**Managements
Discussion and Analysis**

For the Year Ended December
  31, 2002

The following managements
  discussion and analysis of financial condition and results of operations of
  Russel Metals Inc. and its subsidiaries (Russel Metals or the Company) provides
  information to assist the reader and should be read in conjunction with the
  audited Consolidated Financial Statements for the year ended December 31, 2002,
  including the notes thereto. Statements contained in this document that relate
  to Russel Metals beliefs or expectations as to certain future events are
  not statements of historical fact and are forward-looking statements. Russel
  Metals cautions readers that there are important factors, risks and uncertainties,
  including but not limited to economic, competitive and governmental factors
  affecting Russel Metals operations, markets, products, services and prices
  that could cause the Companys actual results, performance or achievements
  to be materially different from those forecasted or anticipated by Russel Metals
  in such forward-looking statements. All dollar references in this report are
  in Canadian dollars unless otherwise stated.

Russel Metals is one of
  the largest metal distribution companies in North America based on revenues
  and tons sold. The Company conducts business primarily in three metals distribution
  business segments: service centers; energy sector related pipe, tube, valves
  and fittings; and steel import/export.



| | Brian
        R. HedgesExecutive Vice President and Chief Financial Officer
      2002 was a year of
        contradictions in the steel sector, and was as unique as 2001, but for
        different reasons. Several factors contributed to the record $0.75 net
        earnings from operations before other costs of Russel Metals.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



**Summary**

2001 was one of the toughest
  years the steel industry experienced with record steel mill and service center
  bankruptcy levels, declining prices and soft demand. Russel Metals was an exception
  in the industry, demonstrating the ability to remain profitable while at the
  same time making investments to advance its corporate objectives through prudent
  acquisitions, divestitures, and excellent working capital management.

2002 was a year of contradictions
  in the steel sector, and was as unique as 2001, but for different reasons. Several
  factors contributed to the record $0.75 net earnings from operations before
  other costs of Russel Metals. The North American dumping actions, coupled with
  the financial weakness of North American steel mills, led to an unprecedented
  40% price increase in flatroll products, including plate. The supply side driven
  price increases were at odds with the demand side fundamentals, which remained
  static in 2002. The rapid price increases resulted in inventory holding gains
  and higher gross margin dollars per ton. In the case of Russel Metals, these
  higher per ton margins, despite the relatively flat demand, enabled the service
  center segment to generate stronger earnings than the previous year. In addition,
  the import/export operations experienced higher volumes and increasingly strong
  margins under the umbrella of the aforementioned higher steel prices.

Political uncertainty and
  merger and acquisition activity influenced energy sector exploration and development
  and caused weak drilling activity in 2002, despite very strong oil and gas prices.
  This decline in activity led to lower revenues, gross margins and operating
  profits in our energy sector distribution businesses.

Strong balance sheet management
  continued in 2002, which resulted in lower borrowings and lower interest expense.
  Inventories did climb in the import/export operations during the later months
  of the year due to strong activity in our import/export operations. These elevated
  inventory levels will be reduced during the first quarter of 2003.

The following analysis
  provides a more detailed discussion of our results of operations.

**Results of Operations**

The following table provides
  a summary of revenues, gross margins (revenue minus cost of sales) as a percentage
  of revenues and operating profits (revenue minus cost of sales and operating
  expenses excluding corporate expenses and interest expense) for Russel Metals
  operating segments. The table shows the segments as they are reported to management
  and they are consistent with the segmented reporting in Note 13 to the 2002
  Consolidated Financial Statements.



**Service Center
  Distribution**

a)
  Description of operationsThe Company provides processing
  and distribution services to a broad base of approximately 15,000 end users
  through a network of 42 Canadian and four U.S. locations. The Companys
  network of service centers carries a full line of products in a wide range of
  sizes, shapes and specifications, including carbon hot rolled and cold finished
  steel, pipe and tubular products, stainless steel and aluminum. Russel Metals
  purchases these products primarily from steel producers in North America and
  packages them in accordance with end user specifications. The Company services
  all major geographic regions of Canada and selected regions in the United States.
  Within Canada, the service centers operate under the names Russel Metals, Métaux
  Russel, Drummond McCall, A. J. Forsyth and Vantage Laser. Heavy gauge flat rolled
  operations are conducted by B&T Steel and McCabe Steel, both located in
  Hamilton, Ontario. Russel Metals U.S. service center operations are conducted
  under the names Russel Metals Williams Bahcall and Baldwin International. The
  Williams Bahcall operations focus primarily on the distribution of general line
  carbon products through three facilities in Wisconsin. Baldwin International
  distributes specialty alloy products through its facility in Ohio.

In September 2002, the
  Company purchased the operating assets of a service center located in Milwaukee,
  Wisconsin formerly known as Williams Steel. This operation will add strength
  to the Russel Metals Bahcall operations. Williams Steel had sales of approximately
  $49 million for the year prior to the acquisition date. The acquisition is anticipated
  to be accretive to earnings in 2003. The Bahcall and Williams operations have
  substantially completed the process of restructuring which commenced during
  November 2002.

In October 2001, the Company
  purchased the shares of A. J. Forsyth and Company Limited, a service center
  operation with six locations in British Columbia and one in the Yukon. The A.
  J. Forsyth operations strengthen Russel Metals operations within the British
  Columbia region. A. J. Forsyth had sales of approximately $66 million for the
  year prior to the acquisition date.

****b)
  Factors affecting results

**External **

- steel pricing fluctuates
    significantly throughout the cycle. Steel prices are influenced by overall
    demand and by product availability.
- demand is significantly
    affected by economic cycles with revenues and operating profit fluctuating
    with the level of general business activity in the markets served.
- product availability
    is affected by supply side management practiced by steel producers in North
    America and international supply and demand which impacts steel imports.
- trade sanctions initiated
    either by steel mills or the public sector in North America, and less directly
    worldwide.
- Canadian steel service
    centers, which represent a large portion of the service center distribution
    segment operations, are particularly affected by general economic conditions
    and the manufacturing sector in Ontario and Quebec, and by pulp and paper,
    agriculture and resource sector activities in Western Canada, where demand
    for steel by the construction and capital goods sectors fluctuates considerably
    during the economic cycle.

**Internal **

- the Company has a strong
    strategic network of branches across Canada, encompassing all provinces, thus
    declines in demand in one region may be countered by higher demands in other
    regions.
- many employees, including
    management, receive bonuses based on bottom line results; thus a portion of
    their compensation is variable and employees are motivated to maximize profitability.
- a large portion of the
    service center costs are fixed and are not reduced as volume declines, which
    can negatively impact results when demand weakens.
- the Company monitors
    its inventory levels and endeavors to achieve above average inventory turns
    in order to position itself to react to pricing and supply changes in the
    market and to minimize holding losses. The above average turns mean the Company
    is able to reduce the impact of price changes and stabilize its earnings stream,
    which results in stronger earnings in a downturn and compared to our competitors
    slightly lower earnings increases when prices increase.
- knowledge of international
    pricing trends obtained by the steel import/export operations provides insight
    for pricing and buying decisions.

c)
  Service center segment results  2002 compared to 2001

Revenues for 2002 increased
  6.3% due to higher selling prices and acquisitions compared to 2001. Revenue
  increases were most significant in British Columbia region due to the acquisition
  of A. J. Forsyth in October 2001. Volume declines occurred in Alberta due to
  lower oil and gas activity and at our U.S. operation, Williams Bahcall, due
  to general lower customer demand in the Wisconsin region and customer facility
  closures. Increased revenues, from the acquisition of Williams Steel effective
  September 9, 2002, are offset by the sale of the Eagan, Minnesota location in
  October 2001.

The average selling price
  per ton was approximately 5% higher in 2002 compared to 2001. The average selling
  price started to increase during the second quarter of 2002, reflecting price
  increases implemented by the North American steel mills. The average selling
  price plateaued in the last half of 2002.

Gross margins improved
  from 24.9% for 2001 to 26.8% for 2002, mainly a result of rising selling prices
  during 2002 and inventory holding gains. Gross margins decreased in the fourth
  quarter of 2002 and the Company expects them to decrease further in 2003.

Service center operating
  profits for 2002 increased by 62.9% compared to 2001. This increase is a result
  of selling price increases and corresponding higher gross margins, and the acquisition
  of A. J. Forsyth. Operating expenses for 2002 were $13.6 million, or 8.7% higher
  than 2001. Approximately $10.2 million of the increase in operating costs relates
  to the British Columbia region due to the acquisition of A. J. Forsyth.

Operating profits as a
  percentage of revenues for 2002 were 4.2%, a significant improvement over 2001
  at 2.7% in one of the weakest years on record for the industry.

d)
  Service center segment results  2001 compared to 2000Revenues
  for 2001 decreased 12.2% due to lower volume and selling prices. Volume declines
  were most significant in British Columbia due to weaker demand in the pulp and
  paper industry and Ontario due to weaknesses in the manufacturing sector. Alberta
  was the only region with increased volume due to the strength of the oil and
  gas industry. Excess inventory positions at both the mills and our competitors
  affected market pricing in the first half of 2001. Selling prices declined in
  all regions excluding Alberta with the most significant declines in British
  Columbia, Ontario and the U.S. operations of Bahcall. Selling prices for Alberta
  showed a slight improvement.

Gross margins improved
  from 24.3% in 2000 to 24.9% in 2001. By maintaining lower inventory levels than
  our competitors, Russel Metals was able to capitalize on low-priced purchases
  resulting in gross margin improvements compared to 2000.

The recession affecting
  the U.S. Midwest resulted in significant losses at Bahcall during 2001. In an
  effort to reduce costs and minimize losses, the Company disposed of the inventory
  and fixed assets of the Eagan, Minnesota operation for book value in October
  2001.

Service center operating
  profits for the year ended 2001 decreased by 46.3% compared to 2000. This decline
  was a result of the significant volume and selling price declines. Operating
  expenses for 2001, adjusted for expenses of A. J. Forsyth in 2001, were $6.6
  million, or 4.1% lower than 2000.

Operating profits as a
  percentage of revenues for 2001 were 2.7% compared to 4.5% for 2000 due to operating
  expenses not declining as significantly as revenues, a result of the significant
  portion of operating expenses being fixed.

**Energy Sector Distribution**

a)
  Description of operationsThese operations distribute
  pipe, tube, valves and fittings, primarily to the energy sector in Western Canada
  and the Western United States, from five Canadian and two U.S. locations. Russel
  Metals purchases these products either from the pipe processing arms of North
  American steel mills or from independent manufacturers of pipe and its accessories.
  The energy sector operates under the names Comco Pipe and Supply Company, Fedmet
  Tubulars, Triumph Tubular & Supply, Pioneer Pipe and Spartan Steel.

In August 2001, the Company
  purchased Spartan Steel, a pipe distributor in the midwest and southern United
  States. The Spartan operations complement the Pioneer Pipe business. Spartan
  had sales of approximately US $15 million for the year prior to the acquisition
  date.

In June 2001, the Company
  sold the operations of Total Distributors Supply Corporation, its U.S. operation
  serving the petrochemical and heat exchanger industries. The decision to sell
  the Total Distributors assets was based on the significant losses that
  had occurred in this operation due to the very competitive heat exchanger tubing
  market it served.

**b)
  Factors affecting results**

**External –**

- affected by economic
    cycles.
- significantly affected
    by oil and gas pricing, which impacts oil rig count and subsequent drilling
    activities particularly in Western Canada.
- Canadian operations
    affected by U.S. dollar since some products are sourced outside Canada and
    are priced in U.S. dollars.
- pricing is influenced
    by overall demand and by product availability.
- trade sanctions initiated
    either by steel mills or the public sector in North America.

**Internal –**

- low fixed costs due to
    a large portion of inventory stored at locations rented on a usage basis.
- employees’ compensation
    is highly variable as it is based on profits, allowing the Company to be profitable
    throughout the cycle.

Comco Pipe, which distributes
  pipe, valves and fittings to other fluid handling industries as well as the
  energy sector, had increased revenues of 28.9% in 2002 compared to 2001. Comco
  Pipes revenue is more project oriented and as such is not as dependent
  on drilling levels.

Energy sector operating
  profits declined $4.8 million, or 26.0%, in 2002 compared to 2001. The decline
  is related to the drop in volume in the oil country tubular goods operations,
  partially offset by increased operating profits at Comco Pipe due to higher
  volumes from large projects.

d) Energy
  sector distribution results  2001 compared to 2000

Energy sector revenues
   increased 8.8% for 2001 compared to 2000. The increase in revenue for
  the businesses excluding Total Distributors, which was divested in June 2001,
  is 13.7%. Approximately 60% of the revenue increase relates to the acquisition
  of Triumph Tubular effective September 1, 2000 and Spartan Steel effective August
  15, 2001. The strong oil and gas prices experienced through the first three
  quarters of 2001 resulted in higher volumes in 2001 compared to 2000 for the
  other businesses. The oil country tubular operations in Western Canada and Western
  United States both had significant declines in volume during the fourth quarter
  of 2001 due to general economic uncertainty, a late winter freeze and weaker
  oil and gas pricing.

Energy sector operating
  profits improved by 20.2% in 2001 compared to 2000. Total Distributors, our
  U.S. operation serving the petrochemical and the heat exchanger industries,
  was sold in June 2001, which had a negative impact on revenue; however, it positively
  impacted operating profits. The operating profits increased 1.3% for the businesses,
  excluding Total Distributors losses from each year. The operating profits
  for the first nine months of 2001 were stronger than those for the same period
  in 2000; however, the fourth quarter was significantly lower than the fourth
  quarter of 2000 as drilling activity declined.

**Steel Import/Export**

a)
  Description of operationsRussel Metals steel
  import/export business primarily imports foreign steel products into Canada
  and the United States. It also exports steel from Canada and the United States.
  The international presence provides the Companys other business segments
  with valuable insight regarding international pricing trends and their potential
  impact on steel markets in North America.

The main steel products
  sourced by the import/export operations are structural beam, heavy-wall plate,
  heavy-wall coils, pipe and tubing. The operations in this sector are Wirth Steel
  and Sunbelt Group.

Effective March 1, 2002,
  the Company purchased the operations of Arrow Steel Processors, a coil processor
  of customer owned material, located at the port in Houston, Texas. Arrow had
  sales of approximately US $2 million for the year prior to the acquisition date.
  Arrow Steel provides processing to Sunbelt as well as other customers.

b) Factors
  affecting results

**External **

- trade sanctions initiated
    either by steel mills or the public sectors in North America.
- mill capacity by product
    line in North America.
- Canadian operations affected
    by movement in the U.S. dollar since purchases are mainly in U.S. dollars.
- steel pricing is influenced
    by overall demand and by product availability both domestically and worldwide.
- demand is affected by
    economic cycles.
- supply side management
    practiced by steel producers in North America and international supply and
    demand, which impacts steel imports and significantly affects product availability.

**Internal **

- operating costs are variable
    with volume, since inventory is stored in public warehouses and employees
    are significantly compensated based on earnings.
- inventory is sourced
    throughout the world, including North America, providing flexibility for sourcing
    supply.

c)
  Steel import/export results  2002 compared to 2001Steel import/export
  revenues increased 8.3% in 2002 compared to 2001. A decline in revenue was experienced
  during the first quarter of 2002 compared to the first quarter of 2001, when
  uncertainty existed related to the resolution of the U.S. and Canadian trade
  rulings. The U.S. made its ruling in March 2002, while the Canadian Safeguard
  initiative is still under review. This resulted in increased steel pricing.
  Revenues during the remainder of 2002 were significantly higher than 2001 due
  to a slight improvement in customer demand and higher selling prices.

Steel price increases initiated
  by North American steel mills contributed to higher selling prices resulting
  in a stronger gross margin of 14.3% for 2002 compared to 9.4% for 2001. The
  gross margin as a percentage of revenue of 14.3% for 2002 is higher than normal
  and is expected to decline in 2003.

Steel import/export operating
  profits increased 98.2% to $28.1 million for 2002 compared to 2001. The increase
  is mainly related to higher gross margin. This higher gross margin resulted
  in operating profits as a percentage of revenues of 8.1% for 2002 compared to
  4.4% for 2001.

d)
  Steel import/export results  2001 compared to 2000Steel import/export
  revenues decreased 16.6% for 2001 compared to 2000. The oversupply of carbon
  products in North America and the weakness in demand at the service center level
  impacted 2001 revenues. Volumes and selling prices for 2001 were lower than
  2000.

Steel import/export operating
  profits decreased by 29.6% in 2001 compared to 2000. The lower volume was the
  most significant contributor to this; however, a bad debt write-off of $1.3
  million related to a large U.S. service center which filed for Chapter 11 also
  impacted expenses for 2001.

**Other  2002
  compared to 2001 and 2000**

Other revenue and income
  represents the results of Thunder Bay Terminals, our coal handling terminal
  in Thunder Bay. Revenue for 2002 was 2.5% higher than 2001 due to increased
  volumes of coal handled. The revenues in 2001 had increased 40.9% compared to
  2000. Operating profits for 2002 at $5.7 million are slightly less than 2001;
  however, 2002 and 2001 represent a significant increase over 2000, which is
  attributable to higher volumes handled. Approximately 37% of the 2002 revenues
  were a result of a short-term contract with one large customer. Revenues for
  2003 may vary based on renewing this contract.

**Consolidated Results
   2002 compared to 2001**

Earnings from operations
  were $70.4 million, an increase of 39.1% compared to 2001 at $50.6 million.
  This increase in operating profits for 2002 relates to higher volumes and margins
  in service center and import/export operations offset by lower volumes in the
  energy operations. Consolidated revenues for 2002 approximate revenues for 2001.

During the second quarter
  of 2001, the Company reported a number of items that are not representative
  of the Companys ongoing business and thus were disclosed separately. The
  loss on sale of business related to the sale of the inventory and fixed assets
  of Total Distributors and the acquisition costs related to the cost of due diligence
  and legal expense of an unsuccessful acquisition attempt. These items are referred
  to as unusual items.

The following table discloses
  earnings from ongoing operations net of income taxes, other costs net of income
  taxes and unusual items net of income taxes. Earnings per common share are also
  disclosed to assist the reader in determining results from ongoing operations.

| | 
| | 

The acquisition of Williams
  Steel was completed in September 2002. Similar to the acquisition of A. J. Forsyth
  in 2001, the Williams Steel operation was a strategic acquisition and the rationalization
  of the Williams Steel and Bahcall operations is expected to strengthen the Wisconsin
  operations. Williams Steel had one large operation in Milwaukee, which serviced
  most of Wisconsin and other nearby states. The restructuring with Bahcall will
  result in the closure of the Bahcall location near Milwaukee in the first quarter
  of 2003. The closing of this location as well as employee terminations related
  to eliminating duplicate functions has been estimated to cost $3.1 million,
  pre-tax. The first steps in the plan commenced in November 2002. The cost of
  restructuring the Williams Bahcall operations was anticipated at the time of
  acquisition.

The 2001 reserve, which
  provided for the restructuring of A. J. Forsyth with the Russel Metals operation
  in British Columbia, was reduced in the fourth quarter of 2002 by $392,000,
  pre-tax. The restructuring related to all operations other than those on Vancouver
  Island have been completed, and facility closure costs were less than originally
  anticipated.

During 2002, the Company
  recorded a foreign exchange gain of $0.3 million related to U.S. denominated
  debt that was not designated as a hedge of the Companys net investment
  in foreign subsidiaries. The movement in the Canadian dollar against the U.S.
  dollar caused the gain for 2002 versus the loss for 2001.

Consolidated interest expense
  decreased $2.7 million to $20.3 million for 2002 compared to 2001. This decrease
  is due to lower borrowing levels to fund working capital and lower U.S. denominated
  debt in 2002 due to the purchases of US $9.4 million of the U.S. Note in September
  and October 2001. The majority of the interest expense relates to the fixed
  term 10% Senior Notes and, therefore, no benefit was experienced from lower
  prime borrowing rates available through the bank credit facility.

Income taxes for 2002 were
  $18.4 million compared to $7.1 million for 2001. This dollar increase relates
  to higher operating earnings before tax for 2002 compared to 2001 and the unusual
  items recorded in 2001.

Basic earnings per share
  for 2002 was $0.71 compared to $0.17 for 2001. Earnings per share before other
  costs and unusual items was $0.75 for 2002 compared to $0.37 in 2001.

The weighted average number
  of common shares outstanding for 2002 was 38,024,034 compared to 37,981,501
  for 2001. The increase relates to stock options exercised. The number of common
  shares outstanding at December 31, 2002 is 38,057,001.

**Consolidated Results
   2001 compared to 2000**

Earnings from operations
  were $50.6 million, a decline of 23.5% from $66.1 million in 2000. The lower
  volumes and selling prices in the service center and import/export operations
  were partially offset by increased volumes in the energy sector. In addition,
  Thunder Bay Terminals had a very strong year. Consolidated revenues for the
  entire Company decreased by 8.4%, to $1,402.5 million, in 2001 compared to 2000.

The acquisition of A. J.
  Forsyth in October 2001 was completed to strengthen the Russel Metals
  operations in British Columbia. The cost of restructuring the Russel Metals
  operations, including employee termination costs, relocation of equipment and
  closure of plants, was estimated at $2.4 million, based on the plan prepared
  by management. The first steps in the plan commenced in December 2001. The cost
  of restructuring the A. J. Forsyth operations was anticipated at the time of
  acquisition.

During 2001, the Company
  recorded a foreign exchange loss of $1.4 million related to U.S. denominated
  debt that was not designated as a hedge of the Companys net investment
  in foreign subsidiaries.

Debt repurchase costs relate
  to the repurchase of US $9.4 million of 10% Senior Notes in 2001. This cost
  includes $0.3 million for the write-off of deferred issue costs recorded at
  the time of the issue of the Senior Notes.

In June 2001, the Company
  sold the inventory and fixed assets of Total Distributors, its Tulsa-based energy
  sector operation, for cash of $9.6 million. This transaction resulted in a pre-tax
  operating loss on the sale of the business of $6.0 million. The decision to
  sell these assets below book value was based on the significant losses that
  had occurred in this operation due to the very competitive heat exchanger tubing
  market it served.

In May 2001, the Company
  announced that it had been unsuccessful in finalizing an agreement for the acquisition
  of a U.S. service center operation. The due diligence process and legal expenses
  resulted in a write-off of costs of $1.7 million.

Consolidated interest expense
  decreased $0.8 million to $23.0 million for 2001 compared to 2000. This decrease
  is due to lower debt outstanding offset by higher exchange rates on U.S. denominated
  long-term debt for 2001 compared to 2000. The majority of the interest expense
  relates to the fixed term 10% Senior Notes and, therefore, no benefit was experienced
  from lower prime borrowing rates available through the bank credit facility.

Income taxes for 2001 were
  $7.1 million compared to $18.4 million for 2000. This decrease relates primarily
  to lower earnings. In the second quarter of 2001, the Company recorded income
  taxes recovered of $0.4 million relating to an Ontario tax rate adjustment enacted
  in 2001, applicable to timing differences on the balance sheet.

Basic earnings per share
  for 2001 was $0.17 compared to $0.53 for 2000. Earnings per share before other
  costs and unusual items was $0.37 for 2001 compared to $0.53 in 2000.

The weighted average number
  of common shares outstanding for 2001 was 37,981,501 compared to 41,068,870
  for 2000. The reduction relates to common shares purchased under a substantial
  issuer bid on March 31, 2000 and under normal course issuer bids during 2000.

**Interest Expense**

The following table shows
  the components of interest expense.



The long-term debt interest
  expense relates to the 10% Senior Notes and the 8% Debentures. The Company currently
  has no floating rate long-term debt. The decrease in the long-term debt interest
  relates to lower interest costs due to the repurchase of 10% Senior Notes in
  2001 offset by higher foreign exchange on the U.S. denominated debt interest
  of approximately $0.2 million. In September and October 2001, the Company used
  cash on hand to repurchase US $9.4 million of Senior Notes.

The Company had cash on
  hand and no short-term borrowings for most of 2002, resulting in net interest
  income of $0.2 million. The Company experienced a lower cash on hand position
  during the fourth quarter of 2002 due to increased working capital caused by
  price increases in steel inventory, higher revenues and the acquisition of Williams
  Steel.

**Coverage Ratio**

Russel Metals interest
  coverage ratio for 2002 improved to the best ratio experienced in the last ten
  years and is significantly higher than 2001 and 2000 due to the higher earnings
  from operations and lower interest expense. The Companys ability to meet
  interest payments for the next two years remains strong. The coverage ratios
  set forth below are calculated using earnings from operations before interest,
  income taxes, depreciation and amortization (EBITDA) excluding restructuring
  costs and foreign exchange gain (loss) and, for 2001, debt repurchase costs
  and unusual items.

**Coverage
  Ratio**



**Accounting Policies
  and Estimates**

a)
  GoodwillThe Company adopted the Canadian Institute of Chartered
  Accountants new accounting standard for goodwill and other intangible
  assets effective January 1, 2002. Goodwill on acquisitions is not amortized
  but is subject to an impairment test. Under the new standard, all goodwill is
  subject to an initial impairment test as of January 1, 2002 and generally annually
  thereafter.

The Companys initial
  impairment test as of January 1, 2002 indicated that the value of the goodwill
  was less than its carrying value in each reporting unit containing goodwill.
  The impairment loss of $15.1 million has been charged to opening retained earnings
  as at January 1, 2002.

Under the previous standard,
  the Company was required to write down goodwill when there was a permanent impairment
  in value based on a recoverability test using undiscounted cash flows. The new
  standard requires a point in time evaluation of goodwill at the
  reporting unit level. The initial evaluation of goodwill required at January
  1, 2002, was at a point when the sector of the economy that the Company services
  and the steel industry were depressed. The Companys evaluation of goodwill
  at the various reporting units required assumptions on the impact of the safeguard
  actions on imported steel in the U.S. and Canada, the effect of the softwood
  lumber tariffs on the British Columbia market, how oil and gas pricing would
  impact drilling, and the general economy. These factors significantly influence
  operations on a discounted cash flow basis, even though the Company believes
  these operations will contribute positively to its results subsequent to January
  1, 2002.

The acquisition of Williams
  Steel in September 2002 resulted in goodwill of $2.7 million.

b)
  OtherThe preparation of the Companys financial statements
  requires management to make estimates and judgements that affect the reported
  amounts. On an ongoing basis, the Company evaluates its estimates, including
  those related to bad debts, inventories, fixed asset lives, income taxes, restructuring
  costs, pensions and other post-retirement benefits, environmental, contingencies
  and litigation. The Company bases its estimates on historical experience and
  on various other assumptions that are believed to be reasonable under the circumstances,
  the results of which form the basis for making judgements about the carrying
  values of assets and liabilities that are not readily apparent from other sources.
  Actual results may differ from these estimates under different assumptions or
  conditions.

The Companys most
  significant assets consist of accounts receivable and inventory. The Company
  maintains allowances for doubtful accounts for estimated losses resulting from
  the inability of its customers to make required payments. If the financial condition
  of the Companys customers were to deteriorate, resulting in an impairment
  of their ability to make payments, additional allowances may be required. The
  Company reviews its inventory for obsolescence and to ensure that the cost of
  inventory is not in excess of the estimated market value. Inventory reserves
  or write downs are recorded if required.

The Company continues to
  use the intrinsic value-based method for stock-based compensation. If the Company
  had adopted the fair value-based accounting method effective January 1, 2002
  and expensed stock options issued in 2002, the amount expensed would have been
  $136,000 or less than $0.01 per share. The Company has considered changing its
  policy to the fair value-based accounting method; however, since the change
  would not be material, the Company is waiting for the proposed new Canadian
  pronouncements to be finalized.

**Capital Expenditures**

Capital expenditures during
  2002 were $12.8 million compared to $8.2 million in 2001. Russel Metals
  capital expenditures are mainly related to maintenance capital, the purchase
  of additional processing equipment across a broad base of the operations and
  upgrades to its existing facilities and computer systems.

In 2002, capital expenditures
  of $5.3 million were incurred in the British Columbia region to consolidate
  the Russel Metals operations with the A. J. Forsyth operations primarily to
  expand the Vancouver location to consolidate both operations.

Depreciation expense was
  $14.0 million for 2002 and $13.0 million for 2001. Depreciation expense has
  increased in 2002 mainly related to assets acquired from the A. J. Forsyth acquisition
  in October 2001. It will increase slightly in 2003 due to the Williams Steel
  acquisition.

**Liquidity**

Russel Metals stresses
  working capital management to ensure working capital is minimized and leverage
  reduced in an economic downturn. The Company reduced working capital employed
  significantly over the five quarters to March 31, 2002 as economic conditions
  deteriorated in the steel sector. Revenue increased in the last half of 2002
  and working capital employed by Russel Metals has also increased. The amount
  of cash used for additional working capital in 2002 was $29.1 million.

Inventory and accounts
  receivable represent 76.4% of total assets, at December 31, 2002, compared to
  72.7% at December 31, 2001. The increase relates to the expansion of inventory
  and accounts receivable levels to support the increased revenues. Property,
  plant and equipment utilized in the operations of the Company are very stable
  and are not expected to vary significantly. During 2002 capital spending was
  less than depreciation expense. Acquisitions in 2002 added $6.3 million to fixed
  assets.

The balances disclosed
  in the consolidated cash flow statements are adjusted to remove the non-cash
  component related to foreign exchange rate changes impacting inventory, accounts
  receivable and accounts payable of the U.S. operations. Assets purchased as
  part of the Williams Steel and Arrow Steel Processors acquisitions are also
  shown separately based on balances at the date of the transactions.

The Companys net
  cash position, cash less bank indebtedness, at December 31, 2002 is $3.9 million.
  This balance is approximately $13.2 million lower than December 31, 2001.

For 2002, cash generated
  from operations was $55.7 million and cash utilized for changes in working capital
  was $29.1 million. Revenue increases have resulted in increased inventories
  utilizing cash of $55.8 million for 2002. However, accounts payable increases,
  related to increased volumes, generated cash of $23.9 million.

Inventory levels for 2002
  increased $64.0 million from December 31, 2001. Inventory turns declined to
  3.5 in the fourth quarter, as inventory levels increased more than cost of sales.

**Inventory Turns**



The inventory turns are
  calculated using the cost of sales for the quarter annualized and the ending
  inventory position.

The service center inventory
  turns are lower in the last half of 2002 compared to the first half due to higher
  inventory levels. The turns for the last half of 2002 are consistent with the
  last half of 2001. This can be compared with the industry turns estimated to
  be 3.2 for the three months ended November 30, 2002 as derived from the monthly
  Business Conditions Report published for the United States by the Metals Service
  Center Institute. It is managements goal to maintain service center inventory
  turns at significantly higher levels than the industry norm.

Steel import/export inventory
  levels are significantly higher at December 31, 2002 compared to December 31,
  2001 and the first three quarters of 2002. The inventory position at December
  31, 2001 and during the first half of 2002 was intentionally lower than normal
  due to concerns about the impending dumping actions, steel pricing and profitability.

The level of inventory
  held by the import/export sector at December 31, 2002 has significantly reduced
  inventory turns for the quarter ended December 31, 2002 for the steel import/export
  sector and the total company. At December 31, 2002, approximately one third
  of the inventory was either pre-sold and not yet delivered to the customer or
  was in transit from the mill. The Company anticipates that the steel import/export
  sector will reduce its inventory during the first quarter of 2003.

The other major component
  of working capital is accounts payable and accrued liabilities, which increased
  to support higher inventory purchases in the last half of 2002, generating cash
  of $23.9 million. For 2001, accounts payable decreased utilizing cash of $46.3
  million.

The Company acquired the
  operations including the fixed assets of Arrow Steel Processors, a coil processor
  of customer owned material, for $4.4 million in March 2002 and the operating
  assets of Williams Steel, a service center operation, for $17.0 million in September
  2002.

During 2002, the Company
  utilized cash of $12.8 million on capital expenditures and $8.7 million on common
  and preferred share dividends.

For several years, the
  Companys cash flow has been positively impacted by its ability to utilize
  income tax losses. In 2003, the Company will be required to make payments related
  to 2002 as well as instalments for 2003. The Company estimates income tax payments
  of $3.8 million will be required in the first quarter of 2003. Payments for
  the remainder of the year are estimated to be $5.8 million; however, this amount
  may vary based on earnings.

The Company will be relocating
  its flat rolled operation in Hamilton, Ontario during the fourth quarter of
  2003. The Company anticipates spending $29 million for land, building, machinery
  and equipment for the new location. These commitments will result in periodic
  payments throughout 2003.

For 2001, overall cash
  generated was $46.7 million, determined by adding the decrease in bank indebtedness
  to the increase in cash. Cash generated from operations before working capital
  changes was $38.2 million. The improvement in net working capital generated
  by lower revenues resulted in cash generated from working capital of $54.9 million
  in 2001.

The sale of businesses
  in 2001 generated $10.4 million in cash.

The acquisition of A. J.
  Forsyth in October 2001 and Spartan Steel in August 2001, including assumed
  bank debt, consumed $42.4 million in cash.

In addition, during 2001
  the Company utilized cash of $14.8 million to repurchase Senior Notes in September
  and October 2001, $8.2 million for capital expenditures and $9.8 million for
  common and preferred share dividends.

**Debt
  and Credit Facilities**

The Company manages its
  cash position based on bank borrowings net of cash. The bank credit facilities
  table provides the split between loans and cash on deposit.

Bank
  Credit Facilities



The Company has two long-term
  debt instruments outstanding. The $30 million 8% Subordinated Debentures mature
  in 2006. The 10% Senior Notes mature in 2009. The balance outstanding at December
  31, 2002 is US $115.6 million, unchanged from December 31, 2001. The Canadian
  dollar equivalent of the Senior Notes fluctuates with the exchange rate.

Russel Metals has a bank
  credit facility with a syndicate of Canadian and U.S. banks. The $253.8 million
  facility may be extended for an additional one year period on each anniversary,
  with the consent of the banks. Russel Metals has extended the facility to June
  19, 2005. Russel Metals is entitled to borrow under this facility, on a revolving
  basis, up to an amount equal to the sum of specified percentages of eligible
  accounts receivable and inventories, to a maximum of $253.8 million. At December
  31, 2002, Russel Metals was entitled to borrow $231.3 million, including letters
  of credit. At December 31, 2002, Russel Metals had borrowings of $5.8 million
  and $8.0 million in letters of credit under this facility. At December 31, 2001,
  Russel Metals had no borrowings and had $10.5 million in letters of credit under
  this facility.

In addition, certain U.S.
  subsidiaries of Russel Metals have their own one year bank credit facility.
  The maximum borrowing under this facility is US $35.0 million. At December 31,
  2002, these subsidiaries had borrowings of US $11.8 million and letters of credit
  of US $5.6 million compared to borrowings of US $0.5 million and letters of
  credit of US $1.8 million at December 31, 2001.

Based on Russel Metals
  current financial position, operating results and absence of scheduled debt
  maturities, Russel Metals believes that it will generate a sufficient amount
  of cash flow to pay all of its preferred share dividends, interest obligations
  and operating costs as they become due during the next two years.

**Contractual Obligations**

The Company is contractually
  obligated to payments under its long-term debt agreements and lease obligations
  that come due during the following periods.



The Company does not have
  any off-balance sheet arrangements other than the letters of credit referred
  to in the bank credit facilities table.

**Dividends and Share
  Capital**

The ability to pay dividends
  on common shares is impacted by restrictions associated with the 10% Senior
  Notes due June 2009. Dividends on common shares and the repurchase of common
  and preferred shares are considered to be restricted payments under the Note
  Indenture. Due to these restrictions, the quarterly dividend on common shares
  was not declared for payment during the first quarter of 2002. The quarterly
  dividend on common shares of $0.05 per common share was resumed in the second
  quarter. A decision was made to increase the $0.05 per share quarterly dividend
  on common shares to $0.06 per share, in the third quarter of 2002. Dividends
  totaling $6.5 million were paid in 2002 to common shareholders compared to $7.6
  million 2001. The Senior Notes do not restrict preferred share dividends. At
  December 31, 2002, the Company had $10.1 million available for restricted payments.

The ability to make restricted
  payments is adjusted quarterly by 50% of the quarterly net income or loss. Net
  income is adjusted for certain exclusions that include: extraordinary items,
  gains or losses on asset dispositions and unrealized foreign exchange gains
  and losses.

As at December 31, 2002,
  the Company had 38,057,001 common shares and 1,200,000 class II preferred shares
  outstanding. During 2002, 75,500 common shares were issued upon the exercise
  of stock options at an average exercise price of $3.35. At February 17, 2003,
  the Company has 38,059,301 common shares and 1,200,000 class II preferred shares
  outstanding.

**Vision and Strategy**

The metals distribution
  business is a segment of a mature, cyclical industry  steel. The use of
  distributors by both manufacturers and end users of steel continues to grow.
  This is evidenced by the growth in the percentage of total steel shipments from
  steel producers to distributors. As the distribution segment continues to grow
  its share of steel industry shipments, steel distributors such as Russel Metals
  can grow their business over the course of a cycle.

Russel Metals strives to
  deal with the cyclical nature of the business by operating with the lowest possible
  net assets throughout the course of a cycle. In addition, its aim is to be more
  profitable through the various successive peaks and troughs as the steel cycles
  progress. In order to achieve this, management emphasizes profitability rather
  than revenue growth. This intensive asset management reduces borrowings and
  therefore interest expense in declining periods in the economic cycle and creates
  much more stable returns on net assets over the course of the cycle. Our conservative
  management approach creates relatively stronger trough earnings but could cause
  peak earnings to be somewhat muted. In periods of rapid price increases, as
  was experienced in 2002, strong inventory management led to lower inventory
  holding gains due to lower inventory levels.

Management strongly believes
  that it is more prudent to be profitable throughout a cycle, without the spikes
  in earnings caused by less emphasis on asset management, and have average earnings
  over the full range of the cycle in the top decile of the industry.

Growth from selective acquisitions
  is also a core management philosophy. The Company focuses on investment opportunities
  in businesses that have dominant market niches or provide mass to existing Russel
  Metals operations. The acquisition of A. J. Forsyth and Williams Steel, and
  the subsequent rationalization of the new businesses with existing Russel Metals
  businesses, has enabled the Company to establish a stronger market presence
  in both British Columbia and Wisconsin. The Company believes it requires stronger
  market positions in the Quebec and Ontario service center marketplace and is
  looking to make meaningful acquisitions in those markets.

In the energy and import/export
  segments, all of the companies in the Russel Metals group have significant operations
  in the market niche that they service. Consistent with our acquisition philosophy,
  any new acquisitions in these areas could likely be either major stand alone
  operations or complements to existing operations.

In the future, the length
  of the steel-based economic cycle will continue to shorten and a management
  structure that allows the fastest reaction to the changes will be the most successful.
  The Company will continue to invest in business systems to enable faster reaction
  times to changing business conditions. In addition, management believes the
  high level of service and flexibility provided by service centers will enable
  this distribution channel to capture an increasing percentage of total steel
  revenues to end users, allowing for increased growth within the sector.

**Outlook**

We expect the current demand
  experienced in the service center and import/export operations in the previous
  three quarters of 2002 to continue, although we anticipate pricing will weaken.
  We expect the decline in gross margins that was experienced in the fourth quarter
  of 2002 to continue in 2003.

At the current oil and
  gas price levels we would anticipate a seasonal pickup in demand in the energy
  sector in 2003; however, we believe it will be very modest based on indications
  at this time.