**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**
| Description                                                                                                                                                                                                                                              | Page                           |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------|
|                                                                                                                                                                                                                                                          |
| Management's Report to theShareholders..........................................................                                                          | 2                              |
| Auditors'Report........................................................................................ | 3                              |
| Consolidated BalanceSheets.........................................................................                              | 4                              |
| Consolidated Statements of Earnings and RetainedEarnings....................................                                                                                                 | 5                              |
| Consolidated Cash FlowStatements................................................................                                                | 6                              |
| Notes to the Consolidated FinancialStatements...................................................                                                                    | 7                              |
|                                                                                                                                                                                                                                 |       |
|                                                                                                                                                                                                                                                          |

****

**Management's Report to the Shareholders**

The accompanying consolidated financial statements, management's discussion and analysis and all information in the AnnualReport have been prepared by management and approved by the Audit Committee and the Board of Directors of the Company.

These consolidated financial statements were prepared in accordance with Canadian generally accepted accounting principles and,where appropriate, reflect management's best estimates and judgements.  Management is responsible for the accuracy, integrityand objectivity of the consolidated financial statements and management's discussion and analysis within reasonable limits ofmateriality and for the consistency of financial data included in the text of the Annual Report with that contained in theconsolidated financial statements.

To assist management in the discharge of these responsibilities, the Company maintains a system of internal controls designed toprovide reasonable assurance that its assets are safeguarded, that only valid and authorized transactions are executed, and thataccurate, timely and comprehensive financial information is prepared.  In addition, the Company maintains a system ofdisclosure controls in order to provide reasonable assurance that the financial information is relevant, reliable and accurate.

The Company's Audit Committee is appointed annually by the Board of Directors.  The Audit Committee, which is composedentirely of outside directors, meets with management to satisfy itself that management is properly discharging its financialreporting responsibilities and to review the consolidated financial statements, the management's discussion and analysis and thereport to shareholders.  The Audit Committee reports its findings to the Board of Directors for consideration in approving theconsolidated financial statements, the managements discussion and analysis and the report to shareholders for presentation to theshareholders.

The consolidated financial statements have been audited on behalf of the shareholders by the external auditors, Deloitte &Touche LLP, in accordance with Canadian generally accepted auditing standards.  Deloitte & Touche LLP has full and freeaccess to the Audit Committee.

Dated February 23, 2006
| (signed) E. M. Siegel, Jr.            |   |   | (signed) Brian R. Hedges     |
|---------------------------------------|--------|--------|------------------------------|
|                                       |   |   |                              |
| President and Chief Executive Officer |   |   | Executive Vice President and |
|              |   |   | Chief Financial Officer      |

**Auditors' Report**

To the Shareholders of Russel Metals Inc.

We have audited the consolidated balance sheets of Russel Metals Inc. as at December 31, 2005 and 2004 and the consolidatedstatements of earnings and retained earnings and of cash flows for each of the years in the three-year period ended December 31,2005.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility isto express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards.  Those standards require that weplan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  Anaudit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluatingthe overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of theCompany as at December 31, 2005 and 2004 and the results of its operations and its cash flows for each of the years in thethree-year period ended December 31, 2005 in accordance with Canadian generally accepted accounting principles.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financialreporting.  Our audit included consideration of internal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of theCompany's internal control over financial reporting.  Accordingly we express no such opinion.
| (signed) Deloitte & Touche LLP |       |
|------------------------------------|--------------------------------|
|                                    |       |
| Chartered Accountants              |       |

Toronto, OntarioJanuary 30, 2006

COMMENTS BY AUDITORS ON CANADA – U.S. REPORTING DIFFERENCES

The standards of the Public Company Accounting Oversight Board (United States) require the addition of an explanatory paragraph(following the opinion paragraph) when there are changes in accounting principles that have a material effect on the comparabilityof the Company's consolidated financial statements, such as the changes described in Note 2 to the consolidated financialstatements.  Our report to the Shareholders, dated January 30, 2006, is expressed in accordance with Canadian reportingstandards which do not require a reference to such changes in accounting principles in the auditors' report when the change isproperly accounted for and adequately disclosed in the financial statements.
| (signed) Deloitte & Touche LLP |       |
|------------------------------------|--------------------------------|
|                                    |       |
| Chartered Accountants              |       |

Toronto, OntarioJanuary 30, 2006

**Consolidated Balance Sheets**
| *At December 31($000)*                                                  | **2005**                                                   | 2004                                                                    |
|-------------------------------------------------------------------------|------------------------------------------------------------|-------------------------------------------------------------------------|
|                                                                         |
| **ASSETS**                                                              | **     **                         |                                                |
| **Current**                                                             | **     **                         |                                                |
|       Cash                                     | **$      ****47,055**        | $            634 |
|       Accounts receivable                      | **359,594**                                                | 360,696                                                                 |
|       Inventories                              | **474,034**                                                | 553,915                                                                 |
|      Prepaid expenses and other assets         | **7,010**                                                  | 7,069                                                                   |
|      Income taxes receivable                   | **304**                                                    | 5,996                                                                   |
|      Discontinued operations (Note 5)          | **-**                                                      | 9,483                                                                   |
|                                                                         |
|                                                | **887,997**                                                | 937,793                                                                 |
|                                                |                                   |                                                |
| **Property, Plant and Equipment (Note 6)**                              | **181,841**                                                | 180,655                                                                 |
| **Assets Held For Sale (Note 4)**                                       | **5,085**                                                  | 6,291                                                                   |
| **Deferred Financing Charges**                                          | **7,240**                                                  | 8,357                                                                   |
| **Goodwill (Note 4)**                                                   | **9,205**                                                  | 9,205                                                                   |
| **Future Income Tax Assets (Note 10)**                                  | **994**                                                    | 1,614                                                                   |
| **Other Assets**                                                        | **2,821**                                                  | 2,566                                                                   |
|                                                                         |
|                                                | **$ 1,095,183**                                       | $ 1,146,481                                                        |
|                                                                         |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                | **     **                         |                                                |
| **Current**                                                             | **     **                         |                                                |
|       Bank indebtedness                        | **$        2,098** | $      33,242                             |
|       Accounts payable and accrued liabilities | **312,937**                                                | 348,166                                                                 |
|      Income taxes payable                      | **5,588**                                                  | 60,049                                                                  |
|       Discontinued operations (Note 5)         | **2,386**                                                  | 9,403                                                                   |
|                                                                         |
|                                                | **323,009**                                                | 450,860                                                                 |
| **Contingencies, Guarantees and Commitments (Note 15)**                 | **     **                         |                                                |
| **Other Accrued Liabilities (Note 12)**                                 | **15,210**                                                 | 11,440                                                                  |
| **Long-Term Debt (Note 8)**                                             | **204,033**                                                | 210,630                                                                 |
| **Pensions and Benefits (Note 14 b)**                                   | **8,949**                                                  | 10,146                                                                  |
| **Future Income Tax Liabilities (Note 10)**                             | **5,285**                                                  | 6,831                                                                   |
|                                                                         |
|                                                | **556,486**                                                | 689,907                                                                 |
|                                                                         |
| **Shareholders' Equity (Note 11)**                                      | **538,697**                                                | 456,574                                                                 |
|                                                                         |
|                                                | **$ 1,095,183**                                       | $  1,146,481                                                       |
|                                                                         |

ON BEHALF OF THE BOARD,
| (signed) C.R. Fiora            |   |   | (signed) R. Hartog             |
|--------------------------------|--------|--------|--------------------------------|
|                                |   |   |                                |
| Director                       |   |   | Director                       |
|       |   |   |       |

**Consolidated Statements of Earnings and Retained Earnings**
| *For the Years Ended December 31*                |                                                    |                                           |                                       |
|--------------------------------------------------|-----------------------------------------------------------------------------|--------------------------------------------------------------------|----------------------------------------------------------------|
| *($000, except per share data)*                  | **2005**                                                                    | 2004                                                               | 2003                                                           |
|                                                  |
| **Revenues**                                     | **$  2,615,246**                                                  | $  2,412,502                                             | $  1,503,814                                         |
| Cost of sales and operating expenses             | **2,413,705**                                                               | 2,089,391                                                          | 1,443,119                                                      |
|                                                  |
| **Earnings before the following**                | **201,541**                                                                 | 323,111                                                            | 60,695                                                         |
| Restructuring (Note 4)                           | **(1,140)**                                                                 | 3,632                                                              | 3,583                                                          |
| Debt restructuring costs (Note 8)                | **-**                                                                       | 13,718                                                             | -                                                              |
| Foreign exchange gain (Note 12)                  | **-**                                                                       | -                                                                  | (348)                                                          |
| Goodwill impairment (Note 4)                     | **-**                                                                       | -                                                                  | 2,410                                                          |
| Interest expense, net (Note 9)                   | **17,529**                                                                  | 20,024                                                             | 22,723                                                         |
|                                                  |
| **Earnings before income taxes**                 | **185,152**                                                                 | 285,737                                                            | 32,327                                                         |
| Provision for income taxes (Note 10)             | **(60,374)**                                                                | (105,268)                                                          | (13,250)                                                       |
|                                                  |
| **Earnings from continuing operations**          | **124,778**                                                                 | 180,469                                                            | 19,077                                                         |
| Loss from discontinued operations (Note 5)       | **(62)**                                                                    | (2,623)                                                            | (578)                                                          |
|                                                  |
| **Net earnings for the year**                    | **124,716**                                                                 | 177,846                                                            | 18,499                                                         |
|                         |                                                    |                                           |                                       |
| **Retained earnings --**                         |                                                    |                                           |                                       |
|                         |                                                    |                                           |                                       |
| Dividends on preferred shares                    | **-**                                                                       | (611)                                                              | (2,250)                                                        |
|                                                  |
| **Earnings available to common shareholders**    | **124,716**                                                                 | 177,235                                                            | 16,249                                                         |
| Dividends on common shares                       | **(45,434)**                                                                | (25,004)                                                           | (11,605)                                                       |
| Retained earnings, beginning of the year         | **262,733**                                                                 | 110,502                                                            | 105,858                                                        |
|                                                  |
| **Retained earnings, end of the year (Note 11)** | **$   342,015**                                              | $   262,733                                         | $   110,502                                     |
|                                                  |
| **Basic earnings per common share (Note 11)**    |                                                    |                                           |                                       |
| **  - continuing operations**               | **$    ****     2.47**         | **$**         3.70    | $           0.42  |
|                                                  |
| **Basic earnings per common share**              | **$   ****     **** 2.47**     | $**         ** 3.64   | $         0.41    |
|                                                  |
| **Diluted earnings per common share**            |                                                    |                                           |                                       |
| **  - continuing operations**               | **$  **** **** ****     2.42** | $   ** **        3.61 | $            0.40 |
|                                                  |
| **Diluted earnings per common share**            | **$    ****     2.42**         | $**        **  3.56   | $           0.39  |
|                                                  |

**Consolidated Cash Flow Statements**
| *For the Years Ended December 31 ($000)*                                                   | **2005**                                        | 2004                                                                   | 2003                                        |
|--------------------------------------------------------------------------------------------|-------------------------------------------------|------------------------------------------------------------------------|---------------------------------------------|
|                                                                                            |
| Operating activities                                                                       |                        |                                               |                    |
|       Earnings from continuing operations                         | **$    124,778**            | $    180,469                                       | $      19,077 |
|       Depreciation and amortization                               | **19,158**                                      | 18,598                                                                 | 16,330                                      |
|       Future income taxes                                         | **6,305**                                       | 5,021                                                                  | (426)                                       |
|      Gain (loss) on sale of fixed assets and assets held for sale | **(1,972)**                                     | 264                                                                    | (89)                                        |
|       Stock-based compensation                                    | **1,309**                                       | 804                                                                    | 217                                         |
|       Restructuring costs                                         | **-**                                           | 2,051                                                                  | 3,162                                       |
|       Debt redemption costs                                       | **-**                                           | 3,071                                                                  | -                                           |
|       Goodwill impairment                                         | **-**                                           | -                                                                      | 2,410                                       |
|                                                                                            |
| Cash from operating activities before working capital                                      | **149,578**                                     | 210,278                                                                | 40,681                                      |
|                                                                                            |
| Changes in non-cash working capital items                                                  |                             |                                               |                    |
|       Accounts receivable                                         | **(2,368)**                                     | (122,814)                                                              | 18,193                                      |
|       Inventories                                                 | **76,475**                                      | (260,898)                                                              | 91,439                                      |
|       Accounts payable and accrued liabilities                    | **(32,189)**                                    | 128,473                                                                | (12,669)                                    |
|       Current income taxes                                        | **(55,644)**                                    | 54,711                                                                 | 11,681                                      |
|       Other                                                       | **51**                                          | (2,075)                                                                | 2,571                                       |
|                                                                                            |
| Change in non-cash working capital                                                         | **(13,675)**                                    | (202,603)                                                              | 111,215                                     |
|                                                                                            |
| **Cash from operating activities**                                                         | **135,903**                                     | 7,675                                                                  | 151,896                                     |
|                                                                                            |
| Financing activities                                                                       |                        |                                               |                    |
|      (Decrease) increase in bank borrowing                        | **(31,144)**                                    | (44,851)                                                               | 56,952                                      |
|       Issue of common shares                                      | **4,385**                                       | 54,439                                                                 | 5,663                                       |
|       Dividends on common shares                                  | **(45,434)**                                    | (25,004)                                                               | (11,605)                                    |
|       Dividends on preferred shares                               | **-**                                           | (611)                                                                  | (2,250)                                     |
|       Deferred financing costs                                    | **(338)**                                       | (9,117)                                                                | (77)                                        |
|       Issuance of long-term debt                                  | **-**                                           | 235,200                                                                | -                                           |
|       Repurchase of long-term debt                                | **-**                                           | (184,715)                                                              | -                                           |
|       Redemption of preferred shares                              | **-**                                           | (30,000)                                                               | -                                           |
|       Repayment of debt assumed                                   | **-**                                           | -                                                                      | (99,262)                                    |
|                                                                                            |
| **Cash used in financing activities**                                                      | **(72,531)**                                    | (4,659)                                                                | (50,579)                                    |
|                                                                                            |
| Investing activities                                                                       |                        |                                               |                    |
|       Purchase of fixed assets                                    | **(26,463)**                                    | (25,394)                                                               | (34,879)                                    |
|       Proceeds on sale of fixed assets                            | **1,644**                                       | 849                                                                    | 1,804                                       |
|       Proceeds from assets held for sale and sale of businesses   | **5,869**                                       | 3,675                                                                  | -                                           |
|       Purchase of businesses (Note 4)                             | **-**                                           | -                                                                      | (70,359)                                    |
|       Other                                                       | **(4,443)**                                     | 305                                                                    | (4,628)                                     |
|                                                                                            |
| **Cash used in investing activities**                                                      | **(23,393)**                                    | (20,565)                                                               | (108,062)                                   |
|                                                                                            |
| Discontinued operations                                                                    |                             |                                               |                    |
|       Operating activities                                        | **(62)**                                        | (1,174)                                                                | (406)                                       |
|      Investing activities                                         | **6,504**                                       | 349                                                                    | 1,091                                       |
|                                                                                            |
| **Cash from (used in) discontinued operations**                                            | **6,442**                                       | (825)                                                                  | 685                                         |
|                                                                                            |
| **Increase (decrease) in cash**                                                            | **46,421**                                      | (18,374)                                                               | (6,060)                                     |
| Cash position, beginning of the year                                                       | **634**                                         | 19,008                                                                 | 25,068                                      |
|                                                                                            |
| **Cash position, end of the year**                                                         | **$      47,055** | $           634 | $      19,008 |
|                                                                                            |

**Notes to the Consolidated Financial Statements**

**1.      Summary of Significant Accounting Policies**

*a)*       *Basis of presentation*

The consolidated financial statements include the accounts of Russel Metals Inc. and its subsidiary companies herein referred toas the Company.  The reporting currency is Canadian dollars unless otherwise noted.  All  inter-company balances,transactions and profits have been eliminated.

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accountingprinciples.  Material differences from accounting principles generally accepted in the U.S. are disclosed in Note 16.

The revenue and results of operations of Poutrelles Delta and Armabec Inc., which have been sold, have been reclassified toreflect the classification of these operations as discontinued (Note 5).

*b)***      ***Inventories*

Inventories are recorded at the lower of cost and net realizable value.  Cost is determined on either an average cost basisor an actual cost basis depending on the business unit.

*c)***      ***Property, plant, equipment and depreciation*

Property, plant, equipment and leasehold improvements are recorded at cost.  Depreciation is provided on a straight-linebasis at rates that charge the original cost of such assets to operations over their estimated useful lives.  The rates usedare 20 to 40 years for buildings, 10 years for machinery and equipment, 2 to 5 years for computer equipment, and over the leaseterm for leasehold improvements.  Depreciation expense was $17,703,000 in 2005 (2004: $17,326,000; 2003: $15,140,000).

*d)***      ***Deferred financing charges and amortization*

Costs incurred that relate to financing are deferred and amortized on a straight-line basis over the period of the relatedfinancing.  Deferred financing charges are recorded at cost less accumulated amortization.  Amortization of deferredfinancing charges was $1,455,000 in 2005 (2004: $1,271,000; 2003: $1,190,000).

*e)***      ***Goodwill*

Goodwill represents the excess purchase price paid on acquisitions over the value assigned to identifiable net assetsacquired.  The Company reviews goodwill for impairment annually and whenever facts and circumstances indicate that carryingamounts may not be recoverable.  As part of the evaluation, the estimated future undiscounted cash flows associated with theunderlying business operation are compared to the carrying amount of goodwill to determine if a write-down is required.  Ifsuch an assessment indicates that the undiscounted future cash flows will not be recovered, the carrying amount is reduced to theestimated fair value (Note 4).

*f)***      ***Pensions*

The cost of pension benefits earned by employees covered under defined benefit plans is determined using the projected benefitmethod prorated on service and is charged to expense as services are rendered.  Actuarial gains and losses and past servicecosts are amortized on a straight-line basis over the estimated average remaining service lives of the employee groups.  Theamortization of actuarial gains and losses utilizes the corridor approach.  The cost of post-retirement benefits other thanpensions is recognized on an accrual basis over the working lives of employees.

*g)***      ***Income taxes*

The Company uses the liability method of income tax allocation.  Under this method, future tax assets and liabilities aredetermined based on differences between the financial accounting and tax bases of assets and liabilities and are measured using thesubstantively enacted tax rates and laws that will be in effect when the differences are expected to reverse.  Future incometax assets are recognized to the extent that their realization is more likely than not.

*h)***      ***Foreign currency translation*

The accounts of self-sustaining foreign subsidiaries are translated from U.S. dollars to Canadian dollars at the noon spot ratesin effect at the balance sheet date, which was 1.1659 at December 31, 2005 (2004: 1.2036).  Revenues and expenses aretranslated at the average rate of exchange for the year.  For 2005, the U.S. dollar published average exchange rate was 1.2114(2004: 1.3013; 2003: 1.4010).  The resulting gains or losses are included in the cumulative translation adjustment line ofshareholders' equity.

Exchange gains or losses on long-term debt denominated in foreign currencies not designated as a hedge are expensed as incurred(see Note 12).  Exchange gains or losses on the translation of long-term debt denominated in a foreign currency designated asa hedge of the Company's net investment in foreign subsidiaries are included in the cumulative translation adjustment line ofshareholders' equity.

*i)***      ***Earnings per share*

Basic earnings per common share are calculated using the weighted daily average number of common shares outstanding.  Theweighted average number of common shares for 2005 was 50,461,330 (2004: 48,671,915; 2003: 40,021,479).

*j)***      ***Revenue recognition*

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, selling price is fixed andcollection is reasonably assured.  Revenue on certain sales within the energy tubular products segment, where the Company actsas an agent, is presented on a net basis.  Freight and shipping billed to customers are included in revenue.

*k)***      ***Stock-based compensation*

The Company uses the fair value-based approach to account for stock-based compensation granted to employees subsequent toJanuary 1, 2003.  Compensation expense and an increase in contributed surplus is recognized for stock options over theirvesting period based on their estimated fair values on the date of grant, as determined by the Black-Scholes option-pricingmodel.  Compensation expense is also recognized for deferred share units  when issued with the liability marked to marketuntil exercised.

*l)***      ***Derivative financial instruments*

The Company uses foreign exchange contracts to manage foreign exchange risk on certain committed cash outflows, primarilyinventory purchases.  When the derivative instruments have been designated and are highly effective at offsetting risks, hedgeaccounting is applied.  Hedge accounting requires that gains and losses on the hedging item are recognized through income inthe same period or manner as the hedged item.  Realized and unrealized foreign exchange gains and losses not designated as ahedge are included in income.  Derivatives are not entered into for speculative purposes and the use of derivative contractsis governed by documented risk management policies.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk managementobjective and strategy for undertaking various hedge transactions.  This process includes linking all derivatives to specificfirm commitments or forecasted transactions.  The Company assesses, both at the hedge's inception and on an ongoing basis,whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows ofhedged items.

*m)***      ***Cash*

Cash includes short-term investments with a maturity of less than 30 days.

*n)***      ***Use of estimates*

The preparation of consolidated financial statements in conformity with Canadian generally accepted accounting principlesrequires management to make estimates and assumptions that affect the reported assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during thereporting periods.  In particular, inventories, accounts receivable, asset retirement obligations, fair values, othercontingencies, and assigned values on net assets acquired represent management's best estimates.  Actual results could differfrom these estimates.

**2.      Change in Accounting Policies**

a)     Effective January 1, 2004, the Company adopted the new accounting guideline, AcG-13, HedgingRelationships, which establishes certain conditions when hedge accounting may be applied.  The guideline sets out therequirements for the identification, designation, documentation and effectiveness of hedging relationships for the purpose ofapplying hedge accounting.  The adoption of this standard did not have a material effect on the Company's results ofoperations, financial position or cash flows.  The Company has applied this standard to the fixed for fixed cross currencyswaps entered into on February 20, 2004, in order to hedge the last US$100 million of its US$175 million U.S. Senior Notes (Note8).  In addition, this standard has been applied to the Company's other hedging relationships, namely foreign exchangecontracts used to manage certain committed cash flows and the hedge of the net investment in U.S. subsidiaries.

b)     Effective January 1, 2004, the Company adopted the new CICA Handbook section 3110, AssetRetirement Obligations.  This standard establishes standards for the recognition, measurement and disclosure of liabilitiesfor asset retirement obligations and the associated asset retirement costs.  The Company has certain significant assetretirement obligations relating to its land lease for its Thunder Bay Terminal operations.  The landlord has the option toretain the facilities or to require the Company to remove them.  In addition, the Company has certain end-of-lease obligationsin six of its service center operations (Note 6).  The adoption of this standard did not have a material effect on theCompany's results of operations, financial position or cash flows.

c)     Effective January 1, 2004, the Company prospectively adopted the new CICA Handbook section 1100,Generally Accepted Accounting Principles (GAAP).  This standard establishes what constitutes Canadian generally acceptedaccounting standards and provides guidance on the GAAP hierarchy.  The adoption of this standard did not have a materialeffect on the Company’s results of operations, financial position or cash flows.

d)     Effective October 1, 2004, the Company prospectively adopted the new accounting guidelineAcG-15, Variable Interest Entities.  The adoption of this standard did not have a material effect on the Company’sresults of operations, financial position or cash flows.

e)     Effective May 1, 2003, the Company adopted the new accounting standard for the Disposal ofLong-Lived Assets and Discontinued Operations.  This standard, along with emerging issues abstracts EIC-134, Accounting forSeverance and Termination Benefits and EIC-135, Accounting for Costs Associated with Exit and Disposal Activities (Including CostsIncurred in a Restructuring) have been applied to the restructuring as a result of the Acier Leroux inc. acquisition (Note 4).

**3.**      **Future Accounting Changes**

On September 8, 2005, the CICA issued EIC-156, Accounting by a Vendor for Consideration Given to a Customer (including aReseller of the Vendor's Products).  The Company is currently evaluating the effect of this standard on its consolidatedfinancial statements and is expected to adopt the standard effective January 1, 2006.

During 2005, the CICA issued three new accounting standards: CICA Handbook section 1530, Comprehensive Income; CICA Handbooksection 3855, Financial Instruments – Recognition and Measurement; and CICA Handbook section 3865, Hedges.  Thesestandards, which must be adopted together, are effective for fiscal years beginning on or after October 1, 2006.  The Companyis currently evaluating the impact on its consolidated financial statements of adopting these standards effective January 1,2007.

a)     *Comprehensive Income*

This standard provides guidance on the presentation of comprehensive income which is defined as the change in equity during aperiod from transactions and other events and circumstances from non-owner sources.  Comprehensive income is comprised of netincome and other comprehensive income.  Other comprehensive income includes certain gains and losses that are recognizedoutside of net income.

b)     *Financial Instruments – Recognition and Measurement*

This standard provides guidance for recognizing and measuring financial assets and financial liabilities which are to be valuedat fair value with certain limited exceptions.  The standard also provides guidance on the classification of gains and lossesinto net income or other comprehensive income.

c)      *Hedges*

This standard replaces existing hedge accounting guidance in CICA Handbook section 1650, Foreign Currency Translation, andaccounting guideline AcG-13, Hedging Relationships, and provides requirements for the designation, documentation and disclosure ofqualifying hedge relationships.

**4.**      **Business Acquisitions and Restructuring**

a)      Acquisitions

On July 3, 2003, the Company purchased 99.52% of the issued and outstanding Class A shares, 97.53% of the issued and outstandingClass B shares, 86.61% of the outstanding 8% convertible unsecured subordinated debentures and 87.2% of the outstanding 7.25%convertible unsecured subordinated debentures of Acier Leroux inc.   Acier Leroux is a metals service center operation withCanadian locations in Ontario, Quebec and the Atlantic provinces.  The Company issued 3,546,874 shares and paid $48,947,000 incash in consideration for the shares and $16,684,000 in cash in consideration for the tendered debentures.  In addition, theCompany entered into an arrangement with the former Chairman and Chief Executive Officer of Acier Leroux requiring payments over athree-year period in the amount of $1,350,000, which was accrued as a transaction cost.

On August 19, 2003, the Company, under the provisions of the *Companies Act* (Quebec), acquired the remaining shares ofAcier Leroux for $1,190,000 in cash.  On August 27, 2003, Acier Leroux redeemed the debentures not acquired in the offer.

The final net assets acquired, at assigned values, are as follows:
| *($000)*                                        |              |
|-------------------------------------------------|---------------------------------------|
|                                                 |
| Accounts receivable                             | $     74,572 |
| Inventories                                     | 82,880                                |
| Fixed assets                                    | 60,180                                |
| Other assets                                    | 2,122                                 |
| Goodwill                                        | 7,815                                 |
|                                                 |
| Total assets - continuing operations            | 227,569                               |
| Accounts payable and accrued liabilities        | (47,127)                              |
| Accrued pension and benefit liability           | (1,380)                               |
| Future income taxes                             | 11,057                                |
|                                                 |
| Net identifiable assets - continuing operations | 190,119                               |
| Discontinued operations                         | 7,481                                 |
|                                                 |
| Total net assets acquired, before debt assumed  | $   197,600            |
|                                                 |
| Financed by:                                    |              |
| Debt assumed, net of cash of $2.7 million       | $   123,956            |
| Cash consideration                              | 50,137                                |
| Russel Metals common shares - issued            | 19,969                                |
| Transaction costs, net of taxes                 | 3,538                                 |
|                                                 |
|                        | $   197,600            |
|                                                 |

Effective September 1, 2000, the Company purchased Triumph Tubular & Supply Ltd., a Calgary, Alberta, distributor of oilcountry tubular goods.  Under the purchase agreement, additional amounts under an earnout based on results could be paid overfive years and would be incremental to goodwill.  The final payment in this earnout arrangement of $1,390,000 was paid in2004.

These acquisitions were accounted for using the purchase method and their results of operations have been consolidated sincetheir respective acquisition dates.

The 2004 goodwill relating to Triumph Tubular & Supply Ltd. has been allocated to the energy tubular products segment. The remaining goodwill for 2004 and 2003 was allocated to the metals service centers segment.  The tax-deductible portion ofgoodwill is $nil.

The continuity of the carrying value of the goodwill is as follows:
| *($000)*                                                   |                                |
|------------------------------------------------------------|--------------------------------|
|                                                            |
| Balance December 31, 2003                                  | $    4,216 |
| Change in allocation of the purchase price of Acier Leroux | 3,599                          |
| Triumph Tubular earnout                                    | 1,390                          |
|                                                            |
| **Balance December 31, 2004 and 2005**                     | $    9,205 |
|                                                            |

b)      Restructuring

Restructuring of the Company's service center segment's operations as a result of acquisitions is charged to income asincurred.  Under certain conditions, restructuring relating to the acquired operation is included in the net assetsacquired.

In 2003, a restructuring charge of $3.6 million was recorded relating to the severance, employee benefits and termination costsdue to the closure of the Russel Metals' operations as a result of the acquisition of Acier Leroux.  These costs primarilyrelate to the closure of the Russel Metals' Lachine, Quebec location.  Operations ceased at Lachine on December 31, 2003, andthe vacant property along with the vacant Dartmouth property acquired in the Leroux acquisition were classified in Assets Held forSale in the first quarter of 2004.

During 2004, the Company sold its Dartmouth property for the book value of $2.2 million.  In 2004, the Company incurred arestructuring charge of $3.7 million related to the restructuring of the Russel Metals' locations as a result of the Acier Lerouxacquisition.  These costs primarily relate to the restructuring of the Ontario region and the on going costs associated withthe Lachine property.

In 2004, restructuring of $0.5 million (2003: $3.1 million) was charged to provisions provided for the restructuring of theBahcall locations as a result of the Williams Steel purchase in 2002.  The unutilized balance of $0.3 million relating to A.J.Forsyth was released to income in 2004.  Also, the additional restructuring relating to Bahcall of $0.2 million was charged toincome in 2004.  The restructuring of these operations as a result of acquisitions was completed in 2004.

On May 2, 2005, the Company sold its Lachine property, previously classified as an Asset Held for Sale, for net proceeds of $5.8million.  The resulting before tax gain of $2.9 million has been recorded in restructuring.

On September 2, 2005, the Company announced the closure of one of its Ontario branches.  The Company determined based on avaluation that the carrying amount of the property and equipment was greater than the fair value and recorded an impairment loss inthe third quarter of $1.3 million.  On December 31, 2005, the Company vacated the property and accordingly classified itscarrying value of $5.1 million as an Asset Held for Sale.  In addition, the Company provided for contractual termination costsof $0.5 million relating to the employees at this location.  At December 31, 2005, $0.2 million of these costs remained to bepaid.

In 2005, the Company recorded restructuring income of $361,000 relating to costs accrued as part of the fair value of AcierLeroux net assets acquired that were not required.  These costs primarily related to the resolution of matters relating toPoutrelles Delta (Note 5).

Restructuring was charged to income as follows:
| *($000)*                                                       | **2005**                           | 2004                                                                 | 2003                                                                 |
|----------------------------------------------------------------|------------------------------------|----------------------------------------------------------------------|----------------------------------------------------------------------|
|                                                                |
| Impairment loss on Ontario branch                              | **$    1,315** | $           - | $           - |
| Ontario branch severance and                                   |           |                                             |                                             |
|      other employee termination costs | **525**                            | -                                                                    | -                                                                    |
| Gain on Asset Held for Sale                                    | **(2,932)**                        | -                                                                    | -                                                                    |
| Acier Leroux restructuring                                     | **313**                            | 3,695                                                                | 3,583                                                                |
| Acier Leroux unutilized acquisition                            | **(361)**                          | -                                                                    | -                                                                    |
| Williams Steel acquisition                                     | **-**                              | 231                                                                  | -                                                                    |
| A.J. Forsyth acquisition                                       | **-**                              | (294)                                                                | -                                                                    |
|                                                                |
| Restructuring                                                  | **$   (1,140)**     | $    3,632                                       | $    3,583                                       |
|                                                                |

The continuity of the Acier Leroux restructuring provision is as follows:
|          | Special                                                                        | Contractual                                                   |                                                       |                                      |
|-----------------------------------|--------------------------------------------------------------------------------|---------------------------------------------------------------|--------------------------------------------------------------------------------|---------------------------------------------------------------|
|          | Termination                                                                    | Termination                                                   |                                                       |                                      |
| *($000)*                          | Benefits                                                                       | Costs                                                         | Other                                                                          | Total                                                         |
|                                   |
| Balance December 31, 2003         | $       228                                 | $    2,402                                | $       532                                 | $    3,162                                |
| Restructuring expensed in 2004    | -                                                                              | 783                                                           | 2,912                                                                          | 3,695                                                         |
| Cash payments                     | (198)                                                                          | (1,516)                                                       | (861)                                                                          | (2,575)                                                       |
| Non-cash changes to the provision | (30)                                                                           | (1,169)                                                       | (2,583)                                                                        | (3,782)                                                       |
|                                   |
| Balance December 31, 2004         | -                                                                              | 500                                                           | -                                                                              | 500                                                           |
| Restructuring expensed in 2005    | -                                                                              | (359)                                                         | 672                                                                            | 313                                                           |
| Cash payments                     | -                                                                              | (73)                                                          | (672)                                                                          | (745)                                                         |
|                                   |
| **Balance December 31, 2005**     | **$            -** | **$         68** | **$            -** | **$         68** |
|                                   |

Non-cash changes to the provision relate to the write down of fixed assets and changes in accrued employee benefitobligations.

c)      Goodwill Impairment

The Company completed its annual goodwill impairment tests, using projected discounted cash flows during the fourth quarter of2005 and 2004, resulting in no impairment charge.

In the fourth quarter of 2003, this evaluation concluded that the fair value associated with the service center segment'sWilliams Bahcall operation due to continuing operating losses could not support the carrying value of the goodwill, and,accordingly, the Company recorded a goodwill impairment charge of $2.4 million.

**5.**      **Discontinued Operations and Divestitures**

During 2005, the Company disposed of two operations acquired with the Acier Leroux acquisition.

On May 10, 2005, the Company sold its investment in Armabec Inc., a metals service center, for book value less selling costs ofapproximately $30,000.  In the second quarter of 2005, as a result of this divestiture, the Company classified Armabec Inc. asdiscontinued, and the revenue and results of operations for the period from January 1, 2005 to the date of sale and the comparativeyears ended December 31, 2004 and 2003 were reclassified to discontinued operations accordingly.  The revenue generated bythis operation for the period prior to sale was $1.0 million (2004:  $6.1 million; 2003: $3.2 million) and the pre-tax profitfor the period prior to sale was $5,000 (2004:  $0.4 million; 2003: $0.3 million).

On December 23, 2004, the Company received an offer pursuant to the Shareholders Agreement whereby the minority shareholderswould purchase the Company’s holdings of Poutrelles Delta Inc.  For the year ended December 31, 2004, the Companyclassified Poutrelles Delta as discontinued and recorded a loss to fair value of $0.6 million.  On February 23, 2005, theCompany sold its investment in Poutrelles Delta, for $4.1 million in cash.  The write-down to fair value at December 31, 2004resulted in no additional gain or loss upon sale.  The revenue and results of operations for Poutrelles Delta for the currentand prior periods was reclassified as discontinued.  The revenue generated by this operation for 2005 was $3.0 million(2004:  $25.9 million; 2003: $10.1 million) and pre-tax loss was $71,000 (2004:  $0.6 million; 2003: $nil).

During 2004, the Company disposed of two asset groups acquired with the Acier Leroux acquisition.

On May 14, 2004, the Company sold the inventory and certain fixed assets of the Dollard Steel operation for book value of $1.5million.

On July 30, 2004, the Company sold the inventory and fixed assets of its Plattsburgh, New York, operation for the book value ofUS$360,000.  As part of the acquisition of Acier Leroux, the Company had adopted a formal plan to dispose of their U.S.operations and classified them as discontinued.  All of the Leroux U.S. operations have been divested.  The Company hascertain residual obligations relating to these operations which are recorded as a discontinued operations liability of $2.4million.  The revenue generated by these operations prior to sale was $3.4 million (2003: $3.3 million) and the pre-tax losswas $0.3 million (2003: $0.8 million loss).

During the year ended December 31, 2004, the Company incurred an additional charge of $3.2 million, net of tax, relating tolong-term lease obligations and other environmental cleanup costs for operations classified as discontinued in 1995.

Basic and fully diluted loss per share from discontinued operations was $0.00 (2004:  $0.06; 2003: $0.01).

**6.**      **Property, Plant and Equipment**
| *($000)*                       | **2005**                 | 2004                                |
|--------------------------------|--------------------------|-------------------------------------|
|                                |
|       | **Cost**                 | **Net**                             | Cost | Net |
|                                |
| Land and buildings             | **$  132,768** | **$    96,482** | $  134,861 | $  101,497 |
| Machinery and equipment        | **193,512**              | **75,333**                          | 184,833 | 69,668 |
| Leasehold improvements         | **25,657**               | **10,026**                          | 24,547 | 9,490 |
|                                |
|       | **$  351,937** | **$  181,841**            | $  344,241 | $  180,655 |
|                                |

During the year ended December 31, 2005, the Company increased its probability-weighted undiscounted expected cash flow relatingto its asset retirement obligations by $1.3 million and the probability-weighted discounted expected cash flow by $0.3 millionprimarily as a result of an increase in the probabilities.  The probability range is 50% - 99% and the discount rate used was9%.  The asset retirement obligation, including applicable accretion at December 31, 2005, was $0.4 million (2004: $0.1million).

**7.**      **Revolving Credit Facilities**

On October 29, 2004, the Company entered into a credit facility with a syndicate of banks, which provides a line of credit to amaximum of $200 million, including letters of credit.  This three-year facility provides for annual extensions.  OnOctober 29, 2005, the Company extended the facility for an additional one-year period to October 29, 2008.  Borrowings underthis facility are restricted by certain financial covenants with which the Company was in compliance at December 31, 2005. The obligations of the Company under this agreement are secured by a pledge of trade accounts receivable and inventories of asignificant portion of the Company's operations.  At December 31, 2005, the Company had borrowings of $nil (2004: $13.0million) and letters of credit of $46.1 million (2004: $35.1 million) under this facility.  Deferred charges relating to theprevious bank facility of $0.5 million were charged to income in 2004.

In addition, certain U.S. subsidiaries of the Company have their own credit facility.  The maximum borrowing under thisfacility is US $45.0 million.  At December 31, 2005, these subsidiaries had US $nil borrowings (2004: US $nil) and letters ofcredit of US $30.6 million (2004: US $14.6 million) under this facility.

On February 25, 2005, the Company entered into an agreement with its banking syndicate to provide, in addition to existingfacilities, a $50 million bridge facility for a term of one year.  The provisions of the existing credit facilities, includingfinancial covenants therein, applied to the new bridge facility.  This bridge facility was repaid and cancelled in itsentirety on August 29, 2005.

**8.**      **Long-Term Debt**

The long-term debt is comprised of the following:
| *($000)*                                             | **2005**                 | 2004                 |
|------------------------------------------------------|--------------------------|----------------------|
|                                                      |
| 6.375% US$175 million Senior Notes due March 1, 2014 | **$  204,033** | $  210,630 |
|                                                      |

On February 20, 2004, the Company completed the issue of US$175 million of Senior Notes due March 1, 2014, bearing interest at6.375%.  The proceeds of this issue were used to redeem US$95.5 million of the 10% Senior Notes due June 1, 2009, including acall premium for 1.0725; the $30 million 8% Subordinated Debentures due June 15, 2006, and the $30 million Class II preferredshares during the first quarter of 2004.  The remaining US$20.l million of 10% Senior Notes were redeemed on June 1, 2004,including a call premium, for 1.05. The call premiums and deferred charges of $2.5 million relating to the redeemed debt werecharged to income in 2004.

The US$175 million Senior Notes are redeemable, in whole or in part, at the option of the Company on or after March 1, 2009 at103.188% of the principal amount declining rateably to 100% of the principal amount on or after March 1, 2012.  In addition,the senior notes are also redeemable, in whole, at the option of the Company at any time at 100% of the principal amount in theevent of certain changes affecting Canadian withholding taxes.  The Senior Notes contain certain restrictions on the paymentof common share dividends in excess of $0.08 per share per quarter.  The Company was in compliance with all debt covenants atDecember 31, 2005.

On February 20, 2004, the Company entered into fixed for fixed cross currency swaps with major banks to manage the foreigncurrency exposure on the last US$100 million of the 6.375% Senior Notes.  On the swaps, the Company receives U.S. denominatedinterest at 6.375% on a notional US$100 million and pays Canadian dollar interest at 7.12% on a notional $131.8 million.  Aspart of the swaps, the Company exchanged US$100 million for $131.8 million on February 20, 2004 and will receive US$100 million for$131.8 million on March 1, 2014.  Both the swap counterparties and the Company have the right to early terminate the swaps inthe first quarter of 2009.  On a monthly basis, the Senior Notes are recorded at month-end exchange rates and the differencebetween the swap rate of $1.3180 and the month-end rate on the US$100 million relating to the swap is recorded separately in OtherAssets or Other Accrued Liabilities.

**9.**      **Interest expense**
| *($000)*                       | **2005**                      | 2004                      | 2003                      |
|--------------------------------|-------------------------------|---------------------------|---------------------------|
|                                |
| Interest on long-term debt     | **$   15,184** | $   16,957 | $   18,820 |
| Other interest expense, net    | **2,345**                     | 3,067                     | 3,903                     |
|                                |
|       | **$   17,529** | $   20,024 | $   22,723 |
|                                |

Interest income on short-term investments is recorded as a reduction of short-term interest expense.  Total interest paidby the Company in 2005 was $17,732,000 (2004:  $20,071,000; 2003:  $21,746,000).

**10.**      **Income taxes**

a)      The non-current future income tax balances consist of:
| *($000)*                                                                    | **2005**                                                 | 2004                                                 |
|-----------------------------------------------------------------------------|----------------------------------------------------------|------------------------------------------------------|
|                                                                             |
| Future income tax assets                                                    |                                 |                             |
|      Tax benefits of loss carryforwards            | **$        771** | $        860 |
|      Plant and equipment                           | **(533)**                                                | (649)                                                |
|      Pensions and benefits                         | **999**                                                  | 981                                                  |
|      Other timing                                  | **1,624**                                                | 2,644                                                |
|                                                                             |
|      Gross future income tax assets                | **2,861**                                                | 3,836                                                |
|      Valuation allowance                           | **(1,867)**                                              | (2,222)                                              |
|                                                                             |
|      Total future income tax assets                | **994**                                                  | 1,614                                                |
|                                                                             |
| Future income tax liabilities                                               |                                 |                             |
|      Plant and equipment                           | **(6,175)**                                              | (5,137)                                              |
|      Pensions and benefits                         | **2,123**                                                | 2,399                                                |
|      Other timing                                  | **1,105**                                                | (2,250)                                              |
|      Unrealized foreign exchange charged to equity | **(2,338)**                                              | (1,843)                                              |
|                                                                             |
|      Total future income tax liabilities           | **(5,285)**                                              | (6,831)                                              |
|                                                                             |
| Net future income taxes                                                     | **$   (4,291)**                           | $   (5,217)                           |
|                                                                             |

b)     The Company's effective income tax rate is derived as follows:
|                          | **2005**   | 2004   | 2003  |
|---------------------------------------------------|------------|--------|-------|
|                                                   |
| Average combined statutory rate                   | **35.5%**  | 36.0%  | 37.0% |
| Rate difference of U.S. companies                 | **0.7%**   | 0.9%   | -     |
| Recognition of previously unrecorded tax benefits | **(1.3)%** | -      | -     |
| Statutory tax rate changes                        | **-**      | -      | 2.8%  |
| Large Corporation Tax                             | **-**      | -      | 0.6%  |
| Other                                             | **(2.3)%** | (0.1)% | 0.6%  |
|                                                   |
| Average effective tax rate                        | **32.6%**  | 36.8%  | 41.0% |
|                                                   |

c)      The details of the income tax provision are as follows:
| *($000)*                       | **2005**                            | 2004                 | 2003                            |
|--------------------------------|-------------------------------------|----------------------|---------------------------------|
|                                |
| Current provision              | **$    54,069** | $  100,225 | $    13,664 |
| Future provision               | **6,305**                           | 5,043                | (1,314)                         |
| Statutory rate adjustments     | **-**                               | -                    | 900                             |
|                                |
|       | **$    60,374** | $  105,268 | $    13,250 |
|                                |

d)     Income taxes paid in 2005 were $110,388,000 (2004:  $47,311,000; 2003: $7,777,000).

e)      The Company has Canadian net operating losses carried forward for tax purposes for which avaluation allowance has been recorded that expire as follows:
| *($000)*                       | **Year of Expiry** | **Amount**                               |
|--------------------------------|--------------------|------------------------------------------|
|                                |
|       | 2006               | $      543 |
|       | 2007               | 745                                      |
|       | 2008               | 507                                      |
|       | 2009               | 4                                        |
|       | 2010               | 263                                      |
|       | 2011               | 145                                      |
|       | 2012               | 4                                        |
|                                |

**11.**      **Shareholders' Equity**

a)     The components of shareholders' equity are as follows:
| *($000)*                                                   | **2005**                      | 2004                 |
|------------------------------------------------------------|-------------------------------|----------------------|
|                                                            |
| Common shares                                              | **$**   **208,139** | $  203,090 |
| Retained earnings                                          | **342,015**                   | 262,733              |
| Contributed surplus (relating to stock-based compensation) | **1,091**                     | 446                  |
| Cumulative translation adjustment                          | **(12,548)**                  | (9,695)              |
|                                                            |
|                                   | **$  538,697**      | $  456,574 |
|                                                            |

b)     At December 31, 2005, the authorized share capital of the Company consists of:

         (i)     an unlimited number of common shareswithout nominal or par value;

         (ii)    an unlimited number of Class I preferredshares without nominal or par value, issuable in                  series; and

         (iii)   an unlimited number of Class II preferred shareswithout nominal or par value, issuable in                   series.

The Directors have the authority to issue the Class I and Class II preferred shares in series and fix the designation, rights,privileges and conditions to be attached to each series, except that the Class I shares shall be entitled to preference over theClass II shares with respect to the payment of dividends and the distribution of assets in the event of liquidation, dissolution orwinding-up of the Company.

The Company's 1,200,000 cumulative, redeemable Class II preferred shares were redeemed on March 22, 2004 (Note 8).

c)     The number of common shares issued and outstanding at December 31 was as follows:
|       | **Number of**  | **Amount**                     |
|--------------------------------|----------------|--------------------------------|
|       | **Shares**     | **($000)**                     |
|                                |
| Balance, December 31, 2003     | 43,023,342     | $   147,981     |
| Common shares issued           | 5,750,000      | 49,240                         |
| Stock options exercised        | 1,114,317      | 5,869                          |
|                                |
| Balance, December 31, 2004     | 49,887,659     | 203,090                        |
| Stock options exercised        | 768,350        | 5,049                          |
|                                |
| **Balance, December 31, 2005** | **50,656,009** | **$   208,139** |
|                                |

d)     The Company has a shareholder-approved share option plan, the purpose of which is to provide thedirectors and employees of the Company and its subsidiaries with the opportunity to participate in the growth and development ofthe Company.  The number of common shares that may be issued under the share option plan is 5% of the current issued andoutstanding common shares.  The options are exercisable on a cumulative basis to the extent of 20% per year of total optionsgranted, except that under certain specified conditions the options become exercisable immediately.  The consideration paid byemployees for purchase of common shares is added to share capital.

The following is a continuity of options outstanding:
|       |       | **Weighted Average** |
|--------------------------------|--------------------------------|----------------------|
|       | **Number of Options**          | **Exercise Price**   |
|                                |
|       | **2005**                       | 2004                 | **2005** | 2004 |
|                                |
| Balance, beginning of the year | **1,793,816**                  | 2,031,133            | **$   6.52** | $   4.40 |
| Granted                        | **856,000**                    | 888,500              | **15.85** | 9.15 |
| Exercised                      | **(768,350)**                  | (1,114,317)          | **5.71** | 4.76 |
| Expired and forfeited          | **(12,000)**                   | (11,500)             | **6.75** | 4.03 |
|                                |
| Balance, end of the year       | **1,869,466**                  | 1,793,816            | **$ 11.12** | $   6.52 |
|                                |
| Exercisable                    | **275,666**                    | 327,216              | **$ 11.87** | $   5.45 |
|                                |

The outstanding options have an exercise price range as follows:
| *(number of options)*                 | **2005**      | 2004      |
|---------------------------------------|---------------|-----------|
|                                       |
| $15.85                                | **852,800**   | -         |
| $  9.15                     | **553,600**   | 776,050   |
| $  5.50 - $  9.14 | **-**         | 27,000    |
| $  4.50 - $  5.49 | **335,066**   | 567,766   |
| $  3.00 - $  4.49 | **128,000**   | 423,000   |
|                                       |
| Options outstanding                   | **1,869,466** | 1,793,816 |
|                                       |

The options expire in the years 2007 to 2015 and have a weighted average remaining contractual life of 8.2 years (2004: 7.8years).

The Black-Scholes option-pricing model assumptions used to compute compensation expense under the fair value-based method are asfollows:
|                       | **2005**         | 2004         | 2003         |
|------------------------------------------------|------------------|--------------|--------------|
|                                                |
| Dividend yield                                 | **5.0%**         | 5.0%         | 5.0%         |
| Expected volatility                            | **25.3%**        | 28.5%        | 34.6%        |
| Expected life                                  | **7 yrs**        | 7 yrs        | 7 yrs        |
| Risk free rate of return                       | **5.0%**         | 5.0%         | 5.0%         |
| Weighted average fair value of options granted | **$  2.93** | $  1.89 | $  1.30 |
|                                                |

e)     The Company has established a Deferred Share Unit (DSU) plan for its directors.  A DSUentitles the holder to receive, upon redemption, a cash payment equivalent to the market value of a common share at the redemptiondate.  DSUs are credited to the director accounts on a quarterly basis and vest immediately.  At December 31, 2005, therewere 18,024 DSUs outstanding (2004: 7,775).

f)     Total compensation cost for stock-based compensation is as follows:
| *($000)*                       | **2005**               | 2004                               | 2003                               |
|--------------------------------|------------------------|------------------------------------|------------------------------------|
|                                |
| Stock options                  | **$  1,309** | $     804 | $     217 |
| DSUs                           | **274**                | 120                                | -                                  |
|                                |
|       | **$  1,583** | $     924 | $     217 |
|                                |

g)     Diluted share amounts were computed as follows:
| *(number of shares)*                        | **2005**       | 2004       | 2003       |
|---------------------------------------------|----------------|------------|------------|
|                                             |
| Weighted average shares outstanding         | **50,461,330** | 48,671,915 | 40,021,479 |
| Dilution impact of stock options            | **1,070,367**  | 1,114,227  | 1,981,324  |
|                                             |
| Diluted weighted average shares outstanding | **51,531,697** | 49,786,142 | 42,002,803 |
|                                             |

**12.**      **Financial Instruments**

a)     *Fair value*

The fair value of long-term debt as at December 31, 2005 and 2004 is estimated based on the last quoted trade price, where theyexist, or on the current rates available to the Company for similar debt of the same remaining maturities.
| *($000)*                                      | **2005**                       | 2004                           |
|-----------------------------------------------|--------------------------------|--------------------------------|
|                                               |
| Long-term debt                                |       |       |
|      Carrying amount | **$  204,033**       | $  210,630           |
|      Fair value      | **$  197,912**       | $  212,736           |
|                                               |

On February 20, 2004, the Company entered into fixed for fixed cross currency swaps with major banks (Note 8).  At December31, 2005, the fair value of the liability relating to these swaps was $29.8 million (2004:  $19.4 million).  The changein the spot foreign exchange rate on the swaps of $15.2 million (2004:  $11.4 million) is recorded as an Other AccruedLiability.  At December 31, 2005 and 2004, the Company had forward exchange contracts outstanding whose fair valueapproximates their contract value.

As at December 31, 2005 and 2004, the estimated fair value of other financial assets, liabilities and off balance sheetinstruments approximates their carrying values.

b)     *Credit risk*

The Company, in the normal course of business, is exposed to credit risk relating to accounts receivable from itscustomers.  This risk is mitigated by the fact that its customer base is geographically diverse and in differentindustries.  The Company is also exposed to credit risk from the potential default by any of its counterparties on its foreignexchange forward contracts and the fixed for fixed cross currency swaps.  The Company mitigates this risk by entering intoforward contracts  and swaps with members of the credit facility syndicate.

c)     *Interest rate risk*

The Company is not exposed to significant interest rate risk.  The Company's long-term debt is at fixed rates.  TheCompany's bank debt that is used to finance working capital, which is short-term in nature, is at floating interest rates.

d)     *Foreign exchange risk*

The Company uses foreign exchange contracts with maturities of less than a year to manage foreign exchange risk on certainfuture committed cash outflows.  As at December 31, 2005, the Company had outstanding forward foreign exchange contracts inthe amounts of US $58.7 million and € 2.9 million, maturing in the first half of 2006 (2004: US $27.6 million and €nil).  The foreign exchange gain on U.S. denominated financial assets and liabilities included in 2005 operating earnings fromcontinuing operations was $1.6 million (2004: $2.3 million; 2003: $881,000).

The Company has designated US $75 million of the Senior Notes as a hedge of its net investment in foreign subsidiaries. The exchange gains and losses on U.S. borrowings not designated as a hedge of its net investment or hedged by the fixed for fixedcross currency swaps are charged to income as incurred.  The hedge designation resulted in no net foreign exchange gain orloss recognized in income in 2005 (2004: $nil; 2003: $348,000).

**13.**      **Segmented Information**

The Company conducts business primarily in three metals business segments.

         i)      Metals service centers

         The Company's network of metals service centers provides processing anddistribution services         on a broad line of metal products in a wide range of sizes, shapes andspecifications, including         carbon hot rolled and cold finished steel, pipe and tubular products,stainless steel and         aluminum.  The Company services all major geographic regions of Canadaand certain regions         in the Midwestern United States.

         ii)      Energy tubular products

         The Company's energy tubular products operations distribute oil countrytubular products, line         pipe, tubes, valves and fittings, primarily to the energy sector in WesternCanada and the         Western United States.

         iii)      Steel distributors

         The Company's steel distributors act as master distributors selling steelto customers in large         volumes, mainly on an "as is" basis.  The steel distributors sourcetheir steel domestically and         off shore.

The Company has segmented its operations on the basis of type of customer, management reporting and geographic segments in whichit operates.  The inter-segment sales from steel distributors to metals service centers were $57.4 million (2004: $54.4million; 2003: $33.8 million).  These sales, which are at market rates, are eliminated in the table following.

a)     **Results by business segment:**
| *($000)*                                                           | **2005**                                                  | 2004                                              | 2003                                              |
|--------------------------------------------------------------------|-----------------------------------------------------------|---------------------------------------------------|---------------------------------------------------|
|                                                                    |
| **Segment Revenues**                                               |                                  |                          |                          |
| Metals service centers                                             | **$  1,539,673**                                | $  1,532,048                            | $     909,502            |
| Energy tubular products                                            | **595,215**                                               | 395,296                                           | 297,532                                           |
| Steel distributors                                                 | **468,720**                                               | 471,205                                           | 283,579                                           |
|                                                                    |
|                                           | **2,603,608**                                             | 2,398,549                                         | 1,490,613                                         |
| Other                                                              | **11,638**                                                | 13,953                                            | 13,201                                            |
|                                                                    |
|                                           | **$  2,615,246**                                | $  2,412,502                            | $  1,503,814                            |
|                                                                    |
| **Segment Operating Profits**                                      |                                  |                          |                          |
| Metals service centers                                             | **$     115,218**                | $     209,413            | $       37,567 |
| Energy tubular products                                            | **53,977**                                                | 47,200                                            | 13,764                                            |
| Steel distributors                                                 | **46,575**                                                | 78,189                                            | 13,380                                            |
|                                                                    |
|                                           | **215,770**                                               | 334,802                                           | 64,711                                            |
| Other income                                                       | **2,385**                                                 | 4,565                                             | 4,002                                             |
| Corporate expenses                                                 | **(16,614)**                                              | (16,256)                                          | (8,018)                                           |
|                                                                    |
|                                           | **$     201,541**                | $     323,111            | $       60,695 |
|                                                                    |
| **Capital Expenditures**                                           |                                  |                          |                          |
| Metals service centers                                             | **$****       23,612** | $       24,390 | $       33,466 |
| Energy tubular products                                            | **1,436**                                                 | 758                                               | 1,032                                             |
| Steel distributors                                                 | **188**                                                   | 71                                                | 77                                                |
| Other                                                              | **1,227**                                                 | 175                                               | 304                                               |
|                                                                    |
|                                           | **$       ****26,463** | $       25,394 | $       34,879 |
|                                                                    |
| **Depreciation Expense**                                           |                                  |                          |                          |
| Metals service centers                                             | **$       15,049**     | $       14,817 | $       12,575 |
| Energy tubular products                                            | **981**                                                   | 1,108                                             | 1,126                                             |
| Steel distributors                                                 | **428**                                                   | 463                                               | 529                                               |
| Other                                                              | **1,245**                                                 | 938                                               | 910                                               |
|                                                                    |
|                                           | **$       17,703**     | $       17,326 | $       15,140 |
|                                                                    |
| **Identifiable Assets**                                            |                                  |                          |                          |
| Metals service centers                                             | **$     583,827**                | $     662,422            | $     501,433            |
| Energy tubular products                                            | **280,968**                                               | 228,325                                           | 144,809                                           |
| Steel distributors                                                 | **138,119**                                               | 192,383                                           | 71,436                                            |
|                                                                    |
| Identifiable assets by segment                                     | **1,002,914**                                             | 1,083,130                                         | 717,678                                           |
|                                           |                                  |                          |                          |
| Assets not included in segments                                    |                                  |                          |                          |
|      Cash                                 | **47,055**                                                | 634                                               | 19,008                                            |
|      Income tax assets                    | **1,298**                                                 | 7,610                                             | 16,370                                            |
|      Deferred financing charges           | **7,240**                                                 | 8,357                                             | 3,547                                             |
|      Other assets                         | **2,821**                                                 | 2,566                                             | 2,840                                             |
|      Corporate and other operating assets | **33,855**                                                | 44,184                                            | 31,176                                            |
|                                                                    |
| Total assets                                                       | **$  1,095,183**                                | $  1,146,481                            | $      790,619      |
|                                                                    |

b)     **Results by geographic segment:**
| *($000)*                       | **2005**                                   | 2004                                   | 2003                                              |
|--------------------------------|--------------------------------------------|----------------------------------------|---------------------------------------------------|
|                                |
| **Segment Revenues**           |                   |               |                          |
| Canada                         | **$  1,984,968**                 | $  1,770,290                 | $  1,124,630                            |
| United States                  | **618,640**                                | 628,259                                | 365,983                                           |
|                                |
|       | **$  2,603,608**                 | $  2,398,549                 | $  1,490,613                            |
|                                |
| **Segment Operating Profits**  |                   |               |                          |
| Canada                         | **$     161,313** | $     232,512 | $       55,448 |
| United States                  | **54,457**                                 | 102,290                                | 9,263                                             |
|                                |
|       | **$     215,770** | $     334,802 | $       64,711 |
|                                |
| **Identifiable Assets**        |                   |               |                          |
| Canada                         | **$     839,401** | $     903,019 | $     580,955            |
| United States                  | **163,513**                                | 180,111                                | 136,723                                           |
|                                |
|       | **$  1,002,914**                 | $  1,083,130                 | $     717,678            |
|                                |

**14.**      **Pensions and Benefits**

a)      The Company maintains defined benefit pension plans, post-retirement benefit plans and definedcontribution pension plans in Canada and 401(k) defined contribution pension plans in the United States.  Actuarial valuationsare performed on defined benefit plans every three years or earlier if required.  Three of the Company's plans were valued atDecember 31, 2005, eight of the Company's plans were valued at December 31, 2004, one plan was valued November 1, 2004, and fourplans were valued at January 1, 2004.  All of the Company's pension plans have a measurement date of December 31, 2005.

The components of the Company's pension and benefit expense include the following:
| *($000)*                                                          | **2005**                                 | 2004                                 | 2003                                 |
|-------------------------------------------------------------------|------------------------------------------|--------------------------------------|--------------------------------------|
|                                                                   |
| Defined benefit pension plans                                     |                 |             |             |
|      Benefits earned during the year     | **$     1,761** | $     1,505 | $     1,538 |
|      Interest cost on benefit obligation | **4,476**                                | 4,166                                | 3,825                                |
|      Expected return on plan assets      | **(4,191)**                              | (3,952)                              | (3,353)                              |
|      Curtailment loss                    | **-**                                    | 81                                   | 225                                  |
|      Settlement loss                     | **-**                                    | 225                                  | 648                                  |
|      Other                               | **325**                                  | 334                                  | 170                                  |
|                                                                   |
|                                          | **2,371**                                | 2,359                                | 3,053                                |
| Post-retirement benefits                                          | **376**                                  | 12                                   | 112                                  |
| Defined contribution plans                                        | **     **       |             |             |
|      Paid during the year                | **792**                                  | 808                                  | 794                                  |
|                                                                   |
|                                          | **3,539**                                | 3,179                                | 3,959                                |
| Related to discontinued operations                                | **(244)**                                | (230)                                | (462)                                |
|                                                                   |
| Pension and benefit expense                                       | **$     3,295** | $     2,949 | $     3,497 |
|                                                                   |

The actuarial determinations were based on the following assumptions in each year:
|                         | **2005** | 2004 | 2003 |
|--------------------------------------------------|----------|------|------|
|                                                  |
| Assumed discount rate - year end                 | **5.0%** | 6.0% | 6.5% |
| Expected long-term rate of return on plan assets | **7.0%** | 7.0% | 7.0% |
| Rate of increase in future compensation          | **4.0%** | 4.0% | 4.0% |
| Rate of increase in future government benefits   | **3.5%** | 3.5% | 3.5% |
|                                                  |

The health care cost trend rates used were 5% for dental and 10% (2004: 8%; 2003: 9%) graded out for medical, which is reduced1% per year until 5% and 5% thereafter.  A 1% change in trend rates would result in an increase in the accrued benefitobligation for post-retirement benefits of $742,000 or a decrease of $633,000 and an increase in net periodic cost of $45,000 or adecrease of $38,000.

b)      The following information pertains to the Company's defined benefit pension and other benefitplans, excluding those which are in the process of being wound up.
|                           | **Pension Plans**                    | **Other Benefit Plans**              |
|----------------------------------------------------|--------------------------------------|--------------------------------------|
| *($000)*                                           | **2005**                             | 2004                                 | **2005** | 2004 |
|                                                    |
| **Reconciliation of accrued benefit obligation**   | **     **   |             | **     ** |       |
| Balance, beginning of the year                     | **$   74,256**        | $   64,159            | **$     6,390** | $      5,643 |
| Current service cost                               | **1,761**                            | 1,505                                | **-** | 8 |
| Participant contribution                           | **317**                              | 327                                  | **-** | - |
| Interest cost                                      | **4,476**                            | 4,166                                | **371** | 355 |
| Benefits paid                                      | **(5,434)**                          | (3,347)                              | **(396)** | (377) |
| Plan amendments                                    | **590**                              | 312                                  | **-** | - |
| Corporate restructuring giving rise to curtailment | **-**                                | 81                                   | **-** | (348) |
| Actuarial loss                                     | **11,881**                           | 7,053                                | **507** | 1,109 |
|                                                    |
| Balance, end of the year                           | **$   87,847**        | $   74,256            | **$     6,872** | $      6,390 |
|                                                    |
| **Reconciliation of fair value of plan assets**    | **     **   |             | **     ** |       |
| Balance, beginning of the year                     | **$   59,832**        | $   56,335            | **$             -** | $             - |
| Actual return of plan assets                       | **7,982**                            | 3,156                                | **-** | - |
| Employer contributions                             | **3,549**                            | 3,361                                | **396** | 377 |
| Employee contributions                             | **317**                              | 327                                  | **-** | - |
| Benefits paid                                      | **(5,434)**                          | (3,347)                              | **(396)** | (377) |
|                                                    |
| Balance, end of the year                           | **$   66,246**        | $     9,832 | **$             -** | $             - |
|                                                    |
| **Unamortized amounts**                            | **     **   | **     **   | **     ** | **     ** |
| Funded status - (deficit)                          | **$  (21,601)**            | $  (14,424)                | **$    (6,872)** | $    (6,390) |
| Unrecognized prior service cost                    | **851**                              | 315                                  | **-** | - |
| Unamortized net actuarial loss                     | **17,531**                           | 9,713                                | **1,142** | 640 |
|                                                    |
| Accrued benefit liability                          | **$    (3,219)** | $    (4,396)     | **$    (5,730)** | $    (5,750) |
|                                                    |

As at December 31, 2005, all the plans in the above table had an unfunded obligation.  On December 31, 2004, one of theCompany's pension plans, included in the previous table, had a projected benefit obligation of $9.3 million, a fair value of planassets of $9.5 million and a surplus of $0.2 million.  At December 31, 2004, the remaining plans had an unfundedobligation.  The closure of Lachine (see Note 4) resulted in a partial settlement and curtailment of one of the Company'splans.

In 2003, the Company acquired two pension plans as part of the Acier Leroux acquisition.  These plans had assets of $4.2million and an accrued benefit obligation of $5.6 million as of the acquisition date.  The deficit in the plan of $1.4 millionwas included in the net assets acquired in the Leroux acquisition.

The other benefit plans represent obligations to retired employees of sold or closed businesses.  No active employees areentitled to post retirement benefits.
| *($000)*                                        | **2005**                                 | 2004                                 |
|-------------------------------------------------|------------------------------------------|--------------------------------------|
|                                                 |
| **Defined contribution plans**                  |                 |             |
| Fair value of plan assets                       |                 |             |
|      Canadian plans    | **$     6,523** | $     5,598 |
|      401(k) U.S. plans | **22,916**                               | 19,149                               |
|                                                 |
|                        | **$   29,439**            | $   24,747            |
|                                                 |

The Company has a number of plans in the process of being wound up that relate to previously discontinued operations with nofurther benefit obligation.  The resolution of the surplus may result in sharing arrangements with employees of thoseoperations.  The fair value of the plan assets and surplus at December 31, 2005 is $2.8 million (2004: $2.7 million).

c)     As at December 31, 2005, approximately 43% of all pension plan assets were invested in equities,30% in fixed income securities, and 27% in cash and cash equivalents.  The expected return on plan assets is based on the fairvalue of plan assets.  Management endeavours to have an asset mix of approximately 55% in equities, 40% in fixed incomesecurities and 5% in cash and cash equivalents.  The investment policy allows up to 30% in cash and cash equivalents. The volatility of the markets has caused management to invest a correspondingly greater percentage of the pension plan assets incash and cash equivalents.  The plan assets are not invested in either derivatives or real estate assets.

The expected annual benefits to be paid from the plans are as follows:
|       | Pension                              | Other                                                |              |
|--------------------------------|--------------------------------------|------------------------------------------------------|---------------------------------------|
| *($000)*                       | Plans                                | Benefit Plans                                        | Total                                 |
|                                |
| 2006                           | $     4,079 | $        352 | $      4,431 |
| 2007                           | 3,605                                | 376                                                  | 3,981                                 |
| 2008                           | 3,762                                | 399                                                  | 4,161                                 |
| 2009                           | 3,939                                | 422                                                  | 4,361                                 |
| 2010                           | 4,158                                | 442                                                  | 4,600                                 |
| 2011 - 2015                    | 25,064                               | 2,438                                                | 27,502                                |
|                                |

As a result of a recent court decision, the Company may be subject to a surplus sharing arrangement on one of its pension plansas a result of a partial plan windup.  The timing and the amount of surplus subject to sharing is currently being reviewed bythe Company.

The elements of defined benefit costs recognized in the year are as follows:
| *($000)*                                                                  | **2005**                       | 2004                           |
|---------------------------------------------------------------------------|--------------------------------|--------------------------------|
|                                                                           |
| Current service costs                                                     | **$   1,761**   | $   1,513       |
| Interest on accrued benefit obligation                                    | **4,847**                      | 4,521                          |
| Actual return on assets                                                   | **(7,982)**                    | (3,156)                        |
| Actuarial loss on accrued benefit obligation                              | **12,389**                     | 5,277                          |
| Curtailment                                                               | **-**                          | (267)                          |
| Settlement                                                                | **-**                          | 225                            |
| Prior service costs                                                       | **590**                        | 312                            |
|                                                                           |
| Elements of future benefit costs                                          | **11,605**                     | 8,425                          |
| Adjustments to recognize the long-term                                    |       |       |
|      nature of employee benefit costs:           |       |       |
|    Difference between expected and actual return on assets | **3,791**                      | (796)                          |
|    Difference between actuarial losses recognized and      |       |       |
|      actuarial losses incurred                   | **(12,113)**                   | (5,206)                        |
|    Difference between prior service costs recognized and   |       |       |
|      prior service costs incurred.               | **(536)**                      | (52)                           |
|                                                                           |
| **Defined benefit cost recognized**                                       | **$   2,747**   | $   2,371       |
|                                                                           |

**15.**      **Contingencies, Guarantees and Commitments**

a)     The Company and certain of its subsidiaries have been named defendants in a number of legalactions. Although the outcome of these claims cannot be determined, management intends to defend all claims and has recordedprovisions based on its best estimate of the potential losses.  In the opinion of management the resolution of these mattersis not expected to have a materially adverse effect on the Company's financial position, cash flows or operations.

b)     The Company and its subsidiary companies have operating lease commitments, with varying terms,requiring approximate annual payments as follows:  2006: $10.2 million; 2007: $8.5 million; 2008: $6.2 million; 2009: $5.6million ; 2010: $4.6 million; 2011 and beyond: $7.5 million.  Rental expense on operating leases was as follows: 2005:  $11.1 million, 2004:  $13.6 million and 2003: $10.1 million.

c)     The Company is incurring site cleanup and restoration costs related to properties not utilizedin current operations.  Remedial actions are currently underway at three sites.  The estimated costs of these cleanupshave been provided for based on management's best estimates.  Additional costs may be incurred at these or other sites as sitecleanup and restoration progress, but the amounts cannot be quantified at this time.

d)     The Company has also entered into other agreements that provide indemnifications tocounterparties in certain transactions including underwriting agreements.  These indemnifications generally require theCompany to indemnify the counterparties for costs incurred as a result of losses from litigation that may be suffered bycounterparties arising from those transactions.  The Company does not expect to make a payment on these indemnifications and,accordingly, no liability has been accrued.

**16.**      **United States Generally Accepted Accounting Principles**

The following table represents the differences between Canadian and U.S. Generally Accepted Accounting Principles (GAAP):
| *($000)*                                                                       | **2005**                                                  | 2004                                                  | 2003                                             |
|--------------------------------------------------------------------------------|-----------------------------------------------------------|-------------------------------------------------------|--------------------------------------------------|
|                                                                                |
| Net earnings for the year under Canadian GAAP                                  | **$  124,716**                                  | $  177,846                                  | $    18,499                  |
| Amortization of transitional obligation - pensions                             | **(561)**                                                 | (561)                                                 | (561)                                            |
|                                                                                |
| Net earnings - U.S. GAAP                                                       | **124,155**                                               | 177,285                                               | 17,938                                           |
| Change in other comprehensive income items:                                    |                                  |                              |                         |
|      Currency translation adjustment, net of tax      | **(2,853)**                                               | (4,862)                                               | 909                                              |
|      Fair value of derivatives, net of tax            | **(4,136)**                                               | (5,196)                                               | -                                                |
|      Unrealized gain in available for sale securities | **-**                                                     | (262)                                                 | 262                                              |
|      Minimum pension liability, net of tax            | **(3,758)**                                               | (599)                                                 | 1,395                                            |
|                                                                                |
| Comprehensive earnings - U.S. GAAP                                             | **$  113,408**                                  | $  166,366                                  | $    20,504                  |
|                                                                                |
| Opening retained earnings and comprehensive earnings                           |                                  |                              |                         |
|      - U.S. GAAP                                      | **$  249,650**                                  | $  108,899                                  | $  102,250                             |
| Dividends on common shares                                                     | **(45,434)**                                              | (25,004)                                              | (11,605)                                         |
| Dividends on preferred shares                                                  | **-**                                                     | (611)                                                 | (2,250)                                          |
| Comprehensive earnings - U.S. GAAP                                             | **113,408**                                               | 166,366                                               | 20,504                                           |
|                                                                                |
| Closing retained earnings and comprehensive earnings                           |                                  |                              |                         |
|      - U.S. GAAP                                      | **317,624**                                               | 249,650                                               | 108,899                                          |
| Common shares                                                                  | **208,139**                                               | 203,090                                               | 147,981                                          |
| Contributed surplus                                                            | **1,091**                                                 | 446                                                   | 192                                              |
|                                                                                |
| Shareholders' equity - U.S. GAAP                                               | **$  526,854**                                  | $  453,186                                  | $  257,072                             |
|                                                                                |
| Basic earnings per common share - U.S. GAAP                                    | **     **                        |                              |                         |
|      - continuing operations                          | **$        2.46** | $        3.68 | $        0.41 |
|                                                                                |
| Fully diluted earnings per common share - U.S. GAAP                            |                                  |                              |                         |
|      - continuing operations                          | **$        2.41** | $        3.60 | $       0.39  |
|                                                                                |
| Basic earnings per common share - U.S. GAAP                                    | **$        2.46** | $        3.63 | $       0.39  |
|                                                                                |
| Fully diluted earnings per common share - U.S. GAAP                            | **$        2.41** | $        3.55 | $       0.37  |
|                                                                                |

a)     In 1999, for Canadian GAAP purposes, the Company retroactively adopted CICA Handbook section3461, Employee Future Benefits, and recorded a cumulative charge to retained earnings in connection with the re-measurement of itspension obligations.  Under U.S. GAAP, an actuarial loss was recognized upon the re-measurement of the pension obligations,which is being amortized to net income using the corridor approach, over the expected average service lives of the employeegroup.  In addition, the U.S. standard requires the recognition of an additional minimum pension liability.  Five of theCompany's plans and one executive arrangement have a minimum liability, which has been charged to other comprehensive income underU.S. GAAP.

b)      Other cumulative comprehensive income also includes changes in the cumulative translationaccount, which represents a reduction in the Company's shareholders' equity and represents unrealized translation adjustments thatarise on the translation to Canadian dollars of U.S. denominated assets and liabilities.  The Company has designated certainU.S. denominated debt as a hedge of its net investment in these U.S. subsidiaries (Note 12).  The change in the cumulativeexchange account relating to debt designated as a hedge of the Company's net investment in its foreign subsidiaries is a gain of$2.8 million in 2005 (2004 gain: $14.1 million; 2003 gain: $25.1 million).  Under Canadian GAAP, these amounts are included inthe cumulative translation adjustment component of shareholders' equity.

Under Canadian GAAP, certain financial instruments qualify as a hedge for accounting purposes and therefore any gains and losseson these contracts are recognized in income when the hedged item affects earnings.  Under U.S. GAAP, all derivativeinstruments must be recognized on the balance sheet at fair value.  The Company has designated its fixed for fixed crosscurrency swaps and other forward contracts as hedges.  The effective portion of the changes in fair value of these instrumentsis accumulated in other comprehensive income and is released from other comprehensive income when the hedged item affectsearnings.  As at December 31, 2005, the fair value of the fixed for fixed swaps not included in Other Accrued Liabilities was$14.6 million (2004: $8.0 million) net of tax of $4.5 million (2004: $2.8 million).  As at December 31, 2005, the fair valueof the forward contracts, net of tax, was $0.1 million (2004: $nil).

c)     As at December 31, 2003, the Company had certain available-for-sale securities that are recordedat the lower of cost or market for Canadian accounting standards and marked to market through other comprehensive income in theamount of $262,000, net of tax of $141,000 as required by U.S. standards.  These securities were sold in 2004.

d)     In March 2005, the FASB issued FIN 47, Accounting for Conditional Asset Retirement Obligations,an interpretation of FASB Statement No. 143 (FIN 47), which requires an entity to recognize a liability for the fair value of aconditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated.  FIN 47 wasadopted by the Company during the year.  The adoption of this standard did not have a material effect on the Company's resultsof operations, financial position or cash flows.

e)     During 2004, the Company adopted FASB FIN 46, Consolidation of Variable Interest Entities. The adoption of this standard did not have a material effect on the Company's results of operations, financial position or cashflows.

f)     During 2003, the Company adopted SFAS 143, Accounting for Asset Retirement Obligations; SFAS144, Accounting for the Impairment or Disposal of Long-Lived Assets; SFAS 148, Accounting for Stock-based Compensation, Transitionand Disclosure; and EITF 02-16, Accounting by a Customer for Certain Consideration Received from a Vendor.  The implementationof these standards did not differ materially from the corresponding Canadian standards except that the Company adopted the CanadianAsset Retirement Obligation standard January 1, 2004.

g)     In December 2004, FASB issued Statement of Financial Accounting Standards (SFAS) No. 123(revised 2004).  Share-Based Payments, or SFAS 123R.  SFAS 123R applies to all awards granted after the requiredeffective date and to awards modified, repurchased, or cancelled after that date.  SFAS 123R will be effective in theCompany's fiscal year ending December 31, 2006.  In March 2005, the SEC Staff issued Staff Accounting Bulletin No. 107 (SAB107) to give guidance on the implementation of SFAS 123R.  The Company utilizes the fair value-based approach to account forstock-based compensation and is currently evaluating the impact of these standards on the Company's consolidated financialstatements.