0%, to $3.9 million, compared with $4.9 million in fiscal 2004. Duringfiscal 2005 we reduced our overall interest bearing debt, which was offset byincreases in the prime rates of Canadian banks during the year.

Income before income taxes decreased by $56.4 million,or 49.8%, to $56.9 million from $113.3 million in fiscal 2004.

Our income taxes in fiscal2005 were $20.0 million and represent 35.1% of our income before taxes,compared to $40.4 million, representing 35.7% of our income taxes in 2004.

**Fiscal 2004 Compared to Fiscal 2003**

In fiscal 2004, our net sales increased by $261.5million, or 51.6%, to $768.6 million, compared with $507.1 million in fiscal2003. During fiscal 2004, the steel industry in general experienced significantprice increases by the North American steel producers of approximately 104.8%over the course of our fiscal year arising from raw material cost and supplyfactors which, in turn, also led to the introduction of surcharges.Accordingly, our average selling prices escalated through the year and weresignificantly higher than in fiscal 2003. In addition, the change in theCanada/U.S. exchange rate on the conversion to U.S. dollars of the net sales ofour Canadian subsidiaries in the consolidated financial statements for fiscal2004 had a positive impact of approximately 4.4% on our net sales whichrepresents an amount of $34.2 million.

Furthermore, our tons sold and processed increased by9.1% to 1,815,000 tons in 2004 from 1,664,000 tons in fiscal 2003. Our tonssold and processed in 2004 includes 914,000 tons from direct sales and 901,000tons from toll processing, compared with 870,000 tons from direct sales and794,000 tons from toll processing in fiscal 2003.

Our gross margin increased from $106.2 million infiscal 2003 to $225.1 million in fiscal 2004, and as a percentage of net salesfrom 21.0% in fiscal 2003 to 29.3% in fiscal 2004. These increases areprimarily attributable to the strong pricing conditions and improved economicenvironment in fiscal 2004 in contrast to the weak market conditions weexperienced through the first three quarters of fiscal 2003, as well as to our focuson regaining and improving our gross margin percentage.

Our operating costs as a percentage of net salesdecreased to 13.9% of sales from 16.4% in 2003. The decrease in percentage wasattributable to our higher net sales. In absolute dollars our operatingexpenses increased by $24.0 million. This increase was attributable to thefollowing: (i) the impact of the change in the Canada/U.S. exchange rateon the conversion to U.S. dollars of the operating expenses of our Canadiansubsidiaries in the consolidated financial statements for fiscal 2004 in theamount of approximately $5.2 million; (ii) the consolidation for the fullyear of one of our operations which was formerly consolidated for only fivemonths in the amount of approximately $1.4 million; (iii)  profit-relatedbonuses in the amount of approximately $5.1 million; (iv) an increase inthe allowance for doubtful accounts in the amount of approximately $1.7million; (v) additional operating costs incurred through the duration ofthe expansion projects in the LaSalle and Brampton facilities in the amount ofapproximately $1.8 million; and (vi) the increase in general overalloperating costs arising from additional plant and office staff, annual salaryand wage increases, utility costs, and other variable  costs resulting from a 9.1% growth in tonssold and processed  in the amount ofapproximately $8.8 million.

In fiscal 2004, our interest expense decreased by $0.2****million, or 5.4%, to $4.9 million,compared with $5.1 million in fiscal 2003. Some of our interest rates wereimpacted positively by reductions in interest premiums which resulted fromimproved covenant ratios. In addition, we reduced the overall interest bearingdebt during fiscal 2004.

Our effective income taxrate in fiscal 2004 was 35.6% of income before taxes compared to 29.1% infiscal 2003. The increase is attributable in part to a reduction in the impacton our effective income tax rate 

26

----

of theCanadian tax incentive for manufacturing and processing activities and to theunavailability of certain previously available U.S. tax credits.

**Fiscal 2003 Compared to Fiscal 2002**

In fiscal 2003, our tons sold and processed increasedby 3.8% to 1,664,000 tons from 1,604,000 tons in fiscal 2002. Our tons sold andprocessed in fiscal 2003 included 870,000 tons from direct sales and 794,000tons from toll processing, compared with 867,000 tons from direct sales and737,000 tons from toll processing in 2002.

Our net sales increased by approximately $41.6million, or 8.9%, to $507.1 million in fiscal 2003, compared with $465.5million in 2002. The increase was partly attributable to higher processingvolumes but also due to prices which, after moving downward through the firsthalf of the year, trended upward through the second half.

Our gross margin, as a percentage of net sales,decreased to 21.0% in fiscal 2003 from 24.5% in fiscal 2002. The decrease wasattributable to weak market conditions prevailing in the first half of fiscal2003 caused by excess inventories throughout the industry.

Our operating expenses, as a percentage of net sales,decreased to 16.5% of sales in fiscal 2003 from 17.1% in fiscal 2002. Thedecrease in percentage was mainly attributable to our higher net sales. Inabsolute dollars, our operating expenses increased by $3.5 million. Thisincrease was due mainly to increased operating levels in certain of ourfacilities and the consolidation of one of our operations which was formerlyaccounted for on an equity basis.

Our interest expense remained unchanged at $5.1million. This was a result of the overall borrowings remaining at the samelevel as 2002.

Income before income taxes decreased by $11.8 million,or 39.1%, to $18.4 million in fiscal 2003 from $30.2 million in fiscal 2002.This decrease was due mainly to our lower gross margins.

Our income taxes in fiscal2003 were $5.3 million and represented 29.1% of our income before taxes,compared to $10.1 million representing 33.4% of our income before income taxesin fiscal 2002.

**Liquidity and Capital Resources**

Our principal capital requirement is to fund ourgrowth, including greenfield projects, strategic acquisitions, the purchase andupgrading of processing equipment, the construction of related facilities andadditional working capital. Historically, we have used cash generated fromoperations and revolving credit borrowings under our credit facilities tofinance our working capital requirements. We have financed acquisitions andcapital additions from the proceeds of long-term indebtedness under our creditfacilities.

We generated net cash from our operating activitiesfor fiscal 2003, 2004 and 2005 in the amounts of $19.1 million, $17.8 millionand $69.6 million, respectively. These variations are attributable mainly tofluctuations in our overall accounts receivable and inventory levels whichreflected the then existing market conditions.

In fiscal 2003, 2004 and 2005 the amounts of net cashwe used for investing activities were $17.0 million, $4.5 million and$20.9 million, respectively. During 2005, the cash we used for investingactivities consisted primarily of $16.4 million for a short term investmentloan in a Canadian corporation which was fully guaranteed by a Canadian bankand has been fully repaid with interest. Our net cash from (used for) financingactivities for fiscal 2003, 2004 and 2005 was $0.1 million, ($13.7) million and($13.1) million, respectively. These differences are mainly due to fluctuationsin our working capital items and repayment of long-term debt.

27

----

We believe that fundsavailable under our credit facilities together with the funds from ouroperations will be sufficient to provide us with the liquidity necessary tofund our anticipated working capital requirements and capital expenditurerequirements over the next 24 months. Our capital requirements are subject tochange as business conditions warrant and opportunities arise. We anticipatespending approximately $16.0 million on certain projects in the current fiscalyear in order to increase capacity at existing facilities. At this time,however, other than the acquisition of land adjoining our existing picklingfacilities in Stoney Creek, Ontario, we have not committed to funding any suchprojects. In connection with our internal and external expansion strategies, wemay from time to time seek additional funds to finance the development of newfacilities and major improvements and additions to processing equipment torespond to our customers’ demands. We plan to refinance our U.S. revolvingcredit and term loan agreements in the normal course when they become due in April 2007.We expect to generate enough cash to repay all of our other long-term debt.

At November 26,2005, our revolving credit facilities consisted of the following:

·       arevolving credit agreement entered into during 2001 by one of our U.S.wholly-owned subsidiaries with a group of U.S. banks providing for borrowings,based upon a formula, of up to $40.0 million through April 7, 2006. On November 22,2005, the term of the agreement was extended for one year through April 7,2007 and the group of banks became one bank.  At November 26, 2005, there was an amountof $38.9 million in available borrowings of which $0 had been drawn down by usand was outstanding under this agreement. The interest rate on borrowings underthe credit agreement is the bank’s prime rate, 7.0% as at November 26,2005, plus a margin varying from 0.0% to 1.25%, or LIBOR, 4.21% as at November 26,2005, plus a margin of 1.25%. Among the restrictive financial covenants containedin the agreement are ratios as to fixed charges, tangible capital base andsenior liabilities to tangible capital base, all of which were respected as at November 26,2005. Borrowings are collateralized by all assets of the U.S. subsidiary havinga carrying value of $191.4 million; and

·       variousdemand revolving credit facilities entered into by certain of our Canadiansubsidiaries with certain Canadian banks, each of which are renegotiated on anannual basis and are available by either prime rate loans or bankers’acceptances, bearing interest at the lenders’ prime rate, 4.75% as at November 26,2005, or bankers’ acceptance rates, respectively, plus a premium varying from0.0% to 0.5%. At November 26, 2005, our outstanding borrowings under theCanadian credit facilities were approximately $2.7 million and were incurred inconnection with working capital requirements arising in the ordinary course ofbusiness. Each of these credit facilities is secured by inventories, movablehypothecs covering the universality of present and future book debts and anegative pledge on certain assets of each of the entities which is a borrowerunder its respective revolving credit agreement.

There are no crosscollateralizations among the various Canadian credit facilities or between theCanadian credit facilities and the U.S. credit facility.

At November 26,2005, our long-term debt consisted of the following:

·       amortgage loan amounting to $4.0 million, bearing interest at a rate of 5.75%,maturing on October 22, 2018, repayable in monthly capital installments of$0.04 million, secured by a first priority hypothec (or mortgage) on the landand building of one of our wholly-owned Canadian subsidiaries, having acarrying value of $8.3 million as at November 26, 2005, and an annualprepayment option of 15% of the outstanding loan balance each year;

·       a$53.0 million term loan agreement entered into during 2001 by one of ourwholly-owned U.S. subsidiaries with a group of U.S. banks maturing on April 7,2006, of which $40.9 million was outstanding at November 26, 2005. On November 22,2005, the term of the agreement was extended for one year through April 7,2007 and the group of banks became one bank. The interest rate on the term loanis the bank’s prime rate, 7.0% as at November 26, 2005, plus a marginvarying from 

28

----

0.125% to 1.375%,or LIBOR, 4.21% as at November 26, 2005, plus a margin varying from 1.375%to 2.625%. Among the restrictive financial covenants contained in the agreementare ratios as to fixed charges, tangible capital base and senior liabilities totangible capital base, all of which were respected as at November 26,2005. The term loan is collateralized by assets of that U.S. subsidiary havinga carrying value of $191.4 million. As required by the term loan agreement, theU.S. subsidiary entered into an interest rate swap agreement in April 2001to fix the interest rate at 5.27% plus the applicable margin on borrowings upto $20.0 million through April 18, 2006. As at November 26, 2005, theinterest rate on $20.0 million was 6.65% and the effective interest rate on theexcess was 5.68%. See “—Hedging;” and

Our credit facilitiescontain various restrictive covenants which require us to maintain minimum networth levels, certain financial ratios and limitations on dividends and capitalexpenditures. As at November 26, 2005, we were in compliance with all suchrestrictive covenants. Our credit facilities restrict our ability to receivedividends and interest from our subsidiaries.

As at November 26,2005, we had $0.1 million outstanding under various letters of credit.

Thefollowing loans were repaid during fiscal 2005:

·       Loansfrom a major shareholder and a director, amounting to $0.9 million, which boreinterest at Royal Bank of Canada’s prime rate, plus a premium of 0.75%;

·       Creditfacility amounting to $1.8 million, of which an amount of approximately $1.2million bore interest at a rate of 6.4% plus a premium varying from 0.0% to0.75%, an amount of $0.3 million bore interest at a rate of 8.0% plus a premiumvarying from 0.0% to 0.75% and an amount of $0.3 bore interest at a rate of7.97% plus a premium varying from 0.0% to 0.75%; and

·       Advancesby a former employee of one of our Canadian subsidiaries amounting to $0.7million, which bore interest at   RoyalBank of Canada’s prime rate, plus a premium of 0.5%.

**Off-balanceSheet Arrangements**

As at and for the yearended November 26, 2005, we had no off-balance sheet arrangements that hador are reasonably likely to have a material current or future affect on our financialcondition, revenues or expenses, liquidity, capital expenditures or capitalresources.

**TabularDisclosure of Contractual Obligations**

Asummary of the payments due under our debt and other contractual obligations asat November 26, 2005 is as follows:

| ** **                                            | ** ** | **Payments due by period**              | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                            | ** ** | **Total**                                              | ** ** | **Less than  1 year** | ** ** | **1 to 3 years** | ** ** | **3 to 5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                                            | ** ** | **(In thousands of U.S. dollars)** | ** ** |
| Long-term debt                                        |       | $                                                      | 44,860     |   |   | $ | 3,078 |   |   |   | $ | 39,061 |   |   |   | $ | 856 |   |   |   | $ | 1,865 |   |   |
| Interest payments  on fixed rate long-term debt  |       | 5,231                                                  |       |   | 3,080 |   |   |   | 1,339 |   |   |   | 342 |   |   |   | 470 |   |   |
| Interest payments  on variable rate debt (1)          |       | 164                                                    |       |   | 164 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Operating leases                                      |       | 12,083                                                 |       |   | 3,744 |   |   |   | 4,985 |   |   |   | 2,366 |   |   |   | 988 |   |   |
| Purchase  obligations                                 |       | 78,916                                                 |       |   | 78,916 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                                                  |       | $                                                      | 141,254    |   |   | $ | 88,982 |   |   |   | $ | 45,385 |   |   |   | $ | 3,564 |   |   |   | $ | 3,323 |   |   |

----

(1)             For purposes of estimating the total interest paymentson the variable interest rate debt, the payments in the above table werecalculated using the borrowing levels and interest rates in place at the end offiscal 2005.

29

----

The amount of purchaseobligations included in the above table reflects our estimate of steel onorder, in production and unshipped and for which we believe we would have anobligation to pay. Most of our purchase orders may be cancelled without penaltyupon giving sufficient notice. In the normal course of business, we purchaseapproximately $616.0 million of steel per year. We estimate no more thanapproximately $78.9 million of steel purchase orders were outstanding at November 26,2005 in the form of firm purchase orders.

**Effects of Inflation**

Inflation generallyaffects us by increasing the cost of personnel, processing equipment, purchasedsteel and borrowings under our credit facilities and other indebtedness. We donot believe that inflation has had a material effect on our operating incomeover the last three fiscal years. However, inflation has had and could have amaterial effect on our financing costs based on its impact on amounts borrowed,the prime rate and LIBOR.

**Effectsof Foreign Currency Fluctuations**

Although our financial results are reported in U.S.dollars, some of our revenues are derived from sales made by Canadiansubsidiaries into the United States, which are denominated in U.S. dollars, andconverted into Canadian dollars based upon the average monthly exchange rate atthe time of sale. If we are not able to successfully hedge our currencyexposure, fluctuations in the rate of exchange between the Canadian dollar andthe U.S. dollar could have a material effect on our financial condition,results of operations and cash flow. See “Quantitative and QualitativeDisclosures About Market Risk.”

In addition, when weconsolidate the financial statements of our Canadian subsidiaries into suchfinancial statements, they are translated from their functional currency, theCanadian dollar, into the reporting currency, the U.S. dollar. Fluctuations inthe value of the U.S. dollar could materially reduce or increase our results ofoperations and assets and liabilities as reported in our financial statements.

**Hedging**

We formally document all relationships between hedginginstruments and the hedged items, as well as our risk-management objectives andstrategies for undertaking various hedge transactions. We formally assess, bothat the hedge’s inception and on an ongoing basis, whether the derivatives thatare used in hedging transactions are highly effective in offsetting changes incash flows of the hedged items.

We discontinue hedge accounting prospectively when (a) wedetermine that the derivative is no longer effective in offsetting changes inthe cash flows of a hedged item, (b) the derivative expires or is sold,terminated or exercised, or (c) we determine that the designation of thederivative as a hedge instrument is no longer appropriate. In these situationswhere hedge accounting is discontinued, the derivative will be carried at itsfair value on the balance sheet, with changes in its fair value recognized incurrent-period earnings.

We minimize the credit (or repayment) risk in derivativeinstruments by entering into transactions with reputable financial institutionsand we do not hold derivative instruments for trading purposes.

At November 26, 2005, one of our U.S.subsidiaries had an interest rate swap agreement to manage its exposure tointerest rate risk as required under the terms of the term loan agreement. See “—Liquidityand Capital Resources.” This swap possesses a term expiring on April 16,2006 with a fixed pay rate and a receive rate indexed to rates paid on thedebt. This derivative was entered into concurrently with the issuance of thedebt being hedged, at which date, it was designated as a cash flow hedge andits fair value was recognized on the balance sheet. Changes in the fair valueof this derivative are reported as a separate component of shareholders’ equityin accumulated other comprehensive income.

30

----

We utilize forwardcontracts, from time to time, to hedge our exposure to Canadian dollar exchangerate fluctuations in connection with future sales and purchases denominated inU.S. dollars. Forward contracts are entered into with reputable financialinstitutions and we do not enter or hold foreign exchange forward contracts fortrading purposes. There were no forward foreign exchange contracts outstandingat November 26, 2005.

**Changes in Accounting Policies**

The Financial AccountingStandards Board, or FASB, issued revised Statement of Financial AcountingStandard No. 123 or SFAS No. 123 (R)”, *Share-BasedPayment*, in December 2004. SFAS No. 123 (R) requiresall entities to recognize the fair value of share-based payment award (stockcompensation) classified in equity. SFAS No. 123 (R) is effective for theCompany at the beginning of the fiscal year 2006. The requirements of SFAS No. 123(R) will not have an impact on the consolidated financial statementsunless the Company grants new share options to plan participants.

**Applicationof Critical Accounting Policies**

The preparation of our consolidated financialstatements requires us to make estimates and assumptions that affect theamounts reported in the financial statements. The estimates and assumptions arebased on our historical experience and past performance. Actual results coulddiffer from those estimates under different assumptions or conditions. On an ongoingbasis, we monitor and evaluate our estimates and assumptions. The followingcritical accounting policies reflect what we believe require our mostdifficult, subjective or complex judgments:

*Revenuerecognition.**  *Revenuefrom product sales is recognized when there is persuasive evidence of anarrangement, the amount is fixed or determinable, delivery of the product tothe customer has occurred, there are no uncertainties surrounding productacceptance and collection of the amount is considered probable. Title to theproduct generally passes and revenue is recognized upon delivery of the productat the customer’s destination. Sales returns and allowances are treated asreductions to sales and are provided for based on historical experience andcurrent estimates.

We charge the customer for the complete productdelivered to the customer’s designated location and we do not charge separatelyfor shipping and handling costs. Shipping and handling costs are recorded underthe “Delivery” caption on our consolidated statement of operations andcomprehensive income and amounted to $23.4 million for the year ended November 26,2005.

*Goodwill.**  *Following the adoption of Statementof Financial Accounting Standard No. 142, *Goodwilland Other Intangible Assets*, goodwill is no longer amortized but itscarrying value must be tested annually for impairment. For the purpose oftesting goodwill impairment, we and an independent appraiser perform avaluation analysis of the reporting unit annually. The most recent valuationreport indicated that the fair value of the reporting unit exceeds its carryingvalue, including goodwill. Therefore no impairment loss had to be recognized inthe November 26, 2005 consolidated financial statements.

*Allowancefor doubtful accounts.*   We maintain an allowancefor doubtful accounts for estimated losses resulting from the inability of ourcustomers to make required payments. If the financial condition of customerswere to deteriorate, resulting in an impairment of their ability to makepayments, increases to the allowance would be required.

*Incometaxes.*   The provision for income taxes iscomputed on the pretax income of the consolidated subsidiaries located withineach taxing jurisdiction based on the current tax law. Deferred income taxesare provided, based upon currently enacted tax rates, for temporary differencesin the recognition of assets and liabilities on the financial statements andfor income tax purposes.

31

----

Deferred income taxes include the benefit of lossescarried forward when it is reasonably likely that future profits will result.Should the opportunity to realize the benefit of these losses expire, suchamounts would result in additional deferred income tax expense.

No provision has been made for deferred income taxesthat may result from future remittances of approximately $68.0 million ofundistributed earnings of our U.S. subsidiaries as at November 26, 2005.Under current Canadian tax law, we may repatriate undistributed earnings ofsuch U.S. subsidiaries without any income tax effect. However, should werepatriate part or all of the undistributed earnings of our U.S. subsidiaries,a 5% withholding tax would be assessable on that amount.

*Derivatives.*   Wehave designated an interest rate swap agreement to manage our exposure tointerest rate risk as a cash flow hedge. Changes in fair value are reported asa separate component of shareholders’ equity in accumulated other comprehensiveincome. We formally assess, both at the hedge’s inception and on an ongoingbasis, whether the derivatives used in hedging transactions are highlyeffective in offsetting changes in cash flows of the hedged items. Should thishedge cease to be highly effective, any changes in fair value will berecognized in current period earning.

**Trend Information**

During the current, aswell as in our previous quarter, we have seen the reversal of the downwardtrend in steel prices in North America which we had experienced through thefirst three quarters of fiscal 2005. We believe steel prices are now at a moresustainable level. We continue to receive reports of continued strong demand inmany manufacturing industries which should bode well for steel demand and steelprices in the first half of 2006. That being said, given the possible impact ofinterest rates, exchange rates, as well as global events and economic factorson our markets it is difficult to accurately forecast future results. As such,it is not certain that we will be able to maintain our present levels of salesand profitability. However, we do expect current market conditions to continueto produce positive results.

**ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES**

**Directors and Senior Management**

Thefollowing are the members of our board of directors and our executive officers:

| **Name**                         | ** ** | ** ** | ** ** | **Age** | ** ** | **Positions(s) Held**                                      | ** ** |
|----------------------------------|------------|------------|------------|---------|------------|-----------------------------------------------------------------|------------|
| D. Bryan Jones(a)(b)             |       |       | 65         |    |       | Chairman of the Board, Chief Executive Officer and  Director    |       |
| Scott B. Jones                   |       |       | 41         |    |       | President, Secretary and Director                               |       |
| Christopher H. Pickwoad(b)       |       |       | 66         |    |       | Executive Vice President, Chief Financial Officer  and Director |       |
| Robert D. Taberner               |       |       | 54         |    |       | Vice President and General Manager—Nova Steel,  Ontario    |       |
| Stephen D. Shaw                  |       |       | 58         |    |       | President and Chief Operating Officer—American Steel       |       |
| Roger Daigneault                 |       |       | 49         |    |       | Vice President, Corporate Purchasing                            |       |
| Peter V. Balboni                 |       |       | 59         |    |       | Vice President, Finance and Treasurer—American Steel       |       |
| Michael L. Richards              |       |       | 66         |    |       | Director                                                        |       |
| John LeBoutillier, C.M.(a)(b)(c) |       |       | 61         |    |       | Director                                                        |       |
| Alexander Adam(a)(c)             |       |       | 61         |    |       | Director                                                        |       |
| Robert  Panet-Raymond(c)         |       |       | 63         |    |       | Director                                                        |       |

----

(a)              Member of Compensation Committee.

(b)             Member of the Nominating Committee.

(c)              Member of the Audit Committee.

32

----

*D. Bryan Jones*has over 44 years of experience in the selling,marketing and production of flat rolled products. In 1967, he and a partnerformed St. Laurent Steel, and he served for many years as its vice presidentand general manager until the time of its sale to a major North American steelservice center. In 1979 he incorporated Nova Steel Ltd. He has served aspresident and chief executive officer and as a director of Nova Steel Ltd., orNova, since its founding. He has been our chairman of the board and chiefexecutive officer since April 4, 1997.

*Scott B. Jones*has 18 years of experience in the steelindustry and has been employed by us since 1991. He has been a vice president,secretary and a director on our board since April 4, 1997. He wasappointed president by the board of directors on September 30, 2005. He isthe son of D. Bryan Jones.

*Christopher H. Pickwoad* has 25 years of experience in the steel industry andhas been employed by us since 1982. Prior to 1982, he was a partner of a firmof chartered accountants. Mr. Pickwoad has been our executive vicepresident, chief financial officer and a director on our board since April 4,1997. He is also a director of Primary Energy Recycling Corporation.

*Robert D. Taberner* has 26 years of sales and marketing experience inthe Ontario flat rolled market. He has served as the vice president and generalmanager of our Ontario facilities since 1992.

*Stephen D. Shaw*has 37 years of experience in the steelindustry, the last 22 years of which were in steel distribution in Canada andthe United States. He joined us in August 1997.

*Roger Daigneault*has been employed by us since 1984. He wasemployed by Ispat Sidbec (now Mittal Canada Inc.)  for eight years in sales and production priorto joining us.

*Peter V. Balboni* joined American Steel in 1975 and has served as itsvice president, finance and treasurer since 1980.

*Michael L. Richards* has been a director on our board since September 24,1997. Mr. Richards is a senior partner in the law firm of Stikeman ElliottLLP, our Canadian counsel. He is also a director of Intertape Polymer GroupInc.

*John LeBoutillier, C.M.*, has been a director on our board since September 24,1997. Mr. LeBoutillier has been chairman of the board of IndustrialAlliance, Insurance and Financial Services Inc. since May 2005. Mr. LeBoutillieris chairman of the board and president of Mazarin Inc./Asbestos CorporationLimited,  chairman of the board ofRoctest Ltd., and a director of Shermag Inc. and Semafo Inc. He was formerly,from November 1996 to March 2000, president and chief executive officer of Iron Ore Company of Canada,Canada’s largest iron ore producer, and prior to November 1996, presidentand chief executive officer of Sidbec-Dosco Inc. (now Mittal Canada Inc.),Canada’s fourth largest steel manufacturer.

*Alexander Adam*has been a director on our board since April 1,2003. Mr. Adam is also a director of Gennum Corporation and serves on theadvisory board of Thomson-Gordon Inc. From June 1996 to August 2002, Mr. Adamwas the president and chief executive officer of Algoma Steel Inc. Hepreviously held executive positions at Toyota Motor Manufacturing Canada Ltd.(TMMC) and Stelco Inc.

*Robert Panet-Raymond*wasappointed to our board by our board of directors and has been on our boardsince June 29, 2005. From 1992 to 2004 Mr. Panet-Raymond was a senior vice president with the CanadianImperial Bank of Commerce. He is also a director of Colabor Income Trust andTecsult Inc.

**Management Compensation**

During fiscal 2005, theaggregate compensation we paid for services rendered by the named executiveofficers as a group totaled $9.2 million. One of our executive officers receives,as a bonus, a certain percentage of pre-tax earnings of the operations that hemanages, which percentage is determined by 

33

----

negotiationbetween that officer and us. This bonus is included in the aggregatecompensation disclosed in this paragraph.

**Compensation of Directors**

Our non-employee directorsare remunerated for their services with an annual retainer fee and anattendance fee for each meeting of the board of directors or meeting of acommittee thereof attended. In fiscal 2005, we paid each of our non-employeedirectors an annual fee of $8,000, plus a fee of $1,500 for each board ofdirectors meeting and each committee meeting attended, except that the chairmenof committees of the board of directors were paid a fee of $3,000 for eachmeeting at which they acted as chair. The meeting fee is equivalent to 50% ofthe above for meetings held by telephone conference. In fiscal 2005, paymentsmade by us to the non-employee directors for their services as directorsamounted to $0.1 million. We also reimbursed out-of-pocket expenses related tothe directors’ attendance at such meetings.

**Board Practices**

Our board of directors currently consists of sevenmembers. Our directors are elected in rotation so that at the first meeting ofour shareholders for the election of directors, one-third of the number ofdirectors to be elected were elected to hold office until the first annualmeeting of shareholders held after that meeting, one-third of the number ofdirectors to be elected were elected to hold office until the second annualmeeting of our shareholders held after that meeting and the balance of thenumber of directors to be elected were elected to hold office until the thirdannual meeting of shareholders held after that meeting. At each subsequentannual meeting, directors are elected to fill the positions of those directorswhose term of office has expired. Unless otherwise removed from the board,elected directors hold office until the third annual meeting after theirelection. A director whose term of office has expired may, if qualified, bere-elected. In addition, our directors may at a meeting of the board appointone or more additional directors to our board who shall hold office for a termexpiring not later than the close of the next annual meeting of ourshareholders (unless such directors are then elected as directors by theshareholders, in which case they shall be elected to hold office until thesecond annual meeting of shareholders held after the meeting of shareholders atwhich they were so elected), but the total number of directors so appointed maynot exceed one-third of the number of directors elected at the previous annualmeeting of our shareholders.

The term of office of D. Bryan Jones, JohnLeBoutillier and Robert Panet-Raymond will expire at our annual meeting ofshareholders to be held on April 3, 2006 or at such other time as theirsuccessors are elected or appointed. The term of office of Christopher H.Pickwoad and Michael L. Richards will expire at our 2007 annual meeting ofshareholders or at such other time as their successors are elected orappointed. The term of office of Scott B. Jones and Alexander Adam will expireat our 2008 annual meeting of shareholders or at such other time as theirsuccessors are elected or appointed.

We do not have any servicecontracts with any directors providing for any benefits to them upon theirtermination of employment or term of office.

**Board Committees**

To date, our boardof directors has established three committees:

·       aCompensation Committee, which is currently comprised of Messrs D. Bryan Jones,John LeBoutillier and Alexander Adam, and whose purpose is to makerecommendations concerning salaries and incentive compensation for executiveofficers and to administer our share option plan;

34

----

·       anAudit Committee, which is currently comprised of Messrs John LeBoutillier,Alexander Adam and Robert Panet-Raymond, and whose purpose is to review ourannual and quarterly results, our communications with shareholders, the scopeof the audit and other services provided by our independent auditors and torecommend to the board the selection and remuneration of the auditors, andwhich operates in accordance with the terms of a charter that complies with theNasdaq’s listing standards; and

·       aNominating Committee, which is currently comprised of Messrs D. Bryan Jones,Christopher H. Pickwoad and John LeBoutillier, and whose purpose is to adviseand make recommendations to the board of directors concerning the selection ofcandidates as nominees for directors.

**Employees**

As at November 26, 2005, we had approximately1,089 employees, of whom 29.1% working at 11 of our 23 facilities are organizedby the United Steelworkers, the Teamsters, the Sheet Metal Workers andindependent employees associations. The labor contract with United SteelWorkers covering 76 employees at our Granby facility has expired on February 21,2006 and is currently being renegotiated. The labor contract with the Teamsterscovering 30 employees at one of our LaSalle facilities will expire on December 1,2006. We do not presently anticipate that any work stoppages will occurprior to renegotiation of these contracts.  We believe that our relations with ouremployees are good, which is supported by our low rate of employee turnover. Wehave not experienced a work stoppage by any of our unions or employeeassociations in over 20 years.

Our approximately 1,089employees are categorized as follows: production and warehouse employees (68%),sales personnel (12%), truck drivers (6%) and administrative employees (14%).

**Share Ownership**

Thefollowing table sets forth certain information with respect to the ownership ofour common shares as of February 22, 2006 by (i) each of our directorsand executive officers, and (ii) all directors and executive officers as agroup. Unless otherwise indicated, the persons named below have the sole votingand investment power with respect to the number of common shares set forthopposite their names.

| **Names of Beneficial Owners**    | ** ** | ** ** | ** ** | **Number of Common Shares  Beneficially Owned** | ** ** | **Ownership Percentage** | ** ** |
|--------------------------------------------------|------------|------------|------------|---------------------------------------------------------------------|------------|-------------------------------|------------|
| D. Bryan Jones                                   |       |       | 5,675,426  | (a)                                                                 |       |                          | 54.3       | % |   |
| Scott B. Jones                                   |       |       | 1,385,282  | (b)                                                                 |       |                          | 13.3       | % |   |
| Christopher H.  Pickwoad                         |       |       | 30,577     |                                                                |       |                          | *          |   |   |
| Michael L.  Richards                             |       |       | 7,300      |                                                                |       |                          | *          |   |   |
| John  LeBoutillier, C.M.                         |       |       | 10,300     |                                                                |       |                          | *          |   |   |
| Alexander Adam                                   |       |       | 1,000      |                                                                |       |                          | *          |   |   |
| Robert  Panet-Raymond                            |       |       | 1,000      |                                                                |       |                          | *          |   |   |
| All directors and  executive officers as a group |       |       | 7,110,885  |                                                                |       |                          | 68.1       | % |   |

----

*                     Less than 1%.

(a)              Includes 4,491,669 shares owned by 3349942 Canada Inc.,a Canadian corporation, all the shares of which are owned by D. BryanJones and the Jones Family Trust (a trust established under the laws of theProvince of Ontario), 910,217 shares owned by 3414116 Canada Inc., awholly-owned subsidiary of 3349942 Canada Inc., and 33,136 shares owned by4273281 Canada Inc., a Canadian corporation, all the shares of which are ownedby 3414116 Canada Inc. and 3414124 Canada Inc.

(b)             Includes 1,104,966 shares owned by 3195538 Canada Inc.,a Canadian corporation, all the shares of which are owned by Scott B. Jones, 257,935shares owned by 3414124 Canada Inc., a wholly-owned subsidiary of 3195538Canada Inc., and 6,136 shares owned by 4273281 Canada  Inc., a Canadian corporation, all the sharesof which are owned by 3414116 Canada Inc. and 3414124 Canada Inc.

35

----

**Share Option Plan**

*The Novamerican Steel Inc. 1997Share Option Plan provides for the grant of incentive stock options, or ISOs,as defined in Section 422 of the Internal Revenue Code of 1986, asamended, or the Code, nonqualified stock options, or NSOs, and other rights. Wehave reserved 1,500,000 common shares for issuance under our share option plan.Administration of our share option plan has been assigned to our CompensationCommittee, a committee consisting of two or more directors of the Company, a majorityof whom are disinterested. The Compensation Committee has, subject to the termsof our share option plan, the authority to grant awards under our share optionplan, to construe and interpret our share option plan and to make all otherdeterminations and take any and all actions necessary or advisable for theadministration of our share option plan.*

Our key employees, executive officers, directors andother individuals who render services of special importance to our or oursubsidiaries’ management, operation and development are eligible to receiveawards under our share option plan, but only our employees are eligible toreceive ISOs. Options will be exercisable during the period specified by theCompensation Committee in each option agreement and will generally beexercisable in installments pursuant to a vesting schedule that is determinedby the Compensation Committee. Notwithstanding the provisions of any optionagreement, options may, in the discretion of the Compensation Committee, becomeimmediately exercisable in the event of a “change of control” (as defined inour share option plan) and in the event of certain mergers and reorganizations.No option will remain exercisable later than ten years after the date of grant(or five years from the date of grant in the case of ISOs granted to holders ofmore than 10% of the common shares).

The exercise price for ISOs granted under our shareoption plan may be no less than the fair market value of the common shares onthe date of grant (or 110% in the case of ISOs granted to employees owning morethan 10% of the common shares). The exercise price for NSOs and all otherawards granted under our share option plan is set at the discretion of theCompensation Committee.

The Compensation Committee may grant StockAppreciation Rights, or SARs, to our share option plan participants as to suchnumber of common shares and on such terms and conditions as it may determine.SARs may be granted separately or in connection with ISOs or NSOs. Uponexercise of a SAR, the holder is entitled to receive payment equal to theexcess of the fair market value on the date of exercise of the number of commonshares for which the SAR is exercised, over the exercise price for such commonshares under a related option, or if there is no related option, over an amountper common share stated in the written agreement setting forth the terms andconditions of the SAR.

On September 24,1997, options to purchase 750,000 common shares were granted to three of ourexecutive officers at an exercise price of $14.00 per share. All of theseoptions have since been exercised and sold. Such options represent the onlyawards granted under our share option plan. As at February 22, 2006, thereare no awards outstanding under our share option plan.

36

----

**ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTYTRANSACTIONS**

**Major Shareholders**

Thefollowing table sets forth certain information with respect to the ownership ofthe common shares as of February 22, 2006 (except as noted below) by eachperson or entity known by us to beneficially own more than 5% of the commonshares. Unless otherwise indicated, the persons named below have the solevoting and investment power with respect to the number of common shares setforth opposite their names. None of these persons has different voting rightsfrom any other holders of common shares.

| **Names of Beneficial Owners**    | ** ** | ** ** | ** ** | **Number of Common Shares  Beneficially Owned** | ** ** | **Ownership Percentage** | ** ** |
|--------------------------------------------------|------------|------------|------------|---------------------------------------------------------------------|------------|-------------------------------|------------|
| D. Bryan Jones                                   |       |       | 5,675,426  | (a)                                                                 |       |                          | 54.3       | % |   |
| Scott B. Jones                                   |       |       | 1,385,282  | (b)                                                                 |       |                          | 13.3       | % |   |
| Fidelity  Management & Research Company |       |       | 2,216,500  | (c)                                                                 |       |                          | 21.2       | % |   |

----

(a)              Includes 4,491,669 shares owned by 3349942 Canada Inc.,a Canadian corporation, all the shares of which are owned by D. BryanJones and the Jones Family Trust (a trust established under the laws of theProvince of Ontario), and 910,217 shares owned by 3414116 Canada Inc., awholly-owned subsidiary of 3349942 Canada Inc. and 33,136 shares owned by4273281 Canada Inc., a Canadian corporation, all the shares of which areowned by 3414116 Canada Inc. and 3414124 Canada Inc.

(b)             Includes 1,104,966 shares owned by 3195538 Canada Inc.,a Canadian corporation, all the shares of which are owned by Scott B. Jones and257,935  shares owned by 3414124 CanadaInc., a wholly-owned subsidiary of 3195538 Canada Inc. and 6,136 sharesowned by 4273281 Canada Inc., a Canadian corporation, all the shares of whichare owned by 3414116 Canada Inc. and 3414124 Canada Inc.

(c)              Includes 1,250,000 shares as of December 31, 2005,based solely on the most recent Schedule 13G/A filed by FMR Corp. et al. on February 14,2006 and 966,500 shares owned by Pyramis Global Advisers, a FidelityInvestments company.

We believe that over 70% of our common shares are heldin Canada and less than 30% of our common shares are held in the United States.We estimate that we have 13 holders of record in Canada.

We are not aware of anyarrangements at this time, the result of which may at a subsequent date resultin a change in control.

**Shareholder Protection Rights Plan**

We previously maintained ashareholder protection rights plan entitling holders of common shares the rightto purchase additional shares at a predetermined exercise price upon theoccurrence of specified events. This plan expired in September 2002 and ithas not been subsequently renewed or reinstated.

**Related Party Transactions**

A Canadian corporation owned by Scott B. Jones, ourpresident, secretary and one of our directors and the son of D. Bryan Jones,our chairman and chief executive officer, owns four facilities located inCanada comprising a total of 261,700 square feet and leases them to us on atriple-net basis at an aggregate annual rent of approximately $1.3 million.Another Canadian corporation 50% indirectly owned by Scott B. Jones and 50%indirectly owned by a party  unrelated tous, owns a facility located in Canada comprising a total of 63,100 square feetand leases it to us on a triple-net basis at an aggregate annual rent ofapproximately $0.3 million. Another Canadian corporation 50% indirectly ownedby Scott B. Jones and 50% by a party unrelated to us owns a facility located inCanada comprising a total of 118,300 square feet and leases it to us on atriple-net basis at an aggregate annual rent of approximately $0.4 million. Allthe facility leases expire at varying dates between May 31, 2007, and December 31,2011, and all but one are subject to one or two five-year renewal options. See “Informationon the company—Property, Plants and Equipment.”

37

----

A Canadian corporation owned by Scott B. Jones owns ninetrailers which it leases to us at an annual aggregate rent of $0.05 million.This corporation also provided transportation arrangements for us in an amounttotaling $7.5 million during fiscal 2005.

Michael L. Richards has been one of our directors sinceSeptember 24, 1997. Mr. Richards is a senior partner in the law firmof Stikeman Elliott LLP, our Canadian counsel. For the fiscal year ended November 26,2005, fees and expenses paid to Stikeman Elliott LLP amounted to approximately$0.6 million, which included certain fees and expenses relating to theCompany’s secondary issue in May 2005.

We have adopted apolicy that all transactions with any of our directors or officers, or with anyperson or entity that beneficially owns or exercises control or direction overshares carrying more than 5% of the voting rights attached to all of ourshares, or any of their affiliates, shall be:

·       subjectto approval by a majority of the independent members of our board of directors;

·       onterms no less favorable to us than could be obtained from unaffiliated parties;and

·       reasonablyexpected to benefit us. The terms of the above described leases and serviceagreements have been unanimously approved by the independent members of ourboard of directors in accordance with that policy. In the case of serviceagreements, such approval is subject to certain terms and conditions, whichmanagement believes are being met.

**ITEM8 FINANCIAL INFORMATION**

**ConsolidatedFinancial Statements and Other Financial Information**

See Item 18 for theFinancial Statements.

**Legal Proceedings**

We are a party to variousclaims and legal actions that we believe are ordinary in nature and incidentalto the operation of our business or are covered by insurance. In our opinion,the outcomes of these proceedings are not likely to have a material adverseeffect upon our business, results of operations or financial condition. Seealso “Key Information—Risk Factors—Environmental Matters.”

**Dividend Policy**

We have never declared orpaid dividends on our common shares. Further, we do not anticipate payingdividends on our common shares for the foreseeable future. Rather, at present,we intend to retain any future earnings to finance our operations and anyexpansion.

**Export Sales**

During 2005, our exportsales amounted to $33.9 million, or 4.1%, of net sales. See “FinancialStatements—Note 20.”

**Significant Changes**

No significant changeshave occurred since the date of our consolidated  financial statements through the date of thisdocument.

38

----

**ITEM 9 THE OFFERAND LISTING**

**Offer and Listing Details**

Ourcommon shares trade on Nasdaq under the symbol “TONS.”  The following table shows, for the last fivefiscal years, the high and low prices for our common shares as reported onNasdaq.

| **Period** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|------------|------------|----------|------------|---------|------------|
| ** ** | ** ** | **$**      | ** ** | **$**    | ** ** |
| 2001       |       | 6.00       |       | 4.23     |       |
| 2002       |       | 10.02      |       | 2.05     |       |
| 2003       |       | 10.19      |       | 5.49     |       |
| 2004       |       | 31.74      |       | 8.52     |       |
| 2005       |       | 90.27      |       | 26.55    |       |

 

Thefollowing table shows, for the last two fiscal years, the quarterly high andlow prices for our common shares as reported on Nasdaq.

| **Period**               | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------|------------|------------|------------|----------|------------|---------|------------|
| ** **               | ** ** | **$**      | ** ** | **$**    | ** ** |
| First Quarter 2004  |       | 18.00      |       | 8.52     |       |
| Second Quarter 2004 |       | 24.05      |       | 14.50    |       |
| Third Quarter 2004  |       | 27.31      |       | 19.35    |       |
| Fourth Quarter 2004 |       | 31.74      |       | 20.75    |       |
| First Quarter 2005  |       | 89.16      |       | 31.82    |       |
| Second Quarter 2005 |       | 90.27      |       | 32.37    |       |
| Third Quarter 2005  |       | 39.94      |       | 26.55    |       |
| Fourth Quarter 2005 |       | 42.00      |       | 28.80    |       |

 

Thefollowing table shows, for the last six months, the monthly high and low pricesfor our common shares as reported on Nasdaq.

| **Period**          | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------|------------|------------|------------|----------|------------|---------|------------|
| ** **          | ** ** | **$**      | ** ** | **$**    | ** ** |
| August 2005    |       | 34.59      |       | 29.00    |       |
| September 2005 |       | 34.89      |       | 28.80    |       |
| October 2005   |       | 39.91      |       | 34.14    |       |
| November 2005  |       | 42.00      |       | 36.08    |       |
| December 2005  |       | 41.73      |       | 34.63    |       |
| January 2006   |       | 43.71      |       | 36.55    |       |

 

**Markets**

Our common shares currently trade on the Nasdaq wherethey were initially traded on October 31, 1997, in connection with ourinitial public offering. Our common shares are not traded on any otherexchanges. Prior to October 31, 1997, there was no public market for suchshares.

39

----

**ITEM 10 ADDITIONAL INFORMATION**

**Certificateand Articles of Incorporation**

We have been incorporated under, and are subject tothe provisions of, the Canada Business Corporations Act, or the CBCA. Ourarticles of incorporation, or Articles, do not restrict the type of businessthat we may carry on.

*Commonshares.*   Holders of our common shares areentitled to one vote for each share held on all matters submitted to a vote ofshareholders, except matters submitted to a vote of another class or series ofshares. Holders of our common shares do not have cumulative voting rights. Holdersof our common shares are entitled to receive such dividends, if any, as may bedeclared by our board of directors out of funds legally available therefore. Uponour liquidation, dissolution or winding-up, the holders of our common sharesare entitled to receive our assets. Holders of our common shares have nopreemptive, subscription, redemption or conversion rights. The rights of theholders of our common shares are subject to the rights of the holders of any ofour preferred shares which may, in the future, be issued. Our outstandingcommon shares are fully paid and non-assessable.

*Preferredshares.*   Our board of directors is authorized toissue preferred shares, in one or more series, and to fix the rights,privileges, restrictions, conditions and limitations, and the number of sharesconstituting any series or the designations of such series, without furthervote or action by the shareholders. Because the terms of the preferred sharesmay be fixed by the board of directors without shareholder action, thepreferred shares could, subject to regulatory policies, be issued quickly  with terms calculated to defeat an attemptedtakeover of our company or to make the removal of our management more difficult.Under certain circumstances, this could have the effect of decreasing themarket value of our common shares. Any preferred shares, if issued, would ranksenior to our common shares as to the distribution of our assets in the eventof a liquidation, dissolution or winding-up of our company. We have no presentplans to issue any preferred shares.

*Changesto the rights of shareholders.*   We may amend, byspecial resolution, our Articles to change the rights attached to our commonshares. A special resolution is a resolution passed by not less than two-thirdsof the votes cast by shareholders who voted in respect of that resolution orsigned by all the shareholders entitled to vote on that resolution.

*Shareholders’meetings.**  *Theannual meeting of our shareholders shall be convened at such day in each yearand at such time as the board of directors may by resolution determine. Othermeetings of the shareholders may be convened by order of our chairman of theboard, the president or a vice president who is a director, or by our board ofdirectors; such meetings to be held at such time and place as may be specifiedin such order. Shareholders holding between them not less than 5% of theoutstanding common shares may requisition a special meeting of shareholders.

*Quorumof shareholders.*   One person present and holdingor representing by proxy at least one of our issued voting shares shall be aquorum of any meeting of shareholders for the choice of a chairman of themeeting and for the adjournment of the meeting; for all other purposes a quorumfor any meeting (unless a different number of shareholders and/or a differentnumber of shares are required to be represented by the CBCA or by the Articlesor by any other by-law) shall be persons present being not less than two innumber and holding or representing by proxy at least twenty percent of theshares entitled to vote at such meeting. If a quorum is present at the openingof a meeting of the shareholders, the shareholders present may proceed withbusiness of the meeting, notwithstanding that a quorum is not presentthroughout the meeting. Where we have only one shareholder or only one holderof any class or series of shares, the shareholder present in person or by proxyconstitutes a meeting.

40

----

We have received an exemption from Nasdaq’s Quorumrequirement of Rule 4350(f) “Qualitative Listing Requirements forNasdaq National Market and Nasdaq Small Cap Market Issuers Except for LimitedPartnerships.”

*Votingrights of non-resident shareholders.**  *Neither Canadian law nor ourorganizational documents restrict or prohibit the right of non-resident orforeign shareholders to hold or exercise voting rights of our common shares. See“Exchange Controls”.

*Changein control.*   Our Articles could make the removalof incumbent officers and directors and the acquisition of our company by meansof a tender offer, proxy contest or otherwise, more difficult due to the factthat we have a staggered board of directors. See “Directors, Senior Managementand Employees—Board Practices”. These provisions may encourage persons seekingto acquire control of our company to negotiate with us first.

*Numberof directors, residency requirement, vacancies and removal.*   TheArticles provide that there shall be a minimum of three directors and a maximumof 15 directors and that the board of directors shall be elected and shallretire in rotation. The exact number of directors is fixed by the board ofdirectors, subject to the requirement of the CBCA that we have a minimum ofthree directors, at least two of whom are not officers or employees. The CBCAprovides that one quarter of the directors of a corporation must be “residentCanadians,” defined to include Canadian citizens and permanent residentsordinarily resident in Canada.

The CBCA provides that a vacancy on the board ofdirectors may be filled by a quorum of directors, except for a vacancyresulting from an increase in the number or minimum number of directors or froma failure to elect the number or minimum number of directors required by theArticles.

The directors of a CBCA corporation may be removedfrom office by a resolution passed by a majority of votes cast at a specialmeeting of the shareholders, subject to any applicable class or cumulativevoting rights.

*Limitationson liability of officers and directors.*   The CBCAprovides that a corporation may indemnify, and our By-laws provide that weshall indemnify, in each case except in respect of an action by or on ourbehalf, or by or on the behalf of a body corporate of which we are or were ashareholder or creditor to procure a judgment in its favor, an officer or adirector, a former officer or director or a person who acts or acted at ourrequest as a director or officer of a body corporate of which we are or were ashareholder or creditor, and his heirs and legal representatives, against allcosts, charges and expenses, including an amount paid to settle an action orsatisfy a judgment, reasonably incurred by him in respect of any civil,criminal or administrative action or proceeding to which he is made a party byreason of his being or having been a director or officer of our company or suchbody corporate, if he acted honestly and in good faith with a view to our bestinterests, and, in the case of a criminal or administrative action orproceeding that is enforced by a monetary penalty, he had reasonable groundsfor believing that his conduct was lawful.

*Amendment of certainprovisions of the Articles and fundamental changes.*   Inaccordance with the provisions of the CBCA, an amendment to our Articles(except in limited circumstances) and the merger, consolidation or dissolutionof our company, such event being a fundamental change, will require theapproval of not less than two-thirds of the votes cast by the shareholdersvoting in person or by proxy at a special meeting of the shareholders. OurBy-laws provide that one person present and holding or representing by proxy atleast one of our issued voting shares shall be a quorum of any meeting of theshareholders for the choice of a chairman of the meeting and for theadjournment of the meeting; for all other purposes a quorum for any meeting(unless a different number of shareholders and/or a different number of sharesare required to be represented by the CBCA or by our Articles or our By-laws)shall be 

41

----

persons presentbeing not less than two in number and holding or representing by proxy at least20% of the shares entitled to vote at such meeting.

**Material Contracts**

On November 22, 2005 American Steel and AluminumCorporation, Nova Tube and Steel, Inc. and Nova Tube Indiana, LLC, asborrowers, and Integrated Steel Industries, Inc., as guarantor, signed anagreement with Bank of America, N.A. as lender, to amend the maturity date ofthe existing U.S. revolving credit and term loan agreements from April 7,2006 to April 7, 2007. The applicable amendment fee was $40,000.

There were no othermaterial contracts.

**Exchange Controls**

There are currently no laws, decrees, regulations or otherlegislation in Canada that restricts the export or import of capital or thataffects the remittance of dividends, interest or other payments to non-residentholders of our securities other than withholding tax requirements. There is nolimitation imposed by Canadian law or by our articles of incorporation or ourother organizational documents on the right of a non-resident of Canada to holdor vote our common shares, other than as provided in the Investment Canada Act,as amended by the North American Free Trade Agreement (NAFTA) ImplementationAct (Canada) and the World Trade Organization (WTO) Agreement ImplementationAct.

The Investment Canada Actrequires notification and, in certain cases, advance review and approval by theGovernment of Canada of the acquisition by a “Non-Canadian” of “control of aCanadian business,” all as defined in the Investment Canada Act. Generally, thethreshold for review will be higher in monetary terms for a member of the WTOor NAFTA.

**Taxation**

Purchasers of our common sharesshould consult their own tax advisers with respect to their particularcircumstances and with respect to the effects of state, local or foreign(including Canadian) income tax laws to which they may be subject.

*Canadian federalincome tax consequences*

The following summarizes the material Canadian federalincome tax consequences relevant to an investment in our common shares byindividuals and corporations who, at all relevant times, are residents, ordeemed residents, of the United States and are not residents, or deemed notresidents, of Canada for the purposes of the Convention between Canada and theUnited States of America with Respect to Taxes on Income and on Capital, asamended, hereinafter referred to as the Convention, who, at all relevant times,hold their common shares as capital property and, at all relevant times, dealat arm’s length with us for the purposes of the Income Tax Act (Canada),hereinafter referred to as the Canadian Tax Act, and who do not use or hold andare not deemed to use or hold such shares in connection with a business carriedon through a permanent establishment or a fixed base in Canada, suchindividuals and corporations being hereinafter referred to as U.S. Residents.Our common shares will generally be considered to be capital property to a U.S.Resident unless they are held as inventory in the course of carrying on abusiness or were acquired in a transaction considered to be an adventure in thenature of trade. This summary is based upon the current provisions of theCanadian Tax Act, the regulations thereunder and the provisions of theConvention as in effect on the date hereof. Other than specific proposals toamend the Canadian Tax Act and regulations thereunder publicly announced by theMinister of Finance of Canada, prior to the date hereof, this summary does nottake into account or anticipate any changes in law, whether by 

42

----

legislative or judicialaction, nor does it take into account tax laws of any province or territory ofCanada or of any jurisdiction outside Canada.

**This summary is of a general nature only and isnot intended to be, nor should it be construed to be, legal or tax advice toany particular U.S. resident. Accordingly, U.S. residents should consult withtheir own tax advisors for advice with respect to their own particularcircumstances.**

A U.S. Resident will not be subject to income tax inCanada on any capital gain realized on a disposition of our common shares,provided that such shares do not constitute “taxable Canadian property” of theU.S. Resident at the time of the disposition for purposes of the Canadian TaxAct. So long as such shares are listed on a prescribed stock exchange (whichincludes Nasdaq), such shares will not generally constitute taxable Canadianproperty of a U.S. Resident unless, at any time during the five-year periodimmediately preceding the disposition, the U.S. Resident, persons with whom theU.S. Resident did not deal at arm’s length, or any combination thereof, owned25% or more of the issued shares of any series or class of our share capital.If such shares are considered taxable Canadian property to a U.S. Resident, theConvention will generally exempt that U.S. Resident from tax under the CanadianTax Act in respect of a disposition of such shares provided the value of theshares issued by us is not derived principally from real property situated inCanada. A U.S. Resident who disposes of our common shares that are taxableCanadian property will be required to fulfill the requirements of Section 116of the Canadian Tax Act unless such shares are listed on a prescribed stockexchange (which includes Nasdaq) at the time of the disposition.

Dividends paid or creditedon our common shares, or deemed to be paid or credited, to a U.S. Resident inrespect of such shares will generally be subject to Canadian withholding tax onthe gross amount of such dividends. Currently, under the Convention, the rateof Canadian withholding tax which would apply on dividends paid by us to a U.S.Resident is (i) 5% with respect to dividends paid if the beneficial ownerof the dividends is a company which owns at least 10% of our voting shares, and(ii) 15% in all other cases.

***U.S.federal income tax considerations***

*General.*   Thefollowing summarizes the material U.S. federal income tax consequences to U.S.Holders of owning and disposing of our common shares. The U.S. federal incometax discussion is based on (i) provisions of the Internal Revenue Code of1986, as amended, hereinafter referred to as the Code, and U.S. TreasuryRegulations thereunder, existing, temporary, proposed, and administrative andjudicial interpretations thereof, on the date hereof, and such authorities maybe repealed, revoked, modified or subject to differing interpretations,possibly on a retroactive basis, so as to result in United States federalincome tax consequences different from those discussed below, (ii) provisionsof the Convention as in effect on the date hereof, and (iii) in part,representations made by us. A “U.S. Holder” is a beneficial owner of our commonshares who or which is, for U.S. federal income tax purposes, (i) acitizen or resident of the United States, including an alien individual who isa lawful permanent resident of the United States or who meets the substantialpresence residency test under the U.S. federal income tax laws, (ii) acorporation or other entity treated as a corporation for U.S. federal incometax purposes, that is created or organized in or under the laws of the UnitedStates, any of the fifty states or the District of Columbia, unless otherwiseprovided by Treasury regulations, (iii) an estate the income of which issubject to U.S. federal income taxation regardless of its source, or (iv) atrust if a court within the United States is able to exercise primarysupervision over the administration of the trust and one or more United Statespersons have the authority to control all substantial decisions of the trust,or electing trusts in existence on August 20, 1996 to the extent providedin Treasury regulations. If a partnership or other entity treated as apartnership for U.S. federal income tax purposes holds our common shares, thetax treatment of a partner will generally depend upon the status of the partnerand the activities of the partnership. Notwithstanding the foregoingdefinition, a holder’s status as a U.S. Holder might be overridden under theprovisions of an 

43

----

applicable tax treaty. A “Non-U.S.Holder” is a holder, other than an entity classified as a partnership for U.S.federal income tax purposes, that is not a U.S. Holder. This summary is subjectto any changes to U.S. law or practice occurring after the date hereof,possibly with retroactive effect, including any change in applicable tax treatyprovisions, or different interpretations. Furthermore, this discussion islimited to holders of our common shares who hold such shares as a capital assetwithin the meaning of Section 1221 of the Code.

**This is not an exhaustive discussion of allpossible tax considerations. In particular, it does not discuss estate and gifttaxes, taxes imposed on us, and the consequences for U.S. Holders subject tospecial tax rules, including U.S. expatriates, certain Non-U.S. Holders (suchas controlled foreign corporations and passive foreign investment companies),dealers in securities, partnerships, insurance companies, regulated investmentcompanies, tax-exempt organizations, banking and financial institutions,persons subject to the alternative minimum tax, persons whose functionalcurrency is not the U.S. dollar, persons holding our common shares as part of ahedging, conversion or straddle transaction, persons who directly or indirectlyor through certain related persons own more than 10% of our capital or votingpower and persons carrying on a trade or business in Canada through a permanentestablishment or fixed base for the purpose of which our common shares havebeen acquired or held. Because of these limitations, we recommend thatprospective purchasers of our common shares in this offering consult their owntax advisors regarding all the tax consequences particular to them of theirownership and disposition of such common shares.**

*Generaltaxation of distributions.*   For U.S. federalincome tax purposes, the gross amount of a distribution by us to U.S. Holders(including any amounts of Canadian tax withheld) will be treated as dividendincome to the extent paid out of our current or accumulated earnings andprofits (as determined for U.S. federal income tax purposes). Dividends paid byus generally will be treated as foreign source dividend income and will not beeligible for the dividends received deduction generally available for UnitedStates corporations under the Code. If a dividend is paid in Canadian dollarsor other property, the amount includible in income will be the U.S. dollarvalue of the Canadian dollars or the fair market value of the other propertydistributed, as determined on the date of distribution to a U.S. Holder or to anominee, custodian or other agent of such U.S. Holder. A U.S. Holder will havea tax basis in such Canadian dollars or other property for U.S. federal incometax purposes equal to their U.S. dollar value on the date of receipt. Anysubsequent gain or loss in respect of such Canadian dollars arising fromexchange rate fluctuations will be ordinary income or loss. If a U.S. Holderhas the option to receive a distribution either in cash or in the form of ourcommon shares, and such U.S. Holder chooses to receive shares, hereinafter referredto as a Share Distribution, such U.S. Holder will be treated for purposes ofthe preceding sentences as having received a distribution to the extent of thefair market value of such shares. To the extent that an amount received by aU.S. Holder exceeds the U.S. Holder’s allocable share of our current andaccumulated earning and profits, such excess will be treated first as anon-taxable return of capital to the extent of the U.S. Holder’s basis in ourcommon shares (thereby reducing the U.S. Holder’s basis in such shares), andthereafter any remaining distribution in excess of basis would constitute ataxable gain from the deemed sale or exchange of the U.S. Holder’s shares. See “Taxon Sale” below. Subject to the limitations set forth in the Code, U.S. Holdersmay elect to claim a foreign tax credit against their U.S. federal income taxliability for Canadian income tax withheld from dividends received in respectof our common shares. For the purposes of the limitations on use of foreign taxcredits, dividends received from us generally will be characterized as passiveincome and therefore any U.S. tax imposed on these dividends cannot be offsetby excess foreign tax credits that a U.S. Holder may have from foreign sourceincome not qualifying as passive income. The rules relating to thedetermination of the foreign tax credit are complex and U.S. Holders shouldconsult their tax advisors to determine whether and to what extent a creditwould be available. U.S. Holders that do not elect to claim a foreign taxcredit may instead claim a deduction for Canadian tax withheld if no otherforeign credit is claimed for that tax year.

44

----

*Reducedtax rates for certain dividends.**  *For taxable years beginning before January 1,2009, a dividend paid by us generally will be taxed at the preferential taxrates applicable to long-term capital gains if (i) we are a “qualifiedforeign corporation” (as defined below), (ii) the U.S. Holder receivingsuch dividend is an individual, estate, or trust, and (iii) such dividendis paid on common shares that have been held by such U.S. Holder for at least61 days during the 121-day period beginning 60 days before the “ex-dividenddate” (i.e., the first date that a purchaser of such common shares will not beentitled to receive such dividend).

We generally will be a “qualified foreign corporation,”or QFC, under Section 1(h)(11) of the Code if (i) we are incorporatedin a possession of the U.S., (ii) our company is eligible for the benefitsof the Canada-U.S. Tax Convention, or (iii) the common shares are readilytradable on an established securities market in the U.S. However, even if wesatisfy one or more of such requirements, we will not be treated as a QFC ifour company is a “passive foreign investment company,” or PFIC (as definedbelow), for the taxable year during which we pay a dividend or for thepreceding taxable year. In 2003, the U.S. Department of the Treasury (the “Treasury”)and the IRS announced that they intended to issue Treasury Regulationsproviding procedures for a foreign corporation to certify that it is a QFC. Althoughthese Treasury Regulations have not been issued, the Treasury and the IRS haveconfirmed their intention to issue these Treasury Regulations. It is expectedthat these Treasury Regulations will obligate persons required to fileinformation returns to report a distribution with respect to a foreign securityissued by a foreign corporation as a dividend from a QFC if the foreigncorporation has, among other things, certified under penalties of perjury thatthe foreign corporation was not a PFIC for the taxable year during which theforeign corporation paid the dividend or for the preceding taxable year.

As discussed below, we intend to conduct our affairsso as to avoid our classification as a PFIC. However, there can be noassurances that we will not be a  PFIC,and accordingly, there can be no assurances that we will be a QFC  or that we will be able to certify that weare a QFC in accordance with the certification procedures expected to be issuedby the Treasury and the IRS. If we are not a QFC, a dividend paid by us to aU.S. Holder that is an individual, estate, or trust generally will be taxed atordinary income tax rates (and not at the preferential tax rates applicable tolong-term capital gains). The dividend rules are complex, and each U.S.Holder should consult its own financial advisor, legal counsel, or accountantregarding the dividend rules.

*Taxon sale.*   For U.S. federal income tax purposes, aU.S. Holder generally will recognize gain or loss on any sale, exchange orother disposition of our common shares (unless a specific non-recognitionprovision applies). Such gain or loss will be measured by the differencebetween the amount of cash (and the fair market value of any other property)received and the U.S. Holder’s tax basis in such shares. A U.S. Holder’s taxbasis in our common shares will generally equal the amount paid by such U.S.Holder for such shares (or, in case of shares acquired by way of a ShareDistribution, the amount included in income at the time of the ShareDistribution). The gain or loss arising from a sale or exchange of our commonshares will be a long-term capital gain or loss if the U.S. Holder’s holdingperiod for such shares exceeds one year. In general, the gain from a sale orexchange of our common shares by a U.S. Holder will be treated as United Statessource income. However, should any Canadian tax be imposed on the sale or otherdisposition of such shares by a U.S. Holder and the U.S. Holder is eligible forthe benefits of the Convention, an election may be available under the Codepursuant to which a U.S. Holder would, for purposes of computing the foreigntax credit limitation, be entitled to treat the gains as foreign source income.Alternatively, the U.S. Holder may claim a deduction for the amount of Canadiantax withheld if no other foreign credit is claimed for that tax year.

*Passiveforeign investment company or controlled foreign corporation.*   APFIC as to any U.S. person, is defined as any foreign corporation at least 75%of whose consolidated gross income for the taxable year is passive income, orat least 50% of the value of whose consolidated assets is attributable toassets that produce or are held for the production of passive income at anytime during such person’s holding period for shares of such corporation. Forthis purpose, passive income generally includes dividends, interest, 

45

----

royalties, rents,annuities and the excess of gains over losses from the disposition of assetswhich produce those types of income. We intend to conduct our affairs so as toavoid our and our subsidiaries’ classification as PFICs with respect to U.S.persons holding our common shares. However, if ever applied to us and any oneof the above subsidiaries, the PFIC rules could produce significantadverse tax consequences for a U.S. Holder, including taxation of dispositiongains as ordinary income and the imposition of an interest charge on U.S.federal income taxes deemed to have been deferred. We currently believe thatneither we nor any of our subsidiaries is a “controlled foreign person,” or CFC.A corporation is a CFC if more than 50% of the shares of the corporation, byvote or value, are owned, directly or indirectly (including shares ownedthrough attribution), by “10% CFC Shareholders” (United States persons directlyor indirectly owning at least 10% of the total combined voting power of allshares of the company). We currently believe that neither we nor any of oursubsidiaries is a CFC because U.S. citizens and residents, in the aggregate, donot own more than 50% of our common shares (taking into account the effect ofapplicable constructive ownership rules). In general, each 10% CFC Shareholderin a CFC on the last day of the CFC’s taxable year is required to include inits gross income for such taxable year its *prorata* share of the CFC’s earnings and profits for that yearattributable to certain types of income or investments, and gain from the saleor exchange of stock in a CFC by a 10% CFC Shareholder is generally treated asordinary dividend income to the extent of earnings and profits attributable tosuch stock. Effective for the portion of a holder’s holding period that beginsafter December 31, 1997, in the case of a corporation that is both a CFCand a PFIC, 10% CFC Shareholders will be treated as shareholders of a CFC andnot as shareholders of a PFIC during the time that such persons are 10% CFCShareholders.

*Informationreporting and backup withholding requirements with respect to U.S. Holders.*   Wedo not currently pay dividends. If we did, and if we used a paying agent (suchas a bank) in the United States, the paying agent would be required to reportthe dividends to U.S. Holders not otherwise exempt from reporting requirements.Certain U.S. Holders may be subject to backup withholding at a 28% rate ondividends received on our common shares. This withholding generally appliesonly if such U.S. Holder (i) fails to furnish a correct taxpayeridentification number, or TIN, to the U.S. financial institution or any otherperson responsible for the payment of dividends on our common shares, (ii) furnishesan incorrect TIN, (iii) is notified by the U.S. Internal Revenue Service,or IRS, of the U.S. Holder’s failure to properly report payments of interestand dividends and the IRS has notified us to begin withholding tax from theU.S. Holder’s dividends, or (iv) fails, under certain circumstances, toprovide a certified statement, signed under penalties of perjury, that the TINprovided is correct and that the U.S. Holder is not subject to backupwithholding rules.

Amounts withheld under the backup withholding rules donot constitute a separate U.S. federal income tax. Rather, any amounts withheldunder the backup withholding rules will be refunded or allowed as a creditagainst the U.S. Holder’s U.S. federal income tax liability, if any, providedthe required information or appropriate claim for refund is filed with the IRS.

*UnitedStates state and local taxes.*   In addition toU.S. federal income taxes, U.S. Holders may be subject to United States stateand local taxes with respect to their common shares. U.S. Holders shouldconsult their own tax advisors regarding such matters.

*U.S.federal income tax consequences to Non-U.S. Holders.*   Thefollowing discussion summarizes the U.S. federal income tax consequences ofowning and disposing of our common shares by a holder of such shares that is aNon-U.S. Holder, is not engaged in the conduct of a trade or business in theUnited States and is not present in the United States for 183 days or moreduring the taxable year.

*Distributionsto Non-U.S. Holders.*   A Non-U.S. Holder wouldgenerally not be subject to U.S. income tax with respect to distributions byus.

*Taxon sale by Non-U.S. Holders.*   A Non-U.S. Holdergenerally will not be subject to U.S. federal income or withholding tax inrespect of gain recognized on the disposition of shares.

46

----

*Informationreporting and backup withholding requirements with respect to Non-U.S. Holders.*   Currently,U.S. information reporting requirements and backup withholding will not applyto dividends on our common shares paid to Non-U.S. Holders if the Non-U.SHolder files required information with the payor or qualifies for certain otherexemptions. As a general matter, information reporting and backup withholdingrequirements will not apply to a payment of the proceeds of a sale of suchshares effected outside the United States by a foreign office of a foreignbroker. However, information reporting requirements (but not backupwithholding) will apply to a payment of the proceeds of a sale effected outsidethe United States through a “U.S. Broker,” unless the broker has documentaryevidence in its records that the shareholder is not a United States person andhas no actual knowledge that such evidence is false, or the Non-U.S. Holderotherwise establishes an exemption. For purposes of the preceding sentence, aU.S. Broker is a broker that (i) is a United States person, (ii) is aforeign person that derives 50% or more of its gross income for certain periodsfrom the conduct of a trade or business in the United States, (iii) is aCFC, or (iv) is a foreign partnership if it is carrying on a United Statestrade or business or if more than 50% of the profits or capital interests inthe partnership are owned by United States persons. Payment by a broker of theproceeds of a sale of our common shares effected inside the United States issubject to both backup withholding and information reporting requirementsunless the Non-U.S. Holder certifies under penalties of perjury that he or sheis not a United States person and provides his or her name and address or theNon-U.S. Holder otherwise establishes an exemption. Any amounts withheld underthe backup withholding rules from a payment to a Non-U.S. Holder will beallowed as a refund or a credit against such Non-U.S. Holder’s U.S. Federalincome tax, provided that the required information or appropriate claim forrefund is furnished to the IRS.

**THEFOREGOING DISCUSSION OF THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES ANDCANADIAN INCOME TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OFOUR COMMON SHARES BY U.S. HOLDERS, IS NOT INTENDED TO BE, NOR SHOULD IT BECONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR U.S RESIDENT. ACCORDINGLY,INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE U.S.FEDERAL INCOME TAX CONSEQUENCES AND CANADIAN INCOME TAX CONSEQUENCES OF THEOWNERSHIP, SALE OR OTHER DISPOSITION OF OUR COMMON SHARES, INCLUDING THEAPPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXJURISDICTION, AS TAX CONSEQUENCES MAY VARY WITH RESPECT TO AN INDIVIDUALSPARTICULAR CIRCUNSTANCES**

**Documents on Display**

Any documents referred toin this Annual Report may be inspected at our corporate office, 6001 IrwinStreet, LaSalle, Québec, Canada H8N 1A1, upon appointment during normal businesshours.

**ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

Although our financial results are reported in U.S.dollars, a substantial portion of our revenues are received in, and ourexpenses are incurred in, Canadian dollars. In determining our results ofoperations, we convert the sales made by Canadian subsidiaries into the UnitedStates, which are denominated in U.S. dollars, into Canadian dollars based uponthe average monthly exchange rate at the time of sale.

Exchange rate fluctuations are beyond our control andalthough we partially hedge our currency exposure, there can be no assurancethat changes in the rate of exchange between the Canadian dollar and the U.S.dollar will not adversely affect our business, results of operations, financialcondition or cash flows.

47

----

Weare exposed to market risk from changes in interest rates and exchange rates.From time to time, and only upon approval by certain of our executive officers,we enter into financial contracts in the ordinary course of business in orderto hedge these exposures. We do not use financial instruments for trading orspeculative purposes.

*Interest rate risk.*   Ourexposure to interest rate risk is as follows, indicated in thousands of U.S.dollars:

| ** **        | ** ** | ** **    | ** ** | **November 26, 2005** | ** ** |
|-------------------|------------|---------------|------------|---------------------------------|------------|
| ** **        | ** ** | ** **    | ** ** | **Debt  outstanding**           | ** ** | **Weighted  average  effective interest  rate** | ** ** |
| Bank indebtedness |       | Floating rate |       |                            | $          | 2,676 |   |   |   | 4.56 | % |   |
| Long-term debt    |       | Floating rate |       |                            | $          | 20,854 |   |   |   | 5.59 | % |   |
|              |       | Fixed rate    |       |                            | 24,006     |   |   |   | 6.46 | % |   |
|              |       |          |       |                            | $44,860    |   |   |   |   |   |   |

 

| ** **                   | ** ** | **November 26, 2005** | ** ** |
|------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **Carrying  amount**            | ** ** | **Fair  value** | ** ** |
| Fair value of long-term debt |       |                            | $          | 44,860 |   |   |   | $ | 44,910 |   |   |
|                              |            |                                 |            |  |  |  |  |  |  |  |  |

 

A 55 basis point movement in the Canadian prime rate,the U.S. base rate or LIBOR would result in an approximate $0.1 million,annualized, for the period ended November 26, 2005, increase or decreasein interest expense and cash flows. The modeling technique used was to apply toour debt, the difference between the actual interest rates at November 26,2005 and the what-if interest rates.

A variable to fixedinterest rate swap agreement is used by one of our U.S. wholly-ownedsubsidiaries to hedge its exposure to interest rate risk related to a termcredit agreement and is accounted for using the accrual basis. We recognizeamounts to be paid or received under the interest rate swap agreement asinterest expense or income in the period in which they accrue. See “Operatingand Financial Review and Prospects—Hedging”.

*Exchange rate risk.*   Fromtime to time, we utilize forward exchange contracts to hedge our exposure toexchange rate fluctuations in connection with future sales and purchases bycertain of our Canadian subsidiaries, denominated in U.S. dollars. Forwardexchange contracts are entered into with reputable financial institutions. At November 26,2005, November 27, 2004 and November 29, 2003, we had no forwardforeign currency exchange contracts outstanding.

We estimate that a 12 centmovement in the value of the Canadian dollar would affect our net sales byapproximately $48.2 million annually, based on our 2005 Canadian dollar netsales, without giving effect to any hedging instruments. The modeling techniqueused was to determine the difference between the conversions of our net salesin Canadian dollars for the period ended November 26, 2005 using theaverage exchange rate for the year and the what-if exchange rate. In 2005, theaverage exchange rate was $1.2162 Canadian.

*Commodity price risk.*   Wedo not use derivative commodity instruments to hedge our exposure to the impactof price fluctuations on our principal raw materials. See “Key Information—RiskFactors—The prices we pay for steel and other raw materials, and the prices weare able to charge our customers for our products, may fluctuate due to anumber of factors beyond our control, which could adversely affect ouroperating results.”

**ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITYSECURITIES**

Not applicable.

48

----

**PART II**

**ITEM 13**            DEFAULTS,DIVIDEND ARREARAGES AND DELINQUENCIES

None.

**ITEM 14**            MATERIALMODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

**ITEM 15**            CONTROLSAND PROCEDURES

Our chief executiveofficer and chief financial officer have concluded, based on their evaluationas the end of the period covered by this report, that our disclosure controlsand procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and15d-15(e)) are effective to ensure that information required to bedisclosed in the reports that we file or submit under the Securities ExchangeAct of 1934 is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms. There were no changes in our internal control over financial reportingduring the year ended November 26, 2005 that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

**ITEM 16A**    AUDIT COMMITTEE FINANCIAL EXPERT

We have determined that wehave at least one audit committee financial expert serving on our AuditCommittee. Our independent audit committee financial expert is JohnLeBoutillier, the Chairman of the Audit Committee.

**ITEM 16B**   CODE OF ETHICS

There have been noamendments or waivers to our Code of Business Conduct and Ethics, which isapplicable to all directors, executive officers and employees. We will send acopy of the Code of Business Conduct and Ethics without charge to any personwho sends a written request therefore to Christopher H. Pickwoad, 6001 IrwinStreet, LaSalle, Québec, Canada H8N 1A1.

**ITEM 16C**   PRINCIPAL ACCOUNTANT FEES AND SERVICES

Thefollowing table sets forth the accounting fees and services for the past twofiscal years:

| ** **          | ** ** | **Nov. 26,  2005**                           | ** ** | **Nov. 27,  2004** | ** ** |
|---------------------|------------|---------------------------------------------------|------------|-------------------------|------------|
| ** **          | ** ** | **(In thousands of U.S. dollars)** | ** ** |
| Audit fees          |       |                                              | $          | 533                     |       |   |   | $ | 448 |   |   |
| Audit-related  fees |       |                                              | 148        |                    |       |   | 11 |   |   |
| Tax fees            |       |                                              | 324        |                    |       |   | 151 |   |   |
| Other               |       |                                              | 27         |                    |       |   | — |   |   |
|                |       |                                              | $          | 1,032                   |       |   |   | $ | 610 |   |   |

 

Audit-related fees include fees for the quarterlyreview of our consolidated financial statements and the fees and expensesrelating to our secondary offering in May 2005. Tax fees include taxcompliance services and tax advisory and planning services as well as feesrelating to our secondary offering. Management presents regular updates to theaudit Committee of the services rendered by the auditors

49

----

The auditors, the AuditCommittee and management maintain regular and open communication in relation tothe audits of our financial statements. There were no disagreements between theauditors, the Audit Committee and management on matters affecting the audit ofour financial statements.

**ITEM 16D**   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDITCOMMITTEES.

Not applicable.

**ITEM 16E**    PURCHASES OF EQUITY SECURITIES BY THE ISSUER ANDAFFILIATED PURCHASERS.

| **Period**                                       | ** ** | **Total Number of   Shares Purchased** | ** ** | **Average Price  Paid  Per Share**            | ** ** | **Total Number of  Shares Purchased as Part of Publicly Announced Plans or Program** | ** ** | **Maximum Number of  Shares that May  Yet be Purchased  Under the Plans or  Program** |
|--------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|
| November 27, 2004 to December 26, 2004 |       | None                                   |       | None                                          |       | None                                                                                      |       | None                                                                                  |
| December 27, 2004 to January 26, 2005  |       | None                                   |       | None                                          |       | None                                                                                      |       | None                                                                                  |
| January 27, 2005 to February 26, 2005  |       | None                                   |       | None                                          |       | None                                                                                      |       | None                                                                                  |
| February 27, 2005 to March 26, 2005    |       | None                                   |       | None                                          |       | None                                                                                      |       | None                                                                                  |
| March 27, 2005 to April 26, 2005       |       | None                                   |       | None                                          |       | None                                                                                      |       | None                                                                                  |
| April 27, 2005 to May 26, 2005    |       | 586,000 (a)                            |       | Purchased with 586,000 common shares (a) |       | None                                                                                      |       | None                                                                                  |
| May 27, 2005 to June 26, 2005     |       | None                                   |       | None                                          |       | None                                                                                      |       | None                                                                                  |
| June 27, 2005 to July 26, 2005         |       | None                                   |       | None                                          |       | None                                                                                      |       | None                                                                                  |
| July 27, 2005 to August 26, 2005       |       | None                                   |       | None                                          |       | None                                                                                      |       | None                                                                                  |
| August 27, 2005 to September 26, 2005  |       | None                                   |       | None                                          |       | None                                                                                      |       | None                                                                                  |
| September 27, 2005 to October 26, 2005 |       | None                                   |       | None                                          |       | None                                                                                      |       | None                                                                                  |
| October 27, 2005 to November 26, 2005  |       | None                                   |       | None                                          |       | None                                                                                      |       | None                                                                                  |
| Total                                            |       | 586,000 (a)                            |       | Purchased with 586,000 common shares (a) |       | None                                                                                      |       | None                                                                                  |

----

(a)     Asset forth in the Company’s registration statement on Form F-3 filedwith the SEC on February 18, 2005, as amended, two of the sellingshareholders, D. Bryan Jones and Scott B. Jones, entered into a series oftransactions, the purpose of which was to increase the tax cost for Canadiantax purposes of a certain number of their shares to be sold in the offering toan amount equal to the pro rata profits which have already been subject to taxat the corporate level. The fees and expenses related to these transactionswere borne by D. Bryan Jones and Scott B. Jones. The series of transactions issummarized as follows:

(1)    3414116Canada Inc., a personal investment company beneficially owned by D. BryanJones, and 3414124 Canada Inc., a personal investment company beneficiallyowned by Scott B. Jones, transfered 471,000 and 115,000 of our common shares,respectively, to 4273273 Canada Inc., in consideration for their respectiveproportional receipt of all the shares of 4273273 Canada Inc.;

50

----

(2)    3414116Canada Inc. and 3414124 Canada Inc. then sold the respective shares of 4273273Canada Inc. that they received to 4273281 Canada Inc., all of the shares ofwhich are beneficially owned in the same respective proportional amounts by D.Bryan Jones and Scott B. Jones, in consideration for shares of 4273281 CanadaInc.;

(3)    4273281Canada Inc. then sold the shares of 4273273 Canada Inc. to us in considerationfor the issuance by us to 4273281 Canada Inc. of 586,000 of our common shares;

(4)    Wethen dissolved and liquidated 4273273 Canada Inc., in the process of which wecancelled the 586,000 of our common shares held by 4273273 Canada Inc.; and

(5)    4273281Canada Inc. then delivered at closing the 437,864 and 108,864 of our commonshares offered for sale, respectively, in the offering by D. Bryan Jones andScott B. Jones. These transactions did not materially affect us.

**PART III**

**ITEM 17**            FINANCIAL STATEMENTS

See Item 18for the Financial Statements.

51

----

**ITEM 18    FINANCIALSTATEMENTS**

 

**Report of Independent Registered Public AccountingFirm**

Tothe Board of Directors and Shareholders of

Novamerican Steel Inc.

We have audited the accompanying consolidated balancesheets of Novamerican Steel Inc. (a Canadian Corporation) and Subsidiaries(the “Company”) as of November 26, 2005 and November 27, 2004 and the relatedconsolidated statements of operations and comprehensive income, shareholders’equity and cash flows for each of the three years in the period ended November 26,2005. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Novamerican Steel Inc. and Subsidiaries as of November 26, 2005 andNovember 27, 2004 and the results of their operations and their cash flows foreach of the three years in the period ended November 26, 2005 inconformity with accounting principles generally accepted in the United Statesof America.

Asdiscussed in Note 2 to the consolidated financial statements, the Companyadopted Statement of Financial Accounting Standard No. 142, *Goodwill and Other Intangible Assets* (“SFAS142”) on December 1, 2002.
|                         |
|-------------------------|
| Chartered Accountants   |
| Montréal, Canada   |
| December 16,  2005 |

 

52

----

**Novamerican Steel Inc. and SubsidiariesConsolidated Statementsof Operations and Comprehensive Income**(In thousands of U.S.dollars, except per share data)

| ** **                                                                                                       | ** ** | **Years ended**             | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                       | ** ** | **November 26,  2005** | ** ** | **November 27,  2004** | ** ** | **November 29,  2003** | ** ** |
| ** **                                                                                                       | ** ** | **$**                       | ** ** | **$** | ** ** | **$** | ** ** |
| **Net  sales**                                                                                                   |       |                        | 834,689    |   |   |   | 768,627 |   |   |   | 507,067 |   |   |
| Cost of sales                                                                                                    |       |                        | 664,134    |   |   |   | 543,503 |   |   |   | 400,825 |   |   |
| **Gross  margin**                                                                                                |       |                        | 170,555    |   |   |   | 225,124 |   |   |   | 106,242 |   |   |
| Operating expenses                                                                                               |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Plant                                                                                                            |       |                        | 43,210     |   |   |   | 40,780 |   |   |   | 34,000 |   |   |
| Delivery                                                                                                         |       |                        | 23,371     |   |   |   | 19,478 |   |   |   | 17,394 |   |   |
| Selling                                                                                                          |       |                        | 13,562     |   |   |   | 13,321 |   |   |   | 11,410 |   |   |
| Administrative and general                                                                                       |       |                        | 30,326     |   |   |   | 33,658 |   |   |   | 20,424 |   |   |
|                                                                                                             |       |                        | 110,469    |   |   |   | 107,237 |   |   |   | 83,228 |   |   |
| **Operating  income**                                                                                            |       |                        | 60,086     |   |   |   | 117,887 |   |   |   | 23,014 |   |   |
| Interest expense                                                                                                 |       |                        | 3,892      |   |   |   | 4,866 |   |   |   | 5,144 |   |   |
| Share in income  of joint ventures                                                                               |       |                        | (720       | ) |   |   | (312 | ) |   |   | (545 | ) |   |
|                                                                                                             |       |                        | 3,172      |   |   |   | 4,554 |   |   |   | 4,599 |   |   |
| Income before  income taxes                                                                                      |       |                        | 56,914     |   |   |   | 113,333 |   |   |   | 18,415 |   |   |
| Income taxes (Note 4)                                                                                       |       |                        | 19,976     |   |   |   | 40,422 |   |   |   | 5,333 |   |   |
| **Net  income**                                                                                                  |       |                        | 36,938     |   |   |   | 72,911 |   |   |   | 13,082 |   |   |
| **Net income per share**(Note  5)                                                                                |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                            |       |                        | 3.70       |   |   |   | 7.51 |   |   |   | 1.35 |   |   |
| Diluted                                                                                                          |       |                        | 3.58       |   |   |   | 7.35 |   |   |   | 1.35 |   |   |
| **Comprehensive  income**                                                                                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                       |       |                        | 36,938     |   |   |   | 72,911 |   |   |   | 13,082 |   |   |
| Changes in  cumulative translation adjustment                                                                    |       |                        | 3,736      |   |   |   | 10,344 |   |   |   | 12,477 |   |   |
| Changes in fair  value of interest rate swap, net of deferred income taxes of $275 ($538 in  2004; $188 in 2003) |       |                        | 395        |   |   |   | 533 |   |   |   | 289 |   |   |
|                                                                                                             |       |                        | 41,069     |   |   |   | 83,788 |   |   |   | 25,848 |   |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

53

----

**Novamerican Steel Inc. and SubsidiariesConsolidated Statementsof Shareholders’ Equity**(In thousands of U.S.dollars, except share data)

| ** **                                                                         | ** ** | ** **             | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **             | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|--------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | ** **             | ** ** | ** **   | ** ** | **other**         | ** ** | **Total**              | ** ** |
| ** **                                                                         | ** ** | **Common shares** | ** ** | **Retained** | ** ** | **comprehensive** | ** ** | **shareholders’** | ** ** |
| ** **                                                                         | ** ** | **Number**             | ** ** | **Amount**   | ** ** | **earnings**      | ** ** | **income (loss)** | ** ** | **equity** | ** ** |
| ** **                                                                         | ** ** | ** **             | ** ** | **$**        | ** ** | **$**             | ** ** | **$**                  | ** ** | **$** | ** ** |
| Balance at  November 30, 2002                                                 |       | 9,700,000              |       |         | 28,404     |              |       | 98,789                 |       |   | (7,326 | ) |   |   | 119,867 |   |   |
| Net income                                                                         |       |                   |       |         |       |              |       | 13,082                 |       |   |   |   |   |   | 13,082 |   |   |
| Changes in cumulative translation adjustment                                       |       |                   |       |         |       |              |       |                   |       |   | 12,477 |   |   |   | 12,477 |   |   |
| Changes in fair value of interest rate swap, net of  deferred income taxes of $188 |       |                   |       |         |       |              |       |                   |       |   | 289 |   |   |   | 289 |   |   |
| Balance at  November 29, 2003                                                 |       | 9,700,000              |       |         | 28,404     |              |       | 111,871                |       |   | 5,440 |   |   |   | 145,715 |   |   |
| Options exercised                                                                  |       | 86,089                 |       |         | 1,205      |              |       |                   |       |   |   |   |   |   | 1,205 |   |   |
| Net income                                                                         |       |                   |       |         |       |              |       | 72,911                 |       |   |   |   |   |   | 72,911 |   |   |
| Changes in cumulative translation adjustment                                       |       |                   |       |         |       |              |       |                   |       |   | 10,344 |   |   |   | 10,344 |   |   |
| Changes in fair value of interest rate swap, net of  deferred income taxes of $538 |       |                   |       |         |       |              |       |                   |       |   | 533 |   |   |   | 533 |   |   |
| Balance at  November 27, 2004                                                 |       | 9,786,089              |       |         | 29,609     |              |       | 184,782                |       |   | 16,317 |   |   |   | 230,708 |   |   |
| Options exercised                                                                  |       | 370,137                |       |         | 5,182      |              |       |                   |       |   |   |   |   |   | 5,182 |   |   |
| Net income                                                                         |       |                   |       |         |       |              |       | 36,938                 |       |   |   |   |   |   | 36,938 |   |   |
| Changes in cumulative translation adjustment                                       |       |                   |       |         |       |              |       |                   |       |   | 3,736 |   |   |   | 3,736 |   |   |
| Changes in fair value of interest rate swap, net of  deferred income taxes of $275 |       |                   |       |         |       |              |       |                   |       |   | 395 |   |   |   | 395 |   |   |
| Balance at  November 26, 2005                                                 |       | 10,156,226             |       |         | 34,791     |              |       | 221,720                |       |   | 20,448 |   |   |   | 276,959 |   |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

54

----

**Novamerican Steel Inc. and SubsidiariesConsolidated Statementsof Cash Flows**(In thousands of U.S.dollars)

| ** **                                                                 | ** ** | **Years ended**        | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                 | ** ** | **November 26,  2005** | ** ** | **November 27,  2004** | ** ** | **November 29,  2003** | ** ** |
| ** **                                                                 | ** ** | **$**                       | ** ** | **$** | ** ** | **$** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                   |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                 |       |                        | 36,938     |   |   |   | 72,911 |   |   |   | 13,082 |   |   |
| Adjustments to reconcile net income to net cash from  operating activities |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                             |       |                        | 9,936      |   |   |   | 8,680 |   |   |   | 6,962 |   |   |
| Share in income of  joint ventures                                         |       |                        | (720       | ) |   |   | (312 | ) |   |   | (545 | ) |   |
| Deferred income  taxes                                                     |       |                        | (359       | ) |   |   | 695 |   |   |   | 2,208 |   |   |
| Loss (gain) on  disposal of property, plant and equipment                  |       |                        | (69        | ) |   |   | 731 |   |   |   | 351 |   |   |
| Changes in working capital items                                           |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Accounts  receivable                                                       |       |                        | 4,339      |   |   |   | (36,584 | ) |   |   | (5,895 | ) |   |
| Income taxes  receivable                                                   |       |                        | (2,666     | ) |   |   | 595 |   |   |   | (595 | ) |   |
| Inventories                                                                |       |                        | 46,181     |   |   |   | (71,339 | ) |   |   | 3,276 |   |   |
| Prepaid expenses  and other                                                |       |                        | (611       | ) |   |   | 530 |   |   |   | (479 | ) |   |
| Accounts payable  and accrued liabilities                                  |       |                        | (4,744     | ) |   |   | 23,462 |   |   |   | 3,922 |   |   |
| Income taxes  payable                                                      |       |                        | (18,648    | ) |   |   | 18,424 |   |   |   | (3,221 | ) |   |
| Net cash from operating  activities                                        |       |                        | 69,577     |   |   |   | 17,793 |   |   |   | 19,066 |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                   |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Loan to a Canadian  Corporation                                            |       |                        | (16,443    | ) |   |   |   |   |   |   |   |   |   |
| Acquisition of remaining  interest in a joint venture                      |       |                        |       |   |   |   |   |   |   |   | (4,100 | ) |   |
| Acquisition of minority  interest                                          |       |                        | (205       | ) |   |   | (161 | ) |   |   | (2,278 | ) |   |
| Investment in joint  ventures                                              |       |                        |       |   |   |   |   |   |   |   | 8,640 |   |   |
| Distribution from joint  ventures                                          |       |                        | 846        |   |   |   | 1,405 |   |   |   |   |   |   |
| Additions to property,  plant and equipment                                |       |                        | (5,359     | ) |   |   | (9,056 | ) |   |   | (25,140 | ) |   |
| Proceeds from disposal of  property, plant and equipment                   |       |                        | 514        |   |   |   | 3,456 |   |   |   | 6,068 |   |   |
| Other assets                                                               |       |                        | (255       | ) |   |   | (176 | ) |   |   | (181 | ) |   |
| Net cash used for  investing activities                                    |       |                        | (20,902    | ) |   |   | (4,532 | ) |   |   | (16,991 | ) |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                   |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Net increase (decrease)  in bank indebtedness                              |       |                        | (802       | ) |   |   | (15,564 | ) |   |   | 13,323 |   |   |
| Issue of common shares                                                     |       |                        | 5,182      |   |   |   | 1,205 |   |   |   |   |   |   |
| Advances due to an  employee                                               |       |                        | (730       | ) |   |   | (2,732 | ) |   |   | 1,122 |   |   |
| Proceeds from long-term  debt                                              |       |                        |       |   |   |   | 21,011 |   |   |   | 1,872 |   |   |
| Repayment of long-term  debt                                               |       |                        | (16,756    | ) |   |   | (17,658 | ) |   |   | (16,134 | ) |   |
| Net cash from (used for)  financing activities                             |       |                        | (13,106    | ) |   |   | (13,738 | ) |   |   | 183 |   |   |
| Effect of exchange rate  changes on cash and cash equivalents              |       |                        | 774        |   |   |   | 674 |   |   |   | 1,417 |   |   |
| **Net  increase in cash and cash equivalents**                             |       |                        | 36,343     |   |   |   | 197 |   |   |   | 3,675 |   |   |
| Cash and cash  equivalents, beginning of year                              |       |                        | 11,462     |   |   |   | 11,265 |   |   |   | 7,590 |   |   |
| Cash and cash  equivalents, end of year                                    |       |                        | 47,805     |   |   |   | 11,462 |   |   |   | 11,265 |   |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**                       |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Interest paid                                                              |       |                        | 4,053      |   |   |   | 4,229 |   |   |   | 4,821 |   |   |
| Income taxes paid                                                          |       |                        | 40,259     |   |   |   | 22,337 |   |   |   | 7,335 |   |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

55

----

**Novamerican Steel Inc. and SubsidiariesConsolidated Balance Sheets**(In thousands of U.S.dollars)

| ** **                                         | ** ** | **November 26,  2005** | ** ** | **November 27,  2004** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **$**                       | ** ** | **$**                       | ** ** |
| **ASSETS**                                         |       |                        |       |                        |       |   |   |   |   |
| Current assets                                     |       |                        |       |                        |       |   |   |   |   |
| Cash and cash equivalents                          |       |                        | 47,805     |                        |       |   | 11,462 |   |   |
| Accounts receivable (Note 6)                       |       |                        | 140,053    |                        |       |   | 125,718 |   |   |
| Income taxes receivable                            |       |                        | 2,778      |                        |       |   |   |   |   |
| Inventories (Note 7)                               |       |                        | 127,316    |                        |       |   | 172,850 |   |   |
| Prepaid expenses and other                         |       |                        | 1,441      |                        |       |   | 799 |   |   |
| Deferred income taxes (Note 4)                     |       |                        | 1,815      |                        |       |   | 1,837 |   |   |
|                                               |       |                        | 321,208    |                        |       |   | 312,666 |   |   |
| Investment in  joint ventures                      |       |                        | 2,137      |                        |       |   | 2,263 |   |   |
| Property, plant  and equipment (Note 8)            |       |                        | 102,794    |                        |       |   | 106,308 |   |   |
| Goodwill (Note 9)                                  |       |                        | 12,994     |                        |       |   | 12,789 |   |   |
| Deferred income  taxes (Note 4)                    |       |                        | 1,767      |                        |       |   | 1,601 |   |   |
| Other assets                                       |       |                        | 683        |                        |       |   | 1,040 |   |   |
|                                               |       |                        | 441,583    |                        |       |   | 436,667 |   |   |
| **LIABILITIES**                                    |       |                        |       |                        |       |   |   |   |   |
| Current liabilities                                |       |                        |       |                        |       |   |   |   |   |
| Current portion of long-term debt                  |       |                        | 3,078      |                        |       |   | 4,855 |   |   |
| Bank indebtedness (Note 10)                        |       |                        | 2,676      |                        |       |   | 3,442 |   |   |
| Accounts payable and accrued liabilities (Note 11) |       |                        | 99,713     |                        |       |   | 103,964 |   |   |
| Income taxes payable                               |       |                        | 998        |                        |       |   | 19,988 |   |   |
| Deferred  income taxes (Note 4)                    |       |                        | 338        |                        |       |   | 186 |   |   |
|                                               |       |                        | 106,803    |                        |       |   | 132,435 |   |   |
| Long-term debt  (Note 12)                          |       |                        | 41,782     |                        |       |   | 56,766 |   |   |
| Fair value of  interest rate swap (Note 16)        |       |                        | 71         |                        |       |   | 741 |   |   |
| Deferred income  taxes (Note 4)                    |       |                        | 15,968     |                        |       |   | 16,017 |   |   |
|                                               |       |                        | 164,624    |                        |       |   | 205,959 |   |   |
| Contingencies and commitments (Notes 18 and 19)    |       |                        |       |                        |       |   |   |   |   |
| **SHAREHOLDERS’  EQUITY**                     |       |                        |       |                        |       |   |   |   |   |
| Share capital  (Note 13)                           |       |                        | 34,791     |                        |       |   | 29,609 |   |   |
| Retained earnings                                  |       |                        | 221,720    |                        |       |   | 184,782 |   |   |
| Accumulated other  comprehensive income            |       |                        | 20,448     |                        |       |   | 16,317 |   |   |
|                                               |       |                        | 276,959    |                        |       |   | 230,708 |   |   |
|                                               |       |                        | 441,583    |                        |       |   | 436,667 |   |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

56

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**1—GOVERNING STATUTES AND NATURE OF OPERATIONS**

Novamerican Steel Inc.(Novamerican) was incorporated under the Canada Business Corporations Act. TheCompany processes and distributes, through its 23 locations in theNortheastern, Mid-Atlantic and Mid-Western United States and the Canadianprovinces of Québec and Ontario, carbon steel, stainless steel and aluminumproducts, including carbon steel tubular products, and operates as anintermediary between primary metal producers and manufacturers that require processedmetal.

**2—ACCOUNTING POLICIES**

The accompanying consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America and the reporting currency is the United Statesof America dollar (U.S. dollar).

A summary of significantaccounting policies consistently applied in the preparation of the accompanyingconsolidated financial statements follows.

**Basis of consolidation**

The consolidated financialstatements include the accounts of Novamerican and all its wholly-ownedsubsidiaries (collectively, the Company). All significant intercompany accountsand transactions have been eliminated.

**Joint ventures**

The Company’s interests injoint ventures are accounted for by the equity method. Accordingly, the Company’sshare in income of joint ventures is included in consolidated net income.

**Fiscal year**

The fiscal year-end of theCompany is the last Saturday of November. The fiscal years ending November 26,2005, November 27, 2004 and November 29, 2003 include 52 weeks ofoperations.

**Translation of foreign currencies**

Transactions concluded in foreign currencies by theCompany are translated into their respective functional currency as follows:monetary assets and liabilities are translated at the exchange rate in effectat year-end; revenues and expenses are translated at the average exchange ratefor the year. Exchange gains and losses arising from transactions denominatedin foreign currencies are included in income. Gains amounted to $101,000 in2005, $218,000 in 2004 and $446,000 in 2003.

The financial statementsof the Company’s Canadian subsidiaries are translated from their functionalcurrency, the Canadian dollar, into the reporting currency, the U.S. dollar, asfollows: assets and liabilities are translated at the exchange rate in effectat year-end; revenues and expenses are translated at the average exchange ratefor the year. All cumulative translation gains or losses are included inaccumulated other comprehensive income in the consolidated balance sheets.

57

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**2—ACCOUNTING POLICIES (Continued)**

**Accountingestimates**

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expenses duringthe reporting period. On an ongoing basis management reviews its estimatesbased on currently available information. Management believes the mostsensitive estimates include the allowance for doubtful accounts, therecoverability of goodwill and income taxes. Actual results could differ fromthose estimates.

**Revenue recognition**

Revenue from product sales is recognized when there ispersuasive evidence of an arrangement, the amount is fixed or determinable,delivery of the product to the customer has occurred, there are nouncertainties surrounding product acceptance and collection of the amount isconsidered probable. Title to the product generally passes and revenue isrecognized upon delivery of the product at the customer’s destination. Salesreturns and allowances are treated as reductions to sales and are provided forbased on historical experience and current estimates.

The customer is chargedfor the complete product delivered to the customer’s designated location andshipping and handling charges are not charged separately. Shipping and handlingcosts are recorded under the “Delivery” caption on the consolidated statementsof operations and comprehensive income.

**Cash and cash equivalents**

Cash and cash equivalentsinclude cash in banks and term deposits which are short-term, highly liquidinvestments with original maturities of three months or less.

**Accounts receivable**

Credit is extended basedon evaluation of a customer’s financial condition and, generally, collateral isnot required. Accounts receivable are stated at amounts due from customersbased on agreed upon payment terms net of an allowance for doubtful accounts.Accounts outstanding longer than the agreed upon payment terms are consideredpast due. The Company determines its allowance by considering a number offactors, including the length of time trade accounts receivable are past due,the customer’s current ability to pay its obligation to the Company, and thecondition of the general economy and the industry as a whole. The Company writesoff accounts receivable when they are determined to be uncollectible, and anypayments subsequently received on such receivables are credited to the bad debtexpense.

**Inventories**

Inventories are stated atthe lower of cost or market and include the cost of purchased steel andfreight. Cost is determined using the specific identification method or theaverage cost method.

58

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**2—ACCOUNTING POLICIES (Continued)**

**Property, plant andequipment**

Property, plant and equipment are stated at cost andare reviewed for possible impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable. Ifchanges in circumstances indicate that the carrying amount of an asset that theCompany expects to hold and use may not be recoverable, future cash flowsexpected to result from the use of the asset and its disposition are estimated.If the undiscounted value of the future cash flows is less than the carryingamount of the asset, impairment is recognized. Management believes that therehas been no impairment of the Company’s property, plant and equipment as at November 26,2005.

Depreciation is calculatedusing the straight-line method over the following estimated useful lives:

| Buildings and  building improvements |   | 10 to 40 years |   |
|--------------------------------------|--------|----------------|--------|
| Machinery and  equipment             |   | 5 to 20 years  |   |
| Furniture and  fixtures              |   | 5 to 15 years  |   |
| Transportation  equipment            |   | 3 to 7 years   |   |
| Computer  equipment                  |   | 3 to 5 years   |   |
| Leasehold  improvements              |   | 5 to 10 years  |   |
| Aircraft                             |   | 15 years       |   |

 

No depreciation is recorded on assets underconstruction.

Depreciation expense wasapproximately $9,327,000, $8,086,000 and $6,440,000 for the years ended November 26, 2005, November 27,2004 and November 29, 2003, respectively.

**Goodwill**

Goodwill represents the excess of the purchase priceover the fair value of the net assets acquired. Until December 1, 2002,the cost of goodwill was being amortized using the straight-line method over40 years. However, with the adoption of Statement of Financial AccountingStandard (“SFAS”) No. 142, *Goodwill andOther Intangible Assets*, in fiscal year 2003, the Companydiscontinued the amortization of goodwill. Goodwill is tested for impairmentannually, or more frequently if events or changes in circumstances indicatethat it is impaired. Goodwill is allocated to reporting units and any potentialgoodwill impairment is identified by comparing the carrying amount of areporting unit with its fair value. If any potential impairment is identified,it is quantified by comparing the carrying amount of goodwill to its fairvalue.

The Company determined the fair value of goodwillbased on a discounted cash flow income approach. The income approach indicatesthe fair value of a business enterprise based on the discounted value of thecash flows that the business can be expected to generate in the future. Thisanalysis is based upon projections prepared by the Company and data fromsources of publicly available information available at the time of preparation.These projections are based on a strategic plan using financial projections fora 3 to 5 year time horizon and represent management’s best estimate offuture results. In making these projections, the Company considered itsmarkets, the competitive environment and its 

59

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**2—ACCOUNTING POLICIES (Continued)**

advantages. There willusually be differences between estimated and actual results as events andcircumstances frequently do not occur as expected, and those differences may bematerial.

In accordance with SFAS No. 142,the Company performed a transitional impairment test of goodwill in fiscal year2003 and annual impairment tests of goodwill for fiscal years 2005, 2004 and2003. No impairment charge resulted from these tests.

**Other assets**

Other assets are recordedat cost and are composed primarily of expenses incurred in issuing long-termdebt which are deferred and amortized over the term of the related debt.Amortization expense was approximately $609,000, $594,000 and $522,000 for the years ended November 26,2005, November 27, 2004 and November 29, 2003, respectively.Amortization of deferred financing costs is recorded as interest expense.

**Income taxes**

The provision for income taxes is computed on thepretax income of the consolidated subsidiaries located within each taxingcountry based on the current tax law. Deferred income taxes are provided, basedupon currently enacted tax rates, for temporary differences in the recognitionof assets and liabilities on the financial statements and for income taxpurposes.

Deferred income taxes include the benefit of lossescarried forward when it is reasonably likely that future profits will result.Should the opportunity to realize the benefit of these losses expire, suchamounts would result in additional deferred income tax expense.

No provision has been madefor deferred income taxes that may result from future remittance ofapproximately $68,045,000 of undistributed earnings of the foreign subsidiariesas at November 26, 2005. Under current Canadian tax law, the Company mayrepatriate undistributed earnings of such foreign subsidiaries without anyincome tax effect. However, should the Company repatriate part or all of theundistributed earnings of the foreign subsidiaries, a 5% withholding tax wouldbe assessable on that amount.

**Comprehensive income**

Components ofcomprehensive income include net income, changes in cumulative translationadjustment and changes in fair value of interest rate swap net of deferredincome taxes.

**Stock-based compensation**

The Company hasestablished a stock-based compensation plan, described in Note 14. TheCompany did not recognize compensation expense when share options were grantedto plan participants during fiscal year 1997. As of November 30, 2002, alloptions outstanding were vested. Any consideration paid by plan participants onthe exercise of share options is credited to share capital.

60

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**2—ACCOUNTING POLICIES (Continued)**

**Current and pendingaccounting changes**

*Current*

Effective November 30, 2003, the Company adoptedFASB Interpretation (“FIN”) 46, *Consolidationof Variable Interest Entities*. Variable interest entities arerequired to be consolidated by their primary beneficiary. The primarybeneficiary is the party that absorbs a majority of the entity’s expectedlosses, receives a majority of its expected returns, or both. However, theCompany has determined that it did not have variable interests in variableinterest entities. Accordingly, FIN 46 did not have an initial impact onthe consolidated financial statements.

Effective December 1, 2002, the Company adoptedSFAS No. 142, *Goodwill and OtherIntangible Assets*, which prescribes accounting for all purchasedgoodwill and intangible assets and states that acquired goodwill and intangibleassets with indefinite lives are not amortized, but are tested for impairmentannually, while other intangible assets with finite lives should be amortizedover their useful economic life. Accordingly, goodwill is no longer amortizedbut its carrying value is tested for impairment annually. There were noimpairment losses resulting from the transitional testing.

During the year ended November 29, 2003, theCompany adopted the disclosure requirements only of the SFAS No. 148, *Accounting for Stock-Based Compensation—Transitionand Disclosure: an amendment of FASB Statement No. 123.*Namely,SFAS No. 148 revises disclosures for all stock compensation plans. Theadoption of SFAS No. 148 did not have a material impact on the consolidatedfinancial statements.

During the year ended November 29, 2003, theCompany adopted FASB FIN 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Other.* FIN 45 requires guarantorsto recognize a liability at the inception of the guarantee and record it at itsfair value. Required disclosures for guarantees include the nature of theguarantee, the maximum potential undiscounted amount of future payments theguarantor could be required to make under the guarantee and the currentcarrying amount of the liability, if any, for the guarantor’s obligations underthe guarantee. Guarantees contemplated by the disclosure requirements ofFIN 45 include product warranties, provisions in a business combination topay contingent consideration and guarantees issued between related parties. Theadoption of FIN 45 did not have a material impact on the consolidatedfinancial statements.

Also during the year endedNovember 29, 2003, the Company adopted Statement of Position (“SOP”) No. 01-6,*Accounting by Certain Entities (IncludingEntities with Trade Receivables) That Lend to or Finance the Activities ofOthers,* of the AICPA’s Accounting Standards Executive Committee(AcSEC). SOP No. 01-6 requires commercial entities that financetheir customers’ purchases of goods and services using trade receivables todisclose their accounting policy for receivables and the related valuationallowance, including the policy for charging off uncollectible receivables anddetermining past due or delinquent status. The adoption of SOP No. 01-6did not have a material impact on the consolidated financial statements.

61

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**2—ACCOUNTING POLICIES (Continued)**

*Pending*

The FASB issued revisedSFAS No.123 (“SFAS 123 (R)”), *Share-BasedPayment*, in December 2004. SFAS 123 (R) requires all entitiesto recognize the fair value of share-based payment award (stock compensation)classified in equity. SFAS 123 (R) is effective for the Company at thebeginning of the fiscal year 2006. The requirements of SFAS 123 (R) will nothave an impact on the consolidated financial statements unless the Companygrants new share options to plan participants.

**Reclassification**

Certain fiscal year 2004amounts have been reclassified to conform to fiscal year 2005 presentation.

**3—business ACQUISITION**

**Acquisitionof remaining interest in a joint venture**

Effective June 30, 2003, the Company acquired theremaining 50% interest in Nova Tube Indiana, LLC (formerly BethNova Tube, LLC),a tubing facility in Jeffersonville, Indiana, for $4,100,000 paid in cash. Theacquisition has been accounted for using the purchase method of accounting and,accordingly, the purchase price has been allocated to the assets andliabilities based on their estimated fair values at the date of acquisition.The excess of the amounts assigned to assets acquired and liabilities assumedover the cost of the purchase reduced the current value of property, plant andequipment by $4,540,000. The results of Nova Tube Indiana, LLC have beenincluded in the Company’s consolidated results from the date of acquisition.Previously, the Company accounted for its interest in Nova Tube Indiana, LLC,then a joint venture, using the equity method.

Pro forma combinedunaudited results, as if this combination occurred as of the beginning offiscal year 2003 are as follows. The pro forma adjustment is solely related tothe reduction of depreciation expenses to reflect the excess of the amountsassigned to assets acquired and liabilities assumed over the cost of thepurchase mentioned above.

| ** **                          | ** ** | **November 29,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2003**              | ** ** |
| ** **                          | ** ** | **$**                 | ** ** |
| Net sales                           |       |                  | 514,654    |   |   |
| Net income                          |       |                  | 13,278     |   |   |
| Basic and diluted income  per share |       |                  | 1.37       |   |   |

 

62

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**4—INCOME TAXES**

The following summarizes the Company’s income taxes onthe earnings of its Canadian and U.S. operations.

Income before income taxes by local jurisdiction:

| ** **    | ** ** | **Years ended**        | ** ** |
|---------------|------------|-----------------------------|------------|
| ** **    | ** ** | **November 26,  2005** | ** ** | **November 27,  2004** | ** ** | **November 29,  2003** | ** ** |
| ** **    | ** ** | **$**                       | ** ** | **$** | ** ** | **$** | ** ** |
| Canada        |       |                        | 31,567     |   |   |   | 59,716 |   |   |   | 14,401 |   |   |
| United States |       |                        | 25,347     |   |   |   | 53,617 |   |   |   | 4,014 |   |   |
|          |       |                        | 56,914     |   |   |   | 113,333 |   |   |   | 18,415 |   |   |

 

Theincome tax provision is composed of the following:

| ** **    | ** ** | **Years ended**        | ** ** |
|---------------|------------|-----------------------------|------------|
| ** **    | ** ** | **November 26,  2005** | ** ** | **November 27,  2004** | ** ** | **November 29,  2003** | ** ** |
| ** **    | ** ** | **$**                       | ** ** | **$** | ** ** | **$** | ** ** |
| Current       |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Canada        |       |                        | 10,015     |   |   |   | 18,816 |   |   |   | 4,645 |   |   |
| United States |       |                        | 10,320     |   |   |   | 20,911 |   |   |   | (1,520 | ) |   |
|          |       |                        | 20,335     |   |   |   | 39,727 |   |   |   | 3,125 |   |   |
| Deferred      |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Canada        |       |                        | (218       | ) |   |   | (490 | ) |   |   | (562 | ) |   |
| United States |       |                        | (141       | ) |   |   | 1,185 |   |   |   | 2,770 |   |   |
|          |       |                        | (359       | ) |   |   | 695 |   |   |   | 2,208 |   |   |
|          |       |                        | 19,976     |   |   |   | 40,422 |   |   |   | 5,333 |   |   |

 

63

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**4—INCOME TAXES (Continued)**

The components of theCompany’s deferred income tax assets and liabilities are as follows:

| ** **                                                          | ** ** | **November 26,  2005** | ** ** | **November 27,  2004** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                          | ** ** | **$**                       | ** ** | **$**                       | ** ** |
| Assets                                                              |       |                        |       |                        |       |   |   |   |   |
| Current deferred income taxes                                       |       |                        |       |                        |       |   |   |   |   |
| Inventories                                                         |       |                        | 819        |                        |       |   | 1,041 |   |   |
| Accounts receivable                                                 |       |                        | 956        |                        |       |   | 796 |   |   |
| Other items                                                         |       |                        | 40         |                        |       |   |   |   |   |
|                                                                |       |                        | 1,815      |                        |       |   | 1,837 |   |   |
| Long-term deferred income taxes                                     |       |                        |       |                        |       |   |   |   |   |
| Fair value of interest rate swap                                    |       |                        | 29         |                        |       |   | 304 |   |   |
| Unrealized capital loss on translation of advances  to subsidiaries |       |                        | 1,424      |                        |       |   | 1,297 |   |   |
| Other items                                                         |       |                        | 314        |                        |       |   |   |   |   |
|                                                                |       |                        | 1,767      |                        |       |   | 1,601 |   |   |
| Liabilities                                                         |       |                        |       |                        |       |   |   |   |   |
| Current deferred income taxes                                       |       |                        |       |                        |       |   |   |   |   |
| Investment in joint ventures                                        |       |                        | 338        |                        |       |   | 185 |   |   |
| Other items                                                         |       |                        |       |                        |       |   | 1 |   |   |
|                                                                |       |                        | 338        |                        |       |   | 186 |   |   |
| Long-term deferred income taxes                                     |       |                        |       |                        |       |   |   |   |   |
| Property, plant and equipment                                       |       |                        | 15,914     |                        |       |   | 15,542 |   |   |
| Investment in joint ventures                                        |       |                        | 54         |                        |       |   | 89 |   |   |
| Intangibles                                                         |       |                        |       |                        |       |   | 15 |   |   |
| Other items                                                         |       |                        |       |                        |       |   | 371 |   |   |
|                                                                |       |                        | 15,968     |                        |       |   | 16,017 |   |   |

 

Thereconciliation between the Canadian statutory income tax rate and the Company’seffective income tax rate is as follows:

| ** **                                                        | ** ** | **Years ended**        | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                        | ** ** | **November 26,  2005** | ** ** | **November 27,  2004** | ** ** | **November 29,  2003** | ** ** |
| ** **                                                        | ** ** | **%**                       | ** ** | **%** | ** ** | **%** | ** ** |
| Canadian  statutory income tax rate                               |       |                        | 30.5       |   |   |   | 30.1 |   |   |   | 29.8 |   |   |
| United States statutory  income tax rate difference               |       |                        | 5.5        |   |   |   | 6.4 |   |   |   | 4.9 |   |   |
| Provincial  incentive for manufacturing and processing activities |       |                        | (0.5       | ) |   |   | (0.3 | ) |   |   | (0.5 | ) |   |
| Other items                                                       |       |                        | (0.4       | ) |   |   | (0.6 | ) |   |   | (5.1 | ) |   |
| Effective income tax  rate                                        |       |                        | 35.1       |   |   |   | 35.6 |   |   |   | 29.1 |   |   |

 

64

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**5—EARNINGS PER SHARE**

The basic income per share is computed by dividing thenet income applicable to common shares by the weighted average number of commonshares outstanding during the year.

The diluted income per share is computed by dividingthe net income applicable to common shares by the weighted average number ofcommon shares outstanding during the year, plus the effects of dilutive stockoptions. The diluted income per share is computed using the treasury method, asif all stock options had been exercised at the beginning of the year and thatthe funds obtained thereby were used to purchase common shares of the Companyat the average trading price of the common shares during the period.

Thefollowing table provides the reconciliation between basic and diluted incomeper share:

| ** **                                                    | ** ** | **Years ended**  | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **November 26,** | ** ** | **November 27,** | ** ** | **November 29,** | ** ** |
| ** **                                                    | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                    | ** ** | **$**                 | ** ** | **$** | ** ** | **$** | ** ** |
| Net income                                                    |       |                  | 36,938     |   |   |   | 72,911 |   |   |   | 13,082 |   |   |
| Weighted  average number of common shares outstanding         |       |                  | 9,993,337  |   |   |   | 9,707,270 |   |   |   | 9,700,000 |   |   |
| Effects of dilutive stock options                             |       |                  | 326,292    |   |   |   | 214,455 |   |   |   |   |   |   |
| Weighted average number of diluted common shares  outstanding |       |                  | 10,319,629 |   |   |   | 9,921,725 |   |   |   | 9,700,000 |   |   |
| Net income per share                                          |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                         |       |                  | 3.70       |   |   |   | 7.51 |   |   |   | 1.35 |   |   |
| Diluted                                                       |       |                  | 3.58       |   |   |   | 7.35 |   |   |   | 1.35 |   |   |

 

For the year ended November 29,2003, stock options were not included in the computation of diluted income pershare as they were antidilutive.

**6—ACCOUNTS RECEIVABLE**

Accountsreceivable consist of the following:

| ** **                                                                                                                         | ** ** | **November 26,** | ** ** | **November 27,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                         | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| ** **                                                                                                                         | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Trade accounts                                                                                                                     |       |                  | 125,922    |                  |       |   | 129,123 |   |   |
| Allowance for  doubtful accounts                                                                                                   |       |                  | (3,399     | )                     |       |   | (3,622 | ) |   |
|                                                                                                                               |       |                  | 122,523    |                  |       |   | 125,501 |   |   |
| Loan to a  Canadian Corporation, bearing interest at  3.12%, maturing December 23, 2005, secured by a Canadian chartered bank |       |                  | 17,132     |                  |       |   |   |   |   |
| Other                                                                                                                              |       |                  | 398        |                  |       |   | 217 |   |   |
|                                                                                                                               |       |                  | 140,053    |                  |       |   | 125,718 |   |   |

 

65

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**6—ACCOUNTSRECEIVABLE (Continued)**

Changes in the Company’sallowance for doubtful accounts are as follows:

| ** **                 | ** ** | **November 26,** | ** ** | **November 27,** | ** ** |
|----------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| ** **                 | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Balance, beginning of year |       |                  | 3,622      |                  |       |   | 1,950 |   |   |
| Bad debt  expense          |       |                  | 1,585      |                  |       |   | 3,638 |   |   |
| Accounts  written off      |       |                  | (1,283     | )                     |       |   | (883 | ) |   |
| Recoveries                 |       |                  | (525       | )                     |       |   | (1,083 | ) |   |
| Balance, end of year       |       |                  | 3,399      |                  |       |   | 3,622 |   |   |

 

**7—INVENTORIES**

| ** **     | ** ** | **November 26,** | ** ** | **November 27,** | ** ** |
|----------------|------------|-----------------------|------------|-----------------------|------------|
| ** **     | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| ** **     | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Raw materials  |       |                  | 75,138     |                  |       |   | 111,151 |   |   |
| Finished goods |       |                  | 52,178     |                  |       |   | 61,699 |   |   |
|           |       |                  | 127,316    |                  |       |   | 172,850 |   |   |

 

**8—PROPERTY,PLANT AND EQUIPMENT**

| ** **                           | ** ** | **November 26,** | ** ** | **November 27,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| ** **                           | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Land                                 |       |                  | 7,090      |                  |       |   | 7,041 |   |   |
| Buildings and  building improvements |       |                  | 45,819     |                  |       |   | 44,738 |   |   |
| Machinery and  equipment             |       |                  | 87,315     |                  |       |   | 84,358 |   |   |
| Furniture and  fixtures              |       |                  | 985        |                  |       |   | 758 |   |   |
| Transportation  equipment            |       |                  | 2,053      |                  |       |   | 2,044 |   |   |
| Computer  equipment                  |       |                  | 3,203      |                  |       |   | 3,688 |   |   |
| Leasehold  improvements              |       |                  | 1,932      |                  |       |   | 1,989 |   |   |
| Aircraft                             |       |                  | 11,650     |                  |       |   | 11,650 |   |   |
| Assets under  construction           |       |                  | 266        |                  |       |   | 971 |   |   |
|                                 |       |                  | 160,313    |                  |       |   | 157,237 |   |   |
| Accumulated  depreciation            |       |                  | 57,519     |                  |       |   | 50,929 |   |   |
|                                 |       |                  | 102,794    |                  |       |   | 106,308 |   |   |

 

**9—GOODWILL**

| ** **                        | ** ** | **November 26,** | ** ** | **November 27,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| ** **                        | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Balance,  beginning of year       |       |                  | 12,789     |                  |       |   | 12,628 |   |   |
| Goodwill acquired during the year |       |                  | 205        |                  |       |   | 161 |   |   |
| Balance, end of year              |       |                  | 12,994     |                  |       |   | 12,789 |   |   |

 

66

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**10—BANK INDEBTEDNESS**

The bank indebtedness of the Company’s Canadiansubsidiaries consists of various demand revolving credit facilities availableby either prime rate loans or bankers’ acceptances, bearing interest at primerate, currently 4.75%(4.25% in 2004), or bankers’ acceptance rates, respectively, plus a premiumvarying from 0% to 0.5% in both years (actual rate 5.25% and 5.00% at November 26,2005 and November 27, 2004 respectively), and secured by inventories,movable hypothecs covering the universality of present and future book debtsand a negative pledge on certain assets of the Canadian subsidiaries. There areno cross collateralizations among the various facilities. These facilities arerenegotiated on an annual basis.

The Company’s Canadian subsidiaries have approximately$42,830,000 (CA$50,000,000) in 2005 and $40,743,000 (CA$48,500,000) in 2004 ofrevolving credit facilities from two Canadian financial institutions, of whichapproximately $41,691,000 (CA$48,670,000) was available at November 26,2005 and $37,204,000 (CA$44,284,000) was available at November 27, 2004.In addition, a Canadian subsidiary had a revolving demand credit facility of $0in 2005 and $630,000 (CA$750,000) in 2004, bearing interest at prime rate,currently 4.75%(4.25% in 2004), plus a rate varying from 0% to 0.50% in both years (actualrate 6.92% at November 27, 2004), of which $0 was available at November 26,2005 and $630,000 (CA$750,000) was available at November 27, 2004. Thisrevolving demand credit facility was not renewed by the Company during fiscalyear 2005.

As at November 26,2005, the bank had issued guarantees and letters of credit to the Company’sCanadian subsidiaries amounting to $99,400 and $97,000 (CA$116,000 in bothyears) as at November 27, 2004.

**11—ACCOUNTSPAYABLE AND ACCRUED LIABILITIES**

| ** **                                                                                                                                                                                                         | ** ** | **November 26,** | ** ** | **November 27,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                         | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| ** **                                                                                                                                                                                                         | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Trade accounts                                                                                                                                                                                                     |       |                  | 97,750     |                  |       |   | 101,714 |   |   |
| Trade accounts to  a company controlled by a director                                                                                                                                                              |       |                  | 873        |                  |       |   | 736 |   |   |
| Trade accounts to  a joint venture                                                                                                                                                                                 |       |                  | 977        |                  |       |   | 768 |   |   |
| Advance due to a  major shareholder, without interest and repayment terms                                                                                                                                          |       |                  | 103        |                  |       |   |   |   |   |
| Advance due to a  director, without interest and repayment terms                                                                                                                                                   |       |                  | 10         |                  |       |   |   |   |   |
| Advance due to an  employee of a subsidiary, bearing interest at a Canadian bank’s prime  rate, 4.25% in 2004, plus a premium of 0.5%, without repayment terms; this  advance was repaid during the year |       |                  |       |                  |       |   | 746 |   |   |
|                                                                                                                                                                                                               |       |                  | 99,713     |                  |       |   | 103,964 |   |   |

 

67

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**12—LONG-TERMDEBT**

| ** **                                                    | ** ** | ** **   | ** ** | **November 26,** | ** ** | **November 27,** | ** ** |
|---------------------------------------------------------------|------------|--------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **Maturity** | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| ** **                                                    | ** ** | ** **   | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Revolving line of credit(a)                                   |       |         | 2007       |                  |       |                  |       |   |   |   | 10,295 |   |   |
| Mortgage loan(b)  (CA$4,676,560; CA$6,038,708 in 2004)        |       |         | 2018       |                  |       |                  | 4,006      |   |   |   | 5,073 |   |   |
| Term credit  facility(c)  (CA$0; CA$2,124,776 in 2004)        |       |         | 2006       |                  |       |                  |       |   |   |   | 1,785 |   |   |
| Term loan(d)                                                  |       |         | 2007       |                  |       |                  | 40,854     |   |   |   | 43,504 |   |   |
| Loan from a major  shareholder(e)  (CA$0; CA$283,155 in 2004) |       |         |       |                  |       |                  |       |   |   |   | 237 |   |   |
| Loan from a director(e)(CA$0; CA$865,023 in 2004)             |       |         |       |                  |       |                  |       |   |   |   | 727 |   |   |
|                                                          |       |         |       |                  |       |                  | 44,860     |   |   |   | 61,621 |   |   |
| Less: Current  portion of long-term debt                      |       |         |       |                  |       |                  | 3,078      |   |   |   | 4,855 |   |   |
|                                                          |       |         |       |                  |       |                  | 41,782     |   |   |   | 56,766 |   |   |

----

(a)                 AU.S. subsidiary entered into a revolving credit agreement with a group ofbanks, as amended, which provides for borrowings, based upon a formula, of upto $40,000,000 through April 7, 2006. On November 22, 2005, the termof the agreement was extended for one year through April 7, 2007 and thegroup of banks became one bank. At November 26, 2005, there was an amountof $38,948,238 ($28,745,254 in 2004) in available borrowings, of which $0 in2005 ($10,294,984 in 2004) was outstanding under this agreement. The interestrate on borrowings under the credit agreement is the bank’s prime rate,currently 7.0% (5.0% in 2004), plus a margin varying from 0% to 1.25% in bothyears, or LIBOR, currently 4.21% (2.21% in 2004), plus 1.25% (a margin varyingfrom 1.25% to 2.5% in 2004) (actual rate 4.19% and 3.38% at November 26,2005 and November 27, 2004 respectively). Among the restrictive financialcovenants contained in the agreement are ratios as to fixed charges, tangiblecapital base and senior liabilities to tangible capital base, all of which wererespected as of November 26, 2005. Borrowings are collateralized by allassets of the U.S. subsidiary having a carrying value of $191,370,000.

(b)                Mortgageloan, amounting to $4,006,000 (CA$4,676,560) in 2005 and $5,073,000(CA$6,038,708) in 2004, bearing interest at a rate of 5.75% in both years,maturing on October 22, 2018, repayable in monthly capital instalments of $36,000in 2005 and $35,000 in 2004 (CA$41,675 in both years), secured by a firsthypothec on the land and building having a carrying value of $8,300,000(CA$9,700,000) as at November 26, 2005. The Company has the option ofprepaying 15% of the outstanding loan balance each year.

(c)                 Termcredit facility, as amended, amounting to $1,785,000 (CA$2,124,776) in 2004maturing on February 28, 2006 and repayable by quarterly instalments of$580,000 (CA$690,000) was repaid during fiscal year 2005. An amount of $1,224,000(CA$1,456,386) in 2004 of the term facility bore interest at a rate of 6.4%plus a premium varying from 0% to 0.75%. An amount of $237,000 (CA$282,259) in2004 of the term facility bore interest at a rate of 8.0% plus a premiumvarying from 0% to 0.75%. An amount of $324,000 (CA$386,131) in 2004 of theterm facility bore interest at a rate of 7.97% plus a 

68

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**12—LONG-TERMDEBT (Continued)**

premium varying from 0% to0.75%. As of November 27, 2004, the effective interest rate on theoutstanding borrowings under this facility was 7.4%.

(d)                AU.S. subsidiary of the Company entered into a $53,000,000 term loan agreementwith a group of banks, as amended, of which an amount of $40,854,000 and$43,504,000 was outstanding at November 26, 2005 and November 27,2004, respectively. On November 22, 2005, the term of the agreement wasextended for one year through April 7, 2007 and the group of banks becameone bank. The interest rate on the term loan is the bank’s prime rate,currently 7.0% (5.0% in 2004), plus a margin varying from 0.125% to 1.375% inboth years, or LIBOR, currently 4.21% (2.21% in 2004), plus a margin varyingfrom 1.375% to 2.625% in both years (actual rate 5.67% and 3.19% at November 26,2005 and November 27, 2004 respectively). Monthly principal payments of$221,000 are due through April 7, 2007 with the balance of the loan of$37,321,000 due April 7, 2007. Among the restrictive financial covenantscontained in the agreement are ratios as to fixed charges, tangible capitalbase and senior liabilities to tangible capital base, all of which wererespected as of November 26, 2005. The term loan is collateralized by allassets of the U.S. subsidiary having a carrying value of $191,370,000.

As required by theterm loan agreement, the U.S. subsidiary has entered into an interest rate swapagreement to fix the interest rate at 5.27% plus the applicable margin onborrowings of up to $20,000,000 through April 16, 2006. As of November 26,2005, the interest rate on $20,000,000 ($30,000,000 in 2004) was 6.65% (6.65%in 2004) and the effective interest rate on the excess was 5.68% (2.94% in2004).

(e)                 Theloans from a major shareholder and a director bore interest at a Canadian bank’sprime rate, 4.25% in 2004, plus a premium of 0.75% and had no repayment terms.These loans were repaid during fiscal year 2005.

Aggregatematurities of long-term debt are as follows:

| **Fiscal years** | ** ** | ** ** | ** ** | **$** | ** ** |
|-----------------------|------------|------------|------------|-------|------------|
| 2006                  |       | 3,078      |       |
| 2007                  |       | 38,633     |       |
| 2008                  |       | 428        |       |
| 2009                  |       | 428        |       |
| 2010                  |       | 428        |       |
| Thereafter            |       | 1,865      |       |

 

**13—SHARE CAPITAL**

**Preferred shares**

The Company is authorized to issue an unlimited numberof preferred shares, issuable in one or more series, the Board of Directorsbeing authorized to fix the rights, dividend rates, conversion rights, votingrights, terms of redemption (including sinking fund provisions), redemptionprice or prices, and the number of shares constituting any series or thedesignation of such series, without further vote or action by 

69

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**13—SHARE CAPITAL(Continued)**

theshareholders. No preferred shares were outstanding as at the dates of, and forthe period covered by, the financial statements.

**Common shares**

The Company is authorizedto issue an unlimited number of common shares, entitled to one vote per share.

**14—SHARE OPTION PLAN**

On September 24, 1997, Novamerican’s Board ofDirectors adopted the Novamerican Steel Inc. 1997 Share Option Plan whichprovides for the grant of incentive stock options (ISOs) as defined in Section 422of the U.S. Internal Revenue Code of 1986, as amended, non-qualified stockoptions (NSOs) and Other Rights (collectively, Awards) to key employees anddirectors of the Company. Options will be exercisable in instalments pursuantto a vesting schedule during the period specified in each option agreement. Nooption will remain exercisable later than ten years after the date of grant (orfive years from the date of grant in the case of ISOs granted to holders ofmore than 10% of the common shares). The exercise price for ISOs granted underthe Share Option Plan may be no less than the fair market value of the commonshares at the date of grant (or 110% in the case of ISOs granted to employeesowning more than 10% of the common shares). The exercise price for NSOs and allother Awards will be at the discretion of the Compensation Committee. StockAppreciation Rights (SARs) may be granted to Share Option Plan participantsseparately or in connection with ISOs and NSOs. Upon exercise of a SAR, theholder is entitled to receive payment equal to the excess of the fair marketvalue, on the date of exercise, of the number of common shares for which theSAR is exercised, over the exercise price for such common shares under arelated option, or if there is no related option, over an amount per commonshare stated in the written agreement setting forth the terms and conditions ofthe SAR. The Company has reserved 1,500,000 common shares for issuance underthe Share Option Plan. Since its inception, 456,226 common shares have been issuedunder this plan.

On September 24, 1997, ISOs were granted to threeexecutive officers of the Company to purchase 750,000 common shares at anexercise price equivalent to the initial public offering price of $14.00 percommon share. One-fifth of the ISOs could be exercised at each anniversary dateof the grant except for 300,000 ISOs of which 40% could be exercised after thesecond anniversary date only and 20% at each anniversary date thereafter. TheCompany has not issued any SARs as of November 26, 2005.

70

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**14—SHARE OPTIONPLAN (Continued)**

A summary of stock optionactivity and related information for 2004 and 2005 follows:

| ** **                               | ** ** | **Shares**         | ** ** | **Weighted  average  exercise price** | ** **         |
|------------------------------------------|------------|--------------------|------------|--------------------------------------------|--------------------|
| ** **                               | ** ** | ** **         | ** ** | **$**                                      | ** **         |
| Outstanding—November 29,  2003 |       | 750,000            |       |                                       | 14.00              |   |   |
| Granted                                  |       |     |       |                                       |     |   |   |
| Exercised                                |       | 86,089             |       |                                       | 14.00              |   |   |
| Forfeited                                |       |     |       |                                       |     |   |   |
| Outstanding—November 27,  2004 |       | 663,911            |       |                                       | 14.00              |   |   |
| Granted                                  |       |     |       |                                       |     |   |   |
| Exercised                                |       | 370,137            |       |                                       | 14.00              |   |   |
| Forfeited                                |       |     |       |                                       |     |   |   |
| Outstanding—November 26,  2005 |       | 293,774            |       |                                       | 14.00              |   |   |

 

| ** **                  | ** ** | **Shares** | ** ** | **Weighted  average  exercise price** | ** ** |
|-----------------------------|------------|------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | ** ** | ** ** | **$**                                      | ** ** |
| Exercisable at  end of year |       |       |       |                                       |       |   |   |
| 2003                        |       | 750,000    |       |                                       | 14.00      |   |   |
| 2004                        |       | 663,911    |       |                                       | 14.00      |   |   |
| 2005                        |       | 293,774    |       |                                       | 14.00      |   |   |

 

The remaining life of the options outstanding as of November 26,2005, is 1 year and 11 months.

71

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**15—RELATED PARTYTRANSACTIONS**

Thefollowing transactions with related parties were concluded in the normal courseof business and were measured at their respective exchange values, which arethe amounts established and agreed to by the related parties:

| ** **                                                         | ** ** | **Years ended**  | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | **November 26,** | ** ** | **November 27,** | ** ** | **November 29,** | ** ** |
| ** **                                                         | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                         | ** ** | **$**                 | ** ** | **$** | ** ** | **$** | ** ** |
| Processing  revenue from joint ventures                            |       |                  | 183        |   |   |   | 377 |   |   |   | 111 |   |   |
| Sales to joint  ventures                                           |       |                  |       |   |   |   |   |   |   |   | 249 |   |   |
| Management fees  from joint ventures                               |       |                  | 49         |   |   |   | 46 |   |   |   | 42 |   |   |
| Processing  charges paid to joint ventures                         |       |                  | 3,254      |   |   |   | 2,621 |   |   |   | 2,355 |   |   |
| Purchases from  joint ventures                                     |       |                  |       |   |   |   |   |   |   |   | 50 |   |   |
| Rental charges  paid to companies controlled by a director    |       |                  | 1,350      |   |   |   | 1,281 |   |   |   | 1,213 |   |   |
| Rental charges  paid to companies jointly controlled by a director |       |                  | 722        |   |   |   | 590 |   |   |   | 491 |   |   |
| Freight charges  paid to a company controlled by a director   |       |                  | 7,458      |   |   |   | 6,643 |   |   |   | 5,283 |   |   |
| Interest paid to  a major shareholder                              |       |                  | 111        |   |   |   | 50 |   |   |   | 81 |   |   |
| Interest paid to  a director                                       |       |                  | 43         |   |   |   | 6 |   |   |   |   |   |   |
| Interest paid to an employee  of a subsidiary                      |       |                  | 36         |   |   |   | 148 |   |   |   | 186 |   |   |

 

**16—FINANCIAL INSTRUMENTS ANDHEDGING ACTIVITIES**

**Fair value of financial instruments**

The fair value offinancial instruments has been estimated using data which management consideredthe best available methodology deemed suitable for the pertinent category offinancial instruments. The estimation methodologies are as follows:

·       Dueto their short-term maturity, the carrying value of certain financialinstruments was assumed to approximate their fair value. These financialinstruments include cash and cash equivalents, accounts receivable, bankindebtedness and accounts payable and accrued liabilities;

·       Thefair value of long-term debt, including the portion due within one year, isdetermined by discounting future cash flows using Government of Canada bondseffective rates increased by a risk premium;

·       Dueto the lack of stated maturity of the loans from a major shareholder and adirector, the Company is unable to determine their fair value;

·       The fair value of theinterest rate swap agreement used for hedging purposes is estimated byobtaining quotes from the Company’s banker.

72

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**16—FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES(Continued)**

Fairvalue of financial instruments:

| ** **                              | ** ** | **November 26, 2005** | ** ** | **November 27, 2004** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Carrying  amount**            | ** ** | **Fair  value**                 | ** ** | **Carrying  amount** | ** ** | **Fair  value** | ** ** |
| ** **                              | ** ** | **$**                           | ** ** | **$**                           | ** ** | **$** | ** ** | **$** | ** ** |
| Long-term debt                          |       |                            | 44,860     |                            |       | 44,910 |   |   | 60,657 |   |   | 60,749 |   |
| Long-term debt  without repayment terms |       |                            |       |                            |       |   |   |   | 964 |   |   | 964 |   |
| Interest rate swap                      |       |                            | 71         |                            |       | 71 |   |   | 741 |   |   | 741 |   |

 

The fair value of the long-term debt is determinedwithout considering any additional repayments based on excess cash flow thatmay be required due to the difficulty of estimating any additional repayments.

The fair value of the interestrate swap represents the amount that would have been required to settle thecontract as of November 26, 2005 had the contract been terminated. Thenotional amount of the swap is $20,000,000 ($30,000,000 in 2004) with anoriginal term of five years expiring April 16, 2006. The Company intendsto use the swap as a hedge of the related debt interest rate until it matures.

**Financial instruments—Derivatives**

A U.S. subsidiary of the Company uses an interest rateswap agreement to hedge its exposure to interest rate risk as required underthe terms of the term loan agreement described in note 10(d). This swappossesses a term equal to the term of the debt, with a fixed pay rate and areceive rate indexed to rates paid on the debt. This derivative was entered intoconcurrently with the issuance of the debt being hedged, at which date, it wasdesignated as a cash flow hedge. The Company formally documents all relationsbetween the hedging instruments and the hedged items, as well as itsrisk-management objectives and strategies for undertaking various hedgetransactions. The Company formally assesses, both at the hedge’s inception andon an ongoing basis, whether the derivatives that are used in hedgingtransactions are highly effective in offsetting changes in cash flows of thehedged items. In a cash flow hedge that is highly effective, the derivative isrecognized on the balance sheet at its fair value with the offsetting amountrecognized in accumulated other comprehensive income.

The Company discontinues hedge accountingprospectively when (a) it is determined that the derivative is no longereffective in offsetting changes in the cash flows of a hedged item; (b) thederivative expires or is sold, terminated or exercised; or (c) managementdetermines that designation of the derivative as a hedge instrument is nolonger appropriate. In these situations where hedge accounting is discontinued,the derivative will be carried at its fair value on the balance sheet, withchanges in its fair value recognized in current-period income.

The Company minimizes thecredit (or repayment) risk in derivative instruments by entering intotransactions with reputable financial institutions and it does not holdderivative instruments for trading purposes.

73

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollars, except share and per share data)

**16—FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES(Continued)**

**Exchange rate risk**

Although the Company’sfinancial results are reported in U.S. dollars, a substantial portion of theCompany’s revenues is received in, and its expenses are incurred in Canadiandollars. The Company from time to time utilizes forward exchange contracts tohedge its exposure to exchange rate fluctuations in connection with futuresales and purchases denominated in U.S. dollars by certain of its Canadiansubsidiaries. At November 26, 2005 and November 27, 2004, the Companyhad no such forward foreign currency contracts outstanding.

**Interest rate risk**

TheCompany’s exposure to interest rate risk is as follows:

| Cash and cash equivalents                 |   | Floating rate and non-interest bearing  |
|-------------------------------------------|--------|-----------------------------------------|
| Accounts  receivable                      |   | Non-interest bearing: $122,921,000 |
|                                      |   | Fixed rate: $17,132,000            |
| Bank indebtedness                         |   | Floating rate                           |
| Accounts payable  and accrued liabilities |   | Floating rate and non-interest bearing  |
| Income and other taxes                    |   | Non-interest bearing                    |
| Long-term debt                            |   | Floating rate: $20,854,000         |
|                                      |   | Fixed rate: $24,006,000            |

 

**Concentration risk**

The Company does not have a concentration of availablesources of supply, labor, service or other rights that, if suddenly eliminated,could severely impact its operations.

The Company’s customerbase is widely diversified and is involved in various industries. Therefore,the Company believes that no material concentrations of credit risk exist. Toreduce credit risk, the Company performs evaluations of its customers’creditworthiness and accordingly does not generally require collateral.

**Commodity price risk**

In the normal course of business, the Company isexposed to market risk or price fluctuations related to the purchase,production or sale of steel products. The Company’s market risk strategy hasgenerally been to obtain competitive prices for its products and services andallow operating results to reflect market price movements dictated by supplyand demand.

74

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollors, except share and per share data)

**17—JOINT VENTURES**

The Company holds a 60% equity interest and a 50%voting interest in a joint venture that processes carbon steel into tubing.

Effective June 30, 2003, the Company purchasedthe remaining 50% equity and voting interest in a joint venture it had withInternational Steel Group, Inc. The joint venture then became awholly-owned subsidiary of the Company and its accounts were consolidated withthe accounts of the Company from the time of its acquisition. Accordingly, thefollowing combined condensed financial information for the year ended November 29,2003, includes the results of this joint venture for the seven-month periodended June 30, 2003 only.

Combinedcondensed financial information of the joint ventures is summarized below:

| ** **       | ** ** | **Twelve-month periods ended** | ** ** |
|------------------|------------|------------------------------------------|------------|
| ** **       | ** ** | **November 26,**2005                | ** ** | **November 27,**2004 | ** ** | **November 29,**2003 | ** ** |
| ** **       | ** ** | **$**                                    | ** ** | **$** | ** ** | **$** | ** ** |
| Operations       |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Net sales        |       |                                     | 4,944      |   |   |   | 3,883 |   |   |   | 10,957 |   |   |
| Operating income |       |                                     | 1,147      |   |   |   | 519 |   |   |   | 959 |   |   |

 

| ** **                             | ** ** | **November 26,  2005** | ** ** | **November 27,  2004** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **$**                       | ** ** | **$**                       | ** ** |
| Balance sheet                          |       |                        |       |                        |       |   |   |   |   |
| Assets                                 |       |                        |       |                        |       |   |   |   |   |
| Current assets                         |       |                        | 1,728      |                        |       |   | 1,416 |   |   |
| Long-term receivable                   |       |                        |       |                        |       |   | 2 |   |   |
| Property, plant and equipment          |       |                        | 2,018      |                        |       |   | 2,403 |   |   |
|                                   |       |                        | 3,746      |                        |       |   | 3,821 |   |   |
| Liabilities                            |       |                        |       |                        |       |   |   |   |   |
| Current liabilities                    |       |                        | 404        |                        |       |   | 329 |   |   |
| Joint venture  investment              |       |                        |       |                        |       |   |   |   |   |
| Capital contributions                  |       |                        | 2,921      |                        |       |   | 2,921 |   |   |
| Undistributed earnings                 |       |                        | 330        |                        |       |   | 502 |   |   |
| Accumulated other comprehensive income |       |                        | 91         |                        |       |   | 69 |   |   |
|                                   |       |                        | 3,746      |                        |       |   | 3,821 |   |   |

 

**18—contingencies**

The Company iscontingently liable under claims issued in the normal course of business andwith respect to claims and litigation that arise from time to time. In theopinion of management, any uninsured liability, which may arise from suchcontingencies, would not have a material adverse effect on the consolidated financialstatements.

75

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollors, except share and per share data)

**19—commitments**

TheCompany has entered into operating leases for certain facilities and equipmentwhich expire at various dates until 2012.The following schedule outlines thefuture minimum rental payments under these commitments as at November 26,2005:

| ** **             | ** ** | **$**  | ** ** |
|------------------------|------------|--------|------------|
| 2006                   |       | 3,744  |       |
| 2007                   |       | 2,821  |       |
| 2008                   |       | 2,164  |       |
| 2009                   |       | 1,536  |       |
| 2010                   |       | 830    |       |
| Thereafter             |       | 988    |       |
| Total minimum payments |       | 12,083 |       |

 

Rental expense under theoperating leases amounted to approximately $4,079,000, $4,064,000 and $4,007,000for the years ended November 26, 2005, November 27, 2004 and November 29, 2003,respectively.

**20—retirement plan**

A U.S. subsidiary makesavailable to substantially all of its employees a 401(k) plan. The planallows employees to contribute a portion of their pretax income in accordancewith specified guidelines. A percentage of such contribution, up to a certainlimit, is matched by the employer. Investment elections are made at thediscretion of the employees and the plan is administered by an independentthird party. Costs incurred under the 401(k) plan amounted toapproximately $552,000, $498,000 and $472,000for the years ended November 26, 2005, November 27, 2004 and November 29,2003, respectively.

76

----

**Novamerican Steel Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**(In U.S. dollars; tabular amounts in thousands of U.S. dollors, except share and per share data)

**21—financial information by geographic area**

TheCompany has established that it has one single reportable segment and that itdoes not need to provide additional information relating to segmentedinformation in the financial statements.

| ** **        | ** ** | **United States** | ** ** | **Canada** | ** ** | **Total** | ** ** |
|-------------------|------------|------------------------|------------|------------|------------|-----------|------------|
| ** **        | ** ** | **$**                  | ** ** | **$**      | ** ** | **$**     | ** ** |
| 2005              |       |                   |       |       |       |      |       |   |   |
| Net sales(a)      |       |                   |       |       |       |      |       |   |   |
| Domestic          |       |                   | 344,354    |       |       | 456,473   |       | 800,827 |   |
| Export            |       |                   | 456        |       |       | 33,406    |       | 33,862 |   |
| Total             |       |                   | 344,810    |       |       | 489,879   |       | 834,689 |   |
| Operating income  |       |                   | 20,169     |       |       | 39,917    |       | 60,086 |   |
| Depreciation      |       |                   | 3,725      |       |       | 5,602     |       | 9,327 |   |
| Long-lived assets |       |                   | 65,118     |       |       | 50,670    |       | 115,788 |   |
| 2004              |       |                   |       |       |       |      |       |   |   |
| Net sales(a)      |       |                   |       |       |       |      |       |   |   |
| Domestic          |       |                   | 347,395    |       |       | 381,186   |       | 728,581 |   |
| Export            |       |                   | 1,700      |       |       | 38,346    |       | 40,046 |   |
| Total             |       |                   | 349,095    |       |       | 419,532   |       | 768,627 |   |
| Operating income  |       |                   | 58,168     |       |       | 59,719    |       | 117,887 |   |
| Depreciation      |       |                   | 3,702      |       |       | 4,384     |       | 8,086 |   |
| Long-lived assets |       |                   | 68,036     |       |       | 51,061    |       | 119,097 |   |
| 2003              |       |                   |       |       |       |      |       |   |   |
| Net sales(a)      |       |                   |       |       |       |      |       |   |   |
| Domestic          |       |                   | 224,236    |       |       | 258,348   |       | 482,584 |   |
| Export            |       |                   | 1,028      |       |       | 23,455    |       | 24,483 |   |
| Total             |       |                   | 225,264    |       |       | 281,803   |       | 507,067 |   |
| Operating income  |       |                   | 7,818      |       |       | 15,196    |       | 23,014 |   |
| Depreciation      |       |                   | 2,747      |       |       | 3,693     |       | 6,440 |   |
| Long-lived assets |       |                   | 70,752     |       |       | 47,387    |       | 118,139 |   |

----

(a)                 Salesare attributed to countries based on location of external customer.

77

----

**Report of Independent Registered Public Accounting Firm**

To theBoard of Directors ofNovamerican Steel Inc.

We haveaudited in accordance with the standards of Public Company Accounting OversightBoard (United States) the Consolidated Financial Statements of NovamericanSteel Inc. and Subsidiaries referred to in our report dated December 16,2005, which is included in the Annual Report for the year ended November 26,2005 on Form 20-F. Our audit was conducted for the purpose offorming an opinion on the basic financial statements taken as a  whole. Schedule II, also included in theAnnual Report, is presented for purposes of additional analysis and is not arequired part of the basic financial statements. This schedule has beensubjected to the auditing procedures applied in the audit of the basicfinancial statements and, in our opinion, is fairly stated  in all material respects in relation to thebasic financial Statements taken as a whole.

CharteredAccountants

Montréal,CanadaDecember 16, 2005

78

----

**Schedule II**

**NOVAMERICAN STEEL INC. AND SUBSIDIARIESVALUATION AND QUALIFYING ACCOUNTS**(in thousands of U.S. dollars)

| **Description**                     | ** ** | ** ** | ** ** | **Balance at  beginning of  year** | ** ** | **Additions  charged to  expenses** | ** ** | **Deductions** | ** ** | **Balance at  end of year** | ** ** |
|-------------------------------------|------------|------------|------------|----------------------------------------------|------------|------------------------------------------|------------|----------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **$**      | ** ** | **$**                                        | ** ** | **$**                                    | ** ** | **$**          | ** ** |
| **Allowance for doubtful accounts** | ** ** |       | ** ** |                                         |       |                                     |       |           |       |                                       |       |   |   |   |   |   |   |
| Year  ended November 26, 2005  |       |       | 3,622      |                                         |       |                                     | 1,585      |           |       |                                       | 1,808      |   |   |   | 3,399 |   |   |
| Year  ended November 27, 2004  |       |       | 1,950      |                                         |       |                                     | 3,638      |           |       |                                       | 1,966      |   |   |   | 3,622 |   |   |
| Year  ended November 29, 2003  |       |       | 1,656      |                                         |       |                                     | 1,619      |           |       |                                       | 1,325      |   |   |   | 1,950 |   |   |
| Year ended November 30, 2002   |       |       | 1,267      |                                         |       |                                     | 1,529      |           |       |                                       | 1,140      |   |   |   | 1,656 |   |   |

 

 

79

----

**ITEM 19**            EXHIBITS

| **Exhibit No.** | ** ** | **Description of Exhibit** | ** ** |
|----------------------|------------|--------------------------------------|------------|
|                 | 1.1        | (a)                                  |       | Articles of incorporation. |   |
|                 | 1.2        | (a)                                  |       | By-laws. |   |
|                 | 2.1        | (a)                                  |       | Specimen of Certificate representing Common Shares. |   |
|                 | 4.1        | (b)                                  |       | 1997 Share Option Plan. |   |
|                 | 4.2        | (c)                                  |       | Formation and Operating Agreement, dated February 2,  2000, of BethNova Tube, LLC. |   |
|                 | 4.3        | (d)                                  |       | Acquisition by 156499 Canada Inc. of the Minority  Interest in Argo Steel Ltd. |   |
|                 | 4.4        | (e)                                  |       | $40,000,000 Revolving Credit Facility dated April 6,  2001. |   |
|                 | 4.5        | (f)                                  |       | $53,000,000 Term Loan Facility dated April 6, 2001. |   |
|                 | 4.6        | (g)                                  |       | Purchase Agreement dated June 30, 2003 between  Novamerican Tube Holdings, Inc., as Purchaser and ISG Venture Inc., as  Vendor. |   |
|                 | 4.7        |                                      |       | First Amendment to $53,000,000 Term Loan Agreement. |   |
|                 | 4.8        |                                      |       | Fourth Amendment to Revolving Credit Agreement. |   |
|                 | 8.1        |                                 |       | Subsidiaries of the Company. |   |
|                 | 10.1       |                                 |       | Consent of Raymond Chabot Grant Thornton. |   |
|                 | 11.1       | (h)                                  |       | Code of Business Conduct and Ethics. |   |
|                 | 12.1       |                                 |       | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |   |
|                 | 12.2       |                                 |       | Certification of Chief Financial Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. |   |
|                 | 13.1       |                                      |       | Certification of Chief Executive Officer Pursuant to  Title 18, United States Code, Section 1350 as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |   |
|                 | 13.2       |                                      |       | Certification of Chief Financial Officer Pursuant to  Title 18, United States Code, Section 1350 as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |   |

----

(a)              Incorporatedby reference to Exhibit 3.1 to the Company’s Registration Statement on Form F-1/A,filed on October 20, 1997.

(b)             Incorporatedby reference to Exhibit 10.20 to the Company’s Registration Statement on Form S-8,filed on May 12, 1999.

(c)              Incorporatedby reference to Exhibit 2.3 to the Company’s Annual Report on Form 20-F,filed on March 1, 2001.

(d)             Incorporatedby reference to Exhibit 4.3 to the Company’s Annual Report on Form 20-F,filed on February 26, 2003.

(e)              Incorporatedby reference to Exhibit 4.1 to the Company’s Annual Report on Form 20-F,filed on February 20, 2002.

(f)               Incorporatedby reference to Exhibit 4.2 to the Company’s Annual Report on Form 20-F,filed on February 20, 2002.

(g)              Incorporatedby reference to Exhibit 4.6 to the Company’s Annual Report on Form 20-F,filed on February 25, 2004.

(h)             Incorporatedby reference to Exhibit 11.1 to the Company’s Annual Report on Form 20-F,filed on February 25, 2004.

80

----

**SIGNATURES**

The Registrant hereby certifiesthat it meets all of the requirements for filing on Form 20-F andthat it has duly caused and authorized the undersigned to sign this annualreport its behalf.

|                               |     | NOVAMERICAN STEEL INC.  (Registrant) |
|-------------------------------|----------|--------------------------------------|
| Dated: February 22, 2006 | By:      | /s/ *Christopher H. Pickwoad*        |
|                          |     | Christopher  H. Pickwoad             |
|                          | * * | *Executive  Vice President and*      |
|                          | * * | *Chief  Financial Officer*           |

 

81

----