UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 20-F

 [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                                       OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
               OF 1934 For the fiscal year ended December 31, 2005

                                       OR

    [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
              For the transition period from _________ to ________

                                       OR

   [ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
        Date of event requiring this shell company report _______________

                        Commission file number: 333-9410

                                  MARSULEX INC.
             (Exact name of Registrant as specified in its charter)

                                     Canada
                 (Jurisdiction of incorporation or organization)

       111 Gordon Baker Road, Suite 300, Toronto, Ontario, Canada M2H 3R1
                    (Address of principal executive offices)

 Securities registered or to be registered pursuant to Section 12(b) of the Act:
                                      None

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

 Securities for which there is a reporting obligation pursuant to Section 15(d)
                                  of the Act.

   9 5/8% Senior Subordinated Notes Due 2008 (the "Senior Subordinated Notes")

As of December 31, 2005, the number of outstanding common shares was: 32,409,898

        Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
                             Yes [ ]         No [X]
 If this report is an annual or transition report, indicate by check mark if the
  registrant is not required to file reports pursuant to Section 13 or 5(d) of
                      the Securities Exchange Act of 1934.
                             Yes [X]         No [ ]
     Indicate by check mark whether the registrant (1) has filed all reports
   required to be filed by Section 13 or 15(d) of the Securities Exchange Act
   of 1934 during the preceding 12 months (or for such shorter period that the
 registrant was required to file such reports), and (2) has been subject to such
                   filing requirements for the past 90 days.
                             Yes [X]         No [ ]
 Indicate by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of
        "accelerated filer and large accelerated filer" in Rule 12b-2 of
                         the Exchange Act. (Check one):

Large Accelerated Filer [ ]   Accelerated Filer [ ]   Non-Accelerated Filer [X]

Indicate by check mark which financial statement item the registrant has elected
                                   to follow.
                         Item 17 [X]        Item 18 [ ]
 If this is an annual report, indicate by check mark whether the registrant is a
         shell company (as defined in Section 12b-2 of the Exchange Act)
                             Yes [ ]         No [X]

<PAGE>

                                TABLE OF CONTENTS
                                -----------------
                                                                            Page
                                                                            ----
PART I
------

ITEM 1.        IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS           1
ITEM 2.        OFFER STATISTICS AND EXPECTED TIMETABLE                         1
ITEM 3.        KEY INFORMATION                                                 1
ITEM 4.        INFORMATION ON THE COMPANY                                      7
ITEM 4A        UNRESOLVED STAFF COMMENTS                                      17
ITEM 5.        OPERATING AND FINANCIAL REVIEW AND PROSPECTS                   17
ITEM 6.        DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                     17
ITEM 7.        MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS              21
ITEM 8.        FINANCIAL INFORMATION                                          23
ITEM 9.        THE OFFER AND LISTING                                          24
ITEM 10.       ADDITIONAL INFORMATION                                         25
ITEM 11.       QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK      29
ITEM 12.       DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES         31

PART II
-------

ITEM 13.       DEFAULTS, DIVIDEND ARREARAGES AND DELINQUINCIES                31
ITEM 14.       MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
               HOLDERS AND USE OF PROCEEDS                                    31
ITEM 15.       CONTROLS AND PROCEDURES                                        32
ITEM 16A.      AUDIT COMMITTEE FINANCIAL EXPERT                               32
ITEM 16B.      CODE OF ETHICS                                                 32
ITEM 16C.      PRINCIPLE ACCOUNTANTS FEES AND SERVICES                        32
ITEM 16D.      EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES     33
ITEM 16E       PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
               AFFILIATED PURCHASES                                           33


PART III
--------

ITEM 17.       FINANCIAL STATEMENTS                                           34
ITEM 18.       FINANCIAL STATEMENTS                                           34
ITEM 19.       EXHIBITS                                                       34

SIGNATURE                                                                     35

                                       i

<PAGE>

                                     PART I

ITEM 1.     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Information not required for an annual report.

ITEM 2.     OFFER STATISTICS AND EXPECTED TIMETABLE

Information not required for an annual report.

ITEM 3.     KEY INFORMATION

We express all dollar amounts in this Annual Report on Form 20-F in Canadian
dollars, except where otherwise indicated. References to "$" are to Canadian
dollars, and references to "US$" are to U.S. dollars. Unless otherwise
indicated, all references to "Marsulex" or the "Company" are references to
Marsulex Inc. and its subsidiaries.

The historical consolidated financial statements of the Company are reported in
Canadian dollars and are prepared in accordance with generally accepted
accounting principles in Canada ("Canadian GAAP"). These principles conform in
all material respects with generally accepted accounting principles in the
United States ("U.S. GAAP"), except as described in Note 20 to the audited
historical consolidated financial statements of the Company included in this
Annual Report on Form 20-F. All references to "tons" are to metric tons
(approximately 2,200 pounds), rather than "short" tons (2,000 pounds).

Forward-Looking Statements
--------------------------

Certain statements contained in this Annual Report on Form 20-F under the
captions Item 4. Information on the Company, Item 5. Operating and Financial
Review and Prospects and elsewhere in this Annual Report constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. When used in this document, the words,
"anticipate," "believe," "estimate" and "expect" and similar expressions, as
they relate to the Company or its management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. Many factors could cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance, or achievements that may be expressed or implied by
such forward-looking statements, including, among others, the Company's reliance
on customers, competition in the Company's markets, development of new products
and services, fluctuations in currency exchange rates, commodity prices or
interest rates, the Company's ability to maintain good relations with its
employees, changes in laws or regulations regarding the environment or other
environmental liabilities, the Company's ability to integrate acquisitions and
obtain financing and ability to protect its intellectual property, and other
risks discussed under "Risks Factors" in Item 3. Key Information and risks
discussed from time to time in the Company's filings with the Securities and
Exchange Commission and other regulatory authorities. Should one or more of
these risks or uncertainties materialize, or should assumptions underlying the
forward-looking statements prove incorrect, actual results may vary materially
from those described herein as anticipated, believed, estimated or expected. The
Company does not intend, and does not assume any obligation, to update these
forward-looking statements.

A.   Selected Financial Data
     -----------------------

The following table presents selected historical consolidated financial data of
the Company as of and for the fiscal years ended December 31, 2005, 2004, 2003,
2002 and 2001. The selected historical consolidated financial data for the
Company set forth below has been derived from the audited historical
consolidated financial statements of the Company. Historic results are not
necessarily indicative of the results that you may expect for any other future
period or for a full year. The selected historical consolidated financial data
should be read in conjunction with the audited consolidated financial statements
of the Company and the notes thereto included elsewhere in this Annual Report
and Item 5 - "Operating and Financial Review and Prospects".

                                       1
<PAGE>

<TABLE>
<CAPTION>

($000 except share and per share amounts)                      2005           2004            2003         2002            2001
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>            <C>             <C>          <C>             <C>
Canadian GAAP:
Statement of Operations Data:
Revenue                                                     166,456        137,022         134,982      138,291         236,714
Gross profit                                                 60,997         48,867          48,436       48,263          66,302
Selling, general, administrative and other costs             21,116         23,342          19,663       20,747          26,273
Foreign exchange (gains) losses on monetary items               118            (61)         (2,057)        (569)            471
Foreign exchange (gain) loss on Long Term Debt                 (555)            --              --           --             968
Loss on disposal of fixed assets                                 --             57              --           20              59
Depreciation                                                 21,563         16,907          15,727       15,660          15,170
Unusual items (1)                                             1,718            657           1,422        7,487         (55,556)
Amortization of deferred charges                              2,641            708             726          387           1,074
Interest expense                                             11,598         10,569           9,755       13,684          18,085
Interest capitalized                                         (1,693)        (4,252)         (3,738)      (2,572)         (1,065)
Interest income                                                (936)          (756)           (730)      (1,942)         (3,141)
--------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations before
   income taxes, minority interest and amortization
   of goodwill                                                5,427          1,696           7,668       (4,639)         63,964
Income taxes (recovery)                                       4,006         (3,204)            810        1,544          12,268
--------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) from continuing operations
   before minority interest and amortization of
   goodwill                                                   1,421          4,900           6,858       (6,183)         51,696
Minority interest                                                --             --              --        1,595           1,403
--------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations before
   amortization of goodwill                                   1,421          4,900           6,858       (7,778)         50,293
Amortization of goodwill, net of income taxes                    --             --              --           --           3,555
--------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations                    1,421          4,900           6,858       (7,778)         46,738
Earnings from discontinued operations, net of tax                --             --              --           --          16,644
--------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss)                                           1,421          4,900           6,858       (7,778)         63,382
================================================================================================================================

--------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations per                 0.04           0.15            0.22        (0.25)           1.48
   share, basic
Earnings (loss) per share, basic                               0.04           0.15            0.22        (0.25)           2.01
Earnings (loss) from continuing operations per                 0.04           0.15            0.21        (0.25)           1.47
   share, diluted
Earnings (loss) per share, diluted                             0.04           0.15            0.21        (0.25)           2.00
--------------------------------------------------------------------------------------------------------------------------------
Other Financial Data (from continuing operations):
  Capital expenditures                                       48,168         14,627          32,583       40,977          29,775
  Cash flow provided by continuing operations                27,725         25,179          29,501       10,153          14,732
Balance Sheet Data (end of year):
  Current assets                                             57,960         63,690          51,929       37,429         163,822
  Total assets                                              374,400        272,777         270,489      239,245         343,569
  Current liabilities                                        43,051         32,568          25,726       22,264          77,248
  Long-term debt                                            177,126        111,612         119,196       95,943         125,654
  Total debt                                                178,767        113,138         119,196       95,943         167,539
  Shareholders' equity                                      106,891        101,834          96,827       91,702         100,825
  Capital Stock                                              60,093         57,973          57,973       57,625          57,505
  Number of shares                                       32,409,898     31,696,398      31,696,398   31,553,732      31,501,232
================================================================================================================================

</TABLE>
                                                                  2

<PAGE>

<TABLE>
(1) Unusual items:
<CAPTION>

    ($000)                                                2005          2004         2003           2002          2001
   ------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>           <C>          <C>            <C>           <C>
    Expenses incurred on cancellation of stock
     options held by former employees (1a)                  --            --          737             --            --
    Gain on disposal of sulphur removal assets (1b)         --            --           --             --       (64,768)
    Expenses incurred on early retirement of debt (1c)      --            --           --          1,252         5,593
    Write-off of deferred charges                           --            --           --             --         3,619
    (Loss) gain on disposal of parts and service
     business and other assets (1d)                         --           155          685         (4,014)           --
    Write-off of capitalized project costs (1e)             --            --           --          9,508            --
    Loss on arbitration settlement (1f)                  1,913            --           --             --            --
    Other unusual items                                   (195)          502           --            741            --
   ------------------------------------------------------------------------------------------------------------------------
                                                         1,718           657        1,422          7,487       (55,556)
   ========================================================================================================================
</TABLE>

(1a) On December 17, 2003, the Company purchased 433,434 stock options held by
     former employees of the Company for a total consideration of $737,000. The
     options were cancelled and fully expensed.

(1b) On July 18, 2001, the Company completed the sale of its sulphur removal
     services assets in eastern North America and of BCT Chemtrade Corporation,
     a subsidiary of Marsulex, to Chemtrade Logistics Income Fund for gross cash
     proceeds before costs of disposition of $167.2 million (the "Chemtrade
     Transaction") or $156.6 million net of costs of disposition, comprised of
     $128.1 million for the sale of the sulphur removal assets and $28.5 million
     for the sale of BCT. The disposal resulted in a pre-tax gain of $64.8
     million or $54.9 million net of tax for the sulphur removal services assets
     in eastern North America and a gain of $15.9 million or $15.1 million net
     of tax for BCT.

(1c) On July 18, 2001, the Company fully retired its outstanding 10.21% Senior
     Notes and cancelled its US$50.0 million operating credit facility at an
     expense of $5.6 million. These expenses included the write-off of deferred
     debt issuance costs and foreign exchange costs of $3.0 million and a
     make-whole payment of $2.6 million.

     As a result of the Chemtrade Transaction, the Company was obligated to make
     an offer to purchase a portion of the Senior Subordinated Notes limited to
     the net cash proceeds from the transaction reduced by the repayment of
     Senior Notes and funds committed and applied on capital projects. On August
     20, 2002, the Company completed the offer to purchase in the amount of
     $69.5 million (US$44.2 million) principal at par plus accrued interest of
     $0.9 million (US$0.6 million). As part of the purchase, the Company
     incurred expenses of $1.3 million.

(1d) On January 31, 2002, the Company completed the sale of its parts and
     service business and other assets for gross proceeds of $6.6 million.

(1e) Due to significant changes in the financial markets, the Company and Santee
     Cooper mutually agreed not to proceed with the previously announced project
     for Marsulex to build and own a flue gas desulphurization system utilizing
     Marsulex's patented ammonium sulphate scrubbing technology at Santee
     Cooper's Winyah Power Generating Station. This resulted in a write-off of
     capitalized project costs of $9.5 million. Under U.S. GAAP, certain costs
     deferred under Canadian GAAP prior to a legally binding contract being
     entered into must be expensed.

(1f) In the third quarter of 2005, the Company was awarded a US $1.3 million
     ($1.5 million) cash settlement regarding the arbitration with Holcim Inc.
     with respect to the CP-Gyp facility in Dundee, Michigan. The award was not
     sufficient to cover the Company's investment in the plant and the
     operations and resulted in an approximate $1.9 million non-cash unusual
     loss.

Exchange Rate Information
-------------------------

The following tables provide exchange rates for Canadian dollars expressed in
U.S. dollars for each period indicated. These exchange rates are based on the
inverse of the noon buying rate in The City of New York for cable transfers in
Canadian dollars as certified for customs purposes by the Federal Reserve Bank
of New York (the "Noon Buying Rate").

The following table sets forth the high and low exchange rates for each month
during the previous six months:

<TABLE>
                                             Previous Six Months
<CAPTION>
---------------------------------------------------------------------------------------------------------------

                  Feb 2006         Jan 2006         Dec 2005         Nov 2005         Oct 2005        Sept 2005
---------------------------------------------------------------------------------------------------------------
<S>                 <C>              <C>              <C>              <C>              <C>              <C>
High                1.1577           1.1726           1.1734           1.1961           1.1887           1.1882
---------------------------------------------------------------------------------------------------------------
Low                 1.1379           1.1436           1.1507           1.1657           1.1659           1.1611
---------------------------------------------------------------------------------------------------------------
</TABLE>

The following table sets forth the average exchange rates for the five most
recent financial years, calculated by using the average rate on the last day of
each month in such year:

                                       3
<PAGE>

                             Years ended December 31
-------------------------------------------------------------------------------
                  2005          2004          2003           2002          2001
-------------------------------------------------------------------------------
Average         1.2116        1.2959        1.3916         1.5702        1.5487
-------------------------------------------------------------------------------

On March 23, 2006, the-noon-buying-rate was US$ $1.00 per $1.1659.

B.   Capitalization and Indebtedness
     -------------------------------

Information not required for an annual report.

C.   Reasons for the Offer and Use of Proceeds
     -----------------------------------------

Information not required for an annual report.

D.   Risk Factors
     ------------

The following is a description of risk factors that could affect the Company's
business, and ultimately, its profitability.

Reliance on Customers

The business of the Company is dependent on the production of a number of
by-products and waste streams by its industrial customers. As environmental
regulations become more demanding, the need for by-product and waste streams
management, regeneration, disposal, storage, removal, and conversion increases.
Thus, the trend in North America is for continuing growth in demand for the
Company's services, although there can be no assurance that environmental
regulations will not become less stringent in the future or that customers of
the Company will continue to produce by-products and waste streams which drive
their demand for the Company's services. Services provided and products handled
from the Company's major customer accounted for 10.0% of the Company's total
2005 revenue, the loss of which could have a significant impact on the Company.

Competition

Marsulex operates in competitive markets, and some of the Company's competitors
have economic resources greater than those of the Company and are well
established as suppliers to the markets that Marsulex serves.

Accordingly, such competitors may be better able to withstand volatility within
industries and throughout the economy as a whole while retaining significantly
greater operating and financial flexibility than the Company. There can be no
assurances that the Company will be able to compete effectively with its
competitors and competitive pressures may harm the Company's business.

Several of the Company's niche services and products are sold into select
markets. There can be no assurance, however, that these markets will not attract
additional competitors that could have greater financial, technological,
manufacturing and marketing resources than Marsulex.

New Products and Services

The Company has made investments in the development and commercialization of new
products, technologies and services. Broad market acceptance and long-term
commercial viability of services incorporating new products, technologies and
services may take some years to establish, if at all, and are subject to
business and competitive risks. If the Company is unable to develop and market
new products in a timely fashion, or at all, the Company may not be able to
compete successfully.

Foreign Exchange

As the Company has U.S. based operations and reports in Canadian dollars, it is
exposed to foreign exchange fluctuations. Approximately 42.3% of the Company's
2005 revenue (2004 - 44.5%; 2003 - 42.9%) was in U.S. dollars. Ignoring the
foreign exchange impact on U.S. denominated working capital items, at present, a
one-cent increase in the value of the Canadian dollar would negatively impact
gross profit by approximately $0.3 million. The Company's debt and related

                                       4
<PAGE>

interest expense is in U.S. dollars and offsets the U.S. dollar cash flow from
operations.

The U.S. dollar interest expense, when combined with U.S. dollar depreciation
and amortization expenses, limits the exposure of net earnings to foreign
exchange fluctuations. A one-cent increase in the value of the Canadian dollar
positively impacts net earnings before tax by approximately $0.2 million.

The Company has self-sustaining operations holding U.S. dollar assets and debt
and under present accounting rules in Canada, any fluctuation in the Canadian
dollar value against the U.S. dollar is recorded in the foreign currency
translation adjustment account that is part of the shareholders' equity on the
balance sheet.

Commodity Prices

Industrial chemicals sold by the Company are subject to market price
fluctuations. In addition, regional supply and demand imbalances can lead to
isolated price erosion. The Company's end-use contracts generally have a "meet
or release" provision. As a result, competitive pressure can cause the Company
to lower selling prices in order to retain the volume. While the Company
attempts to reduce its exposure to market price fluctuations through contracts
where commodity price exposure is either shared with or borne entirely by the
customer or through contracts which have minimum volume requirements or
guaranteed fees, there can be no assurance that the Company will be successful
in renegotiating existing contracts or entering into new contracts with such
terms.

Labour

Out of a total of 334 employees, the Company has 47 unionized employees at four
sites, represented by three unions through three collective agreements. Two
collective bargaining agreements were negotiated during 2005 and no work
stoppages were incurred as a result of unresolved labour issues. The Company and
the unions satisfactorily resolved two formal grievances with one grievance
outstanding at year-end. The Collective Bargaining Agreement with the
International Union of Operating Engineers in the Company's Prince George plant
is set to expire on June 30, 2006. Although the Company has not suffered any
loss of production due to work stoppages by its employees in recent years, there
can be no assurances that work stoppages or other labour disturbances which may
have a material impact on the Company will not occur in the future. Finally, a
large number of the Company's suppliers and customers have unionized employees
and there can be no assurances that work stoppages or other labour disturbances
at the Company's suppliers or customers will not have a material adverse effect
on the Company's business.

Environment

Notices and Findings of Violation were issued against the Company by federal
regulators in 1998 with respect to the Company's Toledo facility in Oregon,
Ohio. The Company is, however, in compliance with the permits issued by the
governing body (the State) and although there is a potential for penalties to be
assessed against the Company, the Company believes that it is in substantial
compliance with environmental laws, regulations and guidelines.

A Notice and Finding of Violation was issued by federal regulators in 1999 with
respect to the facility in Cairo, Ohio which has been sold to Chemtrade
Logistics Inc. ("Chemtrade"). As part of the sale, the Company has indemnified
Chemtrade against liabilities relating to the Notice and Finding of Violation
issued. As part of the indemnification the Company is obligated to reimburse
Chemtrade for the necessary installation of control equipment and for any
penalties which may be levied against the facility in respect of the Notice and
Finding of Violation.

If the Company is not successful in prosecuting indemnity claims from entities
from which it purchased the Toledo and Cairo facilities, if sufficient funds are
not available from such indemnity obligations or if the Company is subject to
new or significant environmental liabilities of which management is not
currently aware, the Company's business or financial condition could be
materially adversely affected.

Proprietary Technology

The Company relies on a combination of patents, confidentiality procedures and
contractual provisions to protect its proprietary rights. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may obtain and

                                       5
<PAGE>

use information that the Company regards as proprietary. Policing unauthorized
use of such proprietary technology, if required, may be difficult,
time-consuming and costly. In addition, the laws of certain countries in which
the Company does business may not protect its proprietary rights to the same
extent as the laws of the United States or Canada. There can be no assurance
that the Company will be successful in protecting its proprietary rights.

Further, the industry in which the Company competes has many participants, who
own or claim to own, intellectual property. From time to time, a third party may
claim that the Company infringes such third party's intellectual property rights
or may challenge the Company's rights to its own intellectual property. Any
claim, whether or not with merit, could be time-consuming to evaluate, result in
costly litigation or require the Company to enter into licensing agreements that
may require the payment of a license fee and/or royalties to the owner of the
intellectual property. Such licensing agreements, if required, may not be
available on royalty or other licensing terms acceptable to the Company, if
available at all.

Acquisitions

A substantial part of the Company's growth has come through acquisitions. For
example, in August 2005, the Company acquired Stablex, a Quebec-based business
specializing in inorganic hazardous waste treatment and disposal. The success of
acquisitions will depend in part on the Company's ability to overcome
significant challenges, including timely, efficient and successful execution of
post-acquisition strategies. If the Company fails to meet the challenges
involved in integrating the operations of its acquisitions, it may not realize
anticipated benefits or synergies of the acquisitions, which could adversely
affect operating results.

Future acquisitions may involve debt incurrence, operating losses, dilutive
issuances of equity securities and significant cash expenditures, any of which
could have a material adverse effect on the Company's business.

Recent and any future acquisitions involve a number of risks, including:

o    The Company's ability to integrate the acquired business;
o    Diversion of management attention;
o    Impairment of goodwill adversely affecting net income;
o    The Company's ability to retain the management or other key employees of
     the acquired business;
o    The Company's ability to establish uniform standards, controls, procedures
     and policies;
o    The Company's ability to retain customers of the acquired companies;
o    Exposure to legal claims for activities of the acquired business prior to
     the acquisition;
o    Damage to the Company's reputation as a result of performance or customer
     satisfaction problems relating to an acquired business; and,
o    The performance of any acquired business could be lower than anticipated.

New Financing

The Company continues to actively pursue growth initiatives and may enter into
commitments in advance of securing financing. This may require the Company to
seek additional financing to supplement its current cash balances and internally
generated cash flows in order to finance these commitments. Therefore, the
Company is at risk as to the availability of new credit and the associated
interest rates.

Enforcement of Civil Liabilities

Marsulex is a Canadian corporation with its principal place of business in
Canada. A majority of the Company's directors and officers are residents of
Canada and all or a substantial portion of the Company's assets and those of
such persons are located outside the United States. Consequently, it may be
difficult to effect service of process within the United States upon the Company
or its directors or officers who are not residents of the United States, or to
realize in the United States upon judgments of courts of the United States
predicated upon civil liabilities under the U.S. Securities Act of 1933. No
assurance can be given that Canadian courts (1) would enforce judgments of U.S.
courts obtained in actions against the Company or such persons predicated upon
the civil liability provisions of the U.S. federal securities laws or the
securities or "blue sky" laws of any state within the United States or (2) would
enforce, in original actions, liabilities against the Company or such persons
predicated upon the U.S. federal securities laws or any such state securities or
blue sky laws.

                                       6
<PAGE>

Critical Accounting Policies

The Company's accounting policies, which are disclosed in Significant Accounting
Policies note, Note 1 of the audited financial statements, are in accordance
with generally accepted accounting principles in Canada and are applied on a
consistent basis with the exception of goodwill which was applied prospectively.
High-quality financial statements require rigorous application of accounting
policies. Management uses judgment in selecting policies for which alternative
methods exist and in applying the accounting policies. The policies discussed in
Management's Discussion and Analysis, Item 5 of this report, are considered by
management to be critical to an understanding of the Company's financial
statements because their application places the most significant demands on
management's judgment, and financial reporting results rely on estimation about
the effect of matters that are inherently uncertain. Specific risks for these
critical accounting policies are described in the critical account policies
section of the Management, Discussion and Analysis, Item 5 of this report. For
all of these policies, management cautions that future events rarely develop
exactly as forecasted, and the best estimates routinely require adjustment and
these adjustments may have a material impact on the Company's financial
condition.

ITEM 4.     INFORMATION ON THE COMPANY

History and Development of the Company
--------------------------------------

Incorporation

Marsulex was amalgamated under the laws of Canada on June 16, 1989 under the
Canada Business Corporations Act. On June 16, 1989, Marsulex amended its
articles to remove the private company restrictions. On November 19, 1996,
Marsulex amended its articles by, among other things, changing the minimum and
maximum number of directors, amending the authorized capital and reclassifying
certain classes of shares to prepare for a rights offering. Marsulex's
registered office and Canadian headquarters is located at 111 Gordon Baker Road,
Suite 300, Toronto, Ontario, M2H 3R1, and its telephone number is 416-496-9655.
The Company's agent for service in the United States is Mr. Brian Stasiewicz
located at Suite 2100, 203 North La Salle, Chicago, Illinois, 60601, and the
telephone number is 312-558-1545.

A.   History and Development of the Company
     --------------------------------------

The Company was formed in June 1989 when it acquired certain sulphur businesses
and assets from C.I.L. Inc. ("CIL"), a wholly owned subsidiary of ICI plc, a
U.K.-based diversified chemical company. In December 1996, the Company completed
an initial public offering of its common shares and obtained a listing for its
common shares on the Toronto Stock Exchange. CIL entered the sulphur products
business in the late 1800s and was a major U.S. marketer of sulphur products.
Following the acquisition, management shifted the focus of the Company from
marketing sulphur products to providing outsourced environmental compliance
solutions. As a result of this shift, the Company modified its contracts with
customers to de-emphasize the impact of changes in pricing and demand for
industrial chemicals on the Company's financial performance, and increased its
percentage of revenues from contracts with guaranteed fees or minimum volume
requirements.

The Company also began implementing a strategy of expanding its services and
completed the following acquisitions:

o    In October 1996, the Company purchased the business and assets of Coulton
     Chemical Company, L.P., a leading provider of sulphuric acid regeneration
     services in northern Ohio.
o    In June 1997, the Company purchased 65% of Sulconam Inc. (now Marsulex
     Montreal Inc.), which it increased to 100% in 2002. Based in Montreal,
     Canada the facility extracts and recovers sulphur from hydrogen sulphide
     gas sent to the plant by pipeline from the Petro-Canada and Shell Canada
     oil refineries and converts it into elemental sulphur and sodium
     bisulphite.
o    In September 1997, the Company entered the power generation sector with the
     acquisition of certain assets of General Electric Environmental Services
     Inc., providing the Company with a leading market position in air emission
     control to the global power industry.
o    In May 1998 the Company purchased Sulex Inc. ("Sulex") and is the remaining
     subsidiary purchased as part of the purchase of IT Holding, Inc. and BCT
     Chemtrade Corporation from Trelleborg, Alberta. Sulex operates two plants

                                       7
<PAGE>

     on the U.S. west coast - at Long Beach, California and at Mount Vernon,
     Washington - that process molten sulphur from west coast oil refineries
     converting it into a solid form for shipment overseas.
o    In December 2000, Marsulex acquired the assets of Westaim Corporation's
     chemicals division that consisted of two Alberta-based chemical
     manufacturers and distributors of water treatment and industrial chemicals.
o    In April 2001, the Company signed definitive agreements to provide
     environmental services as well as to own and operate a portion of the
     environmental compliance facilities (the Company's Fort McMurray facility)
     for Syncrude Canada Ltd.'s ("Syncrude") Upgrader Expansion project ("UE-1")
     at the Mildred Lake oil sands facility in Alberta. Construction of the
     Company's portion of the environmental compliance facilities began in 2002
     and was completed on schedule in September 2003. The Company continues to
     maintain the plant in readiness for commissioning and start-up when
     Syncrude's overall UE-1 project is completed. (See the full discussion in
     the Property, Plant and Equipment section).
o    In July 2001, the Company completed the sale of its sulphur removal assets
     in eastern North America and of BCT, a subsidiary of the Company, to
     Chemtrade Logistics Income Fund for gross cash proceeds of $167.2 million
     before costs of disposition.
o    In October 2003, the Company acquired the sulphur products business in
     Prince George, British Columbia from Duke Energy Gas Transmission for a
     gross purchase price of $13.4 million financed by the Company through
     existing cash. The operation was integrated into the Company's Western
     Markets Group.
o    In 2004, the Company began expansion of its Montreal facility. The
     expansion is expected to increase the facility's capacity by approximately
     50% and the existing service agreements have been extended to 2015 from
     2010. Construction of the project is scheduled for completion in mid 2006.
     (See the full discussion in the Property, Plant and Equipment section).
o    In August 2005 the Company acquired all of the outstanding shares of the
     holding company owning Stablex, a Quebec-based business specializing in
     inorganic hazardous waste treatment and disposal. The purchase price was
     $71.2 million before acquisition costs of approximately $2.5 million
     financed through amounts drawn on the new credit facilities entered into by
     the Company. The operation was integrated into the Company's Industrial
     Services Group.

B.   Business Overview
     -----------------

The Company

Marsulex is a leading provider of industrial services, primarily environmental
compliance solutions for air quality control and industrial hazardous waste
streams, and a leading producer and marketer of sulphur-based industrial and
water treatment chemicals. The Company's services are provided to a broad base
of customers in a wide range of industries. Increasingly stringent environmental
compliance regulations create opportunities for Marsulex to apply its core
competency of operating small to medium size chemical plants efficiently and
safely. In western Canada, Marsulex produces and markets sulphur-based
industrial and water treatment chemicals. This range of services meets customer
needs and creates long-term value for shareholders.

o    Marsulex provides over 20 oil refineries and numerous industrial customers
     with outsourced solutions for the handling and management of site air
     emissions and hazardous waste streams from six Marsulex owned and operated
     facilities in North America.
o    Through its Stablex operation Marsulex provides inorganic waste treatment
     and disposal services to a broad spectrum of industrial customers located
     in eastern Canada and the north-east U.S.
o    Marsulex is a primary supplier of industrial chemicals to more than 15 pulp
     and paper manufacturers in western Canada and of water treatment chemicals
     to municipalities and industry throughout Alberta and Saskatchewan.
     Industrial chemicals are produced at five plants located in western Canada.
o    Marsulex's proprietary ammonium scrubbing technology, which has been in
     commercial operation in the U.S. since 1996, has been installed at the
     Syncrude coker expansion (UE-1 project) at Mildred Lake, Alberta. Marsulex
     owns and, upon completion of the UE-1 project, will operate part of the
     compliance facilities (the Company's Fort McMurray facility).
o    Marsulex has one of the world's largest installed bases of wet flue gas
     desulphurization ("FGD") systems. Marsulex's technology is utilized in 206
     units - 153 of them outside of North America. The FGD systems are delivered
     by licensees in North America and internationally.
o    Marsulex provides customers with access to leading edge proprietary
     technologies and economies of scale and scope.

                                       8
<PAGE>

The Company's goal is to create shareholder value by providing outsourced
industrial services that generate:

o    Superior returns on invested capital.
o    High quality predictable and sustainable earnings and cash flow.

The Company intends to grow its business through:

o    The identification of new market opportunities in industrial services to
     drive organic growth.
o    The development of new service solutions based on proprietary Marsulex
     technologies or best available technologies that facilitate the outsourcing
     of environmental compliance activities under long-term service agreements
     incorporating guaranteed fees.
o    Acquisition of complementary businesses that are within the Company's core
     competencies.

Business Strategy

The Company's core strength is its ability to operate small to medium size
plants that require special expertise in handling hazardous materials with a
high standard of safety and reliability; plants that may be in geographically
dispersed areas; and that provide services that are critical to customers' own
operations.

The Company's services are designed to meet customer needs and to provide them
with innovative compliance solutions and industrial services that use best
available technology, and the Company's demonstrated expertise in compliance
processes, site operations, risk management, transportation, by-product removal
and marketing to limit or manage environmental exposure at the lowest possible
cost. The Company provides skills that may be far removed from customers' core
businesses, and also can often achieve economies of scale that customers cannot
access on their own.

Two industries where Marsulex has a significant presence are oil refining and
power generation. These industries are:

o    Impacted by stringent environmental regulations.
o    Capital intensive with sensitivity to reduced costs and improved operating
     margins.
o    Increasingly receptive to outsourcing as a way to maximize investment
     returns.
o    Viable and have long-term growth prospects.

The acquisition in 2005 of Stablex, which uses a unique technology to treat and
stabilize inorganic industrial wastes and contaminated soils, broadened the
Company's services and customer base.

Competitive Strengths

As a provider of a range of industrial services, including environmental
compliance services, the Company believes it has a number of competitive
strengths. Further, the Company believes that given the critical and complex
nature of the Company's services, potential new entrants would be disadvantaged
as a result of the Company's large installed base of compliance facilities that
have been in commercial operation for many years.

Strategically Located Facilities
--------------------------------

The Company's conversion and regeneration facilities provide it with the ability
to convert gas, liquid and solid waste streams into useable industrial
chemicals. Some of these facilities are located adjacent to, or are connected by
pipeline with, certain customers' facilities. The Stablex facility is located
outside Montreal, Quebec in an area with a unique geology with 50 to 90 feet of
low permeability marine clay atop a layer of sand and gravel and limestone
bedrock. The Company also operates several chemical manufacturing facilities in
western Canada.

Strong Customer Relationships
-----------------------------

The Company's ability to provide its customers with a total environmental
service solution that generally allows them to meet compliance requirements and
minimize the cost of environmental compliance has allowed the Company to secure

                                       9
<PAGE>

strong and long-standing customer relationships. In the Industrial Services
Group the Company's major oil refinery customers include BP, Petro-Canada, Shell
Canada Products Limited, Marathon Ashland Petroleum LLC and Sunoco, Inc. The
Company or its predecessors have maintained relationships with its major oil
refinery customers for an average of approximately 40 years and has established
long-term relationships averaging approximately 45 years with its three most
significant oil refinery customers. Stablex's customer base of over 1,000
customers covers a broad spectrum of industries and includes leading companies
within each sector.

Western Markets currently maintains long-term relationships with numerous
customers in a variety of sectors, and for a variety of products and services.
These relationships often include multiple products and are often set in
multiple-year agreements. Many of these working relationships have been in place
for over 30 years. For example, Western Markets has supply and sourcing
agreements on various products extending up to or beyond 2007 with Sherritt
International Corporation at Fort Saskatchewan, Alberta, Canada.

The Company's Power Generation Group, one of the world's largest providers of
wet FGD systems and services, has developed long-standing relationships with
numerous customers in North America and internationally.

Established Contracts
---------------------

Where possible, the Company enters into long-term contracts with its customers
related to the provision of services and the removal, distribution and sale of
the resulting industrial chemicals. Such contracts are generally two to 17 years
in length. The Company usually attempts to structure its contracts such that it
receives a guaranteed fee or minimum volume requirements for the services it
provides, or it receives payment based on sharing with the customer changes in
sales price received from the sale of industrial chemicals or other by-products
and/or changes in input costs such as fuel.

The volumes processed by the Industrial Services Group may be affected by the
seasonal variation of its customers' activities, generally peaking during the
summer. For example, although the volumes processed for the Group's refinery
customers may be affected by the market demand and seasonal variations of the
refinery products, generally peaking during the summer driving season, the
revenues from these customers are largely stable year over year and are somewhat
insulated through contractual minimum volume requirements. The Stablex
operations are also affected by seasonality as the industrial waste streams
processed include site remediation projects where activity generally peaks
through the summer months and slows, as the waste materials freeze, in the
winter months.

The demand for the Western Markets Group's products may experience seasonal
fluctuations. For example, demand from the Group's municipality customers for
water treatment chemicals peaks during the spring "run off" and summer seasons.

The timing of revenues earned from the Power Generation Group's projects and
licensing activities results in variances in the Group's quarterly results.

Broad Range of Value-Added Technologies and Technical Capabilities
------------------------------------------------------------------

The Company provides its customers with a broad range of technologies, including
patented or proprietary technologies, technical services and support and has a
reputation for technical skill, innovation and knowledge of customer needs.
Unlike certain of the Company's competitors that focus solely on the sale of
equipment or distribution and sale of converted by-products, the Company works
closely with customers to design the optimal environmental compliance solution
that best meets each customer's needs.

The Company offers its customers outsourced industrial services based on a range
of proprietary and non-proprietary technologies. The Company develops or
acquires technologies that can be incorporated into compliance service packages
that meet customer needs, enabling them to satisfy environmental compliance
requirements while lowering or avoiding operating and capital costs.

For example, Stablex uses a unique technology to treat and stabilize inorganic
industrial hazardous wastes and contaminated soils. The process consists of
making contaminants insoluble in the environment by using a chemical treatment

                                       10
<PAGE>

followed by stabilization and solidification processes before disposal of the
product in a dedicated secure placement cell. Power Generation's proprietary
ammonium and potassium sulphate technologies enable power generators to access
the benefits of lower fuel costs. This is achieved through leading-edge
technology that attains compliance in excess of existing requirements and
produces a saleable by-product of high value while eliminating solid waste
disposal. Similarly, the Company's technology utilized by oil refineries to
remove and recover sulphur emissions enables them to meet stricter environmental
regulations at lower cost and derive more value from the sale of sodium
bisulphite, a higher value by-product.

The Company has a history of providing reliable and safe services. It has
expertise with respect to plant operations and provides risk management and
technical assistance with regard to gas cleaning and the handling,
transportation and storage of by-products and industrial chemicals. This
assistance includes developing protocols for overall risk management, the
handling, transporting and storing of inputs and outputs, materials
compatibility studies and advice on regulatory shipping procedures.

Government Regulations

The Company's operations are subject to numerous laws, regulations and
guidelines relating to air emissions, water discharges, solid and hazardous
wastes, transportation and handling of hazardous substances and employee health
and safety in Canada, and the United States, and are subject to numerous
regulatory agencies such as, state and federal environmental protection agencies
and regulatory agencies under the Canadian Environmental Protection Act. These
environmental regulations are continually changing and generally becoming more
restrictive.

The Company believes that it is currently in material compliance with its
existing permits and regulatory approvals except as disclosed under "Item 3 -
Key Information - Risk Factors - Environment". Further, the terms and conditions
of future permits and approvals may be more stringent and may require increased
expenditures on the part of the Company.

Operating Segments

On December 31, 2005, the business segment formerly named Refinery Services was
re-named Industrial Services to reflect the broader operations of the segment
following the Stablex acquisition. The Company's activities are divided into
four reportable segments. The following three segments are operating segments:
Industrial Services (formerly Refinery Services), Western Markets and Power
Generation. The fourth segment, Corporate Support, is a non-operating segment
that provides centralized services, such as finance, information systems, human
resources and risk management to the operating segments.

Industrial Services Group
-------------------------

Marsulex's Industrial Services Group provides some of North America's leading
oil companies and industrial customers with innovative outsourced solutions for
the handling and management of site air emissions and hazardous waste streams.
These services, which are provided from six Marsulex-owned and operated
facilities, ensure customers' operations meet environmental compliance
regulations reliably and cost effectively.

For oil refineries and chemical companies, Marsulex regenerates alkylation spent
acid contaminated during the production of alkylate, a high octane component of
gasoline and key to clean fuels programs, processes acid gas (H2S), and captures
residual emissions of sulphur dioxide gas (tail gas) from sulphur recovery
processes. The Company also converts molten sulphur from oil refineries into
prilled sulphur, a granular product suitable for offshore markets.

The Stablex operation uses a unique technology to treat and stabilize inorganic
industrial hazardous wastes and contaminated soils. The process consists of
making contaminants insoluble in the environment by using a chemical treatment
followed by stabilization and solidification processes before disposal of the
product in a dedicated secure placement cell.

                                       11
<PAGE>

Western Markets Group
---------------------

The Western Markets Group produces and provides sulphur-enhanced chemicals to
industrial customers and supplies alum, a water treatment chemical used by
municipalities and other industrial companies for water and wastewater
treatment. The primary market for these and other chemicals is western Canada.
Western Markets' product range includes sulphuric acid, liquid sulphur dioxide,
aluminum sulphate ("alum"), sodium bisulphite, aqua ammonia, carbon disulphide,
hydrogen sulphide and sulphur. These products and related services are provided
to numerous customers with whom it has maintained long-term relationships that
may include multiple products and are often set in multi-year agreements. The
chemical products manufactured or marketed by the Industrial Chemicals Group are
discussed below.

Sulphuric Acid. Sulphuric acid is generally regarded as the world's
largest-volume industrial chemical and is primarily used in the production of
phosphate fertilizer, copper leaching, in water treatment, as a bleaching agent
in pulp & paper, and for various industrial uses. Sulphuric acid can be produced
involuntarily as a by-product of base metal smelting (metallurgical acid), crude
oil refining and other industrial processes, or voluntarily by burning Sulphur.
Standard grade Sulphuric acid (93%) exhibits the characteristics of a commodity
product, with market pricing and volatility a function of supply/demand balance
regionally and sometimes seasonally.

Historically, increases in market demand for sulphuric acid in North America, or
unscheduled loss of involuntary production have traditionally been accommodated
by adjustments to voluntary production (versus metallurgical), while over-supply
has typically been absorbed by the fertilizer industry. Sulphuric acid revenue
represented 13.7% of the Company's 2005 revenue (2004 - 15%).

Liquid Sulphur Dioxide. Liquid sulphur dioxide can be produced voluntarily by
burning elemental sulphur, or involuntarily through metallurgical sources or
various industrial processes. For involuntary producers, liquid sulphur dioxide
is a relatively high value product to produce compared to elemental sulphur or
sulphuric acid. However, the conversion of by-product gas into liquid sulphur
dioxide often requires extensive modifications to primary processes, which can
require significant investment and cost.

The price of liquid sulphur dioxide varies by geographic market, but is
comparatively much less freight-sensitive than sulphuric acid and therefore
increases the geographic area within which the liquid sulphur dioxide can be
shipped profitably. Liquid sulphur dioxide is consumed in a number of industrial
sectors and processes.

Aluminum Sulphate. Aluminum sulphate, also known as alum, is produced in both
dry and liquid forms. According to industry consultants, approximately 50% of
aluminum sulphate is consumed in municipal and industrial water treatment and
approximately 45% is used in the pulp and paper industry for process water
treatment and paper sizing.

Sodium Bisulphite. Sodium bisulphite is made by reacting caustic soda or soda
ash with sulphur dioxide in either a liquid or gaseous form. Sodium bisulphite
is primarily used as a bleaching agent in the pulp & paper industry, and can
also be used as a dechlorination agent in municipal and industrial water
treatment.

Aqua Ammonia. Aqua ammonia is used by the pulp & paper industry in the treatment
of water effluents and serves as a nutrient for micro-organisms. Because of its
high water content, freight costs are high and therefore, the product is sold on
a regional basis only.

Carbon Disulphide. Carbon disulphide is primarily used in the production of
xanthates and herbicides. It is also used as a de-waxing agent in the oil and
gas industry.

Hydrogen Sulphide. Hydrogen sulphide is primarily used in the nickel refining
process.

Power Generation Group
----------------------

The Power Generation Group provides environmental systems and services,
primarily air quality compliance, to electric utilities, petrochemical and
general industrial customers worldwide that combust sulphur bearing fossil fuels
or otherwise create sulphur oxide pollutants in their operating plants'
processes. Power Generation's systems and services enable them to cost
effectively remove these and other pollutants from their air emissions to meet

                                       12
<PAGE>

environmental regulations as well as achieve fuel flexibility and access to the
savings of using lower cost, high-sulphur fuels and derive revenues from the
sale of by-products such as commercial quality calcium sulphate (gypsum) and
ammonium sulphate fertilizer. The Group has one of the largest installed bases
of wet FGD systems in the world and offers turnkey solutions through an
extensive licensee base.

Revenue by Segment

($000)                         2005                 2004                 2003
--------------------------------------------------------------------------------

Industrial Services          97,274               73,890               71,504
Western Markets              57,192               54,590               54,295
Power Generation             11,990                8,542                9,183
--------------------------------------------------------------------------------
                            166,456              137,022              134,982
================================================================================

Foreign Operations and Geographic Segments

The Company operates primarily in Canada and the United States and revenue is
attributed to customers based on the location of the customer.

($000)                         2005                 2004                 2003
--------------------------------------------------------------------------------

Canada                       96,009               76,151               77,052
United States                61,716               58,015               57,881
Other                         8,731                2,856                   49
--------------------------------------------------------------------------------
                            166,456              137,022              134,982
================================================================================

Competition

Marsulex operates in competitive markets, and some of the Company's competitors
have economic resources greater than those of the Company and are well
established as suppliers to the markets that Marsulex serves.

In Industrial Services, there are six other North American merchant acid
regeneration companies specializing in recycling spent acid for oil refineries
and chemical manufacturers including E.I. DuPont de Nemours & Co. (DuPont), PVS
Chemical Solutions Inc., Peak Chemical LLC (purchased by Chemtrade Logistic
Income Fund in August 2005), General Chemical Corporation and Rhodia Inc.
Refinery Service's sulphur prilling operation in Long Beach, California, which
converts molten sulphur into solid form for shipment overseas, has two main
competitors: H.J. Baker & Bros., Inc. and California Sulphur Company. The
Group's Stablex operations face competition from Clean Harbors, Inc.,
Massachusetts; Chemical Waste Management, Inc., Illinois; Heritage Environmental
Services, Inc., Indiana; and The Environmental Quality Co., Michigan.

The Western Markets Group operates in a competitive environment and is subject
to volume and price volatility risk. For certain products, the group shares
end-use product price and volume risk with its supplier. Its major direct
competitors include Norfalco Ltd., Teck Cominco Ltd., Border Chemical Company
Ltd., ClearTech Industries Inc., as well as alternative products available in
the marketplace.

There are two primary competitors for Power Generation's ammonium FGD
technology: Airborne Technologies Incorporated and Powerspan Corp., both of
which provide emission control technology to the power generation industry.
Several competitors also supply other goods and services to the customers of the
Power Generation Group including boiler and full power trains. This integrated
approach versus the Power Generation Group's `pollution containment only'
approach may impact the Company's ability to compete. In addition, the Power
Generation Group has competitors providing traditional FGD technology. They
include Alstom, Advatech LLC, Babcock & Wilcox Company, Babcock Power, FISIA
Babcock Environment Gmbh, Mitsubishi Heavy Industries, Ltd., and Siemens
Wheelabrator Air Pollution Control Company Inc.

Several of the Company's niche services and products are sold into select
markets. There can be no assurance, however, that these markets will not attract
additional competitors that could have greater financial, technological,
manufacturing and marketing resources than Marsulex.

                                       13
<PAGE>

Environment

The Company has a comprehensive policy on the environment directed towards
minimizing the environmental impact of all its activities. Application of, and
adherence to, the policy is regularly reviewed through environmental
assessments, including independent reviews of its assets and operations. In
2005, the Company conducted internal assessments at select facilities to verify
the presence and effectiveness of its management systems. The Company also
undergoes periodic external assessment of its management systems and practices
in accordance with the Reverification Protocol of the Canadian Chemical
Producers' Association's Responsible Care(R) initiative. Conducted approximately
every three years after the initial verification of Responsible Care-In-Place,
Reverification involves assessment by an independent team made up of
knowledgeable industry experts, a representative of the community at large and
representatives of the communities in which the Company operates.

The Company's Montreal facility was one of four Quebec organizations honoured to
receive the 2004 EcoGESte Award for controlling and reducing greenhouse gas
emissions. Presented by Environnement Quebec in the Small and Mid-sized Business
category, the facility was recognized for its reduction in greenhouse gas
emissions and energy efficiency improvements.

The Environmental, Health & Safety Committee of the Board of Directors meets
regularly to, among other things; review the Company's performance against the
Company's environmental, health, safety and training policies and practices. The
Committee also works with management to prioritize capital expenditures related
to environmental risk management and regulatory compliance.

Notices and Findings of Violation have been issued against the Company by
federal regulators with respect to the Company's Toledo facility in Oregon,
Ohio. The Company is, however, in compliance with the permits issued by the
governing body (the State) and although there is a potential for penalties to be
assessed against the Company, the Company believes that it is in substantial
compliance with environmental laws, regulations and guidelines.

A Notice and Finding of Violation has been issued by federal regulators with
respect to the facility in Cairo, Ohio which was sold to Chemtrade Logistics
Inc. ("Chemtrade"). As part of the sale, the Company has indemnified Chemtrade
against liabilities relating to the Notice and Finding of Violation issued. As
part of the indemnification the Company is obligated to reimburse Chemtrade for
the necessary installation of control equipment and for any penalties which may
be levied against the facility in respect of the Notice and Finding of
Violation. The Company believes that the Cairo facility is in material
compliance with regulations issued by the State of Ohio as those regulations
relate to allegations of federal regulators, and that the State has issued
lawful permits consistent with those regulations governing the operation of the
Cairo facility.

In the opinion of management, environmental compliance costs and penalties for
both the Cairo and Toledo facilities, if imposed by federal regulators, will not
have a material adverse effect on the financial position of the Company,
provided the Company is successful in prosecuting indemnity claims from the
entity from which it purchased the facilities, and that sufficient monies are
available to fund those indemnity obligations.

The Company may be subject to further environmental liabilities of which
management is not currently aware which may have a material impact on the
business or financial condition of the Company.

A safe workplace has always been a primary objective of the Company, whereby the
goal is to encounter zero incidents of occupational injury or illness among
employees and the contractors engaged at the Company's facilities.

The Company was disappointed with its safety performance in 2005, when
benchmarked against Total Recordable Injuries. However, such setbacks are viewed
to be temporary and not unusual as a company acquires new facilities, which may
not be accustomed to the Recordable standard to which Marsulex measures.
Management is confident it can return to the performance levels previously
enjoyed as it continues its pursuit of excellence in safety.

As a member of the Canadian Chemical Producers' Association since the Company's
inception, Marsulex annually re-affirms its commitment to the ethic of
Responsible Care(R). Through its Codes of Practice and the Company's EH&S
Management Systems, the Company continues to improve its overall performance in

                                       14
<PAGE>

the responsible management of its activities and forms valuable relationships
with its communities and stakeholders. The Marsulex Toledo, Ohio facility was
recognized by the Ohio Chemistry Technology Council (OCTC) and received the OCTC
2005 Excellence in Environmental, Health, Safety and Security Performance Award
for its continued improvement in these areas.

C.   Organizational Structure - Subsidiaries
     ---------------------------------------

As at March 15, 2006, TD Capital Canadian Private Equity Partners Fund ("TD
Capital"), a Toronto-Dominion Bank fund, owned, directly or indirectly, 56.3% of
the Company's outstanding shares. The following list sets forth the wholly owned
subsidiaries, whether directly or indirectly, of Marsulex, as at December 31,
2005, and their jurisdiction of incorporation:

Company                                                             Jurisdiction
-------                                                             ------------

Marsulex Montreal Inc.                                              Canada
Marsulex Environmental Technologies Corporation                     Delaware
Sulex Inc.                                                          California
Marsol Canada Corporation                                           Canada
Marsulex Refinery Environmental Services, Inc.                      Delaware
Soucar Enterprises, LLC                                             Delaware
Investis U.S., Inc.                                                 Delaware
IT Holding, Inc.                                                    Delaware
Marsulex Environmental Technologies, LLC                            Delaware
Marsulex U.S. Partnership                                           Delaware
Marsulex Nova Scotia ULC                                            Canada
Marsulex U.S. Holdings, LLC                                         Delaware
4086554 Canada Inc.                                                 Canada
Gulfstream TLC, Inc.                                                Delaware
Stablex Canada                                                      Canada
Seaway TLC Inc.                                                     Canada


                                       15
<PAGE>

D.   Property, Plant and Equipment
     -----------------------------

Distribution and Facilities

Industrial Services and Manufacturing: The Company's industrial services
facilities provide it with the ability to process sulphur by-product streams. In
addition, the Company can also voluntarily produce a variety of industrial
chemicals at its manufacturing facilities, including sulphuric acid, liquid
sulphur dioxide and alum.

The following table lists the current location and products handled at each of
the conversion, manufacturing, storage and transfer facilities:

<TABLE>
<CAPTION>
                                             Square    Capacity     Capacity
   Facilities            Location           Footage    Utilization  Tons/Year    Ownership        Services & Products
-----------------------------------------------------------------------------------------------------------------------------
<S>                <C>                       <C>           <C> <C>     <C>        <C>        <C>
Industrial         Montreal, Quebec          89,000        70% (1)     54,750     Owned      Hydrogen Sulphide Processing
  Service
  Facilities
                   Toledo, Ohio             115,000        90% (1)    300,000   Land Lease   Spent Acid Regeneration,
                                                                                              Hydrogen Sulphide Processing
                   Long Beach,               29,079        70% (1)    200,000   Land Lease   Sulphur Prilling
                     California
                   Mount Vernon,            204,450        70% (1)    130,000   Land Lease   Sulphur Prilling
                     Washington
                   Whiting, Indiana          29,000        --              --   Land Lease   Redundant Tail Gas Processing
                   Fort McMurray,            66,000        --         109,000   Land Lease   After start-up and commissioning
                     Alberta                                                                  will produce Ammonium Sulphate
                                                                                              Fertilizer
                   Blainville, Quebec       108,468        86%        175,000     Owned      Treatment and disposal of
                                                                                              inorganic hazardous waste

Manufacturing      Calgary, Alberta           9,360        70%         16,500     Owned      Aluminum Sulphate (Alum)
  Facilities
                   Fort Saskatchewan,        72,500        85%         38,000     Owned      Alum and Sodium Bisulphite
                     Alberta                                          /14,000
                   Fort Saskatchewan,        38,000        95%          7,300     Owned      Carbon Disulphide and Hydrogen
                     Alberta                                                                  Sulphide
                   Saskatoon,                11,050        70%         28,000     Owned      Alum
                     Saskatchewan
                   Prince George,           266,000        95%        103,827   Land Lease   Acid, SO2
                     British Columbia
                   Prince George,           177,300        30%         10,800   Land Lease   Aluminum Sulphate (Alum)
                     British Columbia

Customer Service   Calgary, Alberta           1,000         -                     Owned      Sulphuric Acid and Alum
  Storage Centres
                   Fort Saskatchewan,         3,500         -                     Owned      Sulphuric Acid, Aqueous Ammonia
                     Alberta                                                                  and Alum

Office Locations   Toronto, Ontario           9,334                               Lease      Corporate Head Office
                   Chicago, Illinois            374                               Lease      U.S. Head Office and Sales Office
                   Toledo, Ohio               1,915                               Lease      U.S. Plant Management Office
                   Lebanon, Pennsylvania     16,900                               Lease      Power Generation Office
</TABLE>

(1) Generally capacity is under contract. The percent utilization can vary; the
    amount represents approximated contracted capacity.

Construction of the Company's portion of the environmental compliance facilities
at Syncrude's Upgrader Expansion project (UE-1) was completed during the third
quarter of 2003. Marsulex has been maintaining the plant in readiness for
commissioning and start-up when Syncrude's overall UE-1 project is completed.
During 2005 the Company completed its fixed price commitment totaling $32.5
million including approved change orders, to purchase equipment and services
relating to the construction of its Fort McMurray facility that began earning
revenues at the beginning of 2005. At December 31, 2005, the Company had spent
$55.6 million compared to the total budget of $56.6 million.

The Company entered into agreements with Petro-Canada and Shell Canada Products
for the expansion of its Montreal facility that would increase the facilities
capacity by approximately 50%. Construction of the project is scheduled for

                                       16
<PAGE>

completion in mid 2006. Purchase commitments relating to the Company's expansion
of the Montreal facility at the end of December 31, 2005 were $51.8 million. To
the end of December 31, 2005, $45.6 million (2003 - $3.9 million) has been
recorded as part of facilities under construction in property, plant and
equipment.

ITEM 4A.    UNRESOLVED STAFF COMMENTS

The Company has no unresolved comments regarding its periodic reports under the
Exchange Act.

ITEM 5.     OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Management's Discussion & Analysis

Management's Discussion and Analysis of the Company's operating results and
consolidated cash flows for the 3-year period ended December 31, 2005, liquidity
and capital resources, risks and uncertainties, and critical accounting policies
are incorporated by reference herein and are attached as exhibit 5.1 hereto.

ITEM 6.     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.   Directors and Senior Management
     -------------------------------

The following table sets forth the names of the directors and senior management
of the Company, the offices or positions held by them, and their dates of
appointment as applicable. Directors are elected by the shareholders to serve
until the next annual meeting of the Company or until their successor is elected
or appointed.

<TABLE>
---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                       Position with                     Date of
             Name                         Residence                       Company                       Appointment
---------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                                 <C>                          <C>
Roderick F. Barrett                   Toronto, Ontario                    Director                     April, 1993
---------------------------------------------------------------------------------------------------------------------------
William A. Lambert                    Toronto, Ontario                    Director                    February, 2002
---------------------------------------------------------------------------------------------------------------------------
Ian M. Matheson                       Oakville, Ontario                   Director                    October, 1989
---------------------------------------------------------------------------------------------------------------------------
David S. McCann                       Toronto, Ontario                    Director                    February, 2002
---------------------------------------------------------------------------------------------------------------------------
John A. Rogers                        Toronto, Ontario                    Director                    November, 1996
---------------------------------------------------------------------------------------------------------------------------
William C. Stevens                    Toronto, Ontario                    Director                     March, 2004
---------------------------------------------------------------------------------------------------------------------------
Lee C. Stewart                       Weston, Connecticut                  Director                   September, 2000
---------------------------------------------------------------------------------------------------------------------------
Robert L. Yohe                     Bonita Springs, Florida                Director                    November, 1996
---------------------------------------------------------------------------------------------------------------------------
Laurie Tugman                       Mississauga, Ontario               President and                   August, 1994
                                                                  Chief Executive Officer
---------------------------------------------------------------------------------------------------------------------------
Edward R. (Ted) Irwin               Mississauga, Ontario          Chief Financial Officer            September, 2001
---------------------------------------------------------------------------------------------------------------------------
Robert H. Cardell                  Washington, New Jersey        Vice President and General           December, 2001
                                                                 Manager, Power Generation
---------------------------------------------------------------------------------------------------------------------------
Doug Osborne                          Edmonton, Alberta       Vice President, Western Markets           May, 1989
---------------------------------------------------------------------------------------------------------------------------
Brian Stasiewicz                      Chicago, Illinois           Vice President, Refinery              May, 1989
                                                                          Services
---------------------------------------------------------------------------------------------------------------------------
Judith George                          Milton, Ontario              Corporate Secretary               October, 1996
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

Directors

The members of the Board of Directors are listed below:

Roderick F. Barrett. Mr. Barrett is Managing Partner, Stikeman Elliott LLP,
Barristers & Solicitors and has acted as corporate counsel to Marsulex since its
inception. He also serves on the boards of a number of private companies.

William A. Lambert. Mr. Lambert is a Partner of Birch Hill Equity Partners, a
private equity fund raised in August 2005 by the former principals of TD Capital
Canadian Private Equity Partners. Mr. Lambert previously held the position of
Managing Director of TD Capital, the private equity arm of The Toronto-Dominion

                                       17
<PAGE>

Bank. He has over 12 years experience in merchant banking and investing and 10
years experience in consulting and plant engineering. Mr. Lambert received his
M.B.A. from York University and his B.S. degree in Electrical Engineering from
Massachusetts Institute of Technology. He serves on the boards of a number of
private companies.

Ian M. Matheson. Mr. Matheson is Chief Consulting Officer, Risk Management
Consultants of Canada Limited. He has been a director of Marsulex since its
inception. He has also held senior management positions with, and been an
advisor to, major corporations and financial institutions in the United States
and Canada. He is a director of Aon Reed Stenhouse Inc., a subsidiary of Aon
Corporation, a member of the Advisory Board of First Canadian Title Company
Limited, a subsidiary of The First American Corporation, and serves on other
boards in the insurance, financial services, manufacturing and health care
sectors.

David S. McCann. Mr. McCann is a Partner of Birch Hill Equity Partners, a
private equity fund raised in August 2005 by the former principals of TD Capital
Canadian Private Equity Partners. Mr. McCann previously held the position of
Managing Director of TD Capital, the private equity arm of The Toronto-Dominion
Bank. He has over 15 years experience in merchant and investment banking in the
U.S. and Canada. He serves on the boards of a number of private companies.

John A. Rogers. Mr. Rogers retired from the position of President and CEO of MDS
Inc. in June 2005. He had held that position since March 1996, and prior to that
had held increasingly senior positions with MDS since 1973. Mr. Rogers was a
member of the Board of Directors of MDS from 1991 to 2005. He is a Chartered
Accountant and also serves on the boards of several other organizations.

William C. Stevens. Mr. Stevens is a Principal of Birch Hill Equity Partners, a
private equity fund raised in August 2005 by the former principals of TD Capital
Canadian Private Equity Partners. Mr. Stevens previously held the position of
Vice President and Director of TD Capital, the private equity arm of The
Toronto-Dominion Bank. He has over 10 years experience in investment banking and
private equity investing. He serves on the boards of a number of private
companies.

Lee C. Stewart. Mr. Stewart is a private financial consultant. Mr. Stewart has
over 22 years experience as an investment banker followed by such positions as
Vice President with Union Carbide Corporation, and Executive Vice President and
Chief Financial Officer of Foamex, Inc. Additionally, he is a director of AEP
Industries, P.H. Glatfelter & Company, International Transmission Company, and
on the Advisory Board of Daniel Stewart & Company.

Robert L. Yohe. Mr. Yohe is a Corporate Director. Before retiring in 1994, Mr.
Yohe was Vice Chairman and Director of Olin Corporation, a diversified company
with interests in chemicals, metals, electronic materials, ordnance and
aerospace. Prior to joining Olin, he held executive positions with several
chemical companies in the United States. He holds an M.B.A. from Harvard
Business School and has overseen the finance function in his capacity as Vice
Chairman of Olin Corporation and as President of Olin Chemicals, a subsidiary of
Olin Corporation. Mr. Yohe is also a director of Airgas, Inc., Calgon Carbon
Corporation, and The Middleby Corporation.

Management Team

Laurie A. Tugman, President and Chief Executive Officer. Mr. Tugman joined
Marsulex in August 1994 as Vice President Finance & Chief Financial Officer and
held the positions of Executive Vice President and Chief Financial Officer and
Chief Operating Officer prior to his promotion to President and Chief Executive
Officer in November of 2004. From 1990 to 1994, he was Vice President, Finance,
and Chief Financial Officer, of a mine contracting, and engineering company. Mr.
Tugman has over 20 years experience in financial and operational management in
the waste management and oil and gas industries.

Edward R. (Ted) Irwin, Chief Financial Officer. Mr. Irwin joined Marsulex in
September 2001 as Vice President, Finance and was promoted in March 2004 to
Chief Financial Officer. Prior to joining Marsulex he was Chief Financial
Officer for a publicly traded Internet content provider. From 1989 to 1999 he
worked for a large consumer packaged goods company involved in manufacturing and
distribution where he held progressively more senior positions including
Controller, Director Business Information Systems and Director Distribution and
Logistics.

                                       18
<PAGE>

Robert H. Cardell, Vice President and General Manager Power Generation. Dr.
Cardell joined Marsulex in November of 2001. Prior to Marsulex he served as
General Manager of the Environmental Division of Babcock and Wilcox from July
1999. Before Babcock and Wilcox he was with Research-Cottrell where he was
President and CEO of their International Company. Dr. Cardell began his career
at Foster Wheeler in 1977 and held a number of senior positions in their
Construction, Engineering, and Environmental Divisions.

Doug Osborne, Vice President, Western Markets. Mr. Osborne has been with
Marsulex since its inception in 1989 and has held a variety of commercial
positions of increasing responsibility in product management, sales and business
management. Prior to this he held various technical and commercial positions
with CIL based in North York, Ontario.

Brian E. Stasiewicz, Vice President, Refinery Services. Mr. Stasiewicz has been
with the Company since its inception in 1989 and joined CIL in 1983. He served
in various regional and corporate sales positions.

Judith George, Corporate Secretary. Ms. George is the General Counsel of Birch
Hill Equity Partners, a private equity fund raised in August 2005 by the former
principals of TD Capital. Previously, she was the Vice President, Legal and
Compliance of TD Capital Group, the private equity arm of the Toronto-Dominion
Bank, and the Corporate Secretary of the Harrowston group of companies, which
were acquired by TD Capital in July 2001. Ms. George has served as the Corporate
Secretary of the Company since October 1996.

B.   Compensation
     ------------

Discussions regarding the compensation of the Company's directors and executive
officers, as included in the Company's Management Information Circular filed
with the Ontario Securities Commission are hereby incorporated by reference and
included as exhibit 5.2 hereto.

C.   Board Practices
     ---------------

The Mandate of the Marsulex Board is consistent with the TSX's requirement that
a board assume responsibility for the stewardship of a corporation. The
Company's Mandate is reviewed annually and includes the following
responsibilities:

     (a)  adopt and periodically thereafter reassess the strategic plan for the
          Corporation;
     (b)  identify the principal risks associated with the Corporation's
          business and review the implementation of appropriate systems to
          manage those risks;
     (c)  assess the effectiveness of senior management in carrying out
          corporate strategy by monitoring regular evaluations, management
          development programs and succession planning;
     (d)  adopt and review for effectiveness, a regulatory communications policy
          for the Corporation; and
     (e)  review the internal control and management information systems adopted
          by the Corporation are appropriate given the nature of the
          Corporation's enterprise.

Committees

The Board has established four standing committees to assist in this stewardship
function. Each committee is composed of outside directors, the majority of which
(except in the case of the Environmental, Health & Safety Committee) are
unrelated to the Company.

Human Resources and Compensation Committee - This Committee is responsible for
assisting the Board in determining compensation of senior management as well as
reviewing the adequacy and form of directors' compensation. The Committee
annually reviews the goals and objectives of the Chief Executive Officer for the
upcoming year and each year conducts an appraisal of the performance of the
Chief Executive Officer and together with the CEO reviews the performance of
senior management. The members of the committee are:

Robert Yohe (Chair)
David McCann
Lee Stewart

                                       19
<PAGE>

Audit Committee - The Committee assists the Board in fulfilling its oversight
responsibility of the Company's financial reporting, accounting systems,
internal controls and liaising with the external auditors, as well as its
fiduciary duties with regard to the Company's compliance with legal and
regulatory requirements in financial matters, public disclosure policy and
financial risk management. It reviews the annual consolidated financial
statements, quarterly financial statements and management discussion and
analysis and annual information form and SEC Form 20F on behalf of the Board. It
works jointly with the external auditors and management to develop the annual
audit plan and recommendations on internal controls. The Committee meets with
the Corporation's external auditors independently of management at least once a
year. In addition, the Committee deals with financial risk management. The
Committee's mandate is reviewed regularly. The Committee is responsible for
hiring and evaluating the Auditors and for recommending their compensation. It
reviews all non-audit work performed by the Auditors. The members of the
committee are:

John Rogers (Chair)
Lee Stewart
Robert Yohe

All Committee members are considered to be financially literate, which means
having the ability to read and understand financial statements presenting a
breadth and level of complexity of accounting issues, generally comparable to
the breadth and complexity of the issues that can reasonably be expected to be
raised in the Corporation's financial statements.

Environmental, Health and Safety Committee - This Committee is responsible for
assisting the Board in monitoring environmental, health and safety issues.
Responsibilities include policies on employee health and safety, the
environment, product responsibility, and the transportation of hazardous
materials. On a regular basis, the Committee commissions and reviews external
audits related to Marsulex's compliance and reviews management's activities with
respect to correcting any deficiencies. The members of the committee are:

Ian Matheson (Chair)
Robert Yohe

Corporate Governance Committee - This Committee is responsible for developing
the Company's approach to corporate governance issues, advising the Board in
filling vacancies on the Board and periodically reviewing the composition and
effectiveness of the Board and the contribution of individual directors. The
members of the committee are:

Roderick Barrett (Chair)
John Rogers
Robert Yohe

D.   Employees
     ---------

The Company had 334 employees, including 260 in Canada and 74 in the U.S. at
December 31, 2005 (2004 - 186 employees; 2003 - 180 employees). The increase
over 2004 primarily relates to the Stablex acquisition in August 2005.

The Company has 47 unionized employees at four sites, represented by three
unions through three collective agreements. The Collective Bargaining Agreement
with the Communications, Energy and Paperworkers Union at the Company's Fort
Saskatchewan Sulphides plant, which expired March 31, 2005, was successfully
renegotiated, and no work stoppages occurred in 2005 as a result of unresolved
labour issues. The Company also negotiated its first collective agreement with
the Communications, Energy and Paperworkers Union at its Fort Saskatchewan
Customer Service Centre effective April 4, 2005.

The Company satisfactorily resolved two formal grievances with its unions and
one grievance remained outstanding at the end of 2005.

The Collective Bargaining Agreement with the International Union of Operating
Engineers in the Company's Prince George plant is set to expire on June 30,
2006.

                                       20
<PAGE>

Further, while the Company has not suffered any loss of production due to work
stoppages by its employees in recent years, there can be no assurances that work
stoppages or other labour disturbances which may have a material impact on the
Company will not occur in the future. Finally, a large number of the Company's
suppliers and customers have unionized employees and there can be no assurances
that work stoppages or other labour disturbances at the Company's suppliers or
customers will not have a material adverse effect on the Company's business.

E.   Share Ownership
     ---------------

To the knowledge of Marsulex as of March 15, 2006, the directors and senior
management of Marsulex in aggregate beneficially own, directly or indirectly, or
exercise control or direction over, an aggregate of 903,912 shares of Marsulex,
representing approximately 2.7% of the issued and outstanding common shares of
Marsulex.

The following table lists the individuals who are Directors or Officers of the
Company who own 1% or more of the outstanding shares of the Company, calculated
as if options were exercised and shares issued:

                 # of Shares    # of Options    % of Total
                                                Outstanding     Restricted Share
                                                  Shares        Units Granted(1)
--------------------------------------------------------------------------------

Laurie Tugman         12,500         327,250           1.0%              62,435

1.   Pursuant to the Performance Share Unit Plan, as described in Company's
     Management Information Circular which was filed with the Ontario Securities
     Commission, and is attached as exhibit 5.2 hereto.

The exercise price of the above stock options range from $2.23 to $8.80 and have
a weighted average price of $3.79. The options outstanding have expiry dates
ranging from August 11, 2007 to February 27, 2012, with a weighted average
remaining contractual life of 3.79 years.

ITEM 7.     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.   Major Shareholders
     ------------------

The following table sets forth, as of March 15, 2006, information with respect
to any person who is known to the Company to beneficially own, directly or
indirectly, or to exercise control or direction over more than 10% of the voting
rights attached to any class of the voting securities of the Company and the
total amount of voting rights attached to any class of the voting securities
owned by the officers and directors as a group. The shareholders listed below do
not have voting rights different from other shareholders. The jurisdiction in
which the Company is incorporated does not require disclosure by shareholders
that are the beneficial owners of between 5% and 10%, hence this information is
not available. On March 15, 2006, there were 32,599,898 common shares
outstanding.

-------------------------------------------------------------------------
                                                   March 15, 2006 (1)
                                                   ------------------

                                                     Amount      % per
Title of Class       Shareholder                     Owned       notes
-------------------------------------------------------------------------

Common shares        TD Capital (1)               18,364,279    56.33%
                     AIM Funds Management Inc
                      (Canada) (2)                 3,321,900    10.18%
                     Howson Tattersall
                      Investment Cousel            3,394,086    10.41%
                      Limited (3)
Common shares        Directors and Senior
                      Management as a group          903,812     2.68%
                      (4,5)
-------------------------------------------------------------------------

                                       21
<PAGE>

<TABLE>
---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                     Year-End 2005(1)          Year-End 2004             Year-End 2003
                                                     ----------------          --------------            -------------

                                                     Amount       % per      Amount        % per      Amount        % per
Title of Class       Shareholder                     Owned        notes      Owned         notes       Owned        notes
---------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>            <C>       <C>            <C>       <C>            <C>
Common shares        TD Capital (1)               18,364,279     56.66%    18,364,279     57.93%    18,631,779     58.8%
Common shares        AIM Funds Management Inc.
                      (Canada) (2)                 3,321,900     10.25%            --        --             --       --
                     Howson Tattersall
                      Investment Cousel                   --        --             --        --      3,411,283     10.76%
                      Limited (3)
Common shares        Directors and Senior
                      Management as a group          903,812     2.68%        894,492     2.82%      1,853,522     5.49%
                      (4)(,)(5)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
1.   TD Capital Canadian Private Equity Partners, a fund established by The
     Toronto-Dominion Bank. Calculated on shares outstanding and issued (March
     15, 2006 - 32,599,898; December 31, 2005 - 32,409,898).
2.   Based on publicly available information filed by AIM Funds Management Inc
     (Canada) on October 7, 2005 under Ontario securities law. Calculated on
     shares outstanding and issued (March 15, 2006 - 32,599,898; December 31,
     2005 - 32,409,898).
3.   Based on publicly-available information filed by Howson Tattersall
     Investment Counsel Limited under Ontario Securities law: ownership fell
     below 10% for 2004 and 2005, and was increased as of January 31, 2006
     (March 15 2006 - 32,599,898, December 31, 2005 - 32,409,898)
4.   Includes common shares issuable upon the exercise of all options held by
     the group.
5.   Calculated as if options were exercised and shares issued.

On June 17, 2003, the Company filed a Notice of Intention to make a Normal
Course Issuer Bid (NCIB) with the Toronto Stock Exchange, pursuant to which the
Company was entitled to purchase up to 1,341,677 of its common shares,
representing approximately 5% of its 26,833,550 issued and outstanding common
shares as at June 12, 2003. The NCIB commenced on June 19, 2003 and terminated
on June 18, 2004, during which the Company did not purchase any shares.

As of March 15, 2006, there were approximately 24 registered shareholders of the
Company having registered addresses in the United States, holding approximately
100,900 common shares, or 3.1% of the Company's 32,599,898 outstanding common
shares. The computation of the number and percentage of common shares held in
the United States is based upon the number of registered shareholders with U.S.
addresses and do not necessarily reflect the address of the beneficial
shareholder.

B.   Related Party Transactions
     --------------------------
Material Transactions

The Company and TD Capital are parties to a management services agreement (the
"Management Services Agreement") pursuant to which TD Capital provides certain
management and other services to the Company, including strategic advice and
advisory services regarding capital transactions. The fee for such services was
$350,000 annually commencing in 2001 and, pursuant to the Management Services
Agreement, has been adjusted annually for inflation each year. Either party may
terminate the Management Services Agreement at any time upon thirty days notice.
The registered head office of TD Capital is 66 Wellington Street, 12th Floor,
Toronto, Ontario, M5K 1A2.

Certain of the Company's directors hold senior positions with firms that
provided services to the Company and during 2005 the Company incurred fees for
services provided by those firms of $4.9 million (2004 - $3.9 million; 2003 -
$3.4 million). During January and February 2006, the Company incurred $0.2
million in fees from these firms.

Indebtedness of Directors and Officers

None of the directors, executive officers or senior officers of the Company, no
proposed nominee for election as a director of the Company, and no associates or
affiliates of any of the foregoing were indebted to the Company at any time
since the beginning of the Company's most recently completed financial year.

Interest of Informed Persons in Material Transactions

No informed person (as defined in Ontario Securities Act National Instrument
54-102) of the Company, which includes its directors and officers, has any
interest in any material transaction involving the Company.

                                       22
<PAGE>

C.   Interest of Experts and Counsel
     -------------------------------

Information not required for an annual report.

ITEM 8.     FINANCIAL INFORMATION

A.   Consolidated Financial Statements
     ---------------------------------

Reference is made to Item 17 for a list of all financial statements filed as
part of this Form 20-F.

Dividend Policy

It is the current policy of Marsulex to reinvest any available funds in the
Company, and accordingly Marsulex has not paid cash dividends during the past 5
years and does not anticipate paying cash dividends in the near future. The
Board of Directors periodically reviews this policy. The Company's debt facility
limits the payment of dividends.

B.   Significant Changes
     -------------------

See Item 4. - "History and Development of the Company", for significant changes
since December 31, 2005.

Litigation

The Company is currently involved in proceedings with federal regulators in the
United States with regards to certain liabilities with its plant in Toledo,
Ohio. The Company has also indemnified Chemtrade Logistics Inc. for Notices and
Finding of Violations relating to the Cairo, Ohio plant as discussed in "Item 3
Key Information- Risk Factors - Environment".

On August 15, 2005 the Company brought a legal proceeding against Chemtrade
Logistics Income Fund and Chemtrade Logistics Inc. (collectively, "Chemtrade").
In the Company's statement of claim, it alleges that Chemtrade's recent
acquisition of Peak Sulfur, Inc. and Peak Chemical, LLC breaches a
non-competition agreement between the Company and Chemtrade entered into at the
time of Chemtrade's initial public offering in July 2001. The statement of claim
also alleges that Chemtrade is in breach of a service agreement with respect to
pooling its insurance requirement with those of the Company in order to obtain
favourable insurance coverage and premiums. The Company's action also sought
certain declarations that a number of agreements entered into between the
parties were no longer of any force or effect as a result of Chemtrade's
breaches of the non-competition agreement. The Company is seeking damages for
the alleged breaches of contract in the amount of $72.8 million, as well as
other relief.

On September 27, 2005 the Company received a statement of defense and
counterclaim from Chemtrade. The statement of defense from Chemtrade denies that
it has breached the non-competition agreement or the service agreement. The
counterclaim by Chemtrade seeks declarations that the Company has breached a
number of agreements, including a non-competition agreement entered into by the
Company in favour of Chemtrade, damages of up to $20.0 million for the alleged
breach by the Company of those agreements and injunctions against further
breaches of such agreements or damages of up to $67.8 million in lieu of
injunctions, along with punitive or exemplary damages, interest and costs. The
counterclaim alternatively seeks the return of alleged consideration of $30.6
million paid to the Company if a court finds that the agreements entered into
between the parties are no longer of any force or effect and the Company is
relieved of its obligations under those agreements. Management of the Company
regards Chemtrade's claim to be without merit.

The Company is involved in certain claims arising out of the ordinary course and
conduct of its business that, in the opinion of management, will not have a
material impact upon the financial position of the Company.

                                       23
<PAGE>

ITEM 9.     THE OFFER AND LISTING

Common Shares

The common shares of the Company are traded on The Toronto Stock Exchange in
Canada under the symbol "MLX". The following table sets forth the reported high
and low prices of the outstanding common shares on The Toronto Stock Exchange
for the periods indicated:

--------------------------------------------------------------------------------
Period                                               High              Low
================================================================================

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
Year Ended 2001                                  $   4.15         $   1.85
--------------------------------------------------------------------------------
Year Ended 2002                                      5.00             3.00
--------------------------------------------------------------------------------
Year Ended 2003                                      5.20             3.00
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
First quarter ended March 31, 2004                   6.25             4.50
--------------------------------------------------------------------------------
Second quarter ended June 30, 2004                   6.00             5.00
--------------------------------------------------------------------------------
Third quarter ended September 30, 2004               6.00             4.70
--------------------------------------------------------------------------------
Fourth quarter ended December 31, 2004               7.69             5.65
--------------------------------------------------------------------------------
Year Ended 2004                                      7.69             4.50
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
First quarter ended March 31, 2005                   7.60             6.00
--------------------------------------------------------------------------------
Second quarter ended June 30, 2005                   7.50             6.85
--------------------------------------------------------------------------------
Third quarter ended September 30, 2005               8.50             7.05
--------------------------------------------------------------------------------
Fourth quarter ended December 31, 2005               8.20             7.18
--------------------------------------------------------------------------------
Year Ended 2005                                      8.50             6.00
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
Month Ended September 30, 2005                       8.40             7.73
--------------------------------------------------------------------------------
Month Ended October 31, 2005                         8.20             7.18
--------------------------------------------------------------------------------
Month Ended November 30, 2005                        8.10             7.50
--------------------------------------------------------------------------------
Month Ended December 31, 2005                        8.00             7.50
--------------------------------------------------------------------------------
Month Ended January 31, 2006                         7.90             7.50
--------------------------------------------------------------------------------
Month Ended February 28, 2006                        8.15             7.50
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

Senior Subordinated Notes

There is currently no organized public market for the Senior Subordinated Notes
and the Company does not intend to apply for a listing of the Senior
Subordinated Notes on any securities exchange.

The Senior Subordinated Notes were issued under an Indenture, dated as of June
30, 1998, between the Company and The Bank of Nova Scotia Trust Company of New
York, as trustee.

                                       24
<PAGE>

ITEM 10.          ADDITIONAL INFORMATION

A.   Share Capital
     -------------

Information not required for an annual report.

B.   Memorandum of Articles of Association
     -------------------------------------

Reference is made to Exhibit 1.1 and 1.2 of this Form 20-F regarding the
Company's Articles of Incorporation and By-laws.

Corporate Information and Objects and Purposes

The Company is incorporated under the Canada Business Corporations Act (the
"CBCA") through articles of amalgamation dated June 16, 1989, as amended by a
certificate of amendment dated November 19, 1996. The articles of the Company
(the "Articles") place no restrictions on the Company's objects and purposes.
The Company has also adopted by-laws No. 2 and No. 4 to regulate its internal
functions (collectively the "Bylaws").

Directors' Matters

Section 4.18 of Bylaw No. 4 provides that a director of the Company who is a
party to, or who is a director of, or has a material interest in any person who
is a party to, a material contract or proposed material contract with the
Company shall disclose the nature and extent of his or her interest at the time
and in the manner provided by the CBCA. Any such contract or proposed contract
shall be referred to the board or shareholders for approval even if such
contract is one that in the ordinary course of the Company's business would not
require approval by the board or shareholders. Such a director shall not vote on
any resolution to approve the same except as provided by the CBCA.

Section 4.19 of Bylaw No. 4 provides that the remuneration of the directors of
the Company may, from time to time, be determined by the board. There are no
restrictions in the Articles on the directors' power, in the absence of an
independent quorum, to vote compensation to themselves or any member of their
body. The Bylaws do not preclude any director from serving the Company in any
other capacity and receiving remuneration therefore.

Bylaw No. 4 provides that the directors of the Company are authorized to:

(a)  borrow money upon the credit of the Company;

(b)  issue, reissue, sell or pledge bonds, debentures, notes or other evidences
     of indebtedness or guarantee of the Company, whether secured or unsecured;

(c)  to the extent permitted by the Act, give a guarantee on behalf of the
     Company to secure performance of any present or future indebtedness,
     liability or obligation of any person; and

(d)  mortgage, hypothecate, pledge or otherwise create a security interest in
     all or currently owned or subsequently acquired real or personal, movable
     or immovable, property of the Company including book debts, rights, powers,
     franchises and undertakings, to secure any such bonds, debentures, notes or
     other evidences of indebtedness or guarantee or any other present or future
     indebtedness, liability or obligation of the Company.

The borrowing powers of the directors set forth in the Articles can be varied by
amending the Articles. The CBCA provides that a corporation may alter its
articles by filing articles of amendment with the CBCA Director. A proposed
amendment to the articles of a corporation is adopted when such amendment is
approved by a special resolution. A special resolution is defined in the CBCA as
a resolution passed by a majority of not less than two-thirds of the votes cast
by those members of a corporation who, being entitled to do so, vote in person
or by proxy at a general meeting of the corporation, or consented to in writing
by every member of a corporation who would have been entitled to vote in person
or by proxy at a general meeting of the corporation.

                                       25
<PAGE>

There is no provision in the Articles or Bylaws of the Company regarding
retirement or non-retirement of directors under an age limit requirement.

Neither the CBCA, the Company's Articles or Bylaws require that a director hold
any shares to become, or retain the position of, a director of the Company.

Share Rights

As of March 15, 2006, the capital stock of the Company consists of four classes
of authorized shares:

1. unlimited senior preference shares, no par value;
2. unlimited junior preference shares, no par value;
3. unlimited convertible shares, non-voting, no par value; and
4. unlimited common shares, no par value.

Of these four classes, the following are issued and fully paid:

1. nil convertible shares; and
2. 32,599,898 common shares.

Preference Shares

The senior preferred shares as a class may be issued from time to time in one or
more series, each series comprising the number of shares, designation,
privileges, restrictions and conditions which the directors of the Company
determine by resolution. On the liquidation, dissolution or winding-up of the
Company or on any other distribution of assets of the Company among its members
for the purpose of winding up its affairs, the senior preferred shares are
entitled to receive, before any distribution of any part of the assets of the
Company among the holders of any shares ranking subordinate to the senior
preferred shares, for each senior preferred share, an amount equal to the
redemption price of such share and any dividends declared thereon and unpaid.

The junior preferred shares as a class may be issued from time to time in one or
more series, each series comprising the number of shares, designation,
privileges, restrictions and conditions which the directors of the Company
determine by resolution. On the liquidation, dissolution or winding-up of the
Company or on any other distribution of assets of the Company among its members
for the purpose of winding up its affairs, the junior preferred shares are
entitled to receive, before any distribution of any part of the assets of the
Company among the holders of any shares ranking subordinate to the junior
preferred shares, for each junior preferred share, an amount equal to the
redemption price of such share and any dividends declared thereon and unpaid.

Except for such rights relating to the election of directors on a default in
payment of dividends as may be attached to any series of preferred shares by the
directors of the Company, holders of either senior or junior preferred shares
are not entitled to receive notice of, or to attend or vote at any general
meeting of the members of the Company.

Common Shares

The holders of the common shares are entitled to one vote per share for matters
voted on by members of the Company. Subject to the prior rights of the holders
of any senior preferred shares or junior preferred shares ranking senior to the
common shares and non-voting convertible shares with respect to priority of
dividends, the holders of common shares and the holders of non-voting
convertible shares are entitled to receive equally share for share, such
non-cumulative dividends as the directors may, from time to time, declare.

Non-Voting Convertible Shares

The non-voting convertible shares are convertible into common shares on a
one-for-one basis and the common shares are convertible into non-voting
convertible shares on a one-for-one basis at any time. The non-voting
convertible shares are entitled to receive the same dividend as the common
shares and participate equally with the common shares in any distribution of
assets of the Company. The holders of the non-voting convertible shares are not

                                       26
<PAGE>

entitled to vote at the annual meeting or any special meeting of the
shareholders except where the holders of a specified class are entitled to vote
separately as a class as provided in the CBCA.

Modification of Share Rights

Pursuant to the CBCA, the members of the Company may, by special resolution
(defined as described above -Directors' Matters), and by otherwise complying
with the Articles and Bylaws of the Company, vary or abrogate any special rights
or restrictions attached to any shares, whether issued or unissued.

Shareholder Meetings

The CBCA provides that the Company must hold an annual general meeting at least
once in every calendar year. The Company may hold an extraordinary general
meeting at any time. The CBCA also provides that one or more members of the
Company holding not less than 5% of the issued voting shares of the Company may
give notice to the directors requiring them to call and hold a general meeting.

The Company must give to its members entitled to receive notice of a general
meeting not less than 21 days' and not more than 50 days' notice of any general
meeting of the Company, but those members may in any manner waive the period of
notice for a particular meeting. The CBCA provides that for the purpose of
determining members, or members of a class of members, entitled to notice of, or
to vote at, a general meeting or class meeting, the directors may set in advance
a record date which may not be more than 50 days before the meeting date.

The CBCA requires the directors of a reporting company (such as the Company) to
provide with notice of the meeting a form of proxy for use by every member
entitled to vote at such meeting as well as an information circular containing
prescribed information regarding the matters to be dealt with at the general
meeting. Prior to each annual general meeting of its members, the directors of
the Company must place comparative financial statements, made up to a date not
more than six months before the annual general meeting, the report of the
auditor, and the report of the directors to the members.

There are no restrictions under the laws of the jurisdiction of the Company's
incorporation, or in the company's articles or by laws, that limit the rights of
non-residents or foreign shareholders to own, or hold or exercise voting rights
on, our common shares, preference shares or non-voting convertible shares.

The articles and bylaws of the company do not contain any restriction that would
have the effect of delaying, deferring or preventing a change in control of the
Company and that would operate only with respect to a merger, acquisition or
corporate restructuring involving the Company.

The articles and by-laws of the Company do not require that a shareholder
disclose his or her share ownership interest in the Company.

C.   Material Contracts
     ------------------

Credit Agreement

On August 16, 2005, Marsulex entered into a $100 million credit agreement with a
syndicate of banks. The agreement provides for an $80 million Senior Secured
Term Loan and a $20 million Revolving Credit Facility with the facilities
carrying variable rates of interest and is secured by the assets of Marsulex.
All of the loans under this arrangement mature on June 15, 2008. At the time of
the acquisition of Stablex $70 million of the Senior Secured Term Loan was drawn
to fund the purchase of Stablex. The remaining $10 million of the Term Loan
remains undrawn at the end of the year and is available for general corporate
purposes until August 16, 2006, after which undrawn amounts will be cancelled.
The Revolving Credit Facility has been established for general corporate
purposes and remained undrawn at the end of the year. The term loan can be drawn
as LIBOR and Bankers' Acceptance loans with margins ranging from 150 to 275
basis points and prime rate loans with margins ranging from 50 to 175 basis
points. A portion of the Senior Secured Term Facility is denominated in U.S.
dollars and has been translated into Canadian dollars at rates in effect at the
balance sheet date. Interest is paid monthly with quarterly mandatory principal
repayments for the term loan beginning on September 30, 2007 of $6.7 million.

                                       27
<PAGE>

Settlement Agreement with Former CEO

In November 2004, the Company entered into a settlement agreement with David
Gee, the former President and CEO of the Company. The total cost of payments to
Mr. Gee in connection with his departure from the Company pursuant to the
settlement agreement amounted to $4,287,886. This amount represents the payment
of (i) a settlement award calculated using years of service with the Company and
the years of service with the prior employer, (ii) the bonus in respect of
service for the 2004 year, (iii) a lump sum retiring allowance, and (iv) a
lump-sum contribution made in respect of a supplemental pension plan. Also
pursuant to the settlement agreement, the Company agreed to continue to make its
premium contributions so as to provide for certain benefits (including life and
health care insurance) until the earlier of (a) June 30, 2007 and (b) the date
Mr. Gee secures comparable benefit coverage. Under the terms of the settlement
agreement, all performance share units and stock options held by Mr. Gee, to the
extent then not vested, vested immediately. Pursuant to the settlement agreement
entered into with Mr. Gee, the Company has satisfied its obligations with
respect to the supplemental pension plan.

D.   Exchange Controls
     -----------------

There is no law or governmental decree or regulation of general application in
Canada that restricts the export or import of capital, or affects the remittance
of dividends, interest or other payments to a non-resident holder of common
shares, other than withholding tax requirements. See below for discussion on
"Taxation."

There are no limitations of general application imposed by Canadian law or by
the constituent documents of the Company on the right of a non-resident to hold
or vote debt or common shares, other than as provided in the Investment Canada
Act (Canada). The following summarizes the principal features of the Investment
Canada Act (Canada):

The Investment Canada Act (Canada) requires certain "non-Canadian" individuals,
governments, corporations or other entities who wish to acquire control of a
"Canadian business" (as defined in the Investment Canada Act), or establish a
"new Canadian business" (as defined in the Investment Canada Act) to file either
a notification or an application for review with the Investment Review Division
of the federal Department of Industry or in the case of the acquisition of a
"cultural" business (as defined in the Investment Canada Act), the Department of
Canadian Heritage. The Investment Canada Act requires that acquisitions of
control of a Canadian business by a "non-Canadian" that meet specified financial
thresholds be reviewed and approved by the Minister responsible for the
Investment Canada Act on the basis that the Minister is satisfied, or deemed to
be satisfied, that the acquisition is "likely to be of net benefit to Canada,"
having regard to criteria set forth in the Investment Canada Act. The Investment
Canada Act provides detailed rules for determining whether control has been or
will be acquired. The acquisition of one-third or more of the voting shares of a
corporation may be considered an acquisition of control. Generally, reviewable
acquisitions of control may not be implemented before being approved by the
Minister. Failure to comply with the review provisions of the Investment Canada
Act could ultimately result in, among other things, a court order directing
divestiture of the Canadian business.

E.   Taxation
     --------

The following paragraphs set forth certain Canadian federal income tax
considerations in connection with the purchase, ownership and disposition of the
Senior Subordinated Notes. The discussion is restricted to non-residents of
Canada who are residents of the United States and who hold such Senior
Subordinated Notes as capital property. The tax considerations set forth below
are based upon the provisions of the Income Tax Act (Canada), and on the
Canada-United States Income Tax Convention, 1980, as well as regulations,
rulings, judicial decisions and administrative and assessing practices now in
effect in Canada, all of which are subject to change. This discussion does not
take into account provincial or territorial laws of Canada, or laws of foreign
jurisdictions.

The Company is not required to withhold tax from interest paid by it on Senior
Subordinated Notes to any non-resident of Canada with whom it is dealing at
arm's length within the meaning of the Income Tax Act (Canada). Under such laws
and administrative and assessing practices, no other tax on income (including
taxable capital gains) is payable in respect of the purchase, holding,
redemption or disposition of the Senior Subordinated Notes or the receipt of
interest or any premium thereon by holders with whom the company deals at arm's

                                       28
<PAGE>

length and who are not residents, and who are not deemed to be residents, in
Canada in any taxation year in which they hold the Senior Subordinated Notes,
and who do not use or hold, and are not deemed to use or hold, the Senior
Subordinated Notes in connection with carrying on a business in Canada, and who
are not non-resident insurers carrying on an insurance business in Canada and
elsewhere.

The above description of Canadian income tax considerations is of a general
nature only and should not be construed as advice to any particular holder of
Senior Subordinated Notes. Holders should consult with their Canadian tax
advisers with respect to their particular tax position.

F.   Dividends and Paying Agents
     ---------------------------
Information not required for an annual report.

G.   Statement by Experts
     --------------------

Information not required for an annual report.

H.   Documents on Display
     --------------------

The Company is subject to certain of the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith, has
and will file reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information filed with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at 100F Street, N.E. Washington, D.C. 20549. Copies
of such material can also be obtained from the principal office of the
Commission at 100F Street, N.E., Washington, D.C. 20549 at prescribed rates.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. The SEC also maintains an Internet site,
www.sec.gov, which contains reports and other information regarding companies
that file with the SEC.

I.   Subsidiary Information
     ----------------------

Information not required for an annual report.

ITEM 11.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A.   Quantitative Information about Market Risk
     ------------------------------------------

The Company does not invest in market risk-sensitive investments such as
derivative financial instruments or derivative commodity instruments.

B.   Qualitative Information about Market Risk
     -----------------------------------------

The Company is exposed to changes in the market price of the chemicals it sells,
and to fluctuations in the foreign currency exchange and interest rates
primarily in its cash, debt, and foreign currency transactions, all in the
normal course of business.

Interest Rate Risk

The interest rate on the Company's Senior Subordinated Notes and the Long-term
Loan are fixed under contractual agreements and bear interest of 9.625% and 7.3%
per annum respectively.

                                       29
<PAGE>

The following table demonstrates the maturity of the Company's fixed rate debt:
<TABLE>
===========================================================================================================================
<CAPTION>
(In thousands of dollars)           2006         2007         2008         2009        2010       Thereafter      Total
---------------------------------------------------------------------------------------------------------------------------
<C>                                <C>          <C>         <C>            <C>        <C>              <C>         <C>
9.625% Senior Subordinated
  Notes (1)                           --           --      70,848             --         --                --      70,848
7.3% Long-Term Loan (2)            1,641        1,765       1,898          2,040      2,195            28,935      38,474

Weighted average for Senior
  Subordinated Notes and
  Long-Term Loan                     8.8%         8.8%        8.1%           7.3%       7.3%              7.3%

===========================================================================================================================
</TABLE>
     1.  The Senior Subordinated Notes are denominated in US dollars and
         converted at the December 31, 2005 closing rate of 1.1659. The Notes
         mature on June 28, 2008 and are redeemable at the option of the Company
         at specified redemption premiums. Interest is paid on June 30 and
         December 31 of each year until maturity.
     2.  On June 5, 2003, a wholly owned subsidiary of the Company entered into
         a Long-term Loan agreement to finance the construction of the Fort
         McMurray facility which is secured by the subsidiary's assets. The
         Company provides a general guarantee until the successful start-up of
         the facility as defined in the loan agreement at which time the general
         guarantee will be released and the loan will be secured by the
         subsidiary's assets. If, after the successful start-up of the facility,
         the subsidiary fails to perform its operating obligations, the Company
         will become responsible for the operation of the facility and as a
         result the servicing of the debt. The loan bears interest at a fixed
         rate of 7.3% per annum with monthly repayments of principal, which
         commenced in January 2005, due over 15 years.
     3.  Interest on U.S. denominated loans is calculated using the December 31,
         2005 closing rate of 1.1659.

The Senior Secured Term Loan, maturing in 2008 is subject to near term interest
rate fluctuations as interest is variable. The loan can be drawn as LIBOR,
Bankers' Acceptance and prime loans with margins ranging from 150 to 275 basis
points and prime rate loans with margins ranging from 50 to 175 basis points. A
1% decrease in Libor, Bankers Acceptances and prime rate would reduce the
Company's interest payments by US$150,000, $515,000 and $5,000 respectively.

The following table demonstrates the maturity of the Company's variable rate
debt:

<TABLE>
===========================================================================================================================
<CAPTION>
(In thousands of dollars)           2006         2007         2008         2009        2010       Thereafter      Total
---------------------------------------------------------------------------------------------------------------------------
<C>                                  <C>       <C>          <C>             <C>         <C>              <C>      <C>
Senior Secured Term Loan (1)          --       13,340       56,105           --          --               --      69,445

===========================================================================================================================
</TABLE>
     1.  On August 16, 2005, Marsulex completed a $100 million senior secured
         credit facility with a syndicate of banks. The facility provides for an
         $80 million Senior Secured Term Loan and a $20 million Revolving Credit
         Facility carrying variable rates of interest and secured by the assets
         of Marsulex Inc. and its subsidiaries. All of the loans under this
         arrangement mature on June 15, 2008. At December 31, 2005 the loans
         carried the following rates of interest:
             US LIBOR loan (U.S. $15 million) (4.37%) plus 250 basis points
             Cdn. Bankers' Acceptance loan - (3.40%) plus 250 basis points
             Cdn. Prime rate loan - (5.00%) plus 150 basis points
     2.  Interest on U.S. denominated loans is calculated using the December 31,
         2005 closing rate of 1.1659.

Foreign Currency Risk

The following table provides the percentage of Marsulex's revenues that were
denominated in U.S. dollars.

                                          2005             2004             2003
--------------------------------------------------------------------------------

                                         42.3%            44.5%            42.9%
================================================================================

Historically, Marsulex has offset the foreign exchange fluctuations associated
with the transaction of its U.S. dollar cash flow largely by financing its
business with U.S. dollar debt.

                                       30
<PAGE>


A one-cent increase in the value of the Canadian dollar on its U.S. dollar
denominated operations has the following impact:

<TABLE>
<CAPTION>

($ thousands)                                                                    2005             2004             2003
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>             <C>              <C>
Gross margin                                                                  $  (278)        $   (267)        $   (332)
SGA costs                                                                          62               68               91
---------------------------------------------------------------------------------------------------------------------------
Earnings from operations before the undernoted                                $  (216)        $   (199)        $   (241)
Foreign exchange on Senior Secured Loan                                           206               --               --
Depreciation and amortization of deferred charges and intangible assets           156              153              164
Net interest expense                                                               86               98              113
---------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes (1)                                                  232               52               36

===========================================================================================================================
</TABLE>
1.   This excludes the foreign exchange impact on translation of US denominated
     monetary assets and liabilities

Chemical Prices

Industrial chemicals sold by the Company are subject to market price
fluctuations. In addition, regional supply and demand imbalances can lead to
isolated price erosion.

The Company's end-use contracts generally have a "meet or release" provision. As
a result, competitive pressure can cause Marsulex to lower selling prices in
order to retain the volume.

In some contracts, commodity price exposure is either shared with, or borne
entirely by, the generator customers. A number of significant contracts are
structured such that the contract includes minimum volume requirements or
guaranteed fees in order to increase the stability of the cash flows
("fee-based"). The following table demonstrates the percent of revenue from
continuing operations derived from fee-based and risk-sharing arrangements:

                                         2005             2004             2003
--------------------------------------------------------------------------------
Fee-based                               50.3%            46.7%            43.6%
Risk-sharing                            10.5%            12.3%            12.9%
================================================================================

For the contracts that are subject to commodity price fluctuations, a one dollar
change in price would result in an approximate 1.04% change in gross profit.

ITEM 12.    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Information not required for an annual report.

                                     PART II

ITEM 13.    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUINCIES

None

ITEM 14.    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
            PROCEEDS

The Company's debt facility limits the payment of dividends.

                                       31
<PAGE>

ITEM 15.    CONTROLS AND PROCEDURES

A.   Disclosure Controls and Procedures
     ----------------------------------

Disclosure controls and procedures are defined by the Securities and Exchange
Commission as those controls and other procedures that are designed to ensure
that information required to be disclosed by the Company in reports filed or
submitted by it under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the Company's
disclosure controls and procedures as of the period covered by this Annual
Report on Form 20-F and have determined that such disclosure controls and
procedures are effective.

B.   Change in Internal Control Over Financial Reporting
     ---------------------------------------------------
There have not been any significant changes in the Company's internal control
over financial reporting that have occurred during the fiscal period ended
December 31, 2005 and that have materially affected or are reasonably likely to
materially affect the Company's internal control over financial reporting.

ITEM 16A    AUDIT COMMITTEE FINANCIAL EXPERT

The Board of Directors has determined that Mr. John Rogers, an individual
serving on the audit committee of the Company's Board of Directors, is an audit
committee financial expert, as that term is defined in Item 401(h)(2) of
Regulation S-K under the Securities Exchange Act of 1934, as amended. The Board
of Directors of the Company has also determined that Mr. Rogers is independent,
as that term is defined in the applicable listing standards of the Nasdaq Stock
Market, Inc.

ITEM 16B    CODE OF ETHICS

The Company has adopted a Code of Conduct that applies to its all of its
employees including executives, senior officers, and members of the board of
directors. The Company has posted the text of the Code of Conduct on its
website. It can be viewed by visiting the Company's website at www.marsulex.com
and selecting "Investor".

ITEM 16C    PRINCIPLE ACCOUNTANT FEES AND SERVICES

The Audit Committee has adopted policies and procedures for the pre-approval of
audit related, tax services and other non-audit services provided by the
auditors (Auditor Services). These policies and procedures are summarized below.

The terms of engagement and scope of the annual audit of the financial
statements are agreed to by the Audit Committee in advance of the engagement.
The Audit Committee approves the audit fees in respect to the annual audit.

The auditors are not permitted to provide non-audit services that would
compromise their independence or violate any laws or regulations that would
affect their appointment as auditors. They are eligible for selection to provide
non-audit services only to the extent that their skills and experience make them
a logical supplier of the services. The Audit Committee must pre-approve the
provision of all non-audit services by the auditors and will consider regulatory
guidelines in determining the scope of permitted services. The Audit Committee
has pre-approved the list of services that can be performed by the auditor.
Assignments outside these parameters must be specifically pre-approved by the
Audit Committee in advance of commissioning the work.

                                       32
<PAGE>

In 2005, the Audit Committee of the Company approved all audit related, tax
services and other non-audit services performed by the Company's auditors.

Fees during the fiscal year ended December 31         2005                 2004
--------------------------------------------------------------------------------
Audit Fees                                         528,000              369,570
Audit Related Fees                                  11,000               21,950
Tax Service Fees                                   128,500              127,000
Other Fees                                              --                4,850
--------------------------------------------------------------------------------
Total                                              667,500              523,370
================================================================================

Audit Fees
----------

The aggregate fees billed by KPMG LLP (the "Outside Auditors"), the Company's
principal accountant, for the fiscal years ended December 31, 2005 and 2004 are
for professional services rendered by the Outside Auditors for the audit of the
Company's annual and quarterly financial statements or services that are
normally provided by the Outside Auditors in connection with statutory and
regulatory filings or engagements.

Audit-Related Fees
------------------

The aggregate fees billed by the Outside Auditors for the fiscal years ended
December 31, 2005 and 2004, for assurance and related services rendered by it
that are reasonably related to the performance of the audit or review of the
Company's financial statements and are not reported above as audit fees.
Professional services provided included the review of the Company's pension
plans.

Tax Fees
--------

The aggregate fees billed by the Outside Auditors for the fiscal years ended
December 31, 2005 and 2004, for professional services rendered by it for tax
compliance, tax advice, tax planning and other services. Tax services provided
included tax advisory services and review and filing of the Company's annual
income tax returns.

All Other Fees
--------------

The aggregate fees billed by the Outside Auditors for the fiscal years ended
December 31, 2005 and 2004 respectively, for products and services provided by
the Outside Auditors, other than the services reported in the preceding three
paragraphs. These services included SOX advisory and due diligence services.

ITEM 16D    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

ITEM 16E    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
            PURCHASERS

None.

                                       33
<PAGE>

                                    PART III

ITEM 17.    FINANCIAL STATEMENTS

The Consolidated financial statements of the Company have been prepared on the
basis of Canadian GAAP. A reconciliation to U.S. GAAP appears in Note 19
thereto.

<TABLE>
<CAPTION>

Marsulex Inc. Consolidated Financial Statements                                                                Page
---------------------------------------------------------------------------------------------------------------------
<S>                                                                                                               <C>
Management's Responsibilities for Financial Reporting                                                          FS-1
Report of Independent Registered Public Accounting Firm                                                        FS-2
Consolidated Balance Sheets at December 31, 2005 and 2004                                                      FS-3
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003                     FS-4
Consolidated Statements of Retained Earnings for the years ended December 31, 2005, 2004 and 2003              FS-4
Consolidated Statement of Cash Flows for the years ended December 31, 2005, 2004 and 2003                      FS-5
Notes to the Consolidated Financial Statements                                                                 FS-6
</TABLE>

ITEM 18.    FINANCIAL STATEMENTS

The Company has elected to provide financial statements in accordance with Item
17 in lieu of responding to this item.

ITEM 19.    EXHIBITS

<TABLE>
---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
   Exhibit Number      Description
---------------------------------------------------------------------------------------------------------------------------
<S>                    <C>
         1.1           Articles of Incorporation of the Company(1)
---------------------------------------------------------------------------------------------------------------------------
         1.2           By-laws of the Company(1)
---------------------------------------------------------------------------------------------------------------------------
         2.1           Indenture  between  Marsulex  Inc. and the Bank of Nova Scotia Trust  Company of New York for up to
                       US$155,000,000 in 9-5/8% Senior Subordinated Notes(2)
---------------------------------------------------------------------------------------------------------------------------
         4.2           Amended and Restated Asset and Share Purchase Agreement(3)
---------------------------------------------------------------------------------------------------------------------------
         4.3           Amended and Restated Share and Debt Purchase Agreement(3)
---------------------------------------------------------------------------------------------------------------------------
         4.4           Share Purchase Agreement (Shares of Sulconam Inc.)(4)
---------------------------------------------------------------------------------------------------------------------------
         4.5           Loan Agreement(5)
---------------------------------------------------------------------------------------------------------------------------
         4.6           Settlement Agreement with former CEO(6)
---------------------------------------------------------------------------------------------------------------------------
         4.7           Purchase and Sale Agreement (Shares of Seaway TLC Inc.)
---------------------------------------------------------------------------------------------------------------------------
         4.8           Credit Agreement
---------------------------------------------------------------------------------------------------------------------------
         5.1           Management's Discussion and Analysis
---------------------------------------------------------------------------------------------------------------------------
         5.2           Management Information Circular
---------------------------------------------------------------------------------------------------------------------------
         8             Listing of Marsulex subsidiaries (included on page 15 hereof)
---------------------------------------------------------------------------------------------------------------------------
         12.1          Certification  of Chief Executive  Officer and Chief Financial  Officer  Pursuant to Section 302 of
                       the Sarbanes-Oxley Act of 2002
---------------------------------------------------------------------------------------------------------------------------
         13.1          Certification  of Chief Executive  Officer and Chief Financial  Officer  Pursuant to Section 906 of
                       the Sarbanes-Oxley Act of 2002
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
1.   Incorporated by reference to exhibits of the Company's Form 20-F
     (registration  number  333-09410) filed with the SEC on June 27 2001.
2.   Incorporated by reference to Exhibit 7.1 of the Company's Form F-10
     (registration number 333-09410) filed with the SEC on September 17, 1998.
3.   Incorporated by reference to exhibits of the Company's Amendment No. 1 to
     Form 20-F (registration number 333-09410) filed with the SEC on July 8,
     2002.
4.   Incorporated by reference to exhibits of the Company's Form 20-F
     (registration number 333-09410) filed with the SEC on March 18, 2003.
5.   Incorporated by reference to exhibits of the Company's Form 20-F
     (registration number 333-09410) filed with the SEC on March 25, 2004.
6.   Incorporated by reference to exhibits of the Company's Form 20-F
     (registration number 333-09410) filed with the SEC on March 28, 2005.

                                       34
<PAGE>

SIGNATURE

The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.

MARSULEX INC.




By: /s/ Laurie Tugman
Name: Laurie Tugman

Title: President and Chief Executive Officer


Dated this 24th day of March, 2006




                                       35
<PAGE>

Management's Responsibility for Financial Reporting

The management of Marsulex Inc. is responsible for the integrity of the
accompanying Consolidated Financial Statements and all other information in the
annual report including information determined by specialists. The financial
statements have been prepared by management in accordance with Canadian
generally accepted accounting principles applied on a consistent basis and which
recognize the necessity of relying on best estimates and informed judgements.
The most significant of these accounting principles have been set out in Note 1
to the Consolidated Financial Statements.

To discharge its responsibilities for financial reporting and safeguarding of
assets, management depends on the Company's systems of internal accounting
control. These systems are designed to provide reasonable and cost-effective
assurance that the financial records are reliable and form a proper basis for
the timely and accurate preparation of financial statements.

The Board of Directors oversees management's responsibilities for financial
statements primarily through the activities of its Audit Committee, which is
composed solely of Directors who are neither officers nor employees of the
Company. This Committee meets regularly with financial management and the
independent auditors to discuss internal controls, auditing matters and
financial reporting issues. The Audit Committee reviews the Consolidated
Financial Statements and Management's Discussion and Analysis prior to the Board
of Directors' approving them for inclusion in the Annual Report. The Audit
Committee also meets with the auditors without the presence of management, to
discuss the results of their audit and the quality of financial reporting.

The financial statements have been audited by KPMG LLP, Chartered Accountants.
Their report outlines the scope of their examinations and opinion on the
Consolidated Financial Statements.


/s/ Laurie Tugman                                /s/ Edward R. Irwin


Laurie Tugman                                    Edward R. Irwin
President                                        Chief Financial Officer
and Chief Executive Officer


Toronto, Canada
February 17, 2006




                                      FS-1
<PAGE>

Report of Independent Registered Public Accounting Firm

Auditors' Report to the Shareholders

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

We conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.

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

Canadian generally accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in note 21 to the consolidated financial statements.


/s/ KPMG LLP
------------


Chartered Accountants

Toronto, Canada
February 17, 2006




                                      FS-2
<PAGE>

<TABLE>

Consolidated Balance Sheets
(In thousands of dollars)
December 31, 2005 and 2004
===============================================================================================================================
<CAPTION>
                                                                                                       2005               2004
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>                <C>
Assets
Current assets:
   Cash and cash equivalents                                                                   $     12,749       $     30,922
   Cash held in trust (note 4)                                                                       10,268              6,397
   Accounts receivable                                                                               27,924             21,896
   Due from Chemtrade Logistics                                                                          --                900
   Inventories (note 6)                                                                               2,419              1,266
   Future tax asset (note 16)                                                                           544                154
   Prepaid expenses and other assets                                                                  4,056              2,155
-------------------------------------------------------------------------------------------------------------------------------
                                                                                                     57,960             63,690

Long-term portion of cash held in trust (note 11(b))                                                     --              7,500
Property, plant and equipment (note 7)                                                              206,314            152,432
Deferred charges and other assets, net of amortization (note 9)                                       5,213                986
Intangible assets (note 10)                                                                          29,483              2,625
Goodwill                                                                                             75,430             45,544
-------------------------------------------------------------------------------------------------------------------------------
                                                                                               $    374,400       $    272,777

===============================================================================================================================

Liabilities and Shareholders' Equity
Current liabilities:
   Accounts payable                                                                            $     16,921       $     10,564
   Accrued liabilities                                                                               21,346             19,281
   Income taxes payable                                                                               1,077                 60
   Interest payable                                                                                     198                122
   Current portion of deferred revenue                                                                1,868              1,015
   Current portion of long-term debt (note 11)                                                        1,641              1,526
-------------------------------------------------------------------------------------------------------------------------------
                                                                                                     43,051             32,568

Long-term debt (note 11)                                                                            177,126            111,612
Deferred revenue                                                                                      5,814              2,703
Employee future benefits (note 14)                                                                    2,186              1,330
Other liabilities                                                                                     9,795              8,508
Future tax liability (note 16)                                                                       29,537             14,222

Shareholders' equity:
   Capital stock (note 12)                                                                           60,093             57,973
   Retained earnings                                                                                 44,611             43,190
   Foreign currency translation adjustment                                                            2,187                671
-------------------------------------------------------------------------------------------------------------------------------
                                                                                                    106,891            101,834

-------------------------------------------------------------------------------------------------------------------------------
                                                                                               $    374,400       $    272,777
Subsequent event (note 12)
Commitments and contingencies (note 15)
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

On behalf of the Board:

                        /s/ John Rogers               /s/ Lee C. Stewart

                        John Rogers                   Lee C. Stewart
                        Director                      Director


                                      FS-3
<PAGE>

<TABLE>

Consolidated Statements of Operations
(In thousands of dollars, except per share
amounts) Years ended December 31, 2005, 2004 and 2003
===============================================================================================================================
<CAPTION>
                                                                                       2005             2004              2003
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>              <C>              <C>
Revenue                                                                         $   166,456      $   137,022      $    134,982
Cost of sales and services                                                          105,459           88,155            86,546
-------------------------------------------------------------------------------------------------------------------------------
Gross profit                                                                         60,997           48,867            48,436

Selling, general, administrative and other costs                                     21,116           23,342            19,663
Loss on disposal of property, plant and equipment                                        --               57                --
Depreciation                                                                         21,563           16,907            15,727
Amortization of deferred charges and intangible assets                                2,641              708               726
Unusual items (note 2)                                                                1,718              657             1,422
Foreign exchange losses (gains) on monetary items                                       118              (61)           (2,057)
Foreign exchange gain on long-term debt                                                (555)              --                --
Interest expense                                                                     11,598           10,569             9,755
Interest capitalized                                                                 (1,693)          (4,252)           (3,738)
Interest income                                                                        (936)            (756)             (730)
-------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes                                                          5,427            1,696             7,668

Income taxes (recovery) (note 16):
   Current                                                                              577              507               559
   Future                                                                             3,429           (3,711)              251
-------------------------------------------------------------------------------------------------------------------------------
                                                                                      4,006           (3,204)              810

-------------------------------------------------------------------------------------------------------------------------------
Net earnings                                                                   $      1,421    $       4,900     $       6,858

===============================================================================================================================

Earnings per share (note 13):
   Basic                                                                       $       0.04    $        0.15     $        0.22
   Diluted                                                                             0.04             0.15              0.21

===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

<TABLE>
Consolidated Statements of Retained Earnings
(In thousands of dollars)
Years ended December 31, 2005, 2004 and 2003
===============================================================================================================================
<CAPTION>
                                                                                      2005              2004             2003
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>             <C>                <C>
Retained earnings, beginning of year                                           $     43,190    $       38,290     $     31,432

Net earnings                                                                          1,421             4,900            6,858
-------------------------------------------------------------------------------------------------------------------------------
Retained earnings, end of year                                                 $     44,611    $       43,190     $     38,290

===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.


                                                               FS-4
<PAGE>

<TABLE>
Consolidated Statements of Cash Flows
(In thousands of dollars)
Years ended December 31, 2005, 2004 and 2003
===============================================================================================================================
<CAPTION>
                                                                                       2005           2004              2003
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>              <C>             <C>
Cash provided by (used in):

Operating activities:
   Net earnings                                                               $       1,421    $     4,900     $      6,858
   Items not affecting cash:
         Depreciation                                                                21,563         16,907           15,727
         Loss on disposal of property, plant and equipment                               --             57               --
         Non-cash unusual items (note 2)                                              1,913            422              685
         Amortization of deferred charges and intangible assets                       2,641            708              726
         Foreign exchange gain on long-term debt                                       (555)            --               --
         Future income taxes                                                          3,429         (3,711)             251
         Accretion of asset retirement obligations (note 8)                              89             73               61
         Other non-cash items                                                           (68)           294              231

Change in non-cash operating working capital (note 5)                                (2,708)         5,529            4,962
-------------------------------------------------------------------------------------------------------------------------------
   Cash provided by operations                                                       27,725         25,179           29,501

Financing activities:
   Increase in long-term debt                                                        70,000             --           40,000
   Repayment of long-term debt                                                       (1,526)            --               --
   Issuance of common stock (note 12)                                                 2,120             --              348
-------------------------------------------------------------------------------------------------------------------------------
                                                                                     70,594             --           40,348
Investing activities:
   Proceeds on disposal of property, plant and equipment                                 --             26               --
   Arbitration settlement (note 2(a))                                                 1,474             --               --
   Additions to property, plant and equipment                                       (48,168)       (14,627)         (32,583)
   Decrease (increase) in deferred charges                                             (883)           140             (168)
   Acquisitions, net of cash acquired (note 3)                                      (70,633)            --          (11,604)
   Increase in deferred financing costs                                              (2,555)            --               --
   Decrease (increase) in cash held in trust (note 11(b))                             3,629          3,674          (17,571)
   Decrease in other assets                                                             900            900            1,589
-------------------------------------------------------------------------------------------------------------------------------
                                                                                   (116,236)        (9,887)         (60,337)
Foreign exchange loss on cash held in foreign currency                                 (256)          (745)          (1,077)
-------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents                                    (18,173)        14,547            8,435

Cash and cash equivalents, beginning of year                                         30,922         16,375            7,940
-------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                                        $      12,749    $    30,922     $     16,375

===============================================================================================================================

Supplemental cash flow information:
   Interest paid                                                              $      11,771    $    10,569     $      9,633
   Income taxes paid, net of refunds                                                    593            832              559

===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.


                                                               FS-5
<PAGE>

Notes to Consolidated Financial Statements
(Tabular amounts in thousands of dollars except per share amounts) Years ended
December 31, 2005, 2004 and 2003

1.   Significant accounting policies:

(a)  Basis of presentation:

     These consolidated financial statements include the accounts of Marsulex
     Inc. (the Company) and its subsidiaries from their respective dates of
     acquisition. The consolidated financial statements have been prepared in
     accordance with Canadian generally accepted accounting principles and are
     prepared in Canadian dollars. All intercompany balances and transactions
     have been eliminated.

(b)  Cash and cash equivalents:

     Cash equivalents are comprised of highly liquid investments having
     remaining terms of maturity of 90 days or less when acquired. They are
     valued at cost plus accrued interest, which approximates market value.

(c)  Inventories:

     Inventories are valued at the lower of average cost and net realizable
     value, with cost including the purchase cost of raw materials and the cost
     of production for work in process and finished goods.

(d)  Property, plant and equipment:

     Property, plant and equipment is stated at cost. Depreciation is charged on
     a straight-line basis over the economic useful lives of the related assets
     or, where applicable, the lower of the economic useful lives of the related
     assets and the duration of the related customer contracts, which range from
     two to 25 years.

     Costs related to facilities and equipment under construction are not
     depreciated until the facilities and equipment are substantially completed
     and ready for commercial use.

     The Company includes, as part of the cost of its plant and equipment, all
     interest costs incurred prior to the asset becoming ready for operation.

(e)  Asset retirement obligations:

     The Company recognizes the fair value of a future asset retirement as a
     liability in the period in which it incurs a legal obligation associated
     with the retirement of tangible long-lived assets that results from the
     acquisition, construction, development, and/or normal use of the assets.
     The Company concurrently recognizes a corresponding increase in the
     carrying amount of the related long-lived asset that is depreciated over
     the life of the asset. The fair value of the asset retirement obligation is
     estimated using the expected cash flow approach that reflects a range of
     possible outcomes discounted at a credit-adjusted risk-free interest rate.
     Subsequent to the initial measurement, the asset retirement obligation is
     adjusted at the end of each period to reflect the passage of time and
     changes in the estimated future cash flows underlying the obligation.
     Changes in the obligation due to the passage of time are recognized in
     income as an operating expense using the interest method. Changes in the
     obligation due to changes in estimated cash flows are recognized as an
     adjustment of the carrying amount of the related long-lived asset that is
     depreciated over the remaining economic useful life of the asset.

(f)  Intangible assets:

     Intangibles include the estimated value at the date of acquisition of
     long-term contractual customer relationships, technology, certificates and
     permits, a trade name and the cost of other intangible assets. These assets
     are amortized over a period of 3 years to 13 years.

(g)  Impairment of long-lived assets:

     Long-lived assets, including property, plant and equipment and intangibles
     are reviewed for impairment whenever events or changes in circumstances
     indicate that the carrying amount of an asset may not be recoverable.
     Recoverability of assets to be held and used is measured by a comparison of
     the carrying amount of an asset to estimated undiscounted future cash flows
     expected to be generated by the asset. If the carrying amount of an asset
     exceeds its estimated future cash flows, an impairment charge is recognized
     by the amount by which the carrying amount of the asset exceeds the fair
     value of the asset. Assets to be disposed of would be separately presented
     in the balance sheet and reported at the lower of the carrying amount or
     fair value less costs to sell, and are no longer depreciated. The asset and
     liabilities of a disposed group classified as held for sale would be
     presented separately in the appropriate asset and liability sections of the
     balance sheet.

                                      FS-6
<PAGE>

(h)  Goodwill:

     Goodwill is initially recorded as the excess of the Company's cost over the
     fair value of the net identifiable assets acquired in a business
     combination. The amount of the goodwill is assigned to the respective
     reporting unit. On an annual basis, the Company assesses the carrying value
     of goodwill based upon the fair value of the related reporting unit. If any
     impairment in the value of the reporting unit exists, the implied fair
     value of goodwill allocated to that reporting unit is determined and
     compared to the carrying value of the goodwill. Any impairment that exists
     following the assessment is recorded as a charge to the statement of
     operations as part of earnings from operations at the time the impairment
     occurs.

(i)  Deferred charges:

     Deferred charges primarily include deferred financing costs and placement
     cells.

     Deferred financing costs represent expenditures incurred to obtain
     financing which have been deferred and are amortized over the periods to
     maturity of the underlying arrangements.

     Placement cells include expenditures relating to the excavation and related
     infrastructure costs of placement cells. These costs are amortized based
     upon the volume of industrial waste processed for disposal, as these relate
     to the remaining capacity of the placement cell.

(j)  Foreign currency translation:

     The accounts of the Company's foreign operations that are considered to be
     self-sustaining are translated into Canadian dollars using the current rate
     method. Assets and liabilities are translated at the rates in effect at the
     balance sheet date and revenue and expenses are translated at average
     exchange rates for the year. Gains or losses arising from the translation
     of the financial statements of self-sustaining foreign operations are
     deferred in a "foreign currency translation adjustment" account in
     shareholders' equity until there is a realized reduction in the net
     investment.

     Gains and losses on the translation of the U.S. dollar-denominated Senior
     Subordinated Notes (note 10) used for the acquisition of the Company's
     self-sustaining foreign operations are considered to be a hedge of the net
     investment in the self-sustaining operations and are offset against the
     exchange gains or losses arising on translation of the financial statements
     of the foreign operation and are included in the foreign currency
     translation adjustment.

     Monetary assets and liabilities denominated in U.S. dollars of non
     self-sustaining operations are translated into Canadian dollars at the rate
     of exchange in effect at the balance sheet date. All revenue and expenses
     denominated in U.S. dollars are translated at average rates in effect
     during the year. Translation gains and losses are included in the
     consolidated statements of operations.

(k)  Revenue recognition:

     The Company provides industrial services, including the processing,
     removal, treatment and disposal of inorganic hazardous waste; the
     distribution and sale of the by-products resulting from the customers'
     environmental compliance services; and selling of industrial and water
     treatment chemicals.

     Generally, revenue is recognized when a contract has been executed by a
     customer, delivery has occurred, the amount is fixed and determinable, the
     collection of the receivable is deemed reasonably assured and the Company
     has no remaining performance obligations.

     Where the Company enters into a multi-element contract, such as the
     provision of licenses bundled with project management activities, the fees
     are allocated to each element based on the relative fair value of each
     element. When the fair value of the undelivered element has not been
     established, revenue for the delivered element is deferred until the
     earlier of when fair value is established or when all elements have been
     delivered. Any billings or cash received in advance of services rendered
     under the contracts are recorded as deferred revenue and recognized once
     the services are provided.

     Revenue from processing activities, including the treatment and disposal of
     hazardous waste, is recognized as the services are rendered and upon the
     completion of the Company's obligation stipulated under its contractual
     agreements or upon the transfer of title to the Company.

     Revenue from the sale of industrial chemicals and other by-product
     chemicals is recognized at the time of shipment and title having been
     transferred to the customer.

     The revenue associated with the design and procurement of equipment is
     recognized on a percentage of completion method using engineering estimates
     for costs and time to complete the project in order to determine the
     percent complete. The effect of changes in total estimated income for each
     contract is recognized in the year in which the determination is made.

     Revenue from fees earned for the provision of licenses is recognized upon
     completion of the Company's obligations and when reasonable certainty of
     collection of the fees exists and is amortized over the term of the
     agreement.

                                      FS-7
<PAGE>

     Revenue from engineering and project management activities is recognized
     when the services are rendered.

(l)  Employee future benefit plans:

     The Company accrues its obligations under employee benefit plans and the
     related costs net of plan assets and has adopted the following policies:

     i)    The cost of pensions and other retirement benefits earned by
           employees is actuarially determined using the projected benefit
           method prorated on service and management's discount rate and best
           estimate of expected plan investment performance, salary escalation,
           retirement ages of employees and expected health care costs.

     ii)   For the purpose of calculating the expected return on plan assets,
           those assets are valued at fair value.

     iii)  The excess of the net actuarial gain (loss) over 10% of the greater
           of the benefit obligation and the fair value of plan assets at the
           beginning of the year is amortized over the average remaining service
           period of active employees. The average remaining service period of
           the active employees covered by the pension plans is between 11 and
           14 years. The average remaining service period of the active
           employees covered by the other retirement benefit plans is between 11
           and 12 years.

(m)  Income taxes:

     Future income tax assets and liabilities are recognized for the future
     income tax consequences attributable to differences between the financial
     statement carrying amounts of existing assets and liabilities and their
     respective tax bases. Future income tax assets and liabilities are measured
     using enacted or substantively enacted tax rates expected to apply to
     taxable income in the years in which those temporary differences are
     expected to be recovered or settled. A valuation allowance is recorded
     against any future income tax asset if it is more likely than not that the
     asset will not be realized. Income tax expense is the sum of the Company's
     provision for current income taxes and the difference between opening and
     ending balances of future income tax assets and liabilities.

(n)  Environmental obligations:

     Liabilities are recorded when environmental claims or remedial efforts are
     probable and the costs can be reasonably estimated. Environmental
     expenditures that relate to current operations are expensed or capitalized
     as appropriate.

(o)  Stock-based compensation:

     The Company has provided compensation to certain employees, officers and
     directors in the form of stock options. The Company records the fair value
     of the options over the vesting period as an expense. The offset for these
     expenses is recorded in contributed surplus until the options are
     exercised.

     The Company also provides compensation to certain employees, key persons,
     and directors in the form of Deferred Share Units (DSUs) and Performance
     Share Units (PSUs). Upon settlement at the end of the vesting period, PSUs
     automatically convert to DSUs, unless at the option of the holder, the
     units are converted to common stock purchased on the open market. DSUs may
     be settled at retirement, termination, resignation or death, in cash or
     common stock purchased on the open market. These awards are accounted for
     using the intrinsic value method such that the value of the share units at
     vesting date, together with subsequent changes in the common share price in
     relation to the share unit prices, are recorded as compensation expense
     over the vesting period, in selling, general, administrative, and other
     costs in the statements of operation and reflected in accrued liabilities
     in the balance sheets.

(p)  Earnings per share (EPS):

     Basic EPS is calculated by dividing the net earnings available to common
     shareholders by the weighted average number of common shares outstanding
     during the year. Diluted EPS is calculated using the treasury stock method,
     which assumes that all outstanding stock options with an exercise price
     below the average market price are exercised and the assumed proceeds are
     used to purchase common shares at the average market price during the year.

(q)  Use of estimates:

     The preparation of financial statements in conformity with Canadian
     generally accepted accounting principles requires management to make
     estimates and assumptions that affect the reported amounts of assets and
     liabilities and disclosure of contingent assets and liabilities at the date
     of the financial statements and reported amounts of revenue and expenses
     during the year. On an ongoing basis, the Company evaluates its estimates,
     including those related to amounts recognized for or carrying values of
     revenues, bad debts, long-lived assets including intangible assets,
     goodwill, income taxes and contingencies, and litigation. The Company bases

                                      FS-8
<PAGE>

     its estimates on historical experience and on various other assumptions
     that are believed to be reasonable under the circumstances at the time they
     are made. Actual results could differ from those estimates.

(r)  Comparative figures:

     Certain 2004 comparative figures have been reclassified to conform to the
     financial statement presentation adopted in 2005.

2.  Unusual items:

<TABLE>
     Consolidated Statements of Operations
     ========================================================================================================================
<CAPTION>
                                                                                            2005          2004         2003
     ------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>            <C>           <C>
     Expenses incurred on cancellation of stock options held by former employees
       (note 12)                                                                        $     --      $     --     $    737
     Loss on disposal of parts and service business and other assets                          --           155          685
     Loss on arbitration settlement (note 2(a))                                            1,913            --           --
     Other unusual items                                                                    (195)          502           --
     ------------------------------------------------------------------------------------------------------------------------
     Total unusual items                                                                $  1,718      $    657     $  1,422

     ========================================================================================================================
</TABLE>

<TABLE>
     Consolidated Statements of Cash Flows
     ========================================================================================================================
<CAPTION>
                                                                                            2005          2004         2003
     ------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>          <C>          <C>
     Loss on disposal of parts and service business and other assets                    $     --     $      --    $     685
     Loss on arbitration settlement (note 2(a))                                            1,913            --           --
     Other                                                                                    --           422           --
     ------------------------------------------------------------------------------------------------------------------------
     Total non-cash unusual items                                                       $  1,913     $     422    $     685

     ========================================================================================================================
</TABLE>

(a)  During the year the arbitration with Holcim Inc. was settled. The Company
     was awarded U.S. $1,250,000 (C$1,474,000) resulting in an unusual loss of
     $1,913,000 million.

3.   Acquisitions:

(a)  On August 16, 2005 the Company acquired all of the outstanding shares of
     the holding company owning Stablex, a Quebec-based business specializing in
     inorganic hazardous waste treatment and disposal. The purchase price was
     $71,165,000 before acquisition costs of approximately $2,525,000 financed
     through amounts drawn on new credit facilities entered into by the Company
     (note 11). The results of operations have been consolidated from the date
     of acquisition.

     The acquisition has been accounted for using the purchase method of
     accounting. The purchase price allocation, including acquisition costs, is
     as follows:

     ===========================================================================

     Cash                                                        $      1,878
     Current assets                                                     6,482
     Future tax assets                                                    876
     Property, plant and equipment                                     24,318
     Placement cells                                                    1,289
     Intangibles (note 10)                                             29,028
     Goodwill                                                          31,170
     Current liabilities                                               (6,854)
     Other long-term liabilities                                       (2,054)
     Future tax liabilities                                           (12,443)
     ---------------------------------------------------------------------------
     Total Purchase Price                                        $     73,690

     ===========================================================================

     The purchase price equation includes $1,178,900 for expenditures accrued
     but not yet paid as of December 31, 2005.

(b)  On October 7, 2003, the Company acquired the sulphur products business in
     Prince George, British Columbia from Duke Energy Gas Transmission. The
     gross purchase price of $13,382,000 was prior to working capital
     adjustments, which resulted in a cash purchase price of $11,604,000.

                                      FS-9
<PAGE>

     The acquisition has been accounted for using the purchase method of
     accounting and has been consolidated from the date of acquisition. The
     final purchase price has been allocated as follows:

     ===========================================================================

     Property, plant and equipment                                 $    13,382
     Current assets                                                        769
     Current liabilities                                                (1,760)
     Post retirement benefits                                             (670)
     Other liabilities                                                    (117)
     ---------------------------------------------------------------------------
     Cash purchase price                                           $    11,604

     ===========================================================================

     As part of the Duke Energy Gas Transmission acquisition, the Company
     recognized the fully funded pension benefits obligations of $1,390,000 and
     post retirement benefits of $670,000 relating to the employees of this
     plant.

4.   Cash held in trust:

     Cash held in trust relates to restricted funds held as part of the terms of
     the Long-term Loan agreement (note 11(b)) and funds set aside as collateral
     for Irrevocable Performance Guarantees (note 15(a)).

5.   Change in non-cash operating working capital:

<TABLE>
     =========================================================================================================
<CAPTION>
                                                                     2005            2004              2003
     ---------------------------------------------------------------------------------------------------------
<S>                                                             <C>             <C>             <C>
     Accounts receivable                                        $    (827)      $    (2,667)    $     3,907
     Inventories                                                     (106)              550            (980)
     Prepaid expenses and other assets                             (2,139)              358          (1,534)
     Accounts payable and accrued liabilities                       1,729             8,521           2,747
     Income taxes payable                                          (1,365)           (1,233)            822
     ---------------------------------------------------------------------------------------------------------
                                                                $  (2,708)      $     5,529     $     4,962

     =========================================================================================================
</TABLE>

6. Inventories:

<TABLE>
     ===========================================================================================
<CAPTION>
                                                                     2005            2004
     -------------------------------------------------------------------------------------------
<S>                                                          <C>              <C>
     Raw materials and work in process                       $        865     $       461
     Finished goods                                                 1,554             805
     -------------------------------------------------------------------------------------------
                                                             $      2,419     $     1,266

     ===========================================================================================
</TABLE>

                                                  FS-10
<PAGE>

7.   Property, plant and equipment:

<TABLE>

     Details of property, plant and equipment:

     =============================================================================================================
<CAPTION>
                                                                                                           2005
     -------------------------------------------------------------------------------------------------------------
                                                                                    Accumulated        Net book
                                                                         Cost      depreciation           value
     -------------------------------------------------------------------------------------------------------------
<S>                                                               <C>              <C>              <C>
      Land                                                        $     3,124       $        --     $     3,124
      Plant                                                            12,363               655          11,708
      Equipment                                                       262,246           121,260         140,986
      Facilities and equipment under construction                      50,496                --          50,496
     -------------------------------------------------------------------------------------------------------------
                                                                  $   328,229       $   121,915     $   206,314

     =============================================================================================================


     =============================================================================================================
<CAPTION>
                                                                                                           2004
     -------------------------------------------------------------------------------------------------------------
                                                                                    Accumulated        Net book
                                                                         Cost      depreciation           value
     -------------------------------------------------------------------------------------------------------------
<S>                                                               <C>               <C>             <C>
      Land                                                        $     1,499       $        --     $     1,499
      Plant                                                               495               403              92
      Equipment                                                       195,996           106,017          89,979
      Facilities and equipment under construction                      60,862                --          60,862
     -------------------------------------------------------------------------------------------------------------
                                                                  $   258,852       $    106,420    $   152,432

     =============================================================================================================
</TABLE>

     During the year ended December 31, 2005, the Company capitalized $1,693,000
     (2004 - $4,252,000; 2003 - $3,738,000) of interest costs as part of the
     cost of facilities and equipment under construction.

8.   Asset retirement obligations:

     The Company has recorded asset retirement costs and corresponding
     obligation where it has determined legal obligations exist, including
     Company properties that are on leased land, which revert back to the lessor
     and where the Company has a legal obligation under the landlease agreement
     to remove improvements and structures from the properties. The following is
     a reconciliation of the changes in the asset retirement obligations during
     the year, which is included in other liabilities on the consolidated
     balance sheets:

<TABLE>
     =============================================================================================================
<CAPTION>
                                                                                        2005                 2004
     -------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>                 <C>
    Balance, beginning of the year                                                $      936          $       863
    Liabilities assumed on the acquisition of Stablex                                    159                   --
    Liabilities incurred during the year                                                 340                   --
    Accretion expense                                                                     89                   73
     -------------------------------------------------------------------------------------------------------------
    Balance, end of year                                                          $    1,524          $       936

     =============================================================================================================
</TABLE>

     The accretion expense is included in cost of sales and services. The
     estimated undiscounted cash flows required to settle the obligation amount
     to $3,932,000 and are expected to be settled in the next 1 to 21 years. The
     cash flows are discounted using a credit-adjusted risk-free rate of 8.4%
     (2004 - 8.5%).

     Other assumptions used by management to determine the carrying amount of
     the asset retirement obligation are: labour costs based on current
     marketplace wages required to hire contractors to dismantle and remove the
     leasehold improvements, market risk premium for unforeseeable
     circumstances, and the rate of inflation over the expected years to
     settlement.

                                     FS-11
<PAGE>

9. Deferred Charges and Other:

<TABLE>
     ============================================================================================================
<CAPTION>
                                                                                    2005                 2004
     ------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                 <C>
      Deferred financing costs                                                 $   2,817           $      856
      Placement cells                                                              2,223                   --
      Other                                                                          173                  130
     ------------------------------------------------------------------------------------------------------------
                                                                               $   5,213           $      986

     ============================================================================================================
</TABLE>

     Accumulated amortization amounted to $4,437,000 and $4,138,000 at December
     31, 2005 and 2004, respectively.

10.  Intangible assets:

<TABLE>
     ============================================================================================================
<CAPTION>
                                                                                                  December 31,
                                                                                                         2005
     ------------------------------------------------------------------------------------------------------------
                                                                                Accumulated          Net Book
                                                                     Cost      amortization             Value
     ------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                <C>              <C>
      Technology                                              $     4,600        $      229       $     4,371
      Customer relationships                                       11,701             1,686            10,015
      Certificates and permits                                     13,400               834            12,566
      Trade name                                                    1,100                82             1,018
      Other intangible assets                                       1,728               215             1,513
     ------------------------------------------------------------------------------------------------------------
                                                              $    32,529        $    3,046       $    29,483

     ============================================================================================================
</TABLE>

<TABLE>
     ============================================================================================================
<CAPTION>
                                                                                                 December 31,
                                                                                                         2004
     ------------------------------------------------------------------------------------------------------------
                                                                                Accumulated          Net book
                                                                     Cost       amortization            Value
     ------------------------------------------------------------------------------------------------------------
<S>                                                             <C>              <C>             <C>
      Customer relationships                                    $   3,501        $       876     $      2,625

     ============================================================================================================
</TABLE>

     Amortization expense amounted to $2,170,903, $437,588 and $437,588 for the
     years ended December 31, 2005, 2004 and 2003 respectively.

11. Long-term debt:

     Long-term debt outstanding is as follows:

<TABLE>
     ============================================================================================================
<CAPTION>
                                                                                 December 31,      December 31,
                                                                                         2005              2004
      -----------------------------------------------------------------------------------------------------------
<S>                                                                                <C>              <C>
     Senior Secured Term Loan, maturing 2008 (note 11(a))
        6.87% U.S. LIBOR loan (U.S. $15,000,000)                                   $   17,488       $        --
        5.90% Cdn. Bankers' Acceptance loan                                            51,500                --
        6.50% Cdn. Prime rate loan                                                        457                --

     Long-term Loan
       7.3%, maturing 2019  (note 11(b))                                               38,474            40,000

     Senior Subordinated Notes (note 11(c))
       9.625% U.S. $60,766,000, maturing June 2008                                     70,848            73,138
     ------------------------------------------------------------------------------------------------------------
     Total debt                                                                       178,767           113,138

     Less current portion                                                               1,641             1,526
     ------------------------------------------------------------------------------------------------------------
                                                                                   $  177,126       $   111,612

     ============================================================================================================
</TABLE>

                                                        FS-12
<PAGE>

(a)  Senior Secured Term Loan and Revolving Credit Facility:

     On August 16, 2005, Marsulex entered into a $100,000,000 credit agreement
     with a syndicate of banks and incurred $2,555,000 in related financing
     costs. The agreement provides for an $80,000,000 Senior Secured Term Loan
     and a $20,000,000 Revolving Credit Facility with the facilities carrying
     variable rates of interest and is secured by the assets of Marsulex Inc.
     and its subsidiaries. All of the loans under this arrangement mature on
     June 15, 2008.

     $70,000,000 of the Senior Secured Term Loan was drawn to fund the purchase
     of Stablex. The remaining $10,000,000 of the Term Loan remains undrawn at
     the end of the year and is available for general corporate purposes until
     August 16, 2006, after which undrawn amounts will be cancelled.

     The Revolving Credit Facility has been established for general corporate
     purposes and remained undrawn at the end of the year.

     The Term Loan can be drawn as LIBOR and Bankers' Acceptance loans with
     margins ranging from 150 to 275 basis points and prime rate loans with
     margins ranging from 50 to 175 basis points. A portion of the Senior
     Secured Term Loan is denominated in U.S. dollars and has been translated
     into Canadian dollars at rates in effect at the balance sheet date.

     Interest is paid monthly with quarterly mandatory principal repayments for
     the term loan beginning on September 30, 2007 until maturity as follows:

     ===========================================================================

     September 30, 2007                                            $       6,670
     December 31, 2007                                                     6,670
     March 31, 2008                                                        6,670
     June 15, 2008                                                        49,435
     ---------------------------------------------------------------------------
                                                                   $      69,445

     ===========================================================================

(b)  Long-term Loan:

     On June 5, 2003, a wholly owned subsidiary of the Company entered into a
     Long-term Loan agreement to finance its portion of the construction of the
     environmental compliance facilities at Syncrude's Mildred Lake oil sands
     facility in Alberta. The loan is secured by the subsidiary's assets. A
     general guarantee is provided by the Company until the successful start-up
     of the facility as defined in the loan agreement at which time the general
     guarantee will be released and the loan will be secured by the subsidiary's
     assets. If, after the successful start-up of the facility, the subsidiary
     fails to perform its operating obligations, the Company will become
     responsible for the operation of the facility and as a result the servicing
     of the debt.

     The loan bears interest at a fixed rate of 7.3% per annum with monthly
     principal repayments due over the next 15 years as follows:

     ===========================================================================

     2006                                                          $       1,641
     2007                                                                  1,765
     2008                                                                  1,898
     2009                                                                  2,040
     2010                                                                  2,195
     Thereafter                                                    $      28,935

     ===========================================================================

     Under the terms of the agreement $40,000,000 was advanced to a loan
     account, which is held in trust. Cash draws are made on this account as
     construction of the facility progresses. As at December 31, 2005,
     $30,483,700 in cash was drawn from the account to fund the capital
     expenditures made by the Company on the project, leaving a balance of
     $9,516,300 held in trust and recorded in current assets as part of cash
     held in trust. As defined in the agreement, $7,500,000 of the funds are
     required to remain in trust until the successful commissioning and start-up
     of the facility, at which time it will become available for general use.

(c)  Senior Subordinated Notes:

     The Senior Subordinated Notes are denominated in U.S. dollars and have been
     translated to Canadian dollars at rates in effect at the balance sheet
     dates. The Senior Subordinated Notes are redeemable at the option of the
     Company at specified redemption premiums. The Senior Subordinated Notes
     require the Company to offer to repurchase the notes equal to 101% of the
     principal amount upon a change of control. A change of control as defined
     in the indenture has not occurred.

                                     FS-13
<PAGE>

12. Capital stock:

<TABLE>
     =============================================================================================================
<CAPTION>
                                                                                             2005            2004
     -------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>             <C>
     Authorized:
       Unlimited preference shares, no par value Unlimited convertible shares,
       non-voting, no par value Unlimited common shares, no par value
     Issued and fully paid:
       Common shares                                                                 $     60,093    $     57,973

     =============================================================================================================

     =============================================================================================================

     Common shares issued at December 31, 2002                                                         26,833,550
       Conversion of non-voting convertible shares                                                      4,720,182
       Common shares issued upon exercise of stock options                                                142,666
     -------------------------------------------------------------------------------------------------------------
     Common shares issued at December 31, 2003 and December 31, 2004                                   31,696,398
       Common shares issued upon exercise of stock options                                                713,500
     -------------------------------------------------------------------------------------------------------------
     Common shares issued at December 31, 2005                                                         32,409,898

     =============================================================================================================

     =============================================================================================================

     Non-voting convertible shares issued at December 31, 2002                                          4,720,182
       Conversion of non-voting convertible shares into common shares                                  (4,720,182)
     -------------------------------------------------------------------------------------------------------------
     Non-voting convertible shares issued at December 31, 2004 and December 31, 2005                           --

     =============================================================================================================
</TABLE>

     The non-voting convertible shares are convertible into common shares on a
     one-for-one basis and the common shares are convertible into non-voting
     convertible shares on a one-for-one basis at any time. The non-voting
     convertible shares are entitled to receive the same dividend as the common
     shares and participate equally with the common shares in any distribution
     of assets of the Company. In September 2003, the Company's major
     shareholder acquired all of the issued non-voting convertible shares and
     subsequently converted them into common shares.

     During 2005, the Company issued 713,500 common shares for cash proceeds of
     $2,120,200 upon the exercise of stock options. During 2003, the Company
     issued 142,666 common shares for cash proceeds of $348,000 upon the
     exercise of stock options.

     Subsequent to December 31, 2005, the Company issued 190,000 common shares
     for cash proceeds of $883,500 upon the exercise of stock options.

     Stock option plan:

     Under the terms of the Company's stock option plan, 4,095,160 common shares
     have been reserved for issuance to holders of options granted. Options held
     by any participant in the option plan may not exceed 5% of the common
     shares outstanding from time to time. Generally options granted vest in
     equal annual amounts on each of the first three anniversary dates of the
     grant and are exercisable for 10 years from the date of grant.

                                     FS-14
<PAGE>

     Details of the changes in options outstanding are as follows:

<TABLE>
     ===========================================================================================================
<CAPTION>
                                                                              Number of         Weighted average
                                                                                options           exercise price
     -----------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                        <C>
     Outstanding, December 31, 2002                                           2,674,450                  $  3.74
     Forfeited                                                                  (46,585)                    4.92
     Exercised                                                                 (142,666)                    2.44
     Cancelled                                                                 (433,434)                    3.57
     -----------------------------------------------------------------------------------------------------------
     Outstanding, December 31, 2003                                           2,051,765                     3.84
     Forfeited                                                                       --                       --
     Exercised                                                                       --                       --
     -----------------------------------------------------------------------------------------------------------
     Outstanding, December 31, 2004                                           2,051,765                     3.84
     Forfeited                                                                       --                       --
     Exercised                                                                 (713,500)                    2.97
     -----------------------------------------------------------------------------------------------------------
     Outstanding, December 31, 2005                                           1,338,265                  $  4.30

     ===========================================================================================================
</TABLE>

     On December 17, 2003, the Company purchased 433,434 stock options held by
     former employees of the Company for a total consideration of $737,000. The
     options were cancelled and fully expensed.

     The following table summarizes information about stock options outstanding
     and exercisable at December 31, 2005:

<TABLE>
     ===========================================================================================================
<CAPTION>
                                                                         Weighted
                       Range of                                           average                 Weighted
                       exercise                Number                   remaining                  average
                         prices           Outstanding            contractual life           exercise price
     -----------------------------------------------------------------------------------------------------------
<S>                                           <C>                      <C>                           <C>
                    $2.23-$2.90               264,666                  5.22 years                    $2.24
                    $3.40-$4.65               916,099                  3.41 years                    $4.13
                          $8.80               157,500                  2.39 years                    $8.80
     -----------------------------------------------------------------------------------------------------------
                                           1,338,265

     ===========================================================================================================
</TABLE>

     Pro forma impact of stock-based compensation:

     The Company's results would have been as follows had it elected to
     recognize the cost of its stock-based compensation based on the estimated
     fair value of stock options granted during 2002.

<TABLE>
     ===========================================================================================================
<CAPTION>
                                                                               2005          2004           2003
     -----------------------------------------------------------------------------------------------------------
<S>                                                                      <C>           <C>           <C>
     Net earnings for the year, as reported                              $    1,421    $    4,900    $     6,858
     Stock based compensation for options issued during 2002                     12            72            170
     -----------------------------------------------------------------------------------------------------------
     Pro forma net earnings for the year                                 $    1,409    $    4,828    $     6,688

     -----------------------------------------------------------------------------------------------------------

     Pro forma net earnings per share:
       Basic                                                             $     0.04    $     0.15    $      0.21
       Diluted                                                           $     0.04    $     0.15    $      0.21

     ===========================================================================================================
</TABLE>

     Directors' Deferred Share Unit Plan:

     Effective March 1, 2002, the Company established a Directors' Deferred
     Share Unit Plan (DSUs) whereby directors of the Company may elect to have a
     portion or all of their remuneration paid in DSUs. The number of DSUs
     issued is calculated by dividing the director's remuneration by the fair
     market value of the Company's common shares on the vesting date and upon
     settlement are converted into cash or common shares purchased on the open
     market. These awards are accounted for using the intrinsic value method
     such that the value of the share units at vesting date, together with
     subsequent changes in the common share price in relation to the DSUs issue
     price is recorded as compensation expense and included in selling, general,
     administrative and other expenses. In 2005, the Company granted a total of
     14,149 DSUs (2004 - 14,410; 2003 - 21,020).

                                     FS-15
<PAGE>

     Performance Share Unit Plan:

     On March 1, 2002, the Company established a Performance Share Unit Plan
     (PSUs) for certain employees and key persons as part of their long-term
     incentive compensation package. The number of PSUs to be granted each year
     is at the discretion of the Board of Directors, who also determine the
     criteria for vesting of the PSUs. At the end of the vesting period,
     typically three years, the PSUs are automatically converted to DSUs or, at
     the holder's election, into common shares. DSUs may be settled at
     retirement, termination, resignation or death, in cash or common shares.
     PSU and DSU settlements of common shares are made by the Company through
     purchases on the open market. These awards are accounted for using the
     intrinsic value method such that the value of the share units at the
     vesting date, together with the subsequent changes in the common share
     price in relation to the PSU issue price are recorded as compensation
     expense and included in selling, general, administrative and other
     expenses. During the current year, the Company granted 154,802 PSUs (2004 -
     230,415; 2003 - 382,550) and recorded an expense in the amount of
     $1,922,000 (2004 - $2,454,000; 2003 - $1,065,000).

13. Earnings per share:

     The following table sets forth the computation of diluted earnings per
     share:

<TABLE>
     =================================================================================================================
<CAPTION>
                                                                                  2005          2004           2003
     -----------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>          <C>           <C>
     Numerator:
       Net earnings available to common shareholders                          $  1,421     $   4,900     $    6,858
     =================================================================================================================

     Denominator (shares in thousands):
       Weighted average common shares outstanding                               32,166        31,696         31,572
       Effect of dilutive securities:
          Employee stock options                                                   717           808            462
     -----------------------------------------------------------------------------------------------------------------
     Adjusted weighted average shares and assumed conversions                   32,883        32,504         32,034

     =================================================================================================================
</TABLE>

     In 2005, 157,500 stock options (2004 - 157,500; 2003 - 588,600) were not
     included in the determination of earnings per share because to do so would
     be anti-dilutive.

14.  Employee future benefits:

     The Company has non-contributory defined benefit pension plans and provides
     post-retirement benefits other than pensions that include such items as
     medical benefits for pensioners and survivors to a portion of its
     employees. The Company measures its accrued benefit obligations and the
     fair value of plan assets for accounting purposes as at December 31 of each
     year. The most recent actuarial valuation of the pension plans for funding
     purposes was as of December 2004 and February 2004. The next required
     valuation will be three years from those dates.


                                     FS-16
<PAGE>

     The change in the funded status of post-retirement defined benefit plans
     was as follows:

<TABLE>
     =========================================================================================================================
<CAPTION>
                                                                                Pension             Post-retirement benefits
                                                                               benefits                  other than pensions
     -------------------------------------------------------------------------------------------------------------------------
                                                        2005         2004          2003         2005        2004        2003
     -------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>          <C>           <C>         <C>           <C>        <C>
     Change in post-retirement obligations:
       Obligation at beginning of year              $  8,073     $  7,055      $  5,262    $     586    $  1,126    $    512
       Service cost                                      544          375           244           21          20          20
       Interest cost                                     583          460           326           36          49          32
       Benefits paid                                    (325)        (225)         (167)          --          --          --
       Curtailment                                        --           --            --           --        (371)         --
       Actuarial loss (gain)                             214           --            --           --          --        (108)
       Obligations relating to acquisitions            4,312          408         1,390           --        (238)        670
     -------------------------------------------------------------------------------------------------------------------------
     Obligations at end of year                     $ 13,401     $  8,073      $  7,055    $     643    $    586    $  1,126

     =========================================================================================================================

     Change in plan assets:
       Fair value of plan assets at beginning of
          year                                      $  7,169     $  6,271      $  4,357    $      --    $     --    $     --
       Actual return on plan assets                      810          614           384           --          --          --
       Employer contributions                            581          489           307           --          --          --
       Benefits paid                                    (325)        (225)         (167)          --          --          --
       Assets relating to acquisitions                 3,417           20         1,390           --          --          --
     -------------------------------------------------------------------------------------------------------------------------
     Fair value of plan assets at end of year       $ 11,652     $  7,169      $  6,271    $      --    $     --    $     --

     -------------------------------------------------------------------------------------------------------------------------

     =========================================================================================================================

     Funding status of plans:
       Plan surplus/(deficit)                       $ (1,749)    $  (904)      $   (784)   $    (643)   $   (586)   $ (1,126)
       Unrecognized net transitional
          obligations (assets)                          (549)        (614)         (679)          15          25         147
       Unrecognized prior service costs                  740          749           949           --          --          30
     -------------------------------------------------------------------------------------------------------------------------
     Net post-retirement liabilities at end
       of year                                      $ (1,558)    $   (769)     $   (514)   $    (628)   $   (561)   $   (949)

     =========================================================================================================================
</TABLE>

      Included in the above accrued benefit obligation and fair value of plan
      assets at year-end are the following amounts in respect of benefit plans
      that are not fully funded:

<TABLE>
     =========================================================================================================================
<CAPTION>
                                                                                  Pension                            Other
                                                                                  Benefit                          benefit
                                                                                    plans                            plans
                                                                    2005             2004             2005             2004
     -------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>              <C>                <C>              <C>
     Accrued benefit obligation                               $   13,401       $    8,073         $    643         $    586
     Fair value of plan assets                                    11,652            7,169               --               --
     -------------------------------------------------------------------------------------------------------------------------
     Funded status - plan deficit                             $    1,749       $      904         $    643         $    586

     =========================================================================================================================


     =========================================================================================================================
                                                                                                   Percentage of plan assets
     Asset category                                                                                  2005               2004
     -------------------------------------------------------------------------------------------------------------------------

     Amounts outstanding relating to the acquisition of Duke Energy                                   14%                21%
     Equity securities                                                                                52%                47%
     Debt securities                                                                                  33%                32%
     Other                                                                                             1%                --
     -------------------------------------------------------------------------------------------------------------------------
     Total                                                                                           100%               100%

     =========================================================================================================================
</TABLE>

                                                               FS-17
<PAGE>

     Post-retirement benefits expense included the following components:

<TABLE>
     =========================================================================================================================
<CAPTION>
                                                                              Pension               Post-retirement benefits
                                                                             benefits                    other than pensions
     -------------------------------------------------------------------------------------------------------------------------
                                                         2005        2004        2003         2005          2004        2003
     -------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>         <C>         <C>          <C>           <C>          <C>
     Service cost                                     $   544     $   375     $   244      $    21       $    20      $   20
     Interest cost                                        583         460         326           36            49          32
     Expected return on plan assets                      (596)       (442)       (310)          --            --          --
     Amortization of transitional obligations
       (assets)                                           (65)        (65)        (65)          10            25          31
     Amortization of actuarial and investment
       gain (loss)                                          9          29          38           --            --          11
     -------------------------------------------------------------------------------------------------------------------------
     Post-retirement benefits expense                 $   475     $   357     $   233      $    67       $    94      $   94

     =========================================================================================================================
</TABLE>

     The weighted average assumptions used in the determination of the
     post-retirement benefits expense and obligation were as follows:

<TABLE>
     =========================================================================================================================
<CAPTION>
                                                                               Pension              Post-retirement benefits
                                                                              benefits                   other than pensions
     -------------------------------------------------------------------------------------------------------------------------
                                                         2005        2004        2003         2005          2004        2003
     -------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>         <C>         <C>          <C>           <C>         <C>
     Discount rate                                       5.6%        6.0%        6.0%         6.0%          6.0%        6.0%
     Expected return on plan assets                      7.0%        7.0%        7.0%         7.0%          7.0%        7.0%
     Rate of compensation increase                       4.0%        4.0%        4.0%         4.0%          4.0%        4.0%

     =========================================================================================================================
</TABLE>

     The composite health care cost trend rate used in measuring post-retirement
     benefits other than pensions was assumed to begin at 13%, declining one
     percent per year until it reaches 8% and remaining at that level
     thereafter.

     A one percent change in the assumed composite health care cost trend rate
     would have the following effects:

<TABLE>
     =========================================================================================================================
<CAPTION>
                                                                                                            Post-retirement
                                                                                                                    benefits
     -------------------------------------------------------------------------------------------------------------------------
                                                                                               1% Increase       1% Decrease
     -------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                  <C>               <C>
     (Increase) decrease on accumulated benefits obligation                                          $ (85)            $  67
     Increase (decrease) on net periodic expense                                                        27               (20)

     =========================================================================================================================
</TABLE>

15.  Commitments and contingencies:

(a)  Letters of Guarantee:

     Letters of Guarantee in the amount of $1,323,203 (2004 - $766,010) have
     been issued to Marsulex Inc.'s customers in the forms of Irrevocable
     Performance Guarantees and $751,709 (2004 - $766,010) are included as part
     of cash held in trust (note 11(b)).

(b)  Additional Reserves:

     Under the terms of the Long-term Loan (note 11), the Company is required to
     maintain a cash reserve in an amount not less than three months of
     principal and interest payments. Funding began in the first quarter of 2005
     upon payment of the fees relating to the Fort McMurray facility and is
     included in cash and cash equivalents.

                                     FS-18
<PAGE>

(c)  Operating leases:

     Under the terms of operating leases, the Company is committed to rental
     payments as follows:

     ---------------------------------------------------------------------------

     2006                                                             $   3,625
     2007                                                                 3,122
     2008                                                                 2,434
     2009                                                                 1,222
     2010                                                                   401
     Thereafter                                                             344
     ---------------------------------------------------------------------------
                                                                       $ 11,148

     ---------------------------------------------------------------------------

(d)  Purchase agreements:

     A substantial portion all of the Company's service contracts with customers
     have a minimum fixed duration and provide for the guaranteed removal and
     processing of contracted by-products and waste streams, which are produced
     in the customer's manufacturing process.

     During 2005, the Company completed its fixed price commitment totalling
     $32,542,000, including approved change orders, to purchase equipment and
     services relating to the construction of its Fort McMurray facility that
     began earning revenues at the beginning of 2005.

     Purchase commitments relating to the Company's expansion of the Montreal
     facility at the end of December 31, 2005 were $51,848,000 (2004 -
     $12,985,000). To the end of December 31, 2005, $45,570,515 (2004 -
     $3,871,000) has been recorded as part of facilities under construction in
     property, plant and equipment.

(e)  Environmental remediation costs:

     The Company's operations are subject to numerous laws, regulations and
     guidelines relating to air emissions, water discharges, solid and hazardous
     wastes, transportation and handling of hazardous substances, and employee
     health and safety in Canada and the United States where it operates. These
     environmental regulations are continually changing and generally becoming
     more restrictive. The Company has purchased a number of sites as a result
     of the acquisitions of certain businesses and has retained environmental
     obligations as a result of the disposition of certain businesses and
     properties. Subject to certain limitations, the Company will be indemnified
     by the vendors for any remediation costs or environmental actions that may
     arise as a result of conditions existing at the time of acquisition.
     Environmental assessments were conducted prior to the purchase of the sites
     as a basis to, among other things, evaluate indemnity protections and,
     where applicable, to verify the appropriateness of existing accruals and
     estimates for remediation costs. In recent years, the Company engaged third
     party consultants to review the environmental status of the Company's
     sites. Accruals have been made in specific instances where it is probable
     that liabilities will be incurred and where such liabilities can be
     reasonably estimated. Such estimates are, however, subject to change based
     on negotiation with regulatory authorities, changes in laws and regulations
     and as new information becomes available. Although it is possible that
     liabilities may arise in other instances for which no accruals have been
     made, the Company does not believe that such an outcome will significantly
     impact its operations or have a material adverse effect on its financial
     position.

     As part of the sale of sulphur removal assets and BCT Chemtrade Corporation
     to Chemtrade Logistics Income Fund on July 18, 2001, the Company has
     indemnified Chemtrade Logistics Inc. for Notices and Findings of Violation
     relating to a facility, and it is management's assessment that the most
     likely outcome will not have a material impact upon the financial position
     of the Company.

(f)  Litigation:

     On August 15, 2005 the Company brought a legal proceeding against Chemtrade
     Logistics Income Fund and Chemtrade Logistics Inc. (collectively,
     "Chemtrade"). In the Company's statement of claim, it alleges that
     Chemtrade's recent acquisition of Peak Sulfur, Inc. and Peak Chemical, LLC
     breaches a non-competition agreement between the Company and Chemtrade
     entered into at the time of Chemtrade's initial public offering in July
     2001. The statement of claim also alleges that Chemtrade is in breach of a
     service agreement with respect to pooling its insurance requirement with
     those of the Company in order to obtain favourable insurance coverage and
     premiums. The Company's action also sought certain declarations that a
     number of agreements entered into between the parties were no longer of any
     force or effect as a result of Chemtrade's breaches of the non-competition
     agreement. The Company is seeking damages for the alleged breaches of
     contract in the amount of $72.8 million, as well as other relief.

     On September 27, 2005 the Company received a statement of defense and
     counterclaim from Chemtrade. The statement of defense from Chemtrade denies
     that it has breached the non-competition agreement or the service
     agreement. The counterclaim by Chemtrade seeks declarations that the
     Company has breached a number of agreements, including non-competition
     agreement entered into by the Company in favour of Chemtrade, damages of up
     to $20.0 million for the alleged breach by the Company of those agreements
     and injunctions against further breaches of such agreements or damages of
     up to $67.8 million in lieu of injunctions, along with punitive or

                                     FS-19
<PAGE>

     exemplary damages, interest and costs. The counterclaim alternatively seeks
     the return of alleged consideration of $30.6 million paid to the Company if
     a court finds that the agreements entered into between the parties are no
     longer of any force or effect and the Company is relieved of its
     obligations under those agreements.

(g)  Other claims:

     The Company is involved in certain claims arising out of the ordinary
     course and conduct of its business, which in the opinion of management will
     not have a material impact upon the financial position of the Company.

16.  Income taxes:

     The income tax rate varied from the basic federal and provincial income tax
     rate as follows:

<TABLE>
     =========================================================================================================================
<CAPTION>
                                                                                          2005          2004          2003
     -------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>           <C>           <C>
     Statutory federal and provincial income tax rate applied to income before
       taxes                                                                              36.1%         36.1%         36.6%
     Income taxed at different rates in foreign jurisdictions                             (3.1)         15.9          (0.7)
     Federal Large Corporations Tax and minimum tax                                        6.0          19.0           3.3
     Effect of lower manufacturing and processing tax rate of subsidiaries                (1.7)         (1.1)         (0.5)
     Valuation allowance on future tax assets                                             15.9        (182.1)         (6.0)
     Recognition of previously unrecognized tax losses                                    (9.8)        (27.8)        (45.3)
     Impact on taxable portion of capital gains                                             --          (1.3)           --
     Impact of changes in substantively enacted future tax rates                          33.2            --           4.5
     Amounts not deductible for income tax purposes and other                             (2.8)        (47.6)         18.7
     -------------------------------------------------------------------------------------------------------------------------
     Combined effective income tax rate                                                   73.8%       (188.9)%        10.6%

     =========================================================================================================================
</TABLE>

     The tax effects of temporary differences that give rise to significant
     portions of the future tax assets and future tax liabilities at December
     31, 2005 and 2004 are presented below:

<TABLE>
     =========================================================================================================================
<CAPTION>
                                                                                                       2005            2004
     -------------------------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>             <C>
     Future tax assets:
       Loss carryforwards                                                                       $    21,616     $    21,705
       Accrued and other liabilities                                                                  5,612           5,308
       Other                                                                                            238             454
     -------------------------------------------------------------------------------------------------------------------------
       Total gross future tax assets                                                                 27,466          27,467
       Less valuation allowance                                                                     (15,026)        (14,442)
     -------------------------------------------------------------------------------------------------------------------------
       Net future tax assets                                                                         12,440          13,025

     Future tax liabilities:
       Property, plant and equipment                                                                (19,080)        (12,987)
       Goodwill                                                                                     (11,786)        (12,170)
       Deferred charges                                                                                (280)           (277)
       Intangible assets                                                                             (9,420)           (814)
       Long-term debt                                                                                  (867)           (845)
       Other                                                                                             --              --
     -------------------------------------------------------------------------------------------------------------------------
       Total gross future tax liabilities                                                           (41,433)        (27,093)

     -------------------------------------------------------------------------------------------------------------------------
     Net future tax liability                                                                   $   (28,993)    $   (14,068)

     =========================================================================================================================
</TABLE>

     This is presented on the balance sheet as follows:

<TABLE>
     =========================================================================================================================
<CAPTION>
                                                                                                       2005            2004
     -------------------------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>             <C>
     Future tax assets                                                                          $       544     $       154
     Future tax liabilities                                                                         (29,537)        (14,222)
     -------------------------------------------------------------------------------------------------------------------------
                                                                                                $   (28,993)    $   (14,068)

     =========================================================================================================================
</TABLE>

                                                           FS-20
<PAGE>

     As at December 31, 2005, the Company has unused tax losses, corporate
     minimum tax credit carryforwards and deductible temporary differences for
     which no future income tax assets have been recognized. The carryforward
     amounts are as follows:

     ===========================================================================

     Operating losses                                               $    41,555
     Corporate minimum tax credit                                         1,009
     Deductible temporary differences for which no future
       tax assets have been recognized                                      890

     ===========================================================================

     Non-capital loss carryforwards by year of expiry are as follows at December
     31, 2005:

     ===========================================================================

     2008                                                           $     5,571
     2009                                                                    --
     2010                                                                    --
     Thereafter                                                          54,965
     ---------------------------------------------------------------------------
                                                                    $    60,536

     ===========================================================================

17.  Related party transactions:

     The Company has entered into a management services contract with its major
     shareholder for the supply of management and financial services. During
     2005, the Company incurred fees of $351,000 (2004 - $390,000; 2003 -
     $390,000) under the terms of the contract.

     Certain of the Company's Directors hold senior positions with firms that
     provide services to the Company and during 2005, the Company incurred fees
     for services provided by those firms of $4,859,000 (2004 - $3,890,000; 2003
     - $3,411,000).

     The above related party transactions have been recorded at the exchange
     amounts agreed to between the parties.

18.  Business segments:

     The Company's activities are divided into four reportable segments. On
     December 31, 2005, the business segment formerly named Refinery Services
     was re-named Industrial Services to reflect the broader operations of the
     segment following the Stablex acquisition. The three operating segments
     are: Industrial Services (formerly Refinery Services), Western Markets and
     Power Generation. The fourth non-operating segment is Corporate Support,
     which provides centralized services, such as finance, information systems,
     human resources and risk management to the operating segments.

     Industrial Services provides services, including environmental compliance
     solutions, to oil refiners and other industrial customers, primarily in the
     U.S. and Canada. Services include the regeneration of spent sulphuric acid
     produced during the octane enhancement of gasoline; the extraction and
     recovery of sulphur from hydrogen sulphide gas created during the refining
     process; the recovery of sulphur dioxide to ensure air quality compliance;
     and the safe handling, treatment, and disposal of industrial hazardous
     waste streams.

     Western Markets produces and provides sulphur-enhanced chemicals to
     industrial customers and supplies alum, a water treatment chemical used by
     municipalities and other industrial companies, for water and wastewater
     treatment. The primary market for these and other chemicals is Western
     Canada.

     Power Generation provides environmental systems and services for air
     quality compliance, primarily to electric utilities, and also to
     petrochemical and general industrial customers worldwide.

                                     FS-21
<PAGE>

<TABLE>
     ==========================================================================================================================
<CAPTION>
                                                          Industrial        Western         Power     Corporate
     2005                                                   Services        Markets    Generation       Support         Total
     --------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>             <C>         <C>         <C>
     Revenue from external customers                      $   97,274     $   57,192    $   11,990     $      --     $ 166,456
     ==========================================================================================================================

     Gross Profit                                         $   33,894     $   21,912    $    5,191     $      --     $  60,997
     SGA and foreign exchange                                  4,550          1,865         4,038        10,226        20,679
     Unusual items                                                --             --         1,718            --         1,718
     --------------------------------------------------------------------------------------------------------------------------
     Earnings before the undernoted                           29,344         20,047          (565)      (10,226)       38,600
     Depreciation                                             18,474          2,367           515           207        21,563
     Amortization of deferred charges and intangible
       assets                                                  2,167             --            --           474         2,641
     Interest expense                                             --             --            --        11,598        11,598
     Interest capitalized                                         --             --            --        (1,693)       (1,693)
     Interest income                                              --             --            --          (936)         (936)
     ==========================================================================================================================

     Earnings before income taxes                         $    8,703     $   17,680    $   (1,080)    $ (19,876)    $   5,427
     ==========================================================================================================================

     Total assets before goodwill and intangible assets   $  208,931     $   30,275    $    3,061     $  27,220     $ 269,487

     Goodwill and intangible assets, net of amortization      94,595          4,468         5,850            --       104,913
     --------------------------------------------------------------------------------------------------------------------------

     Total assets                                         $  303,526     $   34,743    $    8,911     $  27,220     $ 374,400
     ==========================================================================================================================

     Capital expenditures                                 $   47,136     $      771    $       --     $     261     $  48,168
     =========================================================================================================================

     Additions to goodwill                                $   31,170     $       --    $         --   $      --     $  31,170
     ==========================================================================================================================


     ==========================================================================================================================
<CAPTION>
                                                          Industrial        Western         Power     Corporate
     2004                                                   Services        Markets    Generation       Support         Total
     --------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>            <C>          <C>         <C>              <C>
     Revenue from external customers                      $   73,890     $   54,590    $    8,542     $      --     $ 137,022
     --------------------------------------------------------------------------------------------------------------------------

     Gross Profit                                         $   22,508     $   21,523    $    4,836     $      --     $  48,867
     SGA and foreign exchange                                  2,083          1,398         4,313        15,487        23,281
     Unusual items                                                --             --           155           502           657
     --------------------------------------------------------------------------------------------------------------------------
     Earnings before the undernoted                           20,425         20,125           368       (15,989)       24,929
     Depreciation, including loss on disposal                 13,517          2,294           892           261        16,964
     Amortization of deferred charges and intangible
       assets                                                    657             --            --            51           708
     Interest expense                                             --             --            --        10,569        10,569
     Interest capitalized                                         --             --            --        (4,252)       (4,252)
     Interest income                                              --             --            --          (756)         (756)
     --------------------------------------------------------------------------------------------------------------------------

                     Earnings before income taxes         $    6,251     $   17,831    $    (524)     $ (21,862)    $   1,696
     ==========================================================================================================================

     Total assets before goodwill and intangible assets   $  140,320     $   31,387    $    5,374     $  47,527      $224,608
     Goodwill and intangible assets, net of amortization      37,662          4,468         6,039            --        48,169
     --------------------------------------------------------------------------------------------------------------------------

     Total assets                                         $  177,982     $   35,855    $   11,413     $  47,527      $272,777
     ==========================================================================================================================

     Capital expenditures                                 $   13,634     $      835    $       26     $     132     $  14,627
     ==========================================================================================================================
</TABLE>

                                                              FS-22
<PAGE>

<TABLE>
     ==========================================================================================================================
<CAPTION>
                                                          Industrial        Western         Power     Corporate
     2003                                                   Services        Markets    Generation       Support         Total
     --------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>            <C>           <C>            <C>           <C>
     Revenue from external customers                      $   71,504     $   54,295    $    9,183     $      --     $ 134,982
     ==========================================================================================================================

     Gross Profit                                         $   27,189     $   18,288    $    2,959     $      --     $  48,436
     SGA and foreign exchange                                  2,797          1,352         5,056         8,401        17,606
     Unusual items                                                --             --           685           737         1,422
     --------------------------------------------------------------------------------------------------------------------------
     Earnings before the undernoted                           24,392         16,936        (2,782)       (9,138)       29,408
     Depreciation                                             12,976          1,558         1,001           192        15,727
     Amortization of deferred charges and intangible
       assets                                                    667             --            --            59           726
     Interest expense                                             --             --            --         9,755         9,755
     Interest capitalized                                         --             --            --        (3,738)       (3,738)
     Interest income                                              --             --            --          (730)         (730)
     ==========================================================================================================================

     Earnings before income taxes                         $   10,749     $   15,378    $   (3,783)    $ (14,676)    $   7,668
     ==========================================================================================================================

     Capital expenditures                                 $   31,641     $      573    $       84     $     285     $  32,583
     ==========================================================================================================================
</TABLE>

19.  Geographic segments:

     The Company operates primarily in Canada and the United States with sales
     outside North America denominated in U.S. dollars. Revenue is attributed to
     customers based on location of customer.

<TABLE>
     ==========================================================================================================================
<CAPTION>
                                                                                                           Property, plant and
                                                                                                       equipment, goodwill and
                                                                                      Revenue                intangible assets
     --------------------------------------------------------------------------------------------------------------------------
                                                           2005           2004          2003             2005             2004
     --------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>            <C>           <C>              <C>              <C>
     Canada                                          $   96,009     $   76,151    $   77,052       $  226,194       $  105,035
     United States                                       61,716         58,015        57,881           85,033           95,566
     Other                                                8,731          2,856            49               --               --
     --------------------------------------------------------------------------------------------------------------------------
                                                     $  166,456     $  137,022    $  134,982       $  311,227       $  200,601

     ==========================================================================================================================
</TABLE>

     In 2005, services provided to and products handled from the Company's major
     customer accounted for 10.0% (2004 - 9.6%; 2003 - 10.3%) of the Company's
     total revenue.

20.  Fair values of financial instruments:

     The fair values of cash and cash equivalents, cash held in trust, including
     the long-term portion, accounts receivable, due from Chemtrade, accounts
     payable and accrued liabilities approximate their carrying values because
     of the short-term maturity of these financial instruments.

     The fair value of the publicly traded Senior Subordinated Notes is based on
     quoted market prices. The fair value of all other debt is based on the
     amount of future cash flows associated with each instrument, including
     interest, discounted using borrowing rates currently available to the
     Company for similar debt instruments of comparable maturity.

<TABLE>
     ==========================================================================================================================
<CAPTION>
                                                                                      2005                             2004
     --------------------------------------------------------------------------------------------------------------------------
                                                             Fair market                        Fair market
                                                                   value        Book value            value      Book value
     --------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                <C>               <C>             <C>
     Senior Secured Term Loan                                $   69,445         $   69,445        $      --       $      --
     Long-term Loan                                              39,086             38,474           40,522          40,000
     Senior Subordinated Notes                                   71,025             70,848           74,600          73,138
     --------------------------------------------------------------------------------------------------------------------------
                                                             $  179,556         $  178,767        $ 115,122       $ 113,138

     ==========================================================================================================================
</TABLE>

                                                              FS-23
<PAGE>

21.  Generally accepted accounting principles in Canada and the United States:

     The consolidated financial statements of the Company have been prepared in
     accordance with generally accepted accounting principles ("GAAP") as
     applied in Canada. In the following respects, GAAP as applied in the United
     States differs from that applied in Canada.

     If United States GAAP were employed, the net earnings for the years would
     be adjusted as follows:

<TABLE>
     ==========================================================================================================================
<CAPTION>
                                                                                          2005         2004           2003
     --------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>           <C>            <C>
     Net earnings based on Canadian GAAP                                            $    1,421    $   4,900      $   6,858
     Impact on net earnings of United States GAAP adjustments:
       SFAS 143 cumulative adjustment (note 21(a))                                          --           --           (433)
       Debt financing (note 21(b))                                                          21           21             21
       Income tax (note 21(e))                                                           1,673           --            794
     --------------------------------------------------------------------------------------------------------------------------
     Net earnings based on United States GAAP                                       $    3,115    $   4,921      $   7,240

     --------------------------------------------------------------------------------------------------------------------------
     Per share amounts based on United States GAAP:
       Net earnings - basic                                                         $     0.10    $    0.16      $    0.23
       Net earnings - diluted                                                             0.09         0.15           0.23

     ==========================================================================================================================
</TABLE>

     The impact of the United States GAAP differences discussed above on the
     Company's consolidated statements of retained earnings is as follows:

<TABLE>
     ==========================================================================================================================
<CAPTION>
                                                                                          2005         2004           2003
     --------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>           <C>            <C>
     Retained earnings based on Canadian GAAP                                       $   44,611    $  43,190      $  38,290
     Impact on Sharholders' equity of United States GAAP adjustments:
          Debt financing (note 21(b))                                                      (48)         (69)           (90)
          Foreign currency translation loss (noted 21(c))                               (9,003)      (9,003)        (9,003)
          Deferred costs (note 21(d))                                                     (335)        (335)          (335)
          Income taxes (note 21(e))                                                      2,467          794            794
          Share issue costs (note 21(f))                                                 2,257        2,257          2,257
     --------------------------------------------------------------------------------------------------------------------------
     Retained earnings based on United States GAAP                                  $   39,949    $  36,834      $  31,913

     ==========================================================================================================================
</TABLE>

(a)  SFAS 143 cumulative adjustment:

     In 2003, the Company adopted SFAS 143, "Accounting for Asset Retirement
     Obligations," which requires the fair value of a liability for an asset
     retirement obligation to be recorded in the period which it is incurred and
     a corresponding increase in the carrying amount of the related tangible
     long-lived asset. The change was effective January 1, 2003, and the related
     cumulative effect of change in accounting principle with the effect for
     2003 being a decrease in earnings of $433,000 ($0.014 per share). Effective
     January 1, 2003, under Canadian GAAP, the Company adopted CICA section
     3110, "Asset Retirement Obligations," which is substantially the same as
     the recommendations of SFAS 143 except under CICA section 3110, the change
     in accounting principle was adopted retroactively with restatement.

(b)  Debt financing:

     In 1998, in conjunction with the acquisition of Intertrade Holdings Inc.
     and BCT, a major bank provided the Company with approximately U.S. $57
     million bridge financing, which was repaid on June 30, 1998 from the
     proceeds of the Senior Subordinated Notes. The Company paid U.S. $220,000
     (C$316,000) in connection with this debt. This amount was deferred and
     amortized over the term of Senior Subordinated Notes. Under United States
     GAAP, this amount would be deferred and amortized over the term of the
     bridge financing facility. Since the bridge financing facility extended
     from May 1998 to June 1998, the U.S. $220,000 would be expensed in 1998
     under United States GAAP. There is no net tax impact from this
     Canadian-United States GAAP difference as the movement in the current and
     deferred taxes offsets each other.

(c)  Foreign currency translation loss:

     Under Canadian GAAP, gains and losses on the translation of U.S. dollar
     denominated Senior Subordinated Notes are considered to be a hedge of the
     net investment in self-sustaining operations as described in note 1(i). In
     2001, hedge accounting under United States GAAP was not applied as the

                                     FS-24
<PAGE>

     Company did not meet the requirements of SFAS No. 133, "Accounting for
     Derivative Instruments as Hedge Activities", effective January 1, 2001.
     Accordingly, under United States GAAP net earnings in 2001 were adjusted
     for the gain or loss on the translation of US dollar denominated debt.
     There are no GAAP differences in 2005, 2004 and 2003 as the Company met the
     requirements under both Canadian and United States GAAP.

(d)  Deferred costs:

     Under United States GAAP, certain costs deferred under Canadian GAAP prior
     to a legally binding contract being entered into must be expensed.

(e)  Income taxes:

     Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting
     for Income Taxes," has been adopted by the Company for United States
     reporting purposes. Under the asset and liability method of SFAS 109,
     deferred tax assets and liabilities are recognized for the future tax
     consequences attributable to differences between the financial statement
     carrying amounts of existing assets and liabilities and their respective
     tax bases. The same methodology applies under Canadian GAAP; however, the
     terminology uses the word "future" in the place of "deferred." Deferred tax
     assets and liabilities under Statement 109 are measured using the enacted
     tax rates expected to apply to taxable income in the years in which those
     temporary differences are expected to be recovered or settled. Under
     Canadian GAAP, the future tax assets and liabilities are measured using
     substantively enacted tax rates expected to apply to taxable income in the
     year in which those temporary differences are expected to be recovered or
     settled. Under SFAS 109 and Canadian GAAP, the effect on deferred/future
     tax assets and liabilities of a change in tax rates is recognized in income
     in the period in which the change occurs. The $1.8 million in 2005 relates
     to changes in Quebec tax rates that were substantively enacted in November
     2005.

(f)  Share issue costs:

     Under United States GAAP, share issue costs, net of deferred income taxes,
     would be shown as a reduction of capital stock and not as a reduction of
     retained earnings as permitted by Canadian GAAP.

(g)  Comprehensive income:

     The Company's comprehensive income, as determined under SFAS 130, would
     differ from net earnings as shown below:

<TABLE>
     ==========================================================================================================================
<CAPTION>
                                                                                          2005          2004         2003
     --------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>           <C>          <C>
     Net earnings based on United States GAAP                                        $   3,115     $   4,921    $   7,240
     Other comprehensive income:
       Change in foreign currency translation adjustment                                (1,516)         (107)       2,081
       Minimum pension liability adjustment (note 21(h))                                  (206)         (160)        (447)
     --------------------------------------------------------------------------------------------------------------------------
     Comprehensive income based on United States GAAP                                $   1,393     $   4,654    $   8,874

     ==========================================================================================================================
</TABLE>

(h)  Minimum pension liability adjustment:

     Under United States GAAP, the Company is required to record an additional
     minimum pension liability for certain of its defined benefit pension plans
     to reflect the excess of the accumulated benefit obligations over the fair
     value of the plan assets with a corresponding charge against other
     comprehensive income included in shareholders' equity. No such adjustment
     is required under Canadian GAAP.

                                     FS-25
<PAGE>

(i)  Other recent accounting pronouncements:

i.)  In November 2004, the Financial Accounting Standards Board ("FASB") issued
     SFAS No. 151, which clarifies the accounting for abnormal amounts of idle
     facility expense, freight, handling costs and wasted material as they
     relate to inventory costing and requires these items to be recognized as
     current period expenses. Additionally, the allocation of fixed production
     overheads to the cost of inventory should be based on the normal capacity
     of the production facilities. SFAS 151 is effective for inventory costs
     incurred during fiscal years beginning after June 15, 2005. The Company
     does not believe that the application of SFAS 151 will have a material
     impact on the consolidated statements under U.S. GAAP.

ii.) In December 2004, SFAS No. 123 (revised) "Share-Based Payment," was issued.
     This statement requires an entity to recognize the grant date fair value of
     stock options and other equity-based compensation issued to employees. In
     the income statement, SFAS 123 (revised) eliminates the ability to account
     for share-based compensation transactions using the intrinsic value method
     in APB No. 25. The Company will adopt SFAS 123 (revised) in 2006 in
     accordance with the appropriate transition options and adoption period
     prescribed in the statement. The Company does not expect that the adoption
     of this standard will have a material impact on the consolidated financial
     statements.

iii.)In May 2005, the FASB issued FAS No. 154, "Accounting Changes and Error
     Corrections, a Replacement of APB Opinion No. 20 and SFAS No. 3." SFAS 154
     requires retrospective application of changes in accounting principle to
     prior periods' financial statements, rather than the use of the cumulative
     effect of a change in accounting principle, unless impracticable. If
     impracticable to determine the impact on prior periods, then the new
     accounting principle should be applied to the balances of assets and
     liabilities as of the beginning of the earliest period for which
     retrospective application is practicable, with a corresponding adjustment
     to equity, unless impracticable for all periods presented, in which case
     prospective treatment should be applied. SFAS 154 applies to all voluntary
     changes in accounting principle as well as those required by the issuance
     of new accounting pronouncements if no specific transition guidance is
     provided. SFAS154 does not change the previously issued guidance for
     reporting a change in accounting estimate or correction of an error. SFAS
     154 becomes effective for accounting changes and corrections of errors made
     in fiscal years beginning after December 15, 2005. The Company does not
     expect this policy to have a material impact on the consolidated financial
     statements.

                                     FS-26
<PAGE>

<TABLE>
Index to Exhibits

---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
   Exhibit Number      Description
---------------------------------------------------------------------------------------------------------------------------
<S>                    <C>
         1.1           Articles of Incorporation of the Company(1)
---------------------------------------------------------------------------------------------------------------------------
         1.2           By-laws of the Company(1)
---------------------------------------------------------------------------------------------------------------------------
         2.1           Indenture between  Marsulex Inc. and the Bank of Nova Scotia Trust Company of New York for up to
                       US$155,000,000 in 9-5/8% Senior Subordinated Notes(2)
---------------------------------------------------------------------------------------------------------------------------
         4.2           Amended and Restated Asset and Share Purchase Agreement(3)
---------------------------------------------------------------------------------------------------------------------------
         4.3           Amended and Restated Share and Debt Purchase Agreement(3)
---------------------------------------------------------------------------------------------------------------------------
         4.4           Share Purchase Agreement (Shares of Sulconam Inc.)(4)
---------------------------------------------------------------------------------------------------------------------------
         4.5           Loan Agreement(5)
---------------------------------------------------------------------------------------------------------------------------
         4.6           Settlement Agreement with former CEO(6)
---------------------------------------------------------------------------------------------------------------------------
         4.7           Purchase and Sale Agreement (Shares of Seaway TLC Inc.)
---------------------------------------------------------------------------------------------------------------------------
         4.8           Credit Agreement
---------------------------------------------------------------------------------------------------------------------------
         5.1           Management's Discussion and Analysis
---------------------------------------------------------------------------------------------------------------------------
         5.2           Management Information Circular
---------------------------------------------------------------------------------------------------------------------------
         8             Listing of Marsulex subsidiaries (included on page 15 hereof)
---------------------------------------------------------------------------------------------------------------------------
         12.1          Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of
                       the Sarbanes-Oxley Act of 2002
---------------------------------------------------------------------------------------------------------------------------
         13.1          Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of
                       the Sarbanes-Oxley Act of 2002
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

1.   Incorporated by reference to exhibits of the Company's Form 20-F
     (registration number 333-09410) filed with the SEC on June 27, 2001.
2.   Incorporated by reference to Exhibit 7.1 of the Company's Form F-10
     (registration number 333-09410) filed with the SEC on September 17, 1998.
3.   Incorporated by reference to exhibits of the Company's Amendment No. 1 to
     Form 20-F (registration number 333-09410) filed with the SEC on July 8,
     2002.
4.   Incorporated by reference to exhibits of the Company's Form 20-F
     (registration number 333-09410) filed with the SEC on March 18,, 2003.
5.   Incorporated by reference to exhibits of the Company's Form 20-F
     (registration number 333-09410) filed with the SEC on March 25, 2004.
6.   Incorporated by reference to exhibits of the Company's Form 20-F
     (registration number 333-09410) filed with the SEC on March 28,, 2005.