**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 25, 2006**

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)

Securitiesregistered or to be registered pursuant to Section 12(b) of the Act:

**NONE**

Securitiesregistered or to be registered pursuant to Section 12(g) of the Act:

**Common Shares, withoutnominal or par value**

(Title of Class)

Securitiesfor which there is a reporting obligation pursuant to Section 15(d) ofthe Act:

**NONE**

Indicate the numberof outstanding shares of each of the issuer’s classes of capital or commonstock as of November 25, 2006.

| **10,450,000** | ** ** | **Common Shares**    |
|----------------|------------|----------------------|
| **-0-**        | ** ** | **Preferred Shares** |

 

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

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

 

Ifthis report is an annual or transition report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934.

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

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

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-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 x |   | Non-Accelerated  Filer o |
|---------------------------------|--------|---------------------------|--------|-------------------------------|

 

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

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

 

Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

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

 

 

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**TABLEOF 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         |     |       |
| 4A                                       |       | Unresolved Staff Comments                                                     |        |       | 23         |     |       |
| 5                                        |       | Operating and Financial Review and Prospects                                  |        |       | 23         |     |       |
| 6                                        |       | Directors, Senior Management and Employees                                    |        |       | 34         |     |       |
| 7                                        |       | Major Shareholders and Related Party Transactions                             |        |       | 39         |     |       |
| 8                                        |       | Financial  Information                                                        |        |       | 40         |     |       |
| 9                                        |       | The  Offer and Listing                                                        |        |       | 41         |     |       |
| 10                                       |       | Additional  Information                                                       |        |       | 42         |     |       |
| 11                                       |       | Quantitative and Qualitative Disclosures About Market  Risk                   |        |       | 50         |     |       |
| 12                                       |       | Description of Securities Other Than Equity Securities                        |        |       | 51         |     |       |
|                                     | ** ** | **Part II**                                                              | ** **  |       |       |     |       |
| 13                                       |       | Defaults, Dividend Arrearages and Delinquencies                               |        |       | 51         |     |       |
| 14                                       |       | Material Modifications to the Rights of Security  Holders and Use of Proceeds |        |       | 51         |     |       |
| 15T                                      |       | Controls and Procedures                                                       |        |       | 51         |     |       |
| 16A                                      |       | Audit Committee Financial Expert                                              |        |       | 52         |     |       |
| 16B                                      |       | Code  of Ethics                                                               |        |       | 52         |     |       |
| 16C                                      |       | Principal Accountant Fees and Services                                        |        |       | 52         |     |       |
| 16D                                      |       | Exemptions from the Listing Standards for Audit  Committees                   |        |       | 52         |     |       |
| 16E                                      |       | Purchases of Equity Securities by the Issuer and  Affiliated Purchasers       |        |       | 52         |     |       |
|                                     | ** ** | **Part III**                                                             | ** **  |       |       |     |       |
| 17                                       |       | Financial  Statements                                                         |        |       | 52         |     |       |
| 18                                       |       | Financial  Statements                                                         |        |       | 53         |     |       |
| 19                                       |       | Exhibits                                                                      |        |       | 78         |     |       |
| Signatures                               |       |                                                                          | 79          |       |       |

 

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**STATEMENT ONFORWARD-LOOKING INFORMATION**

Except for the statementsof historical fact contained herein, the information under the headings “Informationon the Company,” “Operating and Financial Review and Prospects,” “Quantitativeand Qualitative Disclosures 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. Suchstatements are subject to certain risks, uncertainties and assumptions,including those identified in the section captioned “Key Information—Risk Factors.”  Should one or more of these risks oruncertainties materialize, or should underlying assumptions prove incorrect,actual results may vary materially from those anticipated, expected, believed,estimated or projected. We undertake no obligation to publicly release, furnishor file the result of any revision to the forward-looking statements hereinthat may be made to reflect events or circumstances after the date hereof or toreflect the occurrence of unanticipated events.

**PART I**

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

**Not applicable.**

**ITEM 2**                   OFFERSTATISTICS AND EXPECTED TIMETABLE

**Notapplicable.**

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**ITEM 3**                   KEYINFORMATION

**Selected FinancialData**

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 25, 2006, 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 contained 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. 25,  2006**                                                                                                                                                                  | ** ** | **Nov. 26,  2005** | ** ** | **Nov. 27,  2004** | ** ** | **Nov. 29,  2003** | ** ** | **Nov. 30,  2002** | ** ** |
| ** **                                                         | ** ** | **(In thousands of U.S. dollars, except share and per share data,  percentages and tons sold and processed)** | ** ** |
| **Statement  of Operations Data:**                                 | ** ** | ** **                                                                                                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                          |       | $                                                                                                                                                                                        | 840,798    |   | $ | 834,689 |   | $ | 768,627 |   | $ | 507,067 |   | $ | 465,501 |   |
| Cost of sales                                                      |       | 655,659                                                                                                                                                                                  |       | 664,134 |   | 543,503 |   | 400,825 |   | 351,229 |   |
| Gross margin                                                       |       | 185,139                                                                                                                                                                                  |       | 170,555 |   | 225,124 |   | 106,242 |   | 114,272 |   |
| Operating expenses                                                 |       | 115,739                                                                                                                                                                                  |       | 110,469 |   | 107,237 |   | 83,228 |   | 79,720 |   |
| Operating income                                                   |       | 69,400                                                                                                                                                                                   |       | 60,086 |   | 117,887 |   | 23,014 |   | 34,552 |   |
| Interest expense                                                   |       | 1,139                                                                                                                                                                                    |       | 3,892 |   | 4,886 |   | 5,144 |   | 5,062 |   |
| Share in income of joint ventures                                  |       | (743                                                                                                                                                                                     | )          | (720 | ) | (312 | ) | (545 | ) | (708 | ) |
| Income before income taxes                                         |       | 69,004                                                                                                                                                                                   |       | 56,914 |   | 113,333 |   | 18,415 |   | 30,198 |   |
| Income taxes                                                       |       | 24,706                                                                                                                                                                                   |       | 19,976 |   | 40,422 |   | 5,333 |   | 10,080 |   |
| Net income                                                         |       | $                                                                                                                                                                                        | 44,298     |   | $ | 36,938 |   | $ | 72,911 |   | $ | 13,082 |   | $ | 20,118 |   |
| Basic income per share (b)                                         |       | $                                                                                                                                                                                        | 4.26       |   | $ | 3.70 |   | $ | 7.51 |   | $ | 1.35 |   | $ | 2.07 |   |
| Diluted income per share (b)                                       |       | $                                                                                                                                                                                        | 4.25       |   | $ | 3.58 |   | $ | 7.35 |   | $ | 1.35 |   | $ | 2.07 |   |
| Weighted average number of common shares outstanding—Basic    |       | 10,391,891                                                                                                                                                                               |       | 9,993,337 |   | 9,707,270 |   | 9,700,000 |   | 9,700,000 |   |
| Weighted average  number of common shares outstanding—Diluted |       | 10,450,000                                                                                                                                                                               |       | 10,319,629 |   | 9,921,725 |   | 9,700,000 |   | 9,700,000 |   |

 

| ** **                           | ** ** | **Years Ended **(a)                                                                                                                                                            | ** ** |
|--------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Nov. 25,  2006**                                                                                                                                                                  | ** ** | **Nov. 26,  2005** | ** ** | **Nov. 27,  2004** | ** ** | **Nov. 29,  2003** | ** ** | **Nov. 30,  2002** | ** ** |
| ** **                           | ** ** | **(In thousands of U.S. dollars, except share and per share data,  percentages and tons sold and processed)** | ** ** |
| **Other  Data:**                     | ** ** | ** **                                                                                                                                                                               | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| EBITDA (c)                           |       | $                                                                                                                                                                                        | 80,840     |   | $ | 70,742 |   | $ | 126,879 |   | $ | 30,521 |   | $ | 41,488 |   |
| Depreciation and amortization        |       | $                                                                                                                                                                                        | 10,697     |   | $ | 9,936 |   | $ | 8,680 |   | $ | 6,962 |   | $ | 6,228 |   |
| Capital expenditures                 |       | $                                                                                                                                                                                        | 22,581     |   | $ | 5,359 |   | $ | 9,056 |   | $ | 25,140 |   | $ | 13,512 |   |
| Dividends paid                       |       | —                                                                                                                                                                                   |       | — |   | — |   | — |   | — |   |
| Gross margin                         |       | 22.0                                                                                                                                                                                     | %          | 20.4 | % | 29.3 | % | 21.0 | % | 24.5 | % |
| Operating margin                     |       | 8.3                                                                                                                                                                                      | %          | 7.2 | % | 15.3 | % | 4.5 | % | 7.4 | % |
| Tons sold and processed (unaudited): |       |                                                                                                                                                                                     |       |   |   |   |   |   |   |   |   |
| Direct sales                         |       | 887,000                                                                                                                                                                                  |       | 925,000 |   | 926,000 |   | 878,000 |   | 881,000 |   |
| Toll processing                      |       | 862,000                                                                                                                                                                                  |       | 1,009,000 |   | 901,000 |   | 794,000 |   | 737,000 |   |
|                                 |       | 1,749,000                                                                                                                                                                                |       | 1,934,000 |   | 1,827,000 |   | 1,672,000 |   | 1,618,000 |   |

 

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| ** **              | ** ** | **Nov. 25,  2006**                                | ** ** | **Nov. 26,  2005** | ** ** | **Nov. 27,  2004** | ** ** | **Nov. 29,  2003** | ** ** | **Nov. 30,  2002** | ** ** |
|-------------------------|------------|--------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **              | ** ** | **(In thousands of U.S. dollars)** | ** ** |
| **Balance Sheet Data:** | ** ** | ** **                                             | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| Current assets          |       | $                                                      | 345,408    |                    | $          | 321,208                 |       | $                       | 312,666    |                    | $          | 189,709 |   | $ | 164,775 |   |
| Current liabilities     |       | 121,911                                                |       | 106,803                 |       | 132,435                 |       | 101,603                 |       | 77,970                  |       |
| Working capital         |       | 223,497                                                |       | 214,405                 |       | 180,231                 |       | 88,106                  |       | 86,805                  |       |
| Total assets            |       | 469,047                                                |       | 441,583                 |       | 436,667                 |       | 312,656                 |       | 271,705                 |       |
| Total debt              |       | 41,800                                                 |       | 47,536                  |       | 65,063                  |       | 76,525                  |       | 73,073                  |       |
| Net assets              |       | 328,546                                                |       | 276,959                 |       | 230,708                 |       | 145,715                 |       | 119,867                 |       |
| Share capital           |       | 38,904                                                 |       | 34,791                  |       | 29,609                  |       | 28,404                  |       | 28,404                  |       |
|                         |            |                                                        |            |                         |            |                         |            |                         |            |                         |            |  |  |  |  |  |

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(a)              Our fiscal year end is the last Saturday of November.The fiscal years ended November 25, 2006, November 26, 2005, November 27,2004 and November 29, 2003 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 measure calculated byadding to net income the amounts for income taxes, interest expense,depreciation and amortization. EBITDA is a measure commonly used in the steelindustry and is presented to enhance the understanding of  our results of operations. EBITDA may be usefulto compare our results to those of other companies in the industry on the samebasis. In addition, it is a measure commonly required by lenders in determiningcompliance with financial covenants. EBITDA is not a measurement of financialperformance under U.S. GAAP and may not be comparable to other similarly titledmeasures of other companies. EBITDA should not be considered as an alternativeto operating or net income (as determined in accordance with U.S. GAAP) as anindicator of our performance or as an alternative to cash flows from operatingactivities (as determined in accordance with U.S. GAAP) as a measure ofliquidity.

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

| ** **                    | ** ** | **Years Ended **(1)                          | ** ** |
|-------------------------------|------------|--------------------------------------------------------|------------|
| ** **                    | ** ** | **Nov. 25,  2006**                                | ** ** | **Nov. 26,  2005** | ** ** | **Nov. 27,  2004** | ** ** | **Nov. 29,  2003** | ** ** | **Nov. 30,  2002** | ** ** |
| ** **                    | ** ** | **(In thousands of U.S. dollars)** | ** ** |
| Net income                    |       | $                                                      | 44,298     |   | $ | 36,938 |   | $ | 72,911 |   | $ | 13,082 |   | $ | 20,118 |   |
| Income taxes                  |       | 24,706                                                 |       | 19,976 |   | 40,422 |   | 5,333 |   | 10,080 |   |
| Interest expense              |       | 1,139                                                  |       | 3,892 |   | 4,866 |   | 5,144 |   | 5,062 |   |
| Depreciation and amortization |       | 10,697                                                 |       | 9,936 |   | 8,680 |   | 6,962 |   | 6,228 |   |
| EBITDA                        |       | $                                                      | 80,840     |   | $ | 70,742 |   | $ | 126,879 |   | $ | 30,521 |   | $ | 41,488 |   |

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(1)            See (a) above.

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**Risk Factors**

*You should carefully consider the following risks anduncertainties which may have a material effect on our business, results ofoperations 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. In recent years, our steel suppliers have been significantlyimpacted by the shortage of raw materials resulting in unprecedented costincreases affecting scrap, coke, iron ore and energy. This together with anumber of additional factors, including the strength of the general economy,the increased consolidation of North American steel producers and the demandsfor steel from the Asian markets has affected the availability and prices offlat rolled carbon steel. When raw material prices are increasing, competitiveconditions will influence how much of the steel price increase can be passed onby us to our customers. We may not be able to pass on these price increases toour customers in the future. When raw material prices are decreasing, we facethe challenge of selling the inventory that we acquired at a relatively highercost at the decreasing prices. Thus, decreases in raw material prices couldresult in lower sale prices and lower margins for our products.

The occurrence of one or more of the above eventscould negatively impact in the prices of our products, reduce our margins orprofitability, and weaken our financial condition.

**Our business may beaffected by the cyclicality of the industries that purchase our products.Reduced demand from any one of these industries could result in lower operatingincome 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 for use in the automotiveindustry accounted for approximately 23.6% of our net sales in fiscal 2006 andapproximately 26.5% of our net sales in fiscal 2005. Such sales include salesdirectly to the automobile manufacturers and to their component and partssuppliers, as well as to manufacturers supplying the automotive “after market”components and parts. The automobile industry experiences fluctuation in demandbased on numerous factors such as general economic conditions and consumerconfidence. The automobile industry is also subject, from time to time, tolabor problems, which may result in reduced demand for our products during workstoppages.

**We may not be ableto grow our business in the future or to manage our expansion effectively**

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 

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our business at the ratewe did in the past, or at all. Any new facility or operation or any futureacquisitions, 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 evaluate, from time-to-time,potential acquisitions, we currently have no understandings, agreements orcommitments to make 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 Protection Agency,or EPA, has issued claim notice letters to 63 parties, some of which aredefendants in the lawsuit. We received, on or about April 25, 2003, an EPAclaim letter seeking reimbursement of costs incurred and to be incurred at thesite. American Steel responded to the claim by denying liability for the site. During2006, American Steel and approximately 25 other defendants in the litigationentered into a settlement with the plaintiffs, with the approval of the EPA,resolving their alleged 

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liability for all claimsfor past and future response and oversight costs in connection with theRemedial Investigation/Feasibility Study for the site. The litigation remainspending against the non-settling defendants. The settlement does not addressfuture remediation costs,****and wedo not believe it is currently possible to estimate our share, if any, of suchcosts, should claims for their recovery be pursued against us. We believe thatwe have meritorious defenses against any such claims, and we intend to defend ourposition vigorously should they be pursued against us. However, we may notprevail in such event, and any significant loss could have an adverse effect onour financial results.

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, Scott B. Jones, our president,  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.

**Our business ishighly competitive and increased competition could reduce our sales andprofitability**

The principal markets thatwe serve are highly competitive. We compete on a regional basis with steelservice centers and, to a certain degree, with 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.

**Our operations maybe impacted by future labor negotiations or work stoppages**

Certain of our employeesat ten of our 22 facilities are organized by the United Steelworkers, theTeamsters, the Sheet Metal Workers and independent employee associations,representing in the aggregate, approximately 276 of our 1,062 employees. Ourlabor contracts expire on staggered dates. The labor contract with the Teamsters covering 30 employees at one of ourLaSalle facilities expired on December 1, 2006 and is currently beingrenegotiated. The labor contract with the United Steel Workers covering 11employees at our Cumberland facility will expire in June 2007. The laborcontract with the 

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Teamsterscovering 22 employees at our Albany facility will expire in December 2007.Labor contracts with employee associations covering 17 employees at our Norwoodfacility and 34 employees at our Portland facility will expire in December 2007.Work stoppages could have a direct negative impact on our ability toconduct business, continue production, and on our results of operations.

**We may incuradditional 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 potentialinability to fund future working capital, acquisitions, capital expendituresand other general corporate requirements, limits on our flexibility in planningfor, or reacting to, changes in our business and the steel industry, limits onfuture borrowings under our existing or future credit arrangements, which couldaffect our ability to pay our indebtedness or to fund our other liquidityneeds, the inability to generate sufficient funds to cover required interestpayments, and restrictions on our ability to refinance our indebtedness oncommercially reasonable 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.

**We are dependent onour 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 American manufacturing and industrial companies,relocate operations or outsource functions 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 their productionoperations or outsource particular functions overseas, we could lose theirbusiness, which could have an adverse effect on our results of operations andfinancial condition.

**It may be difficultto trade our common shares**

Although our common sharesare registered under the Securities Exchange Act of 1934 and quoted on theNasdaq Global Market, at times in the past, there has been a limited volume oftrading of our common shares. Accordingly, investors may not be able to rapidlydivest all or a portion of their common shares should they desire to do so.

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**The market pricefor 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:

·       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 steelprocessing industry, 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 or significantdivestitures; 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 shares could result in adecrease of the prevailing market price of our common shares, especially if ourexisting shareholders were to sell a large number of their common shares, or ifwe were to issue a large number of our common shares. Moreover, the perceptionin the public market that our existing shareholders might sell additionalcommon shares could depress the market for our common shares.

**Our principal shareholders have the ability to exertsignificant control in matters requiring a 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 foregoingpersons continued concentration of voting power, they could delay, deter orprevent a change of control of our Company or other business combinations thatmight otherwise be beneficial to our other shareholders. In deciding how tovote on such matters, such persons may be influenced by interests that conflictwith yours.

**The staggered nature of our board of directors, aswell as our articles of incorporation, could delay, deter or prevent a changeof control**

Our board of directors currently consists of seven members.Our articles of incorporation, or Articles, provide for our board of directorsto be divided into three groups, with staggered three-year terms. As a result,only one group of directors will be elected at each annual meeting of ourshareholders. Furthermore, our Articles authorize our board of directors toappoint, between annual meetings of shareholders, one or more additionaldirectors who would hold office for a term expiring not later than the close ofour following annual meeting of shareholders (unless such appointed directorsare then elected as 

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directors by ourshareholders), provided that the total number of directors so appointed may notexceed one third of the number of directors elected at the previous annualmeeting of our shareholders.

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 topay 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**

**History andDevelopment of the Company**

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

Following our incorporation, a reorganization of thevarious operations wholly-owned or controlled by D. Bryan Jones, our chairmanand chief executive officer, or Scott B. Jones, our  president and the son of D. Bryan Jones,occurred pursuant to which we became the holding company for two main operatinggroups: (i) our Canadian affiliates, consisting of Nova Steel Ltd., NovaTube Inc., Cresswell Industries Inc. (formerly Cresswell Roll Forming Inc.), ArgoSteel Ltd., Nova Tube Ontario Inc., Nova Steel Processing Centre Ltd. and DeltaTube and Company, Limited Partnership; and (ii) our U.S. affiliates,consisting of American Steel and Aluminum Corporation, Nova Tube and Steel, Inc.and Nova Tube Indiana, LLC.

Nova Steel Ltd. was established as a processor ofhot-rolled carbon steel in 1979. In 1983, Nova Steel Ltd. acquired andinstalled its first tube mill in Montréal. In 1987, this operation became NovaSteel Ltd.’s (60%) contribution to a joint venture, Delta Tube and Company,Limited Partnership, for the toll rolling of tubing, with Ispat Sidbec Inc.(now Mittal Canada Inc.) (40%). In 1985, the majority of the shares ofCresswell Roll Forming Inc. (now Cresswell Industries Inc.), a roll forming,stamping and manufacturing business in Québec, were acquired. In 1989, ArgoSteel Ltd., a processor of hot-rolled, cold-rolled and galvanized steelproducts was established in Montréal with a 50.9% interest at the time. Thisexpansion was followed in October 1991 with the establishment of MetcoSteel Inc. (now part of Nova Steel Ltd.), as a processor of carbon steel plateand plate coil in our LaSalle facility.

In July 1991, Nova Tube Inc. acquired a tube milloperation in Baie d’Urfé, Québec and, in May 1996, Nova Tube Ontario Inc.was established with the installation of a tube mill in Mississauga, Ontariospecifically designed to meet the needs of high pressure hydroforming for theautomotive industry.

American Steel, which was founded in 1962 and which weacquired in August 1996, through our U.S. holding company, IntegratedSteel Industries, Inc., operates in nine locations in the Northeastern andMid-Atlantic United States. American Steel is a distributor of steel, aluminumand stainless steel products including hot and cold-rolled carbon steel,aluminum, stainless steel, alloy and coated products in sheet, coil, bar,shapes, tubular and plate forms.

On November 7, 1997, we completed our initialpublic offering of 2,200,000 shares of our common stock and, at such time, ourshares of common stock were listed on Nasdaq where they continue to trade underthe symbol, “TONS.”

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During 1998, we also built a processing facility inStoney Creek, Ontario, Nova Steel Processing Centre Ltd., and installed a400,000 ton per year pickling line together with a 200,000 ton per yearslitting line. Both the pickling line and the slitting line were commissionedand went into full production during the first quarter of 1999. A secondslitting line was installed in 2000 and has been in full production since 2001.

During 2000, Novamerican Tube Holdings, Inc., awholly-owned subsidiary of Integrated Steel Industries, Inc., formed ajoint venture with Bethlehem Steel Corporation, or Bethlehem, under thecorporate name BethNova Tube, LLC, or BethNova, to produce steel tubing for usein hydroforming of automobile and truck components. This state-of-the-art tubemanufacturing facility in Jeffersonville, IN was completed in 2001 and beganramping up production in the fourth quarter of that same year. The bulk of thetube production at this facility is dedicated to Dana Corporation, a majorautomotive parts supplier, which had, at that time, built a hydroforming plantnear Elizabethtown, KY. On October 15, 2001, Bethlehem filed forprotection under Chapter 11 of the United States Bankruptcy Code and on February 6,2003, sold substantially all of its assets, including its interest in the jointventure, to International Steel Group, Inc. In June 2003, wepurchased International Steel Group Inc.’s 50% interest in the BethNova joint venture for $4,100,000, and renamedthe now wholly-owned subsidiary, Nova Tube Indiana, LLC.

In November 2000, we built a new tubing facility,operated by Nova Tube and Steel, Inc. in Morrisville, PA. The structural tubemill began production in November 2000 and is capable of producing hollowstructural sections, or HSS, up to 6” x 6” x 3/8”. The heavy gauge slitter andcut-to-length line were completed in November 2001 and went into fullproduction in 2002.

In 2002, through a subsidiary, we acquired all of theminority interest in Argo Steel Ltd.

During 2002, the premises leased by Nova Tube OntarioInc. in Mississauga, Ontario were expanded by 40,000 square feet which enabledus to install additional equipment to increase capacity at this facility.

At the end of 2004, wecompleted the construction of a 160,000 square foot facility in LaSalle (Montréal),Québec. This manufacturing and processingfacility includes an in-line temper mill and cut-to-length line andbecame operational in early 2005. Thisplant replaced the Nova Steel facility in Dorval, Québec and one of ourfacilities at Lachine, Québec. The mill includes a rotary shear forcontinuous operation and precision cut-to-length tolerances, and is capable of levelingand temper-rolling 40 ton coils up to 1⁄2” thick by 72” wide. The temper mill isalso capable of processing coils up to 80,000 tons minimum yield and creatingelongations of up to 3%. The mill and cut-to-length line join our 1⁄2” x 72” wideslitter that has been operating since our second quarter of fiscal 2004. Inaddition to these pieces of equipment, we upgraded, rebuilt and transferred twoexisting lines, a 1⁄4” x 60” slitter and a 1⁄4” x 72” cut-to-length line, to bringthe total number of lines at the LaSalle facility to four, with the result thatthe facility has an annual slitting and leveling capacity of over 400,000 tons. The cost of this project wasapproximately $20.2 million, which was financed by a combination of newdebt for the land and building and internal sources of funds.

The facility in LaSalle was built to reorganize andrestructure three of our facilities. While historically all three facilitiesprocessed and sold hot-rolled coil and plate, now only the LaSalle facilityundertakes these operations. The LaSalle facility has taken the place of two ofthe previous three operating locations. By consolidating these operations intoone facility, we were able to achieve improved inventory management ofhot-rolled products, and capacity increases, production improvements andreduced manpower requirements from the upgraded equipment. Furthermore, sincethe LaSalle facility is located next to our Delta Tube operation, we were alsoable to achieve quicker transfer of slit coils to the tube mill and lesstransport equipment. We believe these operating efficiencies, equipment, andadministrative and logistical advantages will continue to result in significantcost savings as the production levels at this facility continue to increase.

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During the fourth quarter of 2006, we announced theinstallation of a new pipe finishing facility at the Nova Tube and Steel, Inc.operation in Morrisville, PA. The new in-line capacity will add 50,000 tons offinished pipe on the existing 7” structural tube mill. The anticipated cost ofthis project is approximately $8.5 million of which $0.1 million has beenincurred through February 22, 2007. This project will be financed frominternal sources of funds.

During the first quarterof 2007, we began consolidating the Brampton steel slitting and blankingoperation, acquired in December 1998 by Argo Steel Ltd., with the Dorvalfacility operation. We expect to complete this consolidation by the end of thesecond quarter 2007.

**Business Overview**

We are a well-established steel service center,processor and tubing manufacturer. We operate from 11 locations in theNortheastern, Mid-Atlantic and Mid-Western United States and from 11 locationsin the Canadian provinces of Québec and Ontario. Since inception, we have grownour business internally through identifying and capturing niche opportunitiesin steel manufacturing and processing, and through selective acquisitions. Thishas enabled us to become a multi-facility, multi-process provider ofvalue-added services in several processing and geographic niches. For example,based on our knowledge of the industry, we believe that we are one of threeproducers in North America of hydroform quality tubing used by the automotiveindustry, and one of two independent picklers in Canada. We have also installedan in-line temper mill in our LaSalle, Québec facility, which we believe makesus the only independent provider of this high-precision service in Canada.

We process and distribute carbon steel, stainlesssteel and aluminum products and operate as an intermediary between primarymetal producers and the manufacturers that require processed metal, often on ajust-in-time delivery basis. We produce steel tubing in various sizes for usein the structural and automotive markets (including tubing used inhydroforming). We also produce roll formed steel sections and manufacture heavyequipment parts and accessories. Our flat rolled processing capabilitiesinclude pickling, slitting, blanking, leveling, temper-rolling and cutting-to-lengthto precise customer specifications. Additionally, we perform many of theseprocessing services for customers who provide their own steel, referred to inthe industry as toll processing. For a detailed description of our steelprocessing services, see “Products and Services.”

In fiscal 2006, we had net sales of $840.8 million,operating income of $69.4 million and net income of $44.3 million. Since ourinitial public offering in 1997, our total tons sold and processed have grownfrom 829,000 tons in 1997 to 1,749,000 tons in 2006, which represents acompound annual growth rate of 8.7% and our shareholders equity has grown from$60.8 million in 1997, to $328.5 million in 2006, which represents a compoundannual growth rate of 20.6%.

Since our initialpublic offering in 1997, we have completed the five greenfield projectsdescribed below, each of which involved the acquisition of land, constructionof facilities from the ground up and installation of various machinery andequipment:

·       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 

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commercial production atthis facility in February 1999, nine months after breaking ground. Infiscal 2006, we processed approximately 575,000 tons through the pickling line,which is approximately 35% higher than the manufacturer’s annual rated capacityof 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.

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

·       LaSalle,Québec (2004): This facility includes temper-rolling equipment, as well asslitting and cut-to-length equipment to consolidate certain of our operationsand to achieve cost efficiencies.

We believe that these greenfield projects have allowedus to grow profitability by lowering our costs of production while expandingour value-added processing and manufacturing capabilities. We plan to continueto grow internally by pursuing future greenfield projects as additionalopportunities in our markets arise.

Our business strategy is focused on profitable growth,higher margins and lower costs of production, providing value-added processingcapabilities and expanding our range of services and customer base.

We intend toachieve 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*. Weintend to continue fully utilizing and, where possible, expanding thecapabilities of our equipment by using new technology together with ourexperience and expertise. This has enabled us to consistently increase therated capacity of many of our facilities and reduce our costs of production andincrease customer satisfaction. This has also enabled us to work with ourcustomers to develop and efficiently manufacture innovative value-addedproducts.

·       *Seeking joint ventures and appropriately pricedacquisitions*. We will also continue to pursue opportunities tobroaden our product range and customer base through joint ventures andselective acquisitions. We believe our record of success with joint venturesand our strong financial condition position us to find and act on additionalopportunities of this type. We consider acquisition opportunities that are inline with our business strategy and that, in general, appear to beappropriately priced, immediately accretive and with strong local management.

We believe that wehave the following competitive strengths that will facilitate theimplementation 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 reflectthis ability.

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·       *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 costs associatedwith obtaining steel supply.

·       *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 volume of purchases,enhance our ability to obtain quality steel at competitive prices and on atimely 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**

Our servicesinclude 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.

Our services alsoinclude higher value-added processes, which process and transform steel tospecified lengths, widths and shapes pursuant to specific customer orders,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;

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

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·       temper-rolling:an in-line process that improves the surface finish and flatness ofcut-to-length sheet and plate and that eliminates coil memory or springback.

A distinctiveaspect of our company is our focus on pickling and tubing operations:

·       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 HSS tubing; and

·        our tube mills inMississauga, Ontario, and Jeffersonville, Indiana, were constructedspecifically to meet the needs of high pressure hydroforming for the automotiveindustry and include in-line precision cutting, finishing, testing andpackaging capabilities. Hydroforming is an innovative technology used in themanufacture of certain automotive parts which involves the application of waterat high pressure to form and shape steel tubes. This reduces the cost and theweight of a steel component.

**Suppliers**

We purchase flat rolled steel for processing from anumber of North American and international primary steel producers inquantities that we believe are efficient for such producers. We concentrate ondeveloping relationships with high-quality North American integrated steelmills and mini-mills, as well as international primary steel producers and onbecoming a valued customer of such producers. We are a major customer of flatrolled coil for some of our principal suppliers but are not dependent on anyone supplier. This enables us to maintain continued sources of supply at whatwe believe are competitive prices. We believe the accessibility and proximityof our facilities to major steel producers, together with our strong balancesheet, will continue to be an important factor in our maintaining goodrelationships 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 of120 salaried inside and outside sales representatives of which 22 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.

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**Customers andDistribution**

In fiscal 2006, we processed steel for sale toapproximately 6,200 customers. Our diversified customer and geographic baseserves to reduce our exposure to fluctuations in business and economic cyclesin particular industries and regions. In fiscal 2006, our top 20 customersaccounted for less than 31.5% of total net sales and no single customeraccounted for more than 7.3% 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 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 2006 accounted for approximately 23.6% of totalnet sales and our sales to other steel service centers accounted forapproximately 18.6% 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. 25,  2006**                                | ** ** | **Nov. 26,  2005** | ** ** | **Nov. 27,  2004** | ** ** |
|----------------------|------------|--------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **           | ** ** | **(In thousands of U.S. dollars)** | ** ** |
| Canadian  affiliates |       | $                                                      | 481,278    |                    | $          | 489,879                 |       | $ | 419,532 |   |
| U.S. affiliates      |       | 359,520                                                |       | 344,810                 |       | 349,095                 |       |
|                 |       | $                                                      | 840,798    |                    | $          | 834,689                 |       | $ | 768,627 |   |

 

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

**ManagementInformation Systems**

We maintain managementinformation systems, including bar coding systems, which monitor and allocate inventoryamong our operations. In particular, the inventory system at American Steelprovides information to all sales and management personnel on a real time basiswhich enables them to offer a wide range of products to their customers on atimely basis without the need to maintain an inventory of the full product lineat all locations. Furthermore, 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 

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certification. From timeto time, we have successfully undergone quality audits by certain of our largercustomers. To date, 12 of Nova’s facilities and American Steel’s Auburn,Massachusetts facility have obtained ISO 9001:2000 certification, a universalindustrial quality control standard set by the International Organization forStandardization. Furthermore, two of our facilities are TS16949 certified, thequality standard established for the automotive industry. Our remainingfacilities are seeking ISO certification.

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 haveestablished themselves as quality suppliers by consistently meeting therequirements of their 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 subject to comprehensive andfrequently changing federal, state, provincial and local laws and regulationsin the United States and Canada relating to the protection of the environment,including those related to air emissions, wastewater discharges, treatment,storage and disposal of hazardous substances and other materials and wastes,occupational health and safety, and in general, the emissions of pollutantsinto the environment. Nova Steel Processing Centre Ltd., our facility locatedin Stoney Creek, ON, has obtained ISO 14000 certification.

We believe that we are in material compliance with allcurrently applicable environmental laws and regulations. We do not anticipateany material expenditure to meet environmental requirements and do not believethat continued compliance with such existing laws and regulations will have amaterial adverse effect on our operations or financial condition. However, wecannot predict the environmental laws or regulations that may be enacted in thefuture or how existing or future laws and regulations will be administered orinterpreted. Compliance with more stringent laws or regulations, as well asmore vigorous enforcement policies of the regulatory agencies or stricterinterpretations of existing laws and regulations, may require additionalexpenditures by us which could vary substantially from those currentlyanticipated.

Our subsidiary American Steel was named as one of 19defendants in an action brought in October 2001 by two private partiesunder the Comprehensive Environmental Response Compensation and Liability Act*,* or**CERCLA,to recover costs incurred and to be incurred in connection with a wastedisposal facility in Cumberland, RI, which has been categorized as a Superfundsite by federal authorities. The complaint was subsequently amended twice toadd additional defendants, aggregating to a total of 57 defendants. Theplaintiffs claim that we are liable based upon alleged shipments to the site byAmerican Steel, prior to its acquisition by us in 1996. The plaintiffs haveidentified over 100 potentially responsible parties, or PRPs, and theEnvironmental Protection Agency, or EPA, has issued claim notice letters to 63parties, some of which are defendants in the lawsuit. We 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. During 2006 American Steel and approximatelytwenty-five other defendants in the litigation entered into a settlement withthe plaintiffs, with the approval of the EPA, resolving their alleged liabilityfor all claims for past and future response and oversight costs in 

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connection with theRemedial Investigation/Feasibility Study for the site. The litigation remainspending against the non-settling defendants. The settlement does not addressfuture remediation costs, and we do not believe it is currently possible toestimate our share, if any, of such costs, should claims for their recovery bepursued against us. We believe that we have meritorious defenses against anysuch claims, and we intend to defend our position vigorously should they bepursued against us. However, we may not prevail in such event, and anysignificant loss could have an adverse effect 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 or may be considered hazardous. Accordingly, it ispossible that additional environmental liabilities may arise in the future as aresult of any such waste generation 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 byvarious safety regulations. We believe that we are in compliance with theselaws and regulations in all material respects and we do not believe thatcontinued compliance with such laws and regulations will have a materialadverse effect on our business, results of operations or financial condition.

**OrganizationalStructure**

We are the holding company for two main operatinggroups: (i) our Canadian affiliates, consisting of Nova Steel Ltd., NovaTube Inc., Cresswell Industries Inc (formerly Cresswell Roll Forming Inc.),Argo Steel Ltd., Nova Tube Ontario Inc., Nova Steel Processing Centre Ltd. andDelta Tube and Company, Limited; and (ii) our U.S. affiliates, consistingof American Steel and Aluminum Corporation, Nova Tube and Steel, Inc. andNova Tube Indiana, LLC.

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The following chart illustrates the organization ofour subsidiaries and their country of organization:

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**Property, Plantsand Equipment**

Thefollowing chart describes each of our Canadian operations:

| Subsidiary/Location                | ** ** | **Description of Operations and Products**                           | ** ** | **Title**                                               |
|------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------------------------------|
| **Nova Steel Ltd.****/**           |       | ·   160,000 sq.  ft                                   |       | ·   Hot-rolled,  hot-rolled pickled and  |   | Owned |
| LaSalle, Québec               |       | ·   Temper mill                                       |       | oiled and tubing                                        |   |   |
| ** **                         |       | ·   Two  cut-to-length lines                          |       |                                                    |   |   |
| ** **                         |       | ·   Two slitting  lines                               |       |                                                    |   |   |
| **Nova Steel Ltd./**               |       | ·   49,100 sq. ft                                     |       | ·   Hot-rolled,  hot-rolled pickled and  |   | Leased to |
| Cambridge, Ontario                 |       | ·   Two slitting  lines                               |       | oiled, cold-rolled and  coated slit coils               |   | Nov. 30, 2009 * |
| **Delta Tube and Company,**        |       | ·   100,000 sq.  ft                                   |       | ·   Toll rolling  of HSS tubing for Nova |   | Owned |
| **Limited Partnership/**           |       | ·   HSS tube  mill, up to                             |       | and pipe for Mittal  Canada Inc.                        |   |   |
| LaSalle, Québec               |       | 5” x 5” x 1/4”                                        |       |                                                    |   |   |
| (60% Owned)                        |       |                                                                 |       |                                                    |   |   |
| **Nova Tube Inc./**                |       | ·   47,100 sq. ft                                     |       | ·   Toll rolling  of tubing for Nova for |   | Leased to |
| Baie d’Urfé, Québec |       | ·   Hot-rolled  tube mill up to 3” O.D.          |       | the structural market                                   |   | May 31, 2008 * |
| **Nova Tube Ontario Inc./**        |       | ·   90,000 sq. ft                                     |       | ·   High quality  mechanical tubing      |   | Leased to |
| Mississauga, Ontario               |       | ·   Cold-rolled  tube mill                            |       | targeting hydroformed  automobile                       |   | April 30, 2007 * |
|                               |       | up to 4” O.D.                                                   |       | components and other  automotive                        |   |   |
|                               |       |                                                                 |       | and general manufacturing  applications                 |   |   |
| **Nova Steel Processing**          |       | ·   171,000 sq.  ft                                   |       | ·   Pickling and  slitting of coils on a |   | Owned |
| **Centre Ltd./**                   |       | ·   Pickling line                                     |       | toll rolling basis                                      |   |   |
| Stoney Creek, Ontario              |       | ·   Two slitting  lines                               |       |                                                    |   |   |
| **Argo Steel Ltd./**               |       | ·   75,500 sq. ft                                     |       | ·   Hot-rolled, cold-rolled  and         |   | Leased to |
| Dorval, Québec                |       | ·   Slitting line                                     |       | galvanized products for  general                        |   | Nov. 30, 2011 * |
| ** **                         |       | ·   Two precision  multi-blanking cut-to-length lines |       | manufacturing  applications                             |   |   |
| **Cresswell Industries Inc./**     |       | ·   71,600 sq. ft                                     |       | ·   Variety of  sophisticated roll       |   | Owned |
| Granby, Québec                |       | ·   15 roll  forming lines                            |       | formed sections on  customer                            |   |   |
| ** **                         |       | ·   Seven punch  presses                              |       | demand                                                  |   |   |
| ** **                         |       | ·   Stamping and                                      |       |                                                    |   |   |
| ** **                         |       | manufacturing                                                        |       |                                                    |   |   |
| ** **                         |       | ·   In-line  welding                                  |       |                                                    |   |   |
| **Cresswell Industries Inc./**     |       | ·   72,500 sq. ft                                     |       | ·   Pallet  racking                      |   | Owned |
| Granby, Québec                |       | ·   Electrostatic  powder                             |       |                                                    |   |   |
| ** **                         |       | coating                                                              |       |                                                    |   |   |
| **Cresswell Industries Inc./**     |       | ·   118,300 sq.  ft                                   |       | ·   Front loader  buckets                |   | Leased to |
| St. Hubert, Québec            |       | ·   Manufacturing                                     |       |                                                    |   | Dec. 31, 2011 * |
| **Cresswell Industries Inc./**     |       | ·   19,322 sq. ft                                     |       | ·   Hardwood  flooring nails, nailers    |   | Leased to |
| Shawinigan, Québec            |       | ·   Five punch  presses                               |       | and accessories                                         |   | Feb. 28, 2009 |
| ** **                         |       | ·   Stamping                                          |       |                                                    |   |   |
| ** **                         |       | ·   Assembly                                          |       |                                                    |   |   |

 

*                     Indicates a facility leased from a related party. See “MajorShareholders and Related Party Transactions.”

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The following chartdescribes our two tubing facilities in the United States:

| Subsidiary/Location                 | ** ** | **Description of Operations and Products**                            | ** ** | **Title**                                               |
|-------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------|
| **Nova Tube and Steel, Inc./** |       | ·   163,300 sq.  ft                                    |       | ·   Hot-rolled  HSS tubing up            |   | Owned |
| Morrisville, PA                     |       | ·   HSS tube mill  up to 6” x 6” x 3/8” |       | to 6” square                                       |   |   |
|                                |       | ·   Heavy gauge  slitter                               |       | ·   Hot-rolled  sheet and plate          |   |   |
| ** **                          |       | ·   Heavy gauge  cut-to-length line                    |       | coil                                                    |   |   |
| **Nova Tube Indiana, LLC/**         |       | ·   108,000 sq.  ft                                    |       | ·   High quality  mechanical   |   | Owned |
| Jeffersonville, IN                  |       | ·   Mechanical  tube mill up to 7” O.D.           |       | tubing targeting                                        |   |   |
|                                |       |                                                                  |       | hydroformed automobile                                  |   |   |
|                                |       |                                                                  |       | and truck frame                                         |   |   |
|                                |       |                                                                  |       | components                                              |   |   |

 

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

| Subsidiary/Location | ** ** | **Description of Operations and Products**          | ** ** | **Title**                                                                                                                      |
|---------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|
| **American Steel/** |       | ·   40,000 sq. ft                    |       | ·   All carbon  steel products                                                                                  |   | Owned |
| Albany, NY          |       | ·   Shearing                         |       | and galvanized sheet                                                                                                           |   |   |
| ** **          |       | ·   Bar sawing                       |       | ·   Stainless  steel and                                                                                        |   |   |
| ** **          |       |                                                |       | aluminum products                                                                                                              |   |   |
| ** **          |       |                                                |       | ·   Tubing and  pipe                                                                                            |   |   |
| **American Steel/** |       | ·   45,000 sq. ft                    |       | ·   All carbon  steel products                                                                        |   | Owned |
| Ashland, VA         |       | ·   Shearing                         |       | and galvanized sheet                                                                                                           |   |   |
| ** **          |       | ·   Bar sawing                       |       | ·   Stainless  steel and aluminum products                                                                      |   |   |
| ** **          |       |                                                |       | ·   Tubing and  pipe                                                                                            |   |   |
| **American Steel/** |       | ·   105,000 sq.  ft                  |       | ·   Supplier of  cold-rolled                                                                               |   | Owned |
| Auburn, MA          |       | ·   Four slitting  lines             |       | and high carbon strip  steel                                                                                                   |   |   |
| ** **          |       | ·   Leveling and  cut-to-length line |       | ·   Processing of  coated                                                                                       |   |   |
| ** **          |       | ·   Blanking line                    |       | sheets and bright  finished                                                                                                    |   |   |
| ** **          |       |                                                |       | materials                                                                                                                      |   |   |
| ** **          |       |                                                |       | ·   Processing of  cold-rolled, galvanized, aluminum and stainless coils to supply sheets to all  our divisions |   |   |
| **American Steel/** |       | ·   49,000 sq. ft                    |       | ·   All carbon  steel products                                                                        |   | Owned |
| Cumberland, RI      |       | ·   Shearing                         |       | and galvanized sheet                                                                                                           |   |   |
| ** **          |       | ·   Bar sawing                       |       | ·   Stainless steel  and aluminum products                                                                      |   |   |
| ** **          |       |                                                |       | ·   Tubing and  pipe                                                                                            |   |   |
| **American Steel/** |       | ·   104,000 sq.  ft                  |       | ·   All carbon  steel products                                                                        |   | Owned |
| Harrisburg, PA      |       | ·   Shearing                         |       | and galvanized sheet                                                                                                           |   |   |
| ** **          |       | ·   Bar sawing                       |       | ·   Stainless  steel and                                                                                        |   |   |
| ** **          |       |                                                |       | aluminum products                                                                                                              |   |   |
| ** **          |       |                                                |       | ·   Tubing and  pipe                                                                                            |   |   |
| **American Steel/** |       | ·   36,000 sq. ft                    |       | ·   All carbon  steel products                                                                        |   | Owned |
| Hartford, CT        |       | ·   Shearing                         |       | and galvanized sheet                                                                                                           |   |   |
| ** **          |       | ·   Bar sawing                       |       | ·   Stainless  steel and                                                                                        |   |   |
| ** **          |       |                                                |       | aluminum products                                                                                                              |   |   |
| ** **          |       |                                                |       | ·   Tubing and  pipe                                                                                            |   |   |

 

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| Subsidiary/Location | ** ** | **Description of Operations and Products** | ** ** | **Title**                                                       |
|---------------------|------------|--------------------------------------------|------------|-----------------------------------------------------------------|
| **American Steel/** |       | ·   55,000 sq. ft           |       | ·   All carbon  steel products                   |   | Owned |
| Norwood, MA         |       | ·   Shearing                |       | and galvanized  sheet                                           |   |   |
|                |       | ·   Bar sawing              |       | ·   Stainless  steel and                         |   |   |
|                |       |                                       |       | aluminum products                                               |   |   |
|                |       |                                       |       | ·   Tubing and  pipe                             |   |   |
| **American Steel/** |       | ·   59,000 sq. ft           |       | ·   All carbon  steel products    |   | Owned |
| Portland, ME        |       | ·   Shearing                |       | and galvanized sheet                                            |   |   |
| ** **          |       | ·   Bar sawing              |       | ·   Stainless  steel and                         |   |   |
| ** **          |       |                                       |       | aluminum products                                               |   |   |
| ** **          |       |                                       |       | ·   Tubing and  pipe                             |   |   |
| **American Steel/** |       | ·   53,000 sq. ft           |       | ·   All carbon  steel products                   |   | Owned |
| Syracuse, NY        |       | ·   Shearing                |       | and galvanized sheet                                            |   |   |
|                |       | ·   Bar sawing              |       | ·   Stainless  steel and                         |   |   |
|                |       |                                       |       | aluminum products                                               |   |   |
|                |       |                                       |       | ·   Tubing and  pipe                             |   |   |

 

Each of the abovefacilities is fully utilized.

**ITEM 4A UNRESOLVEDSTAFF COMMENTS**

Not applicable.

**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 operationshistorically have been conducted under the management philosophy of D. BryanJones, our founder and chief executive officer. We were incorporated onApril 4, 1997 as part of a reorganization in order to consolidate theoperations of American Steel and Aluminum Corporation, or American Steel, andNova Steel Ltd., or Nova, under one holding company.

Our consolidated financialstatements include the accounts and transactions of our U.S. affiliates and ourCanadian affiliates at historical cost, except that all material intercompanybalances and transactions have been eliminated. All references to our fiscalyears and to those of our subsidiaries and affiliates are to fiscal years endedon the last Saturday 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.

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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 installed an in-line tempermill, which makes us the only independent provider of this high-precision servicein Canada. We have been profitable in each year since we commenced operationsin 1979, except for a loss of less than $200,000 in 1990. Our total tons soldand processed and our shareholders’ equity has grown from 1997 to 2006 at acompound annual rate of 8.7% and 20.6%, 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 12 month period. Where there is a periodduring which steel prices rise, based on similar volumes, inventories tend toincrease at a greater rate than sales. Similarly where this is a period duringwhich steel prices decrease, 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. Webelieve that the gains in hot-rolled steel prices which have been achievedsince 2004 are sustainable due to the significantly higher cost of inputs usedin the production of steel such as scrap, iron ore, coke and energy—prices ofwhich have all increased due to robust global demand. Furthermore, globalconsolidation at the steel producer’s level is contributing to better controlover the production of steel relative to the demand for steel, which in turnshould lead to more price stability. See “Risk Factors—The prices we pay forsteel 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 adversely affect our operating results,” and “Risk Factors—Ourbusiness may be affected by the cyclicality of the industries that purchase ourproducts. Reduced demand from one or more of these industries could result inlower operating income and profitability.”

In the past few years and continuing into 2007, wehave noticed a trend of consolidation of steel producers, a trend which webelieve will continue in the North American and global markets. We believe thatthis type of consolidation will have the effect of stabilizing pricing in theindustry. We also believe that the increasing demands for steel from the Asianmarkets, particularly China, will continue to influence steel prices.

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 

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increased working capitaldemands as we sell off lower priced inventory but must purchase steel at theincreasing prices. Similarly, when prices are decreasing, we face the challengeof selling the inventory that we acquired at a relatively higher cost, as wereplace our inventory at the decreasing prices. We believe that funds availableunder our credit 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 priceincreases to our customers, which could have a material adverse effect on ourbusiness, results of operations and financial condition in one or more futurereporting periods.

**Selected Results ofOperations**

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 25,  2006** | ** ** | **November 2,   2005** | ** ** | **November 27,  2004** | ** ** |
| Net sales                           |       |                        | 100.0      | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Cost of sales                       |       |                        | 78.0       |   |   |   | 79.6 |   |   |   | 70.7 |   |   |
| Gross margin                        |       |                        | 22.0       |   |   |   | 20.4 |   |   |   | 29.3 |   |   |
| Operating  expenses                 |       |                        | 13.8       |   |   |   | 13.2 |   |   |   | 13.9 |   |   |
| Operating income                    |       |                        | 8.2        |   |   |   | 7.2 |   |   |   | 15.4 |   |   |
| Interest expense                    |       |                        | 0.1        |   |   |   | 0.5 |   |   |   | 0.6 |   |   |
| Share in income  of a joint venture |       |                        | (0.1       | ) |   |   | (0.1 | ) |   |   | (0.0 | ) |   |
| Income before  income taxes         |       |                        | 8.2        |   |   |   | 6.8 |   |   |   | 14.8 |   |   |
| Income taxes                        |       |                        | 2.9        |   |   |   | 2.4 |   |   |   | 5.3 |   |   |
| Net income                          |       |                        | 5.3        | % |   |   | 4.4 | % |   |   | 9.5 | % |   |

 

**Fiscal 2006Compared to Fiscal 2005**

In fiscal 2006, our net sales increased by $6.1million, or 0.7%, to $840.8 million, compared with $834.7 million in fiscal2005.  Our tons sold and processeddecreased by 9.5% to 1,749,000 tons in 2006 from 1,934,000 tons in fiscal 2005.Our tons sold and processed in 2006 include 887,000 tons from direct sales and862,000 tons from toll processing, compared with 925,000 tons from direct salesand 1,009,000 tons from toll processing in 2005.  The change in the Canada/U.S. exchange rate onthe conversion to U.S. dollars of the net sales of our Canadian subsidiaries onthe consolidated financial statements for our fiscal year 2006 had a positiveimpact of approximately 3.9% on our net sales which represents an amount of$32.8 million.

Our gross margin increased from $170.6 million to$185.1 million in fiscal 2006, and as a percentage of net sales from 20.4% infiscal 2005 to 22.0% in fiscal 2006.

Our operating costs as a percentage of net salesincreased to 13.8% of sales from 13.2% in fiscal 2005. The increase inpercentage was attributable to our higher net sales. In absolute dollars, ouroperating expenses increased by $5.3 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 2006 amounts to approximately $4.8 million.

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In fiscal 2006, our interest expense decreased by $2.8million, or 71.7%, to $1.1 million compared with $3.9 million in fiscal 2005. Duringfiscal 2006 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 increased by $12.1 million,or 21.2%, to $69.0 million, from $56.9 million in fiscal 2005.

Our income taxes in fiscal2006 were $24.7 million and represent 35.8% of our income before taxes,compared to $20.0 million, representing 35.1% of our income taxes in 2005.

**Fiscal 2005Compared 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 in fiscal2004. During the first half of fiscal 2005, the North American steel industryexperienced a period of reducing prices as the steel market reacted to excessinventories and an increase in imports. By the end of our third quarter, withinventories 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% to1,922,000 tons in 2005 from 1,815,000 tons in fiscal 2004. Our tons sold andprocessed in 2005 include 913,000 tons from direct sales and 1,009,000 tonsfrom toll processing, compared with 914,000 tons from direct sales and 901,000tons from toll processing in 2004.  Thechange in the Canada/U.S. exchange rate on the conversion to U.S. dollars ofthe net sales of our Canadian subsidiaries on the consolidated financialstatements for our 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 impactedsteel pricing in 2004, notably the rapid increase in North American and worldsteel prices brought about by significant demand from China, significantincreases in the costs of raw materials to the steel producers, and theconsolidation of a number of North American producers which in turn lead to theintroduction of surcharges for the duration of 2004. We believe also that, asthe steel market adjusted to these factors during fiscal 2005, steel pricesadjusted to more sustainable levels than those experienced in fiscal 2004. Ourmargins in fiscal 2005 reflect  theimpact of moving from the exceptional circumstances experienced in 2004 tothese new pricing levels. Due to the costs of raw materials to steel producersthroughout the world, we do not expect that pricing will return to the lowerlevels experienced in years prior to 2004. Our gross margin decreased from$225.1 million to $170.6 million in fiscal 2005, and as a percentage of netsales from 29.3% in fiscal 2004 to 20.4% in fiscal 2005.

Our operating costs as a percentage of net salesdecreased to 13.2% of sales from 13.9% 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.

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.During fiscal 2005 we reduced our overall interest bearing debt, which wasoffset by increases 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.

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**Fiscal 2004Compared 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% overthe course of our fiscal year arising from raw material cost and supply factorswhich, in turn, also led to the introduction of surcharges. Accordingly, ouraverage selling prices escalated through the year and were significantly higherthan in fiscal 2003. In addition, the change in the Canada/U.S. exchange rateon the conversion to U.S. dollars of the net sales of our Canadian subsidiariesin the consolidated financial statements for fiscal 2004 had a positive impactof approximately 4.4% on our net sales which represents an amount of $34.2million.

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 include 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 ourfocus on 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 five monthsin the amount of approximately $1.4 million; (iii) profit-related bonusesin the amount of approximately $5.1 million; (iv) an increase in theallowance for doubtful accounts in the amount of approximately $1.7 million;(v) additional operating costs incurred through the duration of theexpansion 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, comparedwith $5.1 million in fiscal 2003. Some of our interest rates were impactedpositively by reductions in interest premiums which resulted from improvedcovenant ratios. In addition, we reduced the overall interest bearing debtduring 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 of the Canadian tax incentive formanufacturing and processing activities and to the unavailability of certainpreviously available U.S. tax credits.

**Liquidity andCapital 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.

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We generated net cash fromour operating activities for fiscal 2004, 2005 and 2006 in the amounts of $17.8million, $69.6 million and $15.4 million, respectively. These variations areattributable mainly to fluctuations in our overall accounts receivable andinventory levels which reflected the then existing market conditions. During2006, the gain on disposal of property, plant and equipment resulted primarilydue to the trade-in of the corporate aircraft.

In fiscal 2004, 2005 and2006 the amounts of net cash we used for investing activities were $4.5million, $20.9 million and $30.9 million, respectively. During 2006, the cashwe used for investing activities consisted primarily of $20.2 million net for ashort term investment loan in a U.S. corporation which was fully guaranteed bya Canadian bank and has been fully repaid with interest, and additions toproperty, plant and equipment of $11.7 million net.

Our net cash used forfinancing activities for fiscal 2004, 2005 and 2006 was $13.7 million, $13.1 millionand $1.8 million, respectively. These differences are mainly due tofluctuations in our working capital items and repayment of long-term debt.

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 $8.5 million on certain projects in the current fiscalyear. 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 agreement in the normal course when it becomes due in April 2007.On December 7, 2006, we repaid the amount outstanding under the $53.0million term loan agreement.

At November 25,2006, 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 25, 2006, there was an amountof $39.0 million in available borrowings, of which there were no outstandingbalance under this agreement. The interest rate on borrowings under the creditagreement is the bank’s prime rate, 8.25% at November 25, 2006, plus amargin varying from 0.0% to 1.25%, or LIBOR, 5.32% at November 25, 2006,plus a margin of 1.25%. Among the restrictive financial covenants contained inthe agreement are ratios as to fixed charges, tangible capital base and seniorliabilities to tangible capital base, all of which were respected as of November 25,2006. Borrowings are collateralized by all assets of the U.S. subsidiary havinga carrying value of $208.1 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, 6.0% at November 25,2006, or bankers’ acceptance rates, respectively, plus a premium varying from0.0% to 0.5% (actual rate 6.25% at November 25, 2006). At November 25,2006, the Canadian subsidiaries had approximately $43.8 million of revolvingcredit facilities of which approximately $43.1 million was available. Ouroutstanding borrowings under the Canadian credit facilities were approximately$0.5 million and were incurred in connection with working capital requirementsarising in the ordinary course of business. Each of these credit facilities issecured by inventories, movable hypothecs covering the universality of presentand future book debts and a negative pledge on certain assets of each of theentities which is a borrower under its respective revolving credit agreement.

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

At November 25,2006, our long-term debt consisted of the following:

·       amortgage loan amounting to $3.1 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 $8.6 million  November 25,2006, and an annual prepayment option of 15% of the outstanding loan balanceeach 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 $38.2 million was outstanding at November 25, 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. The interest rate on the term loanis the bank’s prime rate, 8.25% at November 25, 2006, plus a marginvarying from 0.125% to 1.375%, or LIBOR, 5.32% at November 26, 2005, plusa margin varying from 1.375% to 2.625% (actual rate 6.79% at November 25,2006). Monthly principal payments of $0.2 million are due through April 7,2007 with the balance of the loan of $37.3 million due April 7, 2007. Amongthe restrictive financial covenants contained in the agreement are ratios as tofixed charges, tangible capital base and senior liabilities to tangible capitalbase, all of which were respected as of November 25, 2006. The term loanis collateralized by assets of that U.S. subsidiary having a carrying value of$208.1 million. As required by the term loan agreement, the U.S. subsidiaryentered into an interest rate swap agreement in April 2001 to fix theinterest rate at 5.27% plus the applicable margin on borrowings up to $20.0million through April 18, 2006. On December 7, 2006, we repaid allamounts due under the $53.0 million term loan agreement.

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 25, 2006, we were in compliance with all suchrestrictive covenants. Our credit facilities restrict our ability to receivedividends and interest from our subsidiaries.

As of November 25,2006, a Canadian bank had issued guarantees and letters of credit amounting toapproximately $0.2 million to our Canadian subsidiaries.

**Off-balance Sheet Arrangements**

As of, and for the yearended, November 25, 2006, we had no off-balance sheet arrangements thathad, or are reasonably likely to have, a material current or future effect onour financial condition, revenues or expenses, liquidity, capital expendituresor capital resources.

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**Tabular Disclosure of Contractual Obligations**

Thefollowing table summarizes the payments due under our debt and othercontractual obligations as of November 25, 2006:
|                                                 | ** ** | **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                                  |       | $                                                      | 41,287     |   |   | $ | 38,642 |   |   |   | $ | 876 |   |   |   | $ | 876 |   |   |   | $ | 893 |   |   |
| Interest payments  on fixed rate long-term debt |       | 918                                                    |       |   | 377 |   |   |   | 256 |   |   |   | 159 |   |   |   | 126 |   |   |
| Interest payments  on variable rate debt (1)    |       | 31                                                     |       |   | 31 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Operating leases                                |       | 12,650                                                 |       |   | 3,515 |   |   |   | 5,054 |   |   |   | 3,453 |   |   |   | 628 |   |   |
| Purchase obligations                            |       | 41,494                                                 |       |   | 41,494 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                                            |       | $                                                      | 96,380     |   |   | $ | 84,059 |   |   |   | $ | 6,186 |   |   |   | $ | 4,488 |   |   |   | $ | 1,647 |   |   |

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(1)             For purposes of estimating the totalinterest payments on the variable interest rate debt, the payments in the abovetable were calculated using the borrowing levels and interest rates in place atthe end of fiscal 2006.

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 $714.1 million of steel per year. We estimate no more thanapproximately $41.5 million of steel purchase orders were outstanding at November 25,2006 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.

**Effects of Foreign Currency Fluctuations**

Although our financialresults are reported in U.S. dollars, some of our revenues are derived fromsales made by Canadian subsidiaries into the United States, which are denominatedin U.S. dollars, and converted into Canadian dollars based upon the averagemonthly exchange rate at the time of sale. If we are not able to successfullyhedge our currency exposure, fluctuations in the rate of exchange between theCanadian dollar and the U.S. dollar could have a material effect on ourfinancial condition, results of operations and cash flow. See “Quantitative andQualitative Disclosures 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 allrelationships between hedging instruments and the hedged items, as well as ourrisk-management objectives and strategies for undertaking various hedgetransactions. We formally assess, both at the hedge’s inception and on anongoing basis, whether the derivatives that are used in hedging transactionsare highly effective in offsetting changes in cash flows of the hedged items.

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We discontinue hedgeaccounting prospectively when (i) we determine that the derivative is nolonger effective in offsetting changes in the cash flows of a hedged item, (ii) thederivative expires or is sold, terminated or exercised, or (iii) wedetermine that the 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 earnings.

We minimize the credit (orrepayment) risk in derivative instruments by entering into transactions withreputable financial institutions and we do not hold derivative instruments fortrading purposes.

At November 26, 2005,one of our U.S. subsidiaries had an interest rate swap agreement to manage itsexposure to interest rate risk as required under the terms of the term loanagreement. See “—Liquidity and Capital Resources.” This swap expired on April 16,2006. 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.

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 25, 2006.

**Changes in Accounting Policies**

Effective November 27,2005, we adopted revised Statement of Financial Accounting Standard (“SFAS”)No. 123 (“SFAS No. 123 (R)”), Share-Based Payment, which requires allentities to recognize the fair value of share-based payment awards (stockcompensation) classified in equity. The adoption of SFAS No. 123 (R) didnot have an initial impact on the consolidated financial statements.

Effective November 27,2005, we adopted SFAS No. 151, Inventory Costs, which clarifies thatabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterials (spoilage) should be recognized as current-period charges and byrequiring the allocation of fixed production overheads to inventory based onthe normal capacity of production facilities. The adoption of SFAS No. 151did not have a material impact on the consolidated financial statements.

Effective November 27,2005, we adopted SFAS No. 153, Exchanges of Nonmonetary Assets—anamendment of APB Opinion No. 29. SFAS No. 153 amends Opinion No. 29to eliminate the exception for non-monetary exchanges of similar productiveassets and replaces it with a general exception for exchanges of non-monetaryassets that do not have commercial substance. A non-monetary exchange hascommercial substance if the future cash flows of the entity are expected tochange significantly as a result to the exchange. The adoption of SFAS No. 153did not have a material impact on the consolidated financial statements.

Effective November 25,2006, we adopted Staff Accounting Bulletin No. 108 (“SAB 108”),Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements issued by the U.S.Securities and Exchange Commission. SAB 108 was issued to provideconsistency between how registrants quantify financial statement misstatements.There have been two widely-used methods for quantifying the effects offinancial statement misstatements. The “roll-over” method quantifies the amountby which the current year income statement is misstated and can result in theaccumulation of errors on the balance sheet that may not have been material toany individual income statement, but which may misstate one or more balancesheet accounts. The “iron curtain” method quantifies the error as thecumulative amount by which the current year balance sheet is misstated and canresult in disregarding the effects of errors in the current year incomestatement that result from the 

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correctionof an error existing in previously issued financial statements. We have usedthe roll-over method for quantifying identified financial statementmisstatements. SAB 108 established an approach that requires quantification offinancial statement misstatements based on the effects of the misstatement oneach of our financial statements and the related financial statementdisclosures. This approach is commonly referred to as the “dual approach”because it requires quantification of errors under both the roll-over and ironcurtain methods.

SAB 108 allowsregistrants to initially apply the dual approach either by retroactivelyadjusting prior financial statements as if the dual approach had always beenused or by recording the cumulative effect of initially applying the dualapproach as adjustments to the carrying values of assets and liabilities as of November 27,2005 with an offsetting adjustment recorded to the opening balance of retainedearnings. Use of this “cumulative effect” transition method requires detaileddisclosure of the nature and amount of each individual error being correctedthrough the cumulative adjustment and how and when it arose. The adoption ofSAB 108 had no impact on the preparation of the consolidated financialstatements.

**Pending Changes inAccounting Policies**

The Financial AccountingStandards Board, or FASB, issued FASB Interpretation No. 48 (“FIN 48”),Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,in June 2006. This interpretation clarifies the accounting for uncertaintyin income taxes recognized in an enterprise’s financial statements inaccordance with SFAS No. 109, Accounting for Income Taxes. It prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of an income tax position taken or expected to betaken in an income tax return. It also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition. FIN 48 is effective for the Company at thebeginning of the 2008 fiscal year. The impact resulting from the adoption ofFIN 48 has not yet been determined.

In September 2006,the FASB issued SFAS No. 157, Fair Value Measurements. This statementdefines fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements. It applies under otheraccounting pronouncements that require or permit fair value measurements.Accordingly, SFAS No. 157 does not require any new fair valuemeasurements. SFAS No. 157 is effective for the Company at the beginningof the 2008 fiscal year. The impact resulting from the adoption of SFAS No. 157has not yet been determined.

In May 2005, the FASBissued SFAS No. 154, Accounting Changes and Error Corrections—a replacementof APB Opinion No. 20 and FASB Statement No. 3. This statementreplaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements, and changes therequirements for the accounting for and reporting of a change in accountingprinciple. It applies to all voluntary changes in accounting principle. It alsoapplies to changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transition provisions.This statement is effective for the Company at the beginning of the 2007 fiscalyear.

**Application of Critical Accounting Policies**

The preparation of ourconsolidated financial statements requires us to make estimates and assumptionsthat affect the amounts reported in the financial statements. The estimates arebased on our historical experience and past performance. Actual results coulddiffer from those estimates under different assumptions or conditions. On anongoing basis, we review our estimates based on currently availableinformation. The following critical accounting policies reflect what we believerequire our most difficult, subjective or complex judgments:

*Revenue recognition.**  *Revenue from product sales isrecognized when there is persuasive evidence of an arrangement, the amount isfixed or determinable, delivery of the product to the customer has occurred, 

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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.

We charge the customer forthe complete product delivered to the customer’s designated location and we donot charge separately for shipping and handling costs. Shipping and handlingcosts are recorded under the “Delivery” caption on our consolidated statementof operations and comprehensive income and amounted to $25.6 million for theyear ended November 25, 2006.

*Goodwill.**  *Following the adoption of SFAS No. 142,*Goodwill and Other Intangible Assets*,goodwill is no longer amortized but its carrying value must be tested annuallyfor impairment. For the purpose of testing goodwill impairment, we and anindependent appraiser perform a valuation analysis of the reporting unitannually. The most recent valuation report indicated that the fair value of thereporting unit exceeds its carrying value, including goodwill. Therefore noimpairment loss had to be recognized in the November 25, 2006 consolidatedfinancial statements.

*Allowance for doubtfulaccounts.*   We maintain an allowance for doubtfulaccounts for estimated losses resulting from the inability of our customers tomake required payments. If the financial condition of customers were todeteriorate, resulting in an impairment of their ability to make payments,increases to the allowance would be required.

*Income taxes.*   Theprovision for income taxes is computed on the pretax income of the consolidatedsubsidiaries located within each taxing jurisdiction based on the currentincome tax laws. Deferred income taxes are provided, based upon currentlyenacted income tax rates, for temporary differences in the recognition ofassets and liabilities on the financial statements and for income tax purposes.

Deferred income taxesinclude the benefit of losses carried forward when it is reasonably likely thatfuture profits will result. Should the opportunity to realize the benefit ofthese losses expire, such amounts would result in additional deferred incometax expense.

No provision has been madefor deferred income taxes that may result from future remittances ofapproximately $89.2 million of undistributed earnings of our U.S. subsidiariesas of November 25, 2006. Under current Canadian income tax law, we mayrepatriate undistributed earnings of such U.S. subsidiaries without any incometax effect. However, should we repatriate part or all of the undistributedearnings of our U.S. subsidiaries, a 5% withholding tax would be assessable onthat amount.

**Trend Information**

During the currentquarter, we have seen the reversal of the downward trend in steel prices inNorth America which we had experienced through the last quarter of fiscal 2006.We believe steel prices are now at a more sustainable level. Given the possibleimpact of interest rates, exchange rates, as well as global events and economicfactors on our markets it is difficult to accurately forecast demand andtherefore future results. As such, it is not certain that we will be able tomaintain our present levels of sales and profitability. However, we do expectcurrent market conditions to continue to produce positive results.

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

**Directors andSenior Management**

Thefollowing are the members of our board of directors and our executive officers:
| Name                              | ** ** | ** ** | ** ** | **Age**                                                      | ** ** | **Position(s) Held** |
|-----------------------------------|------------|------------|------------|--------------------------------------------------------------|------------|---------------------------|
| D. Bryan Jones (a)(b)             |       | 66         |       | Chairman of the Board,  Chief Executive Officer and Director |
| Scott B. Jones                    |       | 42         |       | President and Director                                       |
| Lawrence P. Cannon                |       | 43         |       | Vice President and Chief  Financial Officer                  |
| Robert D. Taberner                |       | 55         |       | Vice President and  General Manager—Nova Steel, Ontario |
| Stephen D. Shaw                   |       | 59         |       | President and Chief  Operating Officer—American Steel   |
| Roger Daigneault                  |       | 50         |       | Vice President,  Corporate Purchasing                        |
| Peter V. Balboni                  |       | 60         |       | Vice President, Finance  and Treasurer—American Steel   |
| Pina Santillo, CA, CPA            |       | 38         |       | Secretary                                                    |
| Christopher H. Pickwoad (b)       |       | 67         |       | Director                                                     |
| Michael L. Richards               |       | 67         |       | Director                                                     |
| John LeBoutillier, C.M. (a)(b)(c) |       | 62         |       | Director                                                     |
| Alexander Adam (a)(c)             |       | 62         |       | Director                                                     |
| Robert Panet-Raymond (c)          |       | 64         |       | Director                                                     |

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(a)              Member ofCompensation Committee.

(b)             Member of theNominating Committee.

(c)              Member of theAudit Committee.

*D.Bryan Jones*has over 45 years of experience in theselling, marketing and production of flat rolled products. In 1967, he and apartner formed St. Laurent Steel, and he served for many years as its vicepresident and general manager until the time of its sale to a major NorthAmerican steel service center. In 1979 he incorporated Nova Steel Ltd. He hasserved as president and as a director of Nova Steel Ltd., or Nova, since itsfounding. He has been our chairman of the board and chief executive officersince April 4, 1997.

*ScottB. Jones*has 19 years of experience in the steelindustry and has been employed by us since 1991. He was a vice president and adirector on our board since April 4, 1997. He has been president of ourboard since September 30, 2005. He is the son of D. Bryan Jones.

*LawrenceP. Cannon, CA, MBA*joined us in November 2006 asvice president and chief financial officer. He was formerly chief financialofficer of BCA Publications Ltd., a subsidiary of Euromoney plc, prior to whichhe held other senior financial management positions.

*RobertD. Taberner*has 27 years of sales and marketingexperience in the Ontario flat rolled steel market. He has served as the vicepresident and general manager of our Ontario facilities since 1992.

*StephenD. Shaw*has 38 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.

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

*PeterV. Balboni*joined American Steel in 1975 and hasserved as its vice president, finance and treasurer since 1980.

*PinaSantillo CA, CPA,*has been employed by us since March 1998and has served as corporate controller since January 2004. She wasappointed secretary by the board of directors on December 15, 2006.

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*ChristopherH. Pickwoad*has 26 years of experience in the steelindustry and had been employed by us from 1982. Prior to 1982, he was a partnerof a firm of chartered accountants. Mr. Pickwoad has served as a directoron our board since April 4, 1997 and was executive vice president and chieffinancial officer until his retirement on November 25, 2006. He is also adirector of Primary Energy Recycling Corporation.

*MichaelL. 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 the chairman of the board of directors ofIntertape Polymer Group Inc.

*JohnLeBoutillier, C.M.,*has been a director on our boardsince September 24, 1997. Mr. LeBoutillier has been chairman of theboard of Industrial Alliance Insurance and Financial Services Inc. since May 2005.Mr. LeBoutillier is chairman of the board and president of MazarinInc./Asbestos Corporation Limited, chairman of the board of Roctest 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 IronOre Company of Canada, Canada’s largest iron ore producer, and prior to November 1996,president and chief executive officer of Sidbec-Dosco Inc. (now Mittal CanadaInc.), one of the largest steel manufacturers in Canada.

*AlexanderAdam*has been a director on our board since April 1,2003. Mr. Adam is also a director of Gennum Corporation and HSE IntegratedInc. and serves on the advisory board of Thomson-Gordon Inc. From June 1996to August 2002, Mr. Adam was the president and chief executiveofficer of Algoma Steel Inc. He previously held executive positions at ToyotaMotor Manufacturing Canada Ltd. (TMMC) and Stelco Inc.

*Robert Panet-Raymond*hasbeen a director on our board since June 29, 2005. From 1992 to 2004,  Mr. Panet-Raymond was a senior vicepresident with the Canadian Imperial Bank of Commerce. He is also a director ofColabor Income Trust and Tecsult Inc.

**ManagementCompensation**

During fiscal 2006, theaggregate compensation we paid for services rendered by the named executiveofficers as a group totaled $6.8 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 negotiation between that officer andus. This bonus is included in the aggregate compensation disclosed in thisparagraph.

**Compensation ofDirectors**

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 2006, 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 2006, 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. The Board of Directors has determined that four of its seven member,namely, Michael L. Richards, John LeBoutillier, C.M., Robert Panet-Raymond andAlexander Adam, are independent with reference to Nasdaq Rule 4200. On ago forward basis, at the end of each quarterly meeting of the board ofdirectors, our independent directors will meet in 

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executive session. Ourdirectors are elected in rotation so that at the first meeting of ourshareholders 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 their election.A director whose term of office has expired may, if qualified, be re-elected. Inaddition, our directors may at a meeting of the board appoint one or moreadditional directors to our board who shall hold office for a term expiring notlater than the close of the next annual meeting of our shareholders (unlesssuch directors are then elected as directors by the shareholders, in which casethey shall be elected to hold office until the second annual meeting ofshareholders held after the meeting of shareholders at which they were soelected), but the total number of directors so appointed may not exceedone-third of the number of directors elected at the previous annual meeting ofour shareholders.

The term of office of Christopher H. Pickwoad andMichael L. Richards will expire at our annual meeting of shareholders to beheld on March 29, 2007 or at such other time as their successors areelected or appointed. At our annual meeting of shareholders to be held on March 29,2007, management will propose Christopher H. Pickwoad and Michael L. Richardsas nominees for re-election as directors to hold office until the third annualmeeting of shareholders held after the meeting or until their successors orotherwise are elected or appointed. The term of office of Scott B. Jones,Alexander Adam and Robert Panet-Raymond will expire at our 2008 annual meetingof shareholders or at such other time as their successors are elected orappointed. The term of office of D. Bryan Jones and John LeBoutillier willexpire at our 2009 annual meeting of shareholders or at such other time astheir successors 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 Alexander Adam,John LeBoutillier and, D. Bryan Jones and whose purpose is to makerecommendations concerning salaries and incentive compensation for executiveofficers and to administer our share option plan;

·       anAudit Committee, which is currently comprised of Messrs John LeBoutillier,Alexander Adam and Robert Panet-Raymond, and whose purpose is to review our annualand quarterly results, our communications with shareholders, the scope of theaudit and other services provided by our independent auditors and to recommendto the board the selection and remuneration of the auditors, and which operatesin accordance with the terms of a charter that complies with Nasdaq’s listingstandards; 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 of November 25, 2006, we had approximately1,062 employees, of whom approximately 26.0% working at 10 of our 23 facilitiesare organized by the United Steelworkers, the Teamsters, the Sheet Metal 

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Workers and independentemployee associations. The labor contract with the Teamsters covering 30employees at one of our LaSalle facilities expired on December 1, 2006 andis currently being renegotiated. The labor contract with the United SteelWorkers covering 11 employees at our Cumberland facility will expire in June 2007.The labor contract with the Teamsters covering 22 employees at our Albanyfacility will expire in December 2007. The labor contract with employeeassociations covering 17 employees at our Norwood facility and 34 employees atour Portland facility will expire in December 2007. We do not presentlyanticipate that any work stoppages will occur prior to renegotiation ofthese contracts.  We believe that ourrelations with our employees are good, which is supported by our low rate ofemployee turnover. We have not experienced a work stoppage by any of ourunions or employee associations in over 20 years.

Our approximately 1,062 employeesare categorized as follows: production and warehouse employees (66%), salespersonnel (11%), truck drivers (8%) and administrative employees (15%).

**Share Ownership**

Thefollowing table sets forth certain information with respect to the ownership ofour common shares as of February 22, 2007 by (i) each of ourdirectors and executive officers, and (ii) all directors and executiveofficers as a group. Unless otherwise indicated, the persons named below havethe sole voting and investment power with respect to the number of commonshares set forth opposite their names.
| Names of Beneficial Owners        | ** ** | ** ** | ** ** | **Number of Common Shares  Beneficially Owned** | ** ** | **Ownership Percentage** | ** ** |
|--------------------------------------------------|------------|------------|------------|---------------------------------------------------------------------|------------|-------------------------------|------------|
| D. Bryan Jones                                   |       |       | 5,673,781  | (a)                                                                 |       |                          | 54.3       | % |   |
| Scott B. Jones                                   |       |       | 1,387,282  | (b)                                                                 |       |                          | 13.3       | % |   |
| Christopher H.  Pickwoad                         |       |       | 43,077     |                                                                |       |                          | *          |   |   |
| 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 |       |       | 7,123,730  |                                                                |       |                          | 68.2       | % |   |

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*                     Less than 1%.

(a)              Includes4,490,024 shares owned by 3349942 Canada Inc., a Canadian corporation, all theshares of which are owned by D. Bryan Jones and the Jones Family Trust (atrust established under the laws of the Province of Ontario), 910,217 sharesowned by 3414116 Canada Inc., a wholly-owned subsidiary of 3349942 Canada Inc.,and 33,136 shares owned by 4273281 Canada Inc., a Canadian corporation, all theshares of which are owned by 3414116 Canada Inc. and 3414124 Canada Inc.

(b)             Includes1,104,966 shares owned by 3195538 Canada Inc., a Canadian corporation, all theshares of which are owned by Scott B. Jones, 257,935 shares owned by 3414124Canada Inc., a wholly-owned subsidiary of 3195538 Canada Inc., and 6,136shares owned by 4273281 Canada  Inc., aCanadian corporation, all the shares of which are owned by 3414116 Canada Inc.and 3414124 Canada Inc.

As D. Bryan Jones, our chairman of the board and chiefexecutive officer of the Company, owns directly or indirectly an aggregate of54.3% of our outstanding common shares, we are a “Controlled Company” asdefined at Nasdaq Rule 4350(c)(5), and, as such, are exempt from themajority of the requirements of Nasdaq Rule 4350(c).

**Share Option Plan**

The Novamerican Steel Inc. 1997 Share Option Planprovides for the grant of incentive stock options, or ISOs, as defined in Section 422of the Internal Revenue Code of 1986, as amended, or the Code, nonqualifiedstock options, or NSOs, and other rights. We have reserved 1,500,000 commonshares for issuance under our share option plan. Administration of our shareoption plan has been assigned to our Compensation Committee, a committeeconsisting of two or more directors of the Company, a majority of 

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whom are disinterested.The Compensation Committee has, subject to the terms of our share option plan,the authority to grant awards under our share option plan, to construe andinterpret our share option plan and to make all other determinations and takeany and all actions necessary or advisable for the administration of our shareoption plan.

Our key employees, executive officers, directors andother individuals who render services of special importance to the Company orits subsidiaries’ 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, at 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 purchase750,000 common shares were granted to three of our executive officers at anexercise price of $14.00 per share. All of these options have since beenexercised and sold. Such options represent the only awards granted under ourshare option plan. As of February 22, 2007, there were no awardsoutstanding under our share option plan.

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**ITEM 7 MAJORSHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

**Major Shareholders**

Thefollowing table sets forth certain information with respect to the ownership ofour common shares as of February 22, 2007 (except as noted below) by eachperson or entity known by us to beneficially own more than 5% of our 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                            |       |       | 5,673,781  | (a)                                                                 |       |                          | 54.3       | % |   |
| Scott B. Jones                            |       |       | 1,387,282  | (b)                                                                 |       |                          | 13.3       | % |   |
| FMR Corp. et al                           |       |       | 1,310,000  | (c)                                                                 |       |                          | 12.5       | % |   |

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(a)              Includes4,490,024 shares owned by 3349942 Canada Inc., a Canadian corporation, all theshares of which are owned by D. Bryan Jones and the Jones Family Trust (atrust established under the laws of the Province of Ontario), and 910,217shares owned by 3414116 Canada Inc., a wholly-owned subsidiary of 3349942Canada Inc., and 33,136 shares owned by 4273281 Canada Inc., a Canadiancorporation, all the shares of which are owned by 3414116 Canada Inc. and3414124 Canada Inc.

(b)             Includes1,104,966 shares owned by 3195538 Canada Inc., a Canadian corporation, all theshares of which are owned by Scott B. Jones and 257,935  shares owned by 3414124 Canada Inc., a wholly-ownedsubsidiary of 3195538 Canada Inc., and 6,136 shares owned by 4273281 CanadaInc., a Canadian corporation, all the shares of which are owned by 3414116Canada Inc. and 3414124 Canada Inc.

(c)              As of December 31,2006, based solely on the most recent Schedule 13G/A filed by FMR Corp. et al.and Edward C. Johnson III, on February 14, 2007. Includes 650,000shares held by Canadian Growth Company Fund and 660,000 shares held byFidelity North Star Fund Sub A, according to such filing.

We believe that over 68% of our common shares are heldin Canada and that less than 32% of our common shares are held in the UnitedStates. We estimate that we have eight 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.

**ShareholderProtection 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 certain specified events, including an unsolicited take-over bid.This plan expired in September 2002 and it has not been subsequentlyrenewed or reinstated.

**Related PartyTransactions**

A Canadian corporation owned by Scott B. Jones, ourpresident, one of our directors and the son of D. Bryan Jones, our chairman andchief executive officer, owns four facilities located in Canada comprising atotal of 261,700 square feet and leases them to us on a triple-net basis at anaggregate annual rent of approximately $1.3 million. Another Canadiancorporation 50% indirectly owned by Scott B. Jones and 50% by a party unrelatedto us owns a facility located in Canada comprising a total of 118,300 squarefeet and leases it to us on a triple-net basis at an aggregate annual rent ofapproximately $0.4 million. All the facility leases expire at varying datesbetween May 31, 2007 and December 31, 2011, and all but one aresubject to one or two five-year renewal options. See “Information on theCompany—Property, Plants and Equipment.”

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A Canadian corporation owned by Scott B. Jones ownsnine trailers which it leases to us at an annual aggregate rent of approximatly$0.1 million. This corporation also provided transportation arrangements for usin an amount totaling approximately $10.5 million during fiscal 2006.

Michael L. Richards has been one of our directorssince September 24, 1997. Mr. Richards is a senior partner in the lawfirm of Stikeman Elliott LLP, our Canadian counsel. For the fiscal year ended November 25,2006, fees and expenses paid to Stikeman Elliott LLP amounted to approximately$0.7 million.

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 abovedescribed leases and service agreements have been unanimously approved by theindependent members of our board of directors in accordance with that policy.In the case of service agreements, such approval is subject to certain termsand conditions, which management believes are being met.

**ITEM 8 FINANCIALINFORMATION**

**ConsolidatedFinancial Statements and Other Financial Information**

See Item 18 for the FinancialStatements.

**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. Furthermore, 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 2006, our exportsales amounted to $40.9 million, or 4.9%, of net sales. See “FinancialStatements—Note 20.”

**Significant Changes**

No significant changes have occurred since the date ofour consolidated financial statements through the date of this document.

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**ITEM 9 THE OFFERAND LISTING**

**Offer and ListingDetails**

Ourcommon shares trade on the Nasdaq Global Market (“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** | ** ** |
|------------|------------|------------|------------|----------|------------|---------|------------|
| ** ** | ** ** | **$**      | ** ** | **$**    | ** ** |
| 2002       |       | 10.02      |       | 2.05     |       |
| 2003       |       | 10.19      |       | 5.49     |       |
| 2004       |       | 31.74      |       | 8.52     |       |
| 2005       |       | 90.27      |       | 26.55    |       |
| 2006       |       | 48.52      |       | 31.52    |       |

 

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** | ** ** |
|--------------------|------------|------------|------------|----------|------------|---------|------------|
| ** **         | ** ** | **$**      | ** ** | **$**    | ** ** |
| FirstQuarter 2005  |       | 89.16      |       | 31.82    |       |
| SecondQuarter 2005 |       | 90.27      |       | 32.37    |       |
| ThirdQuarter 2005  |       | 39.94      |       | 26.55    |       |
| FourthQuarter 2005 |       | 42.00      |       | 28.80    |       |
| FirstQuarter 2006  |       | 43.71      |       | 34.63    |       |
| SecondQuarter 2006 |       | 48.52      |       | 39.35    |       |
| ThirdQuarter 2006  |       | 46.00      |       | 32.58    |       |
| FourthQuarter 2006 |       | 39.22      |       | 31.52    |       |

 

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 2006    |       | 37.13      |       | 32.58    |       |
| September 2006 |       | 35.21      |       | 31.75    |       |
| October 2006   |       | 37.50      |       | 31.52    |       |
| November 2006  |       | 39.22      |       | 36.60    |       |
| December 2006  |       | 39.25      |       | 35.42    |       |
| January 2007   |       | 38.61      |       | 34.00    |       |

 

**Markets**

Our common shares currently trade on  Nasdaq where they were initially traded on October 31,1997, in connection with our initial public offering. Our common shares are nottraded on any other exchanges. Prior to October 31, 1997, there was nopublic market for our common shares.

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**ITEM 10 ADDITIONAL INFORMATION**

**Certificate and Articles of Incorporation**

We have been incorporatedunder, and are subject to the provisions of, the Canada Business CorporationsAct, or the CBCA. Our articles of incorporation, or Articles, do not restrict thetype of business that we may carry on.

*Common shares.*   Holdersof our common shares are entitled to one vote for each share held on allmatters submitted to a vote of shareholders, except matters submitted to a voteof another class or series of shares. Holders of our common shares do not havecumulative voting rights. Holders of our common shares are entitled to receivesuch dividends, if any, as may be declared by our board of directors out offunds legally available therefore. Upon our liquidation, dissolution orwinding-up, the holders of our common shares are entitled to receive our assets.Holders of our common shares have no preemptive, subscription, redemption orconversion rights. The rights of the holders of our common shares are subjectto the rights of the holders of any of our preferred shares which may, in thefuture, be issued. Our outstanding common shares are fully paid andnon-assessable.

*Preferred shares.*   Ourboard of directors is authorized to issue preferred shares, in one or moreseries, and to fix the rights, privileges, restrictions, conditions andlimitations, and the number of shares constituting any series or thedesignations of such series, without further vote or action by our shareholders.Because the terms of the preferred shares may be fixed by the board ofdirectors without shareholder action, the preferred shares could, subject toregulatory policies, be issued quickly with terms calculated to defeat an attempted takeover of our company orto make the removal of our management more difficult. Under certaincircumstances, this could have the effect of decreasing the market value of ourcommon shares. Any preferred shares, if issued, would rank senior to our commonshares as to the distribution of our assets in the event of a liquidation,dissolution or winding-up of our Company. We have no present plans to issue anypreferred shares.

*Changes to the rights ofshareholders.*   We may amend, by specialresolution, our Articles to change the rights attached to our common shares. Aspecial resolution is a resolution passed by not less than two-thirds of thevotes cast by shareholders who voted in respect of that resolution or signed byall the shareholders entitled to vote on that resolution.

*Shareholders’ meetings.**  *The annual meeting of ourshareholders shall be convened at such day in each year and at such time as ourboard of directors may by resolution determine. Other meetings of theshareholders may be convened by order of our chairman of the board, thepresident or a vice president who is a director, or by our board of directors;such meetings to be held at such time and place as may be specified in suchorder. Shareholders holding between them not less than 5% of the outstandingcommon shares may requisition a special meeting of shareholders by followingthe required procedures in the CBCA.

*Quorum of shareholders.*   Oneperson present and holding or representing by proxy at least one of our issuedvoting shares shall be a quorum of any meeting of shareholders for the choiceof a chairman of the meeting and for the adjournment of the meeting; for allother purposes a quorum for any meeting (unless a different number ofshareholders and/or a different number of shares are required to be representedby the CBCA or by the Articles or by any other by-law) shall be 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. If a quorum is present atthe opening of a meeting of the shareholders, the shareholders present mayproceed with business of the meeting, notwithstanding that a quorum is notpresent throughout the meeting. Where we have only one shareholder or only oneholder of any class or series of shares, the shareholder present in person orby proxy constitutes a meeting. Our quorum requirements are established underour by-laws as allowed by the CBCA.

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We have received anexemption from Nasdaq’s Quorum requirement of Rule 4350(f) “QualitativeListing Requirements for Nasdaq Issuers Except for Limited Partnerships.”

*Voting rights ofnon-resident shareholders.**  *Neither Canadian law nor our organizational documentsrestrict or prohibit the right of non-resident or foreign shareholders to holdor exercise voting rights of our common shares. See “Exchange Controls.”

*Change in control.*   OurArticles could make the removal of incumbent officers and directors and theacquisition of our company by means of a tender offer, proxy contest orotherwise, more difficult due to the fact that we have a staggered board ofdirectors. See “Directors, Senior Management and Employees—Board Practices.”  These provisions may encourage personsseeking to acquire control of our Company to negotiate with us first.

*Number of 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 avacancy on the board of directors may be filled by a quorum of directors,except for a vacancy resulting from an increase in the number or minimum numberof directors or from a failure to elect the number or minimum number ofdirectors required by the Articles.

The directors of a CBCAcorporation may be removed from office by a resolution passed by a majority ofvotes cast at a special meeting of the shareholders, subject to any applicableclass or cumulative voting rights.

*Limitations on liabilityof officers and directors.*   The CBCA providesthat a corporation may indemnify, and our By-laws provide that we shallindemnify, in each case except in respect of an action by or on our behalf, orby or on the behalf of a body corporate of which we are or were a shareholderor creditor to procure a judgment in its favor, an officer or a director, aformer officer or director or a person who acts or acted at our request as adirector or officer of a body corporate of which we are or were a shareholderor creditor, and his heirs and legal representatives, against all costs,charges and expenses, including an amount paid to settle an action or satisfy ajudgment, reasonably incurred by him in respect of any civil, criminal oradministrative action or proceeding to which he is made a party by reason ofhis being or having been a director or officer of our company or such bodycorporate, 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 persons present being not less than two in number and holding orrepresenting by proxy at least 20% of the shares entitled to vote at suchmeeting.

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**Material Contracts**

On November 22, 2005,American Steel and Aluminum Corporation, Nova Tube and Steel, Inc. andNova Tube Indiana, LLC, as borrowers, and Integrated Steel Industries, Inc.,as guarantor, signed an agreement with Bank of America, N.A. as lender, toamend the maturity date of the existing U.S. revolving credit and term loanagreements from April 7, 2006 to April 7, 2007.

On December 7, 2006,we repaid all amounts under the $53.0 million term loan agreement.

There were no othermaterial contracts.

**Exchange Controls**

There are currently nolaws, decrees, regulations or other legislation in Canada that restricts theexport or import of capital or that affects the remittance of dividends,interest or other payments to non-resident holders of our securities other thanwithholding tax requirements. There is no limitation imposed by Canadian law orby our articles of incorporation or our other organizational documents on theright of a non-resident of Canada to hold or vote our common shares, other thanas provided in the Investment Canada Act, as amended by the North American FreeTrade Agreement (NAFTA) Implementation Act (Canada) and the World TradeOrganization (WTO) Agreement Implementation Act.

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 commonshares should 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 federal income tax consequences***

The following summarizesthe material Canadian federal income tax consequences relevant to an investmentin our common shares by individuals and corporations who, at all relevanttimes, are residents, or deemed residents, of the United States and are notresidents, or deemed not residents, of Canada for the purposes of theConvention between Canada and the United States of America with Respect toTaxes on Income and on Capital, as amended, hereinafter referred to as theConvention, who, at all relevant times, hold their common shares as capitalproperty and, at all relevant times, deal at arm’s length and are notaffiliated with us for the purposes of the *Income Tax Act*(Canada), hereinafter referred to as the Canadian Tax Act, and who do not useor hold and are not deemed to use or hold such shares in connection with abusiness carried on through a permanent establishment 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 and the current publishedadministrative policies and assessing practices of the Canada Revenue Agency.Other than specific proposals to amend the Canadian Tax Act, and regulationsthereunder, publicly announced by the Minister of Finance of Canada, prior tothe date hereof, hereinafter referred to as the “Proposed Amendments,” thissummary does not take into account or anticipate any changes in law, whether bylegislative or judicial decision or action, nor does it take into account taxlaws of any province or territory of Canada or of any jurisdiction outsideCanada which may differ significantly from those discussed herein, and no assurancecan be given that the Proposed Amendments will be enacted as currentlyproposed, or at all.

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This summary is notapplicable to a U.S. Resident that is a “financial institution,” a “specifiedfinancial institution,” an authorized foreign bank or a registered non-residentinsurer which carries on an insurance business in Canada and elsewhere (withinthe meaning of the Canadian Tax Act).

The current publishedpolicy of the CRA is that certain entities (including most limited liabilitycompanies) that are treated as being fiscally transparent for United Statesfederal income tax purposes will not qualify as residents of the United Statesunder the provisions of the Convention. U.S. Residents should consult their owntax advisors to determine their entitlement to relief under the Conventionbased on their particular circumstances.

This summary is notexhaustive of all possible Canadian federal income tax considerationsapplicable to an investment in our common shares. Furthermore, the income andother tax consequences of acquiring, holding or disposing of our common shareswill vary depending on a U.S. Resident’s particular circumstances.

**Accordingly, this summary is of a general nature onlyand is not intended to be, nor should it be construed to be, legal or taxadvice to any particular U.S. resident. U.S. residents should consult withtheir own tax advisors for advice with respect to their own particularcircumstances.**

A U.S. Resident should notbe subject to income tax in Canada on any capital gain realized on adisposition or deemed disposition (whether on a redemption or otherwise) of ourcommon shares, provided that such shares do not constitute “taxable Canadianproperty” of the U.S. Resident at the time of the disposition for purposes ofthe Canadian Tax Act. So long as such shares are listed on a prescribed stockexchange (which includes Nasdaq), such shares will generally not constitutetaxable Canadian property of a U.S. Resident unless, at any time during thefive-year period immediately preceding the disposition, the U.S. Resident,persons with whom the U.S. Resident did not deal at arm’s length within themeaning of the Convention, or any combination thereof, owned 25% or more of theissued shares of any series or class of our share capital. If such shares areconsidered taxable Canadian property to a U.S. Resident, the Convention willgenerally exempt that U.S. Resident from tax under the Canadian Tax Act inrespect of a disposition of such shares provided the value of the shares issuedby us is not derived principally from real property situated in Canada (asdefined in the Convention). A U.S. Resident who disposes of our common sharesthat are taxable Canadian property will be required to fulfill the requirementsof Section 116 of the Canadian Tax Act unless such shares are shares of aclass of shares listed on a prescribed stock exchange (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 

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or who meets thesubstantial presence 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 applicable tax treaty. A “Non-U.S. Holder” is a holder, otherthan an entity classified as a partnership for U.S. federal income taxpurposes, that is not a U.S. Holder. This summary is subject to any changes toU.S. law or practice occurring after the date hereof, possibly with retroactiveeffect, including any change in applicable tax treaty provisions, or differentinterpretations. Furthermore, this discussion is limited to holders of ourcommon shares who hold such shares as a capital asset within the meaning of Section 1221of the Code.

**This isnot an exhaustive discussion of all possible tax considerations. In particular,it does not discuss estate and gift taxes, taxes imposed on us, and theconsequences for U.S. Holders subject to special tax rules, including U.S.expatriates, certain Non-U.S. Holders (such as controlled foreign corporationsand passive foreign investment companies), dealers in securities, partnerships,insurance companies, regulated investment companies, tax-exempt organizations,banking and financial institutions, persons subject to the alternative minimumtax, persons whose functional currency is not the U.S. dollar, persons holdingour common shares as part of a hedging, conversion or straddle transaction,persons who directly or indirectly or through certain related persons own morethan 10% of our capital or voting power and persons carrying on a trade orbusiness in Canada through a permanent establishment or fixed base for thepurpose of which our common shares have been acquired or held. Because of theselimitations, we recommend that prospective purchasers of our common shares inthis offering consult their own tax advisors regarding all the tax consequencesparticular to them of their ownership and disposition of such common shares.**

*General taxation of distributions.*   Subjectto the discussion below under the subheading “Passive foreign investment company or controlled foreign corporation.” ForU.S. federal income tax purposes, the gross amount of a distribution by us toU.S. Holders (including any amounts of Canadian tax withheld) will be treatedas ordinary dividend income to the extent paid out of our current oraccumulated earnings and profits (as determined for U.S. federal income taxpurposes). Dividends paid by us generally will be treated as foreign sourcedividend income and will not be eligible for the dividends received deductiongenerally available for United States corporations under the Code. If adividend is paid in Canadian dollars or other property, the amount includiblein income will be the U.S. dollar value of the Canadian dollars or the fairmarket value of the other property distributed, as determined on the date ofdistribution to a U.S. Holder or to a nominee, custodian or other agent of suchU.S. Holder. A U.S. Holder will have a tax basis in such Canadian dollars orother property for U.S. federal income tax purposes equal to their U.S. dollarvalue on the date of receipt. Any subsequent gain or loss in respect of suchCanadian dollars arising from exchange rate fluctuations will be ordinaryincome or loss. If a U.S. Holder has the option to receive a distributioneither in cash or in the form of our common shares, and such U.S. Holderchooses to receive shares, hereinafter referred to as a Share Distribution,such U.S. Holder will be treated for purposes of the preceding sentences as havingreceived a distribution to the extent of the fair market value of such shares.To the extent that an amount received by a U.S. Holder exceeds the U.S. Holder’sallocable share of our current and accumulated earning and profits, such excesswill be treated first as a non-taxable return of capital to the extent of theU.S. Holder’s basis in our common shares (thereby reducing the U.S. Holder’s 

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basis in suchshares), and thereafter any remaining distribution in excess of basis wouldconstitute a taxable gain from the deemed sale or exchange of the U.S. Holder’sshares. See “Tax on Sale” below. Subject to the limitations set forth in theCode, U.S. Holders may elect to claim a foreign tax credit against their U.S.federal income tax liability for Canadian income tax withheld from dividendsreceived in respect of our common shares. For the purposes of the limitationson use of foreign tax credits, dividends received from us generally will becharacterized as passive income and therefore any U.S. tax imposed on thesedividends cannot be offset by excess foreign tax credits that a U.S. Holder mayhave from foreign source income not qualifying as passive income. The rules relatingto the determination of the foreign tax credit are complex and U.S. Holdersshould consult their tax advisors to determine whether and to what extent acredit would be available. U.S. Holders that do not elect to claim a foreigntax credit may instead claim a deduction for Canadian tax withheld if no otherforeign credit is claimed for that tax year.

*Reduced tax rates forcertain dividends.**  *Fortaxable years beginning before January 1, 2009, a dividend paid by usgenerally will be taxed at the preferential tax rates applicable to long-termcapital gains if (i) we are a “qualified foreign corporation” (as definedbelow), (ii) the U.S. Holder receiving such dividend is an individual,estate, or trust, and (iii) such dividend is paid on common shares thathave been held by such U.S. Holder for at least 61 days during the 121-dayperiod beginning 60 days before the “ex-dividend date” (i.e., the first datethat a purchaser of such common shares will not be entitled to receive suchdividend).

We generally will be a “qualifiedforeign corporation,” or QFC, under Section 1(h)(11) of the Code if (i) weare incorporated in a possession of the U.S., (ii) our Company is eligiblefor the benefits of the Canada-U.S. Tax Convention, or (iii) the commonshares are readily tradable on an established securities market in the U.S. However,even if we satisfy one or more of such requirements, we will not be treated asa QFC if our Company is a “passive foreign investment company,” or PFIC (asdefined below), 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, weintend to conduct our affairs so as to avoid our classification as a PFIC. However,there can be no assurances that we will not be a PFIC, and accordingly, therecan be no assurances that we will be a QFC or that we will be able to certify that we are a QFC in accordance withthe certification procedures expected to be issued by the Treasury and the IRS.If we are not a QFC, a dividend paid by us to a U.S. Holder that is anindividual, estate, or trust generally will be taxed at ordinary income taxrates (and not at the preferential tax rates applicable to long-term capitalgains). The dividend rules are complex, and each U.S. Holder shouldconsult its own financial advisor, legal counsel, or accountant regarding thedividend rules.

*Tax on sale.*   Subjectto the discussion below under the subheading “Passive foreign investment company or controlled foreign corporation.” ForU.S. federal income tax purposes, a U.S. Holder generally will recognize a gainor loss on any sale, exchange or other disposition of our common shares (unlessa specific non-recognition provision applies). Such gain or loss will bemeasured by the difference between the amount of cash (and the fair marketvalue of any other property) received and the U.S. Holder’s tax basis in suchshares. A U.S. Holder’s tax basis in our common shares will generally equal theamount paid by such U.S. Holder for such shares (or, in case of shares acquiredby way of a Share Distribution, the amount included in income at the time ofthe Share Distribution). The gain or loss arising from a sale or exchange ofour common shares will be a long-term capital gain or loss if the U.S. Holder’s

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holding period forsuch shares exceeds one year. In general, the gain from a sale or exchange ofour common shares by a U.S. Holder will be treated as United States sourceincome. 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.

*Passive foreign investmentcompany 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, royalties,rents, annuities and the excess of gains over losses from the disposition ofassets which produce those types of income. We intend to conduct our affairs soas to avoid our and our subsidiaries’ classification as PFICs with respect toU.S. persons holding our common shares. However, if ever applied to us and anyone of 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.

*Information reporting andbackup 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 taxpayer identificationnumber, or TIN, to the U.S. financial institution or any other personresponsible 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 thebackup withholding rules do not constitute a separate U.S. federal income tax.Rather, any amounts withheld under the backup withholding rules will berefunded or allowed as a credit against the U.S. Holder’s U.S. federal incometax liability, if any, provided the required information or appropriate claimfor refund is filed with the IRS.

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*United States state andlocal taxes.*   In addition to U.S. federal incometaxes, U.S. Holders may be subject to United States state and local taxes withrespect to their common shares. U.S. Holders should consult their own taxadvisors regarding such matters.

*U.S. federal income taxconsequences to Non-U.S. Holders.*   The followingdiscussion summarizes the U.S. federal income tax consequences of owning anddisposing of our common shares by a holder of such shares that is a Non-U.S.Holder, is not engaged in the conduct of a trade or business in the UnitedStates and is not present in the United States for 183 days or more during thetaxable year.

*Distributions to Non-U.S.Holders.*   A Non-U.S. Holder would generally notbe subject to U.S. income tax with respect to distributions by us.

*Tax on sale by Non-U.S.Holders.*   A Non-U.S. Holder generally will not besubject to U.S. federal income or withholding tax in respect of gain recognizedon the disposition of shares.

*Information reporting andbackup 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 TOTHE U.S. FEDERAL INCOME TAX CONSEQUENCES AND CANADIAN INCOME TAX CONSEQUENCESOF THE OWNERSHIP, 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 CIRCUMSTANCES.**

**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 normalbusiness hours.

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

Although our financialresults are reported in U.S. dollars, a substantial portion of our revenues arereceived in, and our expenses are incurred in, Canadian dollars. In determiningour results of operations, we convert the sales made by Canadian subsidiariesinto the United States, which are denominated in U.S. dollars, into Canadiandollars based upon the average monthly exchange rate at the time of sale.

Exchange rate fluctuationsare beyond our control and although we partially hedge our currency exposure,there can be no assurance that changes in the rate of exchange between theCanadian dollar and the U.S. dollar will not adversely affect our business,results of operations, financial condition or cash flows.

We are exposed to marketrisk from changes in interest rates and exchange rates. From time to time, andonly upon approval by certain of our executive officers, we enter intofinancial contracts in the ordinary course of business in order to hedge theseexposures. We do not use financial instruments for trading or speculativepurposes.

*Interest rate risk.*   Ourexposure to interest rate risk is as follows, indicated in thousands of U.S.dollars:          
|                   | ** ** | ** **    | ** ** | **November 25, 2006** | ** ** |
|-------------------|------------|---------------|------------|---------------------------------|------------|
| ** **        | ** ** | ** **    | ** ** | **Debt  outstanding**           | ** ** | **Weighted  average  effective interest**

**rate** | ** ** |
| Bank indebtedness |       | Floating rate |       |                            | $          | 514 |   |   |   | 6.03 | % |   |
| Long-term debt    |       | Floating rate |       |                            | $          | 38,204 |   |   |   | 6.70 | % |   |
|              |       | Fixed rate    |       |                            | 3,083      |   |   |   | 5.77 | % |   |
|              |       |          |       |                            | $          | 41,287 |   |   |   |   |   |   |

 
|                              | ** ** | **November 25, 2006** | ** ** |
|------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **Carrying  amount**            | ** ** | **Fair  value** | ** ** |
| Fair value of long-term debt |       |                            | $          | 41,287 |   |   |   | $ | 41,924 |   |   |
|                              |            |                                 |            |  |  |  |  |  |  |  |  |

 

A 68 basis point movementin the Canadian prime rate, the U.S. base rate or LIBOR would result in anapproximate $0.3 million, annualized, for the period ended November 25,2006, increase or decrease in interest expense and cash flows. The modelingtechnique used was to apply to our debt, the difference between the actualinterest rates at November 25, 2006 and the what-if interest rates.

*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. AtNovember 25, 2006, November 26, 2005 and November 27, 2004, wehad no forward foreign currency exchange contracts outstanding.

We estimate that an 11cent movement in the value of the Canadian dollar would affect our net sales byapproximately $49.6 million annually, based on our 2006 Canadian dollar net sales,without giving effect to any hedging instruments. The modeling technique usedwas to determine the difference between the conversions of our net sales inCanadian dollars for the period ended November 25, 2006 using the averageexchange rate for the year and the what-if exchange rate. In 2006, the averageexchange rate was $1.1350 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 

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prices we pay forsteel 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 adversely affect our operating results.”

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

Not applicable.

**PART II**

**ITEM 13 DEFAULTS, DIVIDEND ARREARAGES ANDDELINQUENCIES**

None.

**ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OFSECURITY HOLDERS AND USE OF PROCEEDS**

None.

**ITEM 15T CONTROLS AND PROCEDURES**

**Disclosure Controls and Procedures**

Our chief executiveofficer and chief financial officer have concluded, based on their evaluationas at the end of the period covered by this report, that our disclosurecontrols and 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.

**Management’s Annual Report on Internal Control OverFinancial Reporting**

The management ofNovamerican Steel Inc. is responsible for establishing and maintaining adequateinternal control over financial reporting. This internal control system wasdesigned to provide reasonable assurance to the Company’s management and boardof directors regarding the preparation and fair presentation of publishedfinancial statements.

This annual report doesnot include an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting. Management’s reportwas not subject to attestation by the Company’s registered public accountingfirm pursuant to tempory rules of the Securities and Exchange Commissionthat permit the Company to provide only management’s report in this annualreport.

Novamerican Steel Inc.’smanagement assessed the effectiveness of the Company’s internal control overfinancial reporting as of November 25, 2006. In making this assessment, itused the criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in Internal Control—Integrated Framework. Based onits assessment, management believes that, as of November 25, 2006, theCompany’s internal control over financial reporting is effective based on thosecriteria.

**Changes in Internal Control Over Financial Reporting**

There were no changes inour internal control over financial reporting during the year ended November 25,2006 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

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**ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT**

Our board of directors hasdetermined that we have at least one audit committee financial expert servingon our Audit Committee. Our independent audit committee financial expert isJohn LeBoutillier, the Chairman of the Audit Committee, who qualifies as “independent”under Nasdaq listing standards.

**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 to our Chief Financial Officer, Lawrence P. Cannon,6001 Irwin Street, 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. 25,  2006**                                | ** ** | **Nov. 26,  2005** | ** ** |
|---------------------|------------|--------------------------------------------------------|------------|-------------------------|------------|
| ** **          | ** ** | **(In thousands of U.S. dollars)** | ** ** |
| Audit fees          |       |                                                   | $          | 581                     |       |   |   | $ | 533 |   |   |
| Audit-related  fees |       |                                                   | 310        |                    |       |   | 148 |   |   |
| Tax fees            |       |                                                   | 270        |                    |       |   | 324 |   |   |
| Other               |       |                                                   | 50         |                    |       |   | 27 |   |   |
|                |       |                                                   | $          | 1,211                   |       |   |   | $ | 1,032 |   |   |

 

Audit-related fees includefees for the quarterly review of our consolidated financial statements and theinternal control review. Tax fees include tax compliance services and taxadvisory and planning services. Management presents regular updates to theAudit Committee of the services rendered by the auditors. The Committeepre-approves all non-audit fees.

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 16DEXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**

Not applicable.

**ITEM 16EPURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED 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 26, 2005 to November 25, 2006 |       |                                                 | None       |                                             |       |                                                                                                                                | —     |                                                                                                                                         |       |   | None |   |   |   | 450,000 | (1) |   |
|                                                  |            |                                                      |            |                                                  |            |                                                                                                                                     |            |                                                                                                                                              |            |  |  |  |  |  |  |  |  |

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(1)             OnJuly 28, 2006, we announced that our board of directors had approved ashare repurchase program of up to 450,000 common shares. As of February 22,2007, no shares have been repurchased pursuant to this program.

**PART III**

**ITEM 17 FINANCIAL STATEMENTS**

See Item 18for the Financial Statements.

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**ITEM 18 FINANCIALSTATEMENTS**

****

**Report ofIndependent Registered Public Accounting Firm**

To the Board of Directors and Shareholders ofNovamerican Steel Inc.

We have audited the accompanying consolidated balancesheets of Novamerican Steel Inc. (a Canadian Corporation) and Subsidiaries (the“Company”) as of November 25, 2006 and November 26, 2005 and therelated consolidated statements of operations and comprehensive income,shareholders’ equity and cash flows for each of the three years in the periodended November 25, 2006. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements 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, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Novamerican Steel Inc. andSubsidiaries as of November 25, 2006 and November 26, 2005 and theresults of their operations and their cash flows for each of the three years inthe period ended November 25, 2006 in conformity with accountingprinciples generally accepted in the United States of America.

Chartered Accountants

Montréal, CanadaDecember 19, 2006

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**NovamericanSteel Inc. and Subsidiaries**ConsolidatedStatements of Operations and Comprehensive Income(In thousands of U.S.dollars, except per share data)

| ** **                                                                                                      | ** ** | **Years ended**        | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                      | ** ** | **November 25,  2006** | ** ** | **November 26,  2005** | ** ** | **November 27,  2004** | ** ** |
| ** **                                                                                                      | ** ** | **$**                       | ** ** | **$** | ** ** | **$** | ** ** |
| **Net  sales**                                                                                                  |       |                        | 840,798    |   |   |   | 834,689 |   |   |   | 768,627 |   |   |
| Cost of sales                                                                                                   |       |                        | 655,659    |   |   |   | 664,134 |   |   |   | 543,503 |   |   |
| **Gross  margin**                                                                                               |       |                        | 185,139    |   |   |   | 170,555 |   |   |   | 225,124 |   |   |
| Operating expenses                                                                                              |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Plant                                                                                                           |       |                        | 45,233     |   |   |   | 43,210 |   |   |   | 40,780 |   |   |
| Delivery                                                                                                        |       |                        | 25,586     |   |   |   | 23,371 |   |   |   | 19,478 |   |   |
| Selling                                                                                                         |       |                        | 13,886     |   |   |   | 13,562 |   |   |   | 13,321 |   |   |
| Administrative and general                                                                                      |       |                        | 31,034     |   |   |   | 30,326 |   |   |   | 33,658 |   |   |
|                                                                                                            |       |                        | 115,739    |   |   |   | 110,469 |   |   |   | 107,237 |   |   |
| **Operating  income**                                                                                           |       |                        | 69,400     |   |   |   | 60,086 |   |   |   | 117,887 |   |   |
| Interest expense                                                                                                |       |                        | 1,139      |   |   |   | 3,892 |   |   |   | 4,866 |   |   |
| Share in income  of a joint venture                                                                             |       |                        | (743       | ) |   |   | (720 | ) |   |   | (312 | ) |   |
|                                                                                                            |       |                        | 396        |   |   |   | 3,172 |   |   |   | 4,554 |   |   |
| Income before  income taxes                                                                                     |       |                        | 69,004     |   |   |   | 56,914 |   |   |   | 113,333 |   |   |
| Income taxes (Note 3)                                                                                           |       |                        | 24,706     |   |   |   | 19,976 |   |   |   | 40,422 |   |   |
| **Net  income**                                                                                                 |       |                        | 44,298     |   |   |   | 36,938 |   |   |   | 72,911 |   |   |
| **Net  income per share** (Note 4)                                                                              |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                           |       |                        | 4.26       |   |   |   | 3.70 |   |   |   | 7.51 |   |   |
| Diluted                                                                                                         |       |                        | 4.25       |   |   |   | 3.58 |   |   |   | 7.35 |   |   |
| **Comprehensive  income**                                                                                       | ** ** |                        |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                      |       |                        | 44,298     |   |   |   | 36,938 |   |   |   | 72,911 |   |   |
| Changes in  cumulative translation adjustment                                                                   |       |                        | 3,134      |   |   |   | 3,736 |   |   |   | 10,344 |   |   |
| Changes in fair  value of interest rate swap, net of deferred income taxes of $29 ($275 in  2005; $538 in 2004) |       |                        | 42         |   |   |   | 395 |   |   |   | 533 |   |   |
|                                                                                                            |       |                        | 47,474     |   |   |   | 41,069 |   |   |   | 83,788 |   |   |

 

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

54

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**NovamericanSteel Inc. and Subsidiaries**ConsolidatedStatements of Shareholders’ Equity(In thousands of U.S.dollars, except share data)

| ** **                                                                         | ** ** | **Common shares** | ** ** | **Retained** | ** ** | **Accumulated  othercomprehensive** | ** ** | **Total  shareholders’** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|--------------|------------|-------------------------------------|------------|-------------------------------|------------|
| ** **                                                                         | ** ** | **Number**             | ** ** | **Amount**   | ** ** | **earnings**                        | ** ** | **income**                    | ** ** | **equity** | ** ** |
| ** **                                                                         | ** ** | **$**                  | ** ** | **$$**       | ** ** | **$**                               | ** ** | ** **                    | ** ** | ** ** | ** ** |
| 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 |   |   |
| Options exercised                                                                  |       | 293,774                |       |         | 4,113      |                                |       |                          |       |   |   |   |   |   | 4,113 |   |   |
| Net income                                                                         |       |                   |       |         |       |                                |       | 44,298                        |       |   |   |   |   |   | 44,298 |   |   |
| Changes in cumulative translation adjustment                                       |       |                   |       |         |       |                                |       |                          |       |   | 3,134 |   |   |   | 3,134 |   |   |
| Changes in fair value of interest rate swap, net of  deferred income taxes of $29  |       |                   |       |         |       |                                |       |                          |       |   | 42 |   |   |   | 42 |   |   |
| Balance at  November 25, 2006                                                 |       | 10,450,000             |       |         | 38,904     |                                |       | 266,018                       |       |   | 23,624 |   |   |   | 328,546 |   |   |

 

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

55

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**Novamerican SteelInc. and Subsidiaries**Consolidated Statements of Cash Flows(In thousands of U.S.dollars)

| ** **                                                                 | ** **   | **Years ended**        | ** **   |
|----------------------------------------------------------------------------|--------------|-----------------------------|--------------|
| ** **                                                                 | ** **   | **November 25,  2006** | ** **   | **November 26,  2005** | ** ** | **November 27,  2004** | ** ** |
| ** **                                                                 | ** **   | **$**                       | ** **   | **$** | ** ** | **$** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                   | *** *** |                        | *** *** | *** *** |   |   | *** *** | *** *** |   |   | *** *** | *** *** |   |
| Net income                                                                 |         |                        | 44,298       |   |   |   | 36,938 |   |   |   | 72,911 |   |   |
| Adjustments to reconcile net income to net cash from  operating activities |         |                        |         |   |   |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                             |         |                        | 10,697       |   |   |   | 9,936 |   |   |   | 8,680 |   |   |
| Share in income of a  joint venture                                        |         |                        | (743         | ) |   |   | (720 | ) |   |   | (312 | ) |   |
| Deferred income taxes                                                      |         |                        | (795         | ) |   |   | (359 | ) |   |   | 695 |   |   |
| Loss (gain) on disposal  of property, plant and equipment                  |         |                        | (995         | ) |   |   | (69 | ) |   |   | 731 |   |   |
| Changes in working capital items                                           |         |                        |         |   |   |   |   |   |   |   |   |   |   |
| Trade accounts  receivable                                                 |         |                        | 15,310       |   |   |   | 4,339 |   |   |   | (36,584 | ) |   |
| Income taxes receivable                                                    |         |                        | 2,858        |   |   |   | (2,666 | ) |   |   | 595 |   |   |
| Inventories                                                                |         |                        | (34,234      | ) |   |   | 46,181 |   |   |   | (71,339 | ) |   |
| Prepaid expenses and  other                                                |         |                        | (634         | ) |   |   | (611 | ) |   |   | 530 |   |   |
| Accounts payable and  accrued liabilities                                  |         |                        | (21,098      | ) |   |   | (4,744 | ) |   |   | 23,462 |   |   |
| Income taxes payable                                                       |         |                        | 696          |   |   |   | (18,648 | ) |   |   | 18,424 |   |   |
| Net cash from operating  activities                                        |         |                        | 15,360       |   |   |   | 69,577 |   |   |   | 17,793 |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                   | *** *** |                        | *** *** | *** *** |   |   | *** *** | *** *** |   |   | *** *** | *** *** |   |
| Repayment of loan to a  Corporation                                        |         |                        | 17,621       |   |   |   |   |   |   |   |   |   |   |
| Loan to a Corporation                                                      |         |                        | (37,885      | ) |   |   | (16,443 | ) |   |   |   |   |   |
| Acquisition of minority  interest                                          |         |                        |         |   |   |   | (205 | ) |   |   | (161 | ) |   |
| Distribution from a  joint venture                                         |         |                        | 1,132        |   |   |   | 846 |   |   |   | 1,405 |   |   |
| Additions to property,  plant and equipment                                |         |                        | (22,581      | ) |   |   | (5,359 | ) |   |   | (9,056 | ) |   |
| Proceeds from disposal  of property, plant and equipment                   |         |                        | 10,877       |   |   |   | 514 |   |   |   | 3,456 |   |   |
| Other assets                                                               |         |                        | (67          | ) |   |   | (255 | ) |   |   | (176 | ) |   |
| Net cash used for  investing activities                                    |         |                        | (30,903      | ) |   |   | (20,902 | ) |   |   | (4,532 | ) |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                   | *** *** |                        | *** *** | *** *** |   |   | *** *** | *** *** |   |   | *** *** | *** *** |   |
| Net decrease in bank  indebtedness                                         |         |                        | (2,236       | ) |   |   | (802 | ) |   |   | (15,564 | ) |   |
| Issue of common shares                                                     |         |                        | 4,113        |   |   |   | 5,182 |   |   |   | 1,205 |   |   |
| Advances due to an  employee                                               |         |                        |         |   |   |   | (730 | ) |   |   | (2,732 | ) |   |
| Proceeds from long-term  debt                                              |         |                        |         |   |   |   |   |   |   |   | 21,011 |   |   |
| Repayment of long-term  debt                                               |         |                        | (3,670       | ) |   |   | (16,756 | ) |   |   | (17,658 | ) |   |
| Net cash used for  financing activities                                    |         |                        | (1,793       | ) |   |   | (13,106 | ) |   |   | (13,738 | ) |   |
| Effect of exchange rate  changes on cash and cash  equivalents             |         |                        | 547          |   |   |   | 774 |   |   |   | 674 |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                  |         |                        | (16,789      | ) |   |   | 36,343 |   |   |   | 197 |   |   |
| Cash and cash  equivalents, beginning of year                              |         |                        | 47,805       |   |   |   | 11,462 |   |   |   | 11,265 |   |   |
| Cash and cash  equivalents, end of year                                    |         |                        | 31,016       |   |   |   | 47,805 |   |   |   | 11,462 |   |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**                       | *** *** |                        | *** *** | *** *** |   |   | *** *** | *** *** |   |   | *** *** | *** *** |   |
| Interest paid                                                              |         |                        | 2,444        |   |   |   | 4,053 |   |   |   | 4,229 |   |   |
| Income taxes paid                                                          |         |                        | 24,738       |   |   |   | 40,259 |   |   |   | 22,337 |   |   |

 

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

56

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**NovamericanSteel Inc. and Subsidiaries**ConsolidatedBalance Sheets(In thousands of U.S.dollars)

| ** **                                                                                                                                               | ** **   | **November 25,  2006** | ** **   | **November 26,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|-----------------------------|--------------|-----------------------------|------------|
| ** **                                                                                                                                               | ** **   | **$**                       | ** **   | **$**                       | ** ** |
| **ASSETS**                                                                                                                                               | *** *** |                        | *** *** | *** ***                |       |   | *** *** | *** *** |   |
| Current assets                                                                                                                                           |         |                        |         | *** ***                |       |   |   | *** *** |   |
| Cash and cash  equivalents                                                                                                                               |         |                        | 31,016       | *** ***                |       |   | 47,805 | *** *** |   |
| Trade accounts receivable,  net (Note 5)                                                                                                                 |         |                        | 109,609      | *** ***                |       |   | 121,626 | *** *** |   |
| Loans receivable  (Note 6)                                                                                                                               |         |                        | 37,670       | *** ***                |       |   | 17,132 | *** *** |   |
| Income taxes  receivable                                                                                                                                 |         |                        |         | *** ***                |       |   | 2,778 | *** *** |   |
| Inventories (Note  7)                                                                                                                                    |         |                        | 163,060      | *** ***                |       |   | 127,316 | *** *** |   |
| Prepaid expenses  and other                                                                                                                              |         |                        | 2,096        | *** ***                |       |   | 2,736 | *** *** |   |
| Deferred income  taxes (Note 3)                                                                                                                          |         |                        | 1,957        | *** ***                |       |   | 1,815 | *** *** |   |
|                                                                                                                                                     |         |                        | 345,408      | *** ***                |       |   | 321,208 | *** *** |   |
| Investment in a joint  venture                                                                                                                           |         |                        | 1,748        | *** ***                |       |   | 2,137 | *** *** |   |
| Property, plant and  equipment (Note 8)                                                                                                                  |         |                        | 106,309      | *** ***                |       |   | 102,794 | *** *** |   |
| Goodwill (Note 9)                                                                                                                                        |         |                        | 12,994       | *** ***                |       |   | 12,994 | *** *** |   |
| Deferred income taxes  (Note 3)                                                                                                                          |         |                        | 2,260        | *** ***                |       |   | 1,767 | *** *** |   |
| Other assets                                                                                                                                             |         |                        | 328          | *** ***                |       |   | 683 | *** *** |   |
|                                                                                                                                                     |         |                        | 469,047      | *** ***                |       |   | 441,583 | *** *** |   |
| **LIABILITIES**                                                                                                                                          | *** *** |                        | *** *** | *** ***                |       |   | *** *** | *** *** |   |
| Current liabilities                                                                                                                                      |         |                        |         | *** ***                |       |   |   | *** *** |   |
| Current portion of  long-term debt                                                                                                                       |         |                        | 38,642       | *** ***                |       |   | 3,078 | *** *** |   |
| Bank indebtedness  (Note 10)                                                                                                                             |         |                        | 513          | *** ***                |       |   | 2,676 | *** *** |   |
| Trade accounts  payable and accrued liabilities                                                                                                          |         |                        | 79,302       | *** ***                |       |   | 97,750 | *** *** |   |
| Trade accounts  payable to a company controlled by a director                                                                                            |         |                        | 677          | *** ***                |       |   | 873 | *** *** |   |
| Trade accounts  payable to a joint venture                                                                                                               |         |                        | 592          | *** ***                |       |   | 977 | *** *** |   |
| Advances due to  related parties (Note 11)                                                                                                               |         |                        | 192          | *** ***                |       |   | 113 | *** *** |   |
| Income taxes  payable                                                                                                                                    |         |                        | 1,703        | *** ***                |       |   | 998 | *** *** |   |
| Deferred income  taxes (Note 3)                                                                                                                          |         |                        | 290          | *** ***                |       |   | 338 | *** *** |   |
|                                                                                                                                                     |         |                        | 121,911      | *** ***                |       |   | 106,803 | *** *** |   |
| Long-term debt (Note 12)                                                                                                                                 |         |                        | 2,645        | *** ***                |       |   | 41,782 | *** *** |   |
| Fair value of interest  rate swap (Note 15)                                                                                                              |         |                        |         | *** ***                |       |   | 71 | *** *** |   |
| Deferred income taxes  (Note 3)                                                                                                                          |         |                        | 15,945       | *** ***                |       |   | 15,968 | *** *** |   |
|                                                                                                                                                     |         |                        | 140,501      | *** ***                |       |   | 164,624 | *** *** |   |
| Contingencies and commitments (Notes 17 and 18)                                                                                                          |         |                        |         | *** ***                |       |   |   | *** *** |   |
| **SHAREHOLDERS’ EQUITY**                                                                                                                            | *** *** |                        | *** *** | *** ***                |       |   | *** *** | *** *** |   |
| Preferred shares, no par  value: Unlimited number of shares authorized; none issued or outstanding                                                  |         |                        |         | *** ***                |       |   |   | *** *** |   |
| Common shares, no  par value: Unlimited number of shares authorized; issued and outstanding  shares: 10,450,000 in 2006 and 10,156,226 in 2005 |         |                        | 38,904       | *** ***                |       |   | 34,791 | *** *** |   |
| Retained earnings                                                                                                                                        |         |                        | 266,018      | *** ***                |       |   | 221,720 | *** *** |   |
| Accumulated other  comprehensive income                                                                                                                  |         |                        | 23,624       | *** ***                |       |   | 20,448 | *** *** |   |
|                                                                                                                                                     |         |                        | 328,546      | *** ***                |       |   | 276,959 | *** *** |   |
|                                                                                                                                                     |         |                        | 469,047      | *** ***                |       |   | 441,583 | *** *** |   |

 

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

57

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**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 ANDNATURE 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 ofconsolidation**

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

**Joint venture**

The Company’s interest ina joint venture is accounted for by the equity method. Accordingly, the Company’sshare in income of joint venture 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 25,2006, November 26, 2005 and November 27, 2004 include 52 weeksof operations.

**Translation offoreign 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 month in which they occur. Exchange gains and losses arising fromtransactions denominated in foreign currencies are included in net sales in theconsolidated statements of operations and comprehensive income. Gains (losses)amounted to $(469 000) in 2006, $101,000 in 2005 and $218,000 in 2004.

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.

58

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**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—ACCOUNTINGPOLICIES (Continued)**

**Accountingestimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. On an ongoing basis, management reviews its estimates basedon currently available information. Management believes the most sensitiveestimates include the allowance for doubtful accounts, the recoverability ofgoodwill and the provision for income taxes. Actual results could differ fromthese 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 invoicedfor the complete product delivered to the customer’s designated location andshipping and handling charges are not invoiced separately. Shipping andhandling costs are recorded under the “Delivery” caption on the consolidatedstatements of operations and comprehensive income.

**Cash and cashequivalents**

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

**Trade accountsreceivable**

Credit is extended basedon evaluation of a customer’s financial condition and, generally, collateral isnot required. Trade accounts receivable are stated at amounts due fromcustomers based on agreed upon payment terms net of an allowance for doubtfulaccounts. Accounts outstanding longer than the agreed upon payment terms areconsidered past due. The Company determines its allowance by considering anumber of factors, including the length of time trade accounts receivable arepast due, the customer’s current ability to pay its obligation to the Company,and the condition of the general economy and the industry as a whole. TheCompany writes off trade accounts receivable when they are determined to beuncollectible, and any payments subsequently received on such receivables arecredited to the bad debt expense.

**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 themoving average cost method.

59

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**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—ACCOUNTINGPOLICIES (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 25,2006.

Property,plant and equipment are depreciated over their estimated useful lives using thefollowing methods:

| Buildings and building  improvements |   | Straight-line       |   | 10  to 40 years |     |
|--------------------------------------|--------|---------------------|--------|-----------------|----------|
| Machinery and equipment              |   | Straight-line       |   | 5 to  20 years  |     |
| Furniture and fixtures               |   | Straight-line       |   | 5 to  15 years  |     |
| Transportation equipment             |   | Straight-line       |   | 3 to  7 years   |  or |
|                                 |   | Diminishing balance |   | 30%             |     |
| Computer equipment                   |   | Straight-line       |   | 3 to  5 years   |  or |
|                                 |   | Diminishing balance |   | 30%             |     |
| Leasehold improvements               |   | Straight-line       |   | 5 to  10 years  |     |
| Aircraft                             |   | Straight-line       |   | 15 years        |     |

 

No depreciation is recorded on assets underconstruction.

Depreciation expense wasapproximately $10,492,000, $9,327,000 and $8,086,000 for the years ended November 25,2006, November 26, 2005 and November 27, 2004, respectively.

**Goodwill**

Goodwill represents the excess of the purchase priceover the fair value of the net assets acquired. Goodwill is not amortized andis tested for impairment annually, or more frequently if events or changes incircumstances indicate that it is impaired. Goodwill is allocated to reportingunits and any potential goodwill impairment is identified by comparing thecarrying amount of a reporting unit with its fair value. If any potentialimpairment is identified, it is quantified by comparing the carrying amount ofgoodwill to its fair value.

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 advantages.

60

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**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—ACCOUNTINGPOLICIES (Continued)**

There will usually be differences between estimatedand actual results as events and circumstances frequently do not occur asexpected, and those differences may be material.

In accordance withStatement of Financial Accounting Standard (“SFAS”) No. 142, *Goodwill and Other Intangible Assets*, theCompany performed an annual impairment test of goodwill for fiscal years 2006,2005 and 2004. 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 $205,000, $609,000 and $594,000 for theyears ended November 25, 2006, November 26, 2005 and November 27,2004, respectively.

**Income taxes**

The provision for income taxes is computed on thepretax income of the consolidated subsidiaries located within each taxingcountry based on the current income tax law. Deferred income taxes are providedbased upon currently enacted income tax rates for temporary differences in therecognition of assets and liabilities on the financial statements and forincome tax purposes.

Deferred income taxes include the benefit of lossescarried forward when it is more likely than not that future profits willresult. Should the opportunity to realize the benefit of these losses expire,such amounts would result in additional deferred income tax expense.

No provision has been madefor deferred income taxes that may result from future remittance ofapproximately $89,227,000 of undistributed tax paid earnings of the foreignsubsidiaries as of November 25, 2006. Under current Canadian income taxlaw, the Company may repatriate undistributed earnings of such foreignsubsidiaries without any income tax effect. However, should the Companyrepatriate part or all of the undistributed earnings of its foreignsubsidiaries, a 5% withholding tax would be assessable on that amount. At thistime, the Company does not intend to repatriate any earnings of foreignsubsidiaries.

**Comprehensiveincome**

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

**Stock-basedcompensation**

The Company hasestablished a stock-based compensation plan, described in Note 13. TheCompany did not recognize compensation expense when stock options were grantedto plan participants during fiscal year 1997. As of November 30, 2002, alloptions outstanding were vested. As of November 25, 2006, all optionsoutstanding were exercised. Any consideration paid by plan participants on theexercise of stock options is credited to share capital. The Company has notissued any stock options since fiscal year 1997.

61

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**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—ACCOUNTINGPOLICIES (Continued)**

**Current and pendingaccounting changes**

*Current*

Effective November 27, 2005, the Company adoptedrevised SFAS No.123 (“SFAS No. 123 (R)”), *Share-Based Payment*, which requires all entities torecognize the fair value of share-based payment awards (stock compensation)classified in equity. The adoption of SFAS No. 123 (R) did not havean initial impact on the consolidated financial statements.

Effective November 27, 2005, the Company adoptedSFAS No. 151, *Inventory Costs*,which clarifies that abnormal amounts of idle facility expense, freight,handling costs, and wasted materials (spoilage) should be recognized ascurrent-period charges and by requiring the allocation of fixed productionoverheads to inventory based on the normal capacity of production facilities.The adoption of SFAS No. 151 did not have a material impact on theconsolidated financial statements.

Effective November 27, 2005, the Company adoptedSFAS No. 153, *Exchanges of NonmonetaryAssets—an amendment of APB Opinion No. 29*. SFAS No. 153amends Opinion No. 29 to eliminate the exception for non-monetaryexchanges of similar productive assets and replaces it with a general exceptionfor exchanges of non-monetary assets that do not have commercial substance. Anon-monetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result to the exchange. Theadoption of SFAS No. 153 did not have a material impact on theconsolidated financial statements.

Effective November 25, 2006, the Company adoptedStaff Accounting Bulletin No. 108 (“SAB 108”), *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*issued by the U.S. Securities and Exchange Commission. SAB 108 was issuedto provide consistency between how registrants quantify financial statementmisstatements. There have been two widely-used methods for quantifying theeffects of financial statement misstatements. The “roll-over” method quantifiesthe amount by which the current year income statement is misstated and canresult in the accumulation of errors on the balance sheet that may not havebeen material to any individual income statement, but which may misstate one ormore balance sheet accounts. The “iron curtain” method quantifies the error asthe cumulative amount by which the current year balance sheet is misstated andcan result in disregarding the effects of errors in the current year incomestatement that result from the correction of an error existing in previouslyissued financial statements. The Company used the roll-over method forquantifying identified financial statement misstatements. SAB 108 establishedan approach that requires quantification of financial statement misstatements basedon the effects of the misstatement on each of the Company’s financialstatements and the related financial statement disclosures. This approach iscommonly referred to as the “dual approach” because it requires quantificationof errors under both the roll-over and iron curtain methods.

SAB 108 allows registrants to initially apply thedual approach either by retroactively adjusting prior financial statements asif the dual approach had always been used or by recording the cumulative effectof initially applying the dual approach as adjustments to the carrying valuesof assets and liabilities as of November 27, 2005 with an offsettingadjustment recorded to the opening balance of retained earnings. Use of this “cumulativeeffect” transition method requires detailed disclosure of the nature and amountof 

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**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—ACCOUNTINGPOLICIES (Continued)**

each individual errorbeing corrected through the cumulative adjustment and how and when it arose.The adoption of SAB 108 had no impact on the preparation of the consolidatedfinancial statements.

*Pending*

The FASB issued FASBInterpretation No. 48 (“FIN 48”), *Accountingfor Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109*,in June 2006. This interpretation clarifies the accounting for uncertaintyin income taxes recognized in an enterprise’s financial statements inaccordance with SFAS No. 109, *Accountingfor Income Taxes*. It prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof an income tax position taken or expected to be taken in an income taxreturn. It also provides guidance on derecognition, classification, interestand penalties, accounting in interim periods, disclosure, and transition.FIN 48 is effective for the Company at the beginning of the 2008 fiscalyear. The impact resulting from the adoption of FIN 48 has not yet beendetermined.

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements*. This statement defines fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurements. It applies under other accounting pronouncements that require orpermit fair value measurements. Accordingly, SFAS No. 157 does not requireany new fair value measurements. SFAS No. 157 is effective for the Companyat the beginning of the 2008 fiscal year. The impact resulting from theadoption of SFAS No. 157 has not yet been determined.

In May 2005, the FASBissued SFAS No. 154, *Accounting Changes andError Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.*This statement replaces APB Opinion No. 20, *AccountingChanges,* and SFAS No. 3, *Reporting AccountingChanges in Interim Financial Statements,* and changes therequirements for the accounting for and reporting of a change in accountingprinciple. It applies to all voluntary changes in accounting principle. It alsoapplies to changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transition provisions.This statement is effective for the Company at the beginning of the 2007 fiscalyear.

**Reclassification**

Certain fiscal year 2005amounts have been reclassified to conform to fiscal year 2006 presentation.

**3—INCOMETAXES**

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

Income before income taxesby local jurisdiction:

| ** **    | ** ** | **Years ended**  | ** ** |
|---------------|------------|-----------------------|------------|
| ** **    | ** ** | **November 25,** | ** ** | **November 26,** | ** ** | **November 27,** | ** ** |
| ** **    | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **    | ** ** | ** **            | **$**      | ** ** | ** ** | ** ** | **$** | ** ** | ** ** | ** ** | **$** | ** ** | ** ** |
| Canada        |       |                  | 34,284     |   |   |   | 31,567 |   |   |   | 59,716 |   |   |
| United States |       |                  | 34,720     |   |   |   | 25,347 |   |   |   | 53,617 |   |   |
|          |       |                  | 69,004     |   |   |   | 56,914 |   |   |   | 113,333 |   |   |

 

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**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)

**3—INCOME TAXES (Continued)**

Theincome tax provision is composed of the following:

| ** **    | ** ** | **Years ended**  | ** ** |
|---------------|------------|-----------------------|------------|
| ** **    | ** ** | **November 25,** | ** ** | **November 26,** | ** ** | **November 27,** | ** ** |
| ** **    | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **    | ** ** | **$**                 | ** ** | **$** | ** ** | **$** | ** ** |
| Current       |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Canada        |       |                  | 11,638     |   |   |   | 10,015 |   |   |   | 18,816 |   |   |
| United States |       |                  | 13,863     |   |   |   | 10,320 |   |   |   | 20,911 |   |   |
|          |       |                  | 25,501     |   |   |   | 20,335 |   |   |   | 39,727 |   |   |
| Deferred      |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Canada        |       |                  | (655       | ) |   |   | (218 | ) |   |   | (490 | ) |   |
| United States |       |                  | (140       | ) |   |   | (141 | ) |   |   | 1,185 |   |   |
|          |       |                  | (795       | ) |   |   | (359 | ) |   |   | 695 |   |   |
|          |       |                  | 24,706     |   |   |   | 19,976 |   |   |   | 40,422 |   |   |

 

The components of theCompany’s net deferred income tax liability are as follows:

| ** **                                                          | ** ** | **November 25,** | ** ** | **November 26,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                                                          | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Assets                                                              |       |                  |       |                  |       |   |   |   |   |
| Current deferred  income taxes                                      |       |                  |       |                  |       |   |   |   |   |
| Inventories                                                         |       |                  | 770        |                  |       |   | 819 |   |   |
| Trade accounts receivable                                           |       |                  | 1,187      |                  |       |   | 956 |   |   |
| Other items                                                         |       |                  |       |                  |       |   | 40 |   |   |
|                                                                |       |                  | 1,957      |                  |       |   | 1,815 |   |   |
| Long-term  deferred income taxes                                    |       |                  |       |                  |       |   |   |   |   |
| Fair value of interest rate swap                                    |       |                  |       |                  |       |   | 29 |   |   |
| Unrealized capital loss on translation of advances  to subsidiaries |       |                  | 1,162      |                  |       |   | 1,424 |   |   |
| Other items                                                         |       |                  | 1,098      |                  |       |   | 314 |   |   |
|                                                                |       |                  | 2,260      |                  |       |   | 1,767 |   |   |
| Liabilities                                                         |       |                  |       |                  |       |   |   |   |   |
| Current deferred  income taxes                                      |       |                  |       |                  |       |   |   |   |   |
| Investment in a joint venture                                       |       |                  | 290        |                  |       |   | 338 |   |   |
| Long-term  deferred income taxes                                    |       |                  |       |                  |       |   |   |   |   |
| Property, plant and equipment                                       |       |                  | 15,933     |                  |       |   | 15,914 |   |   |
| Investment in a joint venture                                       |       |                  | 11         |                  |       |   | 54 |   |   |
| Intangibles                                                         |       |                  | 1          |                  |       |   |   |   |   |
|                                                                |       |                  | 15,945     |                  |       |   | 15,968 |   |   |

 

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**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)

**3—INCOMETAXES (Continued)**

The reconciliation betweenthe Canadian statutory income tax rate and the Company’s effective income taxrate is as follows:

| ** **                                                        | ** ** | **Years ended**  | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **November 25,** | ** ** | **November 26,** | ** ** | **November 27,** | ** ** |
| ** **                                                        | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                        | ** ** | **%**                 | ** ** | **%** | ** ** | **%** | ** ** |
| Canadian  statutory income tax rate                               |       |                  | 34.4       |   |   |   | 30.5 |   |   |   | 30.1 |   |   |
| United States  statutory income tax rate difference               |       |                  | 3.2        |   |   |   | 5.5 |   |   |   | 6.4 |   |   |
| Provincial  incentive for manufacturing and processing activities |       |                  | (0.5       | ) |   |   | (0.5 | ) |   |   | (0.3 | ) |   |
| Other items                                                       |       |                  | (1.3       | ) |   |   | (0.4 | ) |   |   | (0.6 | ) |   |
| Effective income tax  rate                                        |       |                  | 35.8       |   |   |   | 35.1 |   |   |   | 35.6 |   |   |

 

**4—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,which assumes that all stock options are exercised at the beginning of the yearand that the funds obtained are used to purchase common shares of the Companyat the average trading price of the common shares during the period.

The following table provides thereconciliation between basic and diluted income per share:

| ** **                                                    | ** ** | **Years ended**  | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **November 25,** | ** ** | **November 26,** | ** ** | **November 27,** | ** ** |
| ** **                                                    | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | **$**                 | ** ** | **$** | ** ** | **$** | ** ** |
| Net income                                                    |       |                  | 44,298     |   |   |   | 36,938 |   |   |   | 72,911 |   |   |
| Weighted average number of common shares outstanding          |       |                  | 10,391,891 |   |   |   | 9,993,337 |   |   |   | 9,707,270 |   |   |
| Effect of  dilutive stock options                             |       |                  | 58,109     |   |   |   | 326,292 |   |   |   | 214,455 |   |   |
| Weighted average  number of diluted common shares outstanding |       |                  | 10,450,000 |   |   |   | 10,319,629 |   |   |   | 9,921,725 |   |   |
| Net income per share                                          |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                         |       |                  | 4.26       |   |   |   | 3.70 |   |   |   | 7.51 |   |   |
| Diluted                                                       |       |                  | 4.25       |   |   |   | 3.58 |   |   |   | 7.35 |   |   |

 

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**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—TRADE ACCOUNTSRECEIVABLE**

Tradeaccounts receivable consist of the following:

| ** **                       | ** ** | **November 25,** | ** ** | **November 26,** | ** ** |
|----------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                       | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Trade accounts                   |       |                  | 113,316    |                  |       |   | 125,025 |   |   |
| Allowance for  doubtful accounts |       |                  | (3,707     | )                     |       |   | (3,399 | ) |   |
|                             |       |                  | 109,609    |                  |       |   | 121,626 |   |   |

 

Changesin the Company’s allowance for doubtful accounts are as follows:

| ** **                    | ** ** | **November 25,** | ** ** | **November 26,** | ** ** |
|-------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                    | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Balance at  beginning of year |       |                  | 3,399      |                  |       |   | 3,622 |   |   |
| Bad debt expense              |       |                  | 1,739      |                  |       |   | 1,585 |   |   |
| Accounts written off          |       |                  | (1,184     | )                     |       |   | (1,283 | ) |   |
| Recoveries                    |       |                  | (247       | )                     |       |   | (525 | ) |   |
| Balance at end of year        |       |                  | 3,707      |                  |       |   | 3,399 |   |   |

 

**6—LOANS RECEIVABLE**

Loansreceivable consist of the following:

| ** **                                                                                                                         | ** ** | **November 25,** | ** ** | **November 26,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                         | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                                                                                                                         | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Loan to a  Canadian Corporation, bearing interest at 3.12%, maturing December 23,  2005, secured by a Canadian chartered bank |       |                  |       |                  |       |   | 17,132 |   |   |
| Loan to a U.S.  Corporation, bearing interest at 4.23%, maturing December 4, 2006,  secured by a Canadian chartered bank      |       |                  | 37,670     |                  |       |   |   |   |   |
|                                                                                                                               |       |                  | 37,670     |                  |       |   | 17,132 |   |   |

 

**7—INVENTORIES**

| ** **     | ** ** | **November 25,** | ** ** | **November 26,** | ** ** |
|----------------|------------|-----------------------|------------|-----------------------|------------|
| ** **     | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **     | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Raw materials  |       |                  | 91,429     |                  |       |   | 75,138 |   |   |
| Finished goods |       |                  | 71,631     |                  |       |   | 52,178 |   |   |
|           |       |                  | 163,060    |                  |       |   | 127,316 |   |   |

 

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**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)

**8—PROPERTY,PLANT AND EQUIPMENT**

| ** **                           | ** ** | **November 25,** | ** ** | **November 26,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                           | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Land                                 |       |                  | 10,033     |                  |       |   | 7,090 |   |   |
| Buildings and  building improvements |       |                  | 48,033     |                  |       |   | 45,819 |   |   |
| Machinery and  equipment             |       |                  | 91,798     |                  |       |   | 87,315 |   |   |
| Furniture and  fixtures              |       |                  | 1,098      |                  |       |   | 985 |   |   |
| Transportation  equipment            |       |                  | 2,717      |                  |       |   | 2,053 |   |   |
| Computer  equipment                  |       |                  | 3,651      |                  |       |   | 3,203 |   |   |
| Leasehold  improvements              |       |                  | 2,138      |                  |       |   | 1,932 |   |   |
| Aircraft                             |       |                  | 12,870     |                  |       |   | 11,650 |   |   |
| Assets under  construction           |       |                  | 391        |                  |       |   | 266 |   |   |
|                                 |       |                  | 172,729    |                  |       |   | 160,313 |   |   |
| Accumulated  depreciation            |       |                  | 66,420     |                  |       |   | 57,519 |   |   |
|                                 |       |                  | 106,309    |                  |       |   | 102,794 |   |   |

 

**9—GOODWILL**

| ** **                        | ** ** | **November 25,** | ** ** | **November 26,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                        | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Balance at  beginning of year     |       |                  | 12,994     |                  |       |   | 12,789 |   |   |
| Goodwill acquired during the year |       |                  |       |                  |       |   | 205 |   |   |
| Balance at end of year            |       |                  | 12,994     |                  |       |   | 12,994 |   |   |

 

**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 aCanadian bank’s prime rate, currently 6.00% (4.75% in 2005), or bankers’acceptance rates, plus a premium varying from 0% to 0.5% in both years (actualrate 6.25% and 5.25% at November 25, 2006 and November 26, 2005,respectively), and secured by inventories, movable hypothecs covering theuniversality of present and future book debts and a negative pledge on certainassets of the Canadian subsidiaries. There are no cross collateralizationsamong the various facilities. These facilities are renegotiated on an annualbasis.

The Company’s Canadian subsidiaries have approximately$43,802,000 in 2006 and $42,830,000 in 2005 (CA$50,000,000 in both years) ofrevolving credit facilities from two Canadian financial institutions, of whichapproximately $43,062,064 (CA$49,155,346) was available at November 25,2006 and $41,691,000 (CA$48,670,000) was available at November 26, 2005.As of November 25, 2006 and November 26, 2005, the bank had issuedguarantees and letters of credit for the Company’s Canadian subsidiariesamounting to $182,742 (CA$208,600) and $99,400 (CA$116,000), respectively.

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**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)

**11—ADVANCESDUE TO RELATED PARTIES**

| ** **                                                                               | ** ** | **November 25,** | ** ** | **November 26,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                               | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                                                                               | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Advance due to a  major shareholder, without interest and repayment terms           |       |                  | 124        |                  |       |   | 103 |   |   |
| Advance due to a  director, without interest and repayment terms                    |       |                  |       |                  |       |   | 10 |   |   |
| Advance due to a  company controlled by an officer, without interest and repayment terms |       |                  | 68         |                  |       |   |   |   |   |
|                                                                                     |       |                  | 192        |                  |       |   | 113 |   |   |

 

**12—LONG-TERMDEBT**

| ** **                                           | ** ** | ** **   | ** ** | **November 25,** | ** ** | **November 26,** | ** ** |
|------------------------------------------------------|------------|--------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **Maturity** | ** ** | **2005**              | ** ** | **2005**              | ** ** |
| ** **                                           | ** ** | ** **   | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Revolving line of credit(a)                          |       |         | 2007       |                  |       |                  |       |   |   |   |   |   |   |
| Mortgage loan(b)(CA$3,518,735; CA$4,676,560 in 2005) |       |         | 2018       |                  |       |                  | 3,083      |   |   |   | 4,006 |   |   |
| Term loan(c)                                         |       |         | 2007       |                  |       |                  | 38,204     |   |   |   | 40,854 |   |   |
|                                                 |       |         |       |                  |       |                  | 41,287     |   |   |   | 44,860 |   |   |
| Less: Current  portion of long-term debt             |       |         |       |                  |       |                  | 38,642     |   |   |   | 3,078 |   |   |
|                                                 |       |         |       |                  |       |                  | 2,645      |   |   |   | 41,782 |   |   |

 

(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 additional year through April 7,2007 and the group of banks became one bank. At November 25, 2006, therewas an amount of $39,000,564 ($38,948,238 in 2005) in available borrowings, ofwhich there were no outstanding balances under this agreement at November 25,2006 and November 26, 2005. The interest rate on borrowings under thecredit agreement is the bank’s prime rate, currently 8.25% (7.00% in 2005),plus a margin varying from 0% to 1.25% in both years, or LIBOR, currently 5.32%(4.21% in 2005), plus 1.25% in both years (actual rate 5.32% and 4.19% at November 25,2006 and November 26, 2005, 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 25, 2006. Borrowings are collateralized by allassets of the U.S. subsidiary having a carrying value of $208,099,000.

(b)                Mortgageloan, amounting to $3,083,000 (CA$3,518,735) in 2006 and $4,006,000(CA$4,676,560) in 2005, bearing interest at a rate of 5.75% in both years,maturing on October 22, 2018, repayable in monthly capital instalments of$36,000 in 2006 and $35,000 in 2005 (CA$41,675 in both years), secured by afirst hypothec on land and building having a carrying value of $8,590,000(CA$9,805,000) as of November 25, 2006. The Company has the option ofprepaying 15% of the outstanding loan balance each year.

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**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)**

(c)                 AU.S. subsidiary entered into a $53,000,000 term loan agreement with a group ofbanks, as amended, of which an amount of $38,204,000 and $40,854,000 wasoutstanding at November 25, 2006 and November 26, 2005, respectively.On November 22, 2005, the term of the agreement was extended for one year throughApril 7, 2007 and the group of banks became one bank. The interest rate onthe term loan is the bank’s prime rate, currently 8.25% (7.00% in 2005), plus amargin varying from 0.125% to 1.375% in both years, or LIBOR, currently 5.32%(4.21% in 2005), plus a margin varying from 1.375% to 2.625% in both years(actual rate 6.79% and 5.67% at November 25, 2006 and November 26,2005, 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. Amongthe restrictive financial covenants contained in the agreement are ratios as tofixed charges, tangible capital base and senior liabilities to tangible capitalbase, all of which were respected as of November 25, 2006. The term loanis collateralized by all assets of the U.S. subsidiary having a carrying valueof $208,099,000. On December 7, 2006, the Company repaid all amounts dueunder the $53,000,000 term loan agreement.

As required by the term loan agreement, the U.S. subsidiaryhas entered into an interest rate swap agreement to fix the interest rate at5.27% plus the applicable margin on borrowings of up to $20,000,000through April 16, 2006. The agreement expired on April 16, 2006. Asof November 26, 2005, the interest rate on $20,000,000 was 6.65% and theeffective interest rate on the excess was 5.68%.

Aggregatematurities of long-term debt are as follows:

| **Fiscal years** | ** ** | ** ** | ** ** | **$** | ** ** |
|-----------------------|------------|------------|------------|-------|------------|
| 2007                  |       | 38,642     |       |
| 2008                  |       | 438        |       |
| 2009                  |       | 438        |       |
| 2010                  |       | 438        |       |
| 2011                  |       | 438        |       |
| Thereafter            |       | 893        |       |

 

**13—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, the 

69

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**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—SHAREOPTION PLAN (Continued)**

holder is entitled to receivepayment equal to the excess of the fair market value, on the date of exercise,of the number of common shares for which the SAR is exercised, over theexercise price for such common shares under a related option, or if there is norelated option, over an amount per common share stated in the written agreementsetting forth the terms and conditions of the SAR. The Company has reserved1,500,000 common shares for issuance under the Share Option Plan. Since itsinception, 750,000 common shares have been issued under 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 25, 2006.

Asummary of stock option activity and related information for 2005 and 2006follows:

| ** **                               | ** ** | **Shares** | ** ** | **Weighted  average  exercise price** | ** ** |
|------------------------------------------|------------|------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | ** ** | ** ** | **$**                                      | ** ** |
| Outstanding—November 27,  2004 |       | 663,911    |       |                                       | 14.00      |   |   |
| Granted                                  |       |       |       |                                       |       |   |   |
| Exercised                                |       | 370,137    |       |                                       | 14.00      |   |   |
| Forfeited                                |       |       |       |                                       |       |   |   |
| Outstanding—November 26,  2005 |       | 293,774    |       |                                       | 14.00      |   |   |
| Granted                                  |       |       |       |                                       |       |   |   |
| Exercised                                |       | 293,774    |       |                                       | 14.00      |   |   |
| Forfeited                                |       |       |       |                                       |       |   |   |
| Outstanding—November 25,  2006 |       | –     |       |                                       |       |   |   |
| Exercisable at end of year               |       |       |       |                                       |       |   |   |
| 2004                                     |       | 663,911    |       |                                       | 14.00      |   |   |
| 2005                                     |       | 293,774    |       |                                       | 14.00      |   |   |
| 2006                                     |       | –     |       |                                       | –     |   |   |

 

70

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**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—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 25,** | ** ** | **November 26,** | ** ** | **November 27,** | ** ** |
| ** **                                                              | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                              | ** ** | **$**                 | ** ** | **$** | ** ** | **$** | ** ** |
| Processing  revenue from a joint venture                                |       |                  | 200        |   |   |   | 183 |   |   |   | 377 |   |   |
| Management fees  from a joint venture                                   |       |                  | 53         |   |   |   | 49 |   |   |   | 46 |   |   |
| Processing  charges paid to a joint venture                             |       |                  | 3,645      |   |   |   | 3,254 |   |   |   | 2,621 |   |   |
| Rental charges  paid to companies controlled by a director         |       |                  | 1,780      |   |   |   | 1,350 |   |   |   | 1,281 |   |   |
| Rental charges  paid to companies jointly controlled by a director |       |                  | 394        |   |   |   | 722 |   |   |   | 590 |   |   |
| Freight charges  paid to a company controlled by a director             |       |                  | 10,525     |   |   |   | 7,458 |   |   |   | 6,643 |   |   |
| Interest paid to  a major shareholder                                   |       |                  |       |   |   |   | 111 |   |   |   | 50 |   |   |
| Interest paid to  a director                                            |       |                  |       |   |   |   | 43 |   |   |   | 6 |   |   |
| Interest paid to an  employee of a subsidiary                           |       |                  |       |   |   |   | 36 |   |   |   | 148 |   |   |

 

**15—FINANCIAL INSTRUMENTSAND HEDGING ACTIVITIES**

**Fair value offinancial 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, trade accounts and loansreceivable, bank indebtedness, trade accounts payable and accrued liabilities,trade accounts payable to a company controlled by a director, trade accountspayable to a joint venture and advances due to related parties.

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

·       Thefair value of the interest rate swap agreement used for hedging purposes isestimated by obtaining quotes from the Company’s banker.

71

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**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—FINANCIALINSTRUMENTS AND HEDGING ACTIVITIES (Continued)**

Fair value of financialinstruments:

| ** **         | ** ** | **November 25,** | ** ** | **November 26,** | ** ** |
|--------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **         | ** ** | **Carrying  amount**  | ** ** | **Fair  value**       | ** ** | **Carrying  amount** | ** ** | **Fair  value** | ** ** |
| ** **         | ** ** | **$**                 | ** ** | **$**                 | ** ** | **$** | ** ** | **$** | ** ** |
| Long-term debt     |       |                  | 41,287     |                  |       | 41,924 |   |   | 44,860 |   |   | 44,910 |   |
| Interest rate swap |       |                  |       |                  |       |   |   |   | 71 |   |   | 71 |   |

 

The fair value of theinterest rate swap represents the amount that would have been required tosettle the contract as of November 26, 2005 had the contract beenterminated. The notional amount of the swap was $20,000,000 as of November 26,2005 and expired on April 16, 2006.

**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 utilizes, from time to time, 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 25, 2006 and November 26, 2005, 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: $16,577,000        |   |
|-------------------------------------------|--------|-----------------------------------|--------|
|                                      |   | Non-interest bearing: $14,439,000 |   |
| Trade accounts  receivable                |   | Non-interest  bearing             |   |
| Loans receivable                          |   | Fixed  rate                       |   |
| Bank indebtedness                         |   | Floating  rate                    |   |
| Accounts payable  and accrued liabilities |   | Non-interest  bearing             |   |
| Income and other  taxes                   |   | Non-interest  bearing             |   |
| Long-term debt                            |   | Fixed rate: $3,083,000            |   |
|                                      |   | Floating rate: $38,204,000        |   |

 

**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.

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**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—FINANCIAL INSTRUMENTSAND HEDGING ACTIVITIES (Continued)**

**Commodity pricerisk**

In the normal course ofbusiness, the Company is exposed to market risk or price fluctuations relatedto the purchase, production or sale of steel products. The Company’s marketrisk strategy has generally been to obtain competitive prices for its productsand services and allow operating results to reflect market price movementsdictated by supply and demand.

**Credit risk**

The U.S. subsidiariesmaintain their cash in bank deposit accounts at local financial institutions inthe United States, which at times during the year may exceed federal insuredlimits. At November 25, 2006, the amount in excess of federal insuredlimits was approximately $14,452,000. The U.S. subsidiaries have notexperienced any losses in the accounts. The Company believes it is not exposedto any significant credit risk in cash accounts located in the United States.At November 25, 2006, a portion of this amount was invested by a financialinstitution in overnight daily deposit in pooled U.S. Government backedsecurities approximating $6,869,000 and a portion was invested in money marketfunds approximating $5,578,000.

**16—JOINT VENTURE**

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

Condensedfinancial information of the joint venture is summarized below:

| ** **       | ** ** | **Twelve-month periods ended** | ** ** |
|------------------|------------|------------------------------------------|------------|
| ** **       | ** ** | **November 25,**                    | ** ** | **November 26,** | ** ** | **November 27,** | ** ** |
| ** **       | ** ** | **2006**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **       | ** ** | **$**                                    | ** ** | **$** | ** ** | **$** | ** ** |
| Operations       |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Net sales        |       |                                     | 5,725      |   |   |   | 4,944 |   |   |   | 3,883 |   |   |
| Operating income |       |                                     | 1,289      |   |   |   | 1,147 |   |   |   | 519 |   |   |

 

| ** **                             | ** ** | **November 25,** | ** ** | **November 26,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                             | ** ** | **$**                 | ** ** | **$**                 | ** ** |
| Balance sheet                          |       |                  |       |                  |       |   |   |   |   |
| Assets                                 |       |                  |       |                  |       |   |   |   |   |
| Current assets                         |       |                  | 1,479      |                  |       |   | 1,728 |   |   |
| Property, plant and equipment          |       |                  | 1,650      |                  |       |   | 2,018 |   |   |
|                                   |       |                  | 3,129      |                  |       |   | 3,746 |   |   |
| Liabilities                            |       |                  |       |                  |       |   |   |   |   |
| Current liabilities                    |       |                  | 286        |                  |       |   | 404 |   |   |
| Joint  venture investment              |       |                  |       |                  |       |   |   |   |   |
| Capital contributions                  |       |                  | 2,504      |                  |       |   | 2,921 |   |   |
| Undistributed earnings                 |       |                  | 216        |                  |       |   | 330 |   |   |
| Accumulated other comprehensive income |       |                  | 123        |                  |       |   | 91 |   |   |
|                                   |       |                  | 3,129      |                  |       |   | 3,746 |   |   |

 

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**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)

**17—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 consolidatedfinancial statements.

On March 3, 2006,Dana Corporation (“Dana”), a primary customer of one of the U.S. subsidiaries,and 40 of its subsidiaries, filed voluntary petitions for reorganization underChapter 11 of the United States Bankruptcy Code in the United StatesBankruptcy Court for the Southern District of New York. At the time of Dana’sbankruptcy filing, the Company had an account receivable balance ofapproximately $5,055,000 and an account payable balance of approximately$3,192,000. Accordingly, the net pre-petition receivable owed by Danaapproximated $1,863,000 (the “Dana Receivable”). Because Dana has yet topropose a plan for reorganizing its businesses, it is too early to assesswhether the Company will be able to recover all or any portion of the DanaReceivable. After performing an internal analysis of the collectibility of theDana Receivable based on the information available to the Company at this time,the Company concluded that a provision was necessary for amounts that it mayultimately not collect from Dana. This provision is based on the Company’scurrent expectation of amounts it may recover through the Dana bankruptcy proceedingsand is subject to change as the Company obtains new information. While theCompany has recorded a provision for uncollectible amounts owed by Dana as of November 25,2006, it will continue to actively seek reimbursement through the bankruptcyprocess and any other means, including discussions with Dana.

**18—COMMITMENTS**

TheCompany has entered into operating leases for certain facilities and equipmentwhich expire at various dates until 2013. The following schedule outlines thefuture minimum rental payments under these commitments as at November 25,2006:

| ** **             | ** ** | **$**  | ** ** |
|------------------------|------------|--------|------------|
| 2007                   |       | 3,515  |       |
| 2008                   |       | 2,888  |       |
| 2009                   |       | 2,166  |       |
| 2010                   |       | 1,811  |       |
| 2011                   |       | 1,642  |       |
| Thereafter             |       | 628    |       |
| Total minimum payments |       | 12,650 |       |

 

Rental expense under theoperating leases amounted to approximately $4,168,000, $4,079,000 and$4,064,000 for the years ended November 25, 2006, November 26, 2005and November 27, 2004, respectively.

**19—RETIREMENT PLAN**

A U.S. subsidiary makes available to substantially allof its employees a defined contribution plan under the Internal Revenue Code Section 401(k).The plan allows employees to contribute a portion of their pretax income inaccordance with specified guidelines. A percentage of such contribution, up toa 

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**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)

**19—RETIREMENTPLAN (Continued)**

certainlimit, is matched by the employer. Investment elections are made at thediscretion of the employees and the plan is administered by an independentthird party. The U.S. subsidiary matches a percentage of the employeecontributions up to a certain limit. Costs incurred under the 401(k) planamounted to approximately $552,000, $552,000 and $498,000 for the years ended November 25,2006, November 26, 2005 and November 27, 2004, respectively.

**20—FINANCIAL INFORMATIONBY GEOGRAPHIC AREA**

The Company operates in one reportable segment as anintermediate processor and distributor of carbon steel, stainless steel andaluminum products. Sales are attributed to countries based on the location ofthe external customer.

Thefollowing table summarizes the Company’s financial information by geographicarea:

| ** **        | ** ** | **United States** | ** ** | **Canada** | ** ** | **Total** | ** ** |
|-------------------|------------|------------------------|------------|------------|------------|-----------|------------|
| ** **        | ** ** | **$**                  | ** ** | **$**      | ** ** | **$**     | ** ** |
| 2006              |       |                   |       |       |       |      |       |   |   |
| Net  sales        |       |                   |       |       |       |      |       |   |   |
| Domestic          |       |                   | 359,057    |       |       | 440,845   |       | 799,902 |   |
| Export            |       |                   | 463        |       |       | 40,433    |       | 40,896 |   |
| Total             |       |                   | 359,520    |       |       | 481,278   |       | 840,798 |   |
| Operating income  |       |                   | 29,840     |       |       | 39,560    |       | 69,400 |   |
| Depreciation      |       |                   | 3,802      |       |       | 6,690     |       | 10,492 |   |
| Long-lived assets |       |                   | 66,936     |       |       | 52,367    |       | 119,303 |   |
| 2005              |       |                   |       |       |       |      |       |   |   |
| Net  sales        |       |                   |       |       |       |      |       |   |   |
| 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        |       |                   |       |       |       |      |       |   |   |
| 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 |   |

 

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****

**Report ofIndependent Registered Public Accounting Firm**

To theBoard of Directors ofNovamerican Steel Inc.

We haveaudited in accordance with the standards of the Public Company AccountingOversight Board (United States) the consolidated financial statements ofNovamerican Steel Inc. and Subsidiaries referred to in our report dated December 19,2006, which is included in the Annual Report for the year ended November 25,2006 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 19, 2006

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**Schedule II**

**NOVAMERICANSTEEL INC. AND SUBSIDIARIES**

**VALUATIONAND QUALIFYING ACCOUNTS**

**(in thousands of U.S. dollars)**

| ** **                          | ** ** | **Balance at  beginning of  year** | ** ** | **Additions  charged to  expenses** | ** ** | **Deductions** | ** ** | **Balance at  end of year** | ** ** |
|-------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|----------------|------------|--------------------------------------------|------------|
| **Description**                     | ** ** | ** **                                   | ** ** | **$**                                    | ** ** | **$**          | ** ** | **$**                                      | ** ** | **$** | ** ** |
| **Allowance for doubtful accounts** | ** ** |                                         |       |                                     |       |           |       |                                       |       |   |   |   |   |   |   |   |   |
| Year  ended November 25, 2006  |       |                                         | 3,399      |                                     |       |           | 1,739      |                                       |       |   | 1,431 |   |   |   | 3,707 |   |   |
| 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 |   |   |
|                                     |            |                                              |            |                                          |            |                |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

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**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)                         |   | $40,000,000 Revolving Credit Facility dated April 6,  2001. |
|             | 4.4        | (e)                         |   | $53,000,000 Term Loan Facility dated April 6, 2001. |
|             | 4.5        | (f)                         |   | First Amendment to $53,000,000 Term Loan Facility dated  November 22, 2005. |
|             | 4.6        | (g)                         |   | Fourth Amendment to $40,000,000 Revolving Credit Facility  dated November 22, 2005. |
|             | 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 4.1 to the Company’s Annual Report on Form 20-F,filed on February 20, 2002.

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

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

(g)              Incorporatedby reference to Exhibit 4.7 to the Company’s Annual Report on Form 20-F,filed on February 22, 2006.

(h)             Incorporatedby reference to Exhibit 4.8 to the Company’s Annual Report on Form 20-F,filed on February 22, 2006.

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**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, 2007 |   | By:    | * * | */s/ Lawrence P. Cannon*             |
|                          |   |   | * * | Lawrence  P. Cannon, CA, MBA         |
|                          |   |   | * * | *Vice  President and*                |
|                          |   |   | * * | *Chief  Financial Officer*           |

 

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