**UnitedStatesSecurities and Exchange Commission**

**Washington,D.C. 20549**

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**FORM 10-Q**

| **x**                                                  | ** ** | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange   Act of 1934**  |
|--------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|
| **For the quarterly period ended  September 30, 2006** |
| **or**                                                 |
| o                                                      | ** ** | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange   Act of 1934** |

**For the transition periodfrom             to             **

**CommissionFile Number 001- 14568**

**IPSCO Inc.**

(Exact name of registrantas specified in its charter)

**CANADA**

(State or otherjurisdiction of incorporation or organization)

**98-0077354**

(I.R.S. EmployerIdentification No.)

**650 Warrenville Road,Suite 500, Lisle, Illinois 60532Telephone: (630)-810-4800**

(Address and telephonenumber of principal executive offices)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

x Yes   o No

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.
| Large accelerated filer x |   | Accelerated  filer o |   | Non-accelerated  filer o |
|--------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

APPLICABLE ONLY TOISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:

Indicate by check mark whether the registrant hasfiled all documents and reports to be filed by Sections 12, 13 or 15(d) ofthe Securities Exchange Act of 1934 subsequent to the distribution ofsecurities under a plan confirmed by a court.

o Yes   o No

The number of shares of common stock outstanding as ofNovember 6, 2006 is 47,198,092.

 

 

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**IPSCOInc.Form 10-Q, September 30, 2006Table of Contents**
| Part I   Financial  Information |   | 2                                                                                                                                                                        |   |
|------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1                                         |   | Financial Statements                                                                                                                                                     |   | 2 |   |
|                                           |   | Consolidated Statements of Income and Comprehensive  Income for the three- and nine-month periods ended September 30, 2006  and September 30, 2005 (unaudited) |   | 2 |   |
|                                           |   | Consolidated Statements of Retained Earnings for the  three- and nine-month periods ended September 30, 2006 and September 30,  2005 (unaudited)               |   | 2 |   |
|                                           |   | Consolidated Statements of Cash Flows for the three-  and nine-month periods ended September 30, 2006 and September 30,  2005 (unaudited)                      |   | 3 |   |
|                                           |   | Consolidated Balance Sheets as of September 30,  2006 (unaudited) and December 31, 2005                                                                        |   | 4 |   |
|                                           |   | Notes to Consolidated Interim Financial Statements  (unaudited)                                                                                                          |   | 5 |   |
| Item 2                                         |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                              |   | 24 |   |
| Item 3                                         |   | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                              |   | 28 |   |
| Item 4                                         |   | Controls and  Procedures                                                                                                                                                 |   | 29 |   |
| Part II   Other  Information    |   | 30                                                                                                                                                                       |   |
| Item 1                                         |   | Legal Proceedings                                                                                                                                                        |   | 30 |   |
| Item  1A                                       |   | Risk  Factors                                                                                                                                                            |   | 30 |   |
| Item 2                                         |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                             |   | 31 |   |
| Item 3                                         |   | Defaults Upon  Senior Securities                                                                                                                                         |   | 31 |   |
| Item 4                                         |   | Submission of  Matters to a Vote of Security Holders                                                                                                                     |   | 31 |   |
| Item 5                                         |   | Other Information                                                                                                                                                        |   | 31 |   |
| Item  6                                        |   | Exhibits                                                                                                                                                                 |   | 31 |   |
| Signatures                                     |   | 32                                                                                                                                                                       |   |

 

 

 

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**PART I—FINANCIALINFORMATION**

**Item 1.**                        FinancialStatements

**IPSCO Inc.CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)**(thousandsof United States Dollars except for per share and ton data)

| ** **                                               | ** **    | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|----------------------------------------------------------|---------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                               | ** **    | **Sept 30**                                   | ** ** | **Sept 30**                                  | ** ** | **Sept 30** | ** ** | **Sept 30** | ** ** |
| ** **                                               | ** **    | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Plate and Coil  Tons Produced (thousands)                |          | 946.8                                              |       | 759.3                                             |       | 2,794.9 |   | 2,434.5 |   |
| Finished Tons  Shipped (thousands)                       |          | 1,041.7                                            |       | 847.8                                             |       | 3,048.1 |   | 2,507.1 |   |
| Sales                                                    |          | $                                                  | 996,867    |                                              | $          | 726,079 |   | $ | 2,793,321 |   | $ | 2,180,491 |   |
| Cost of sales                                            |          | 682,290                                            |       | 501,204                                           |       | 1,937,726 |   | 1,457,676 |   |
| Gross income                                             |          | 314,577                                            |       | 224,875                                           |       | 855,595 |   | 722,815 |   |
| Selling, general  and administration                     |          | 25,696                                             |       | 23,075                                            |       | 76,776 |   | 57,553 |   |
| Operating income                                         |          | 288,881                                            |       | 201,800                                           |       | 778,819 |   | 665,262 |   |
| Other expenses (income):                                 |          |                                               |       |                                              |       |   |   |   |   |
| Interest on long-term debt                               |          | 6,120                                              |       | 8,784                                             |       | 17,661 |   | 29,187 |   |
| Net interest income                                      |          | (9,482                                             | )          | (4,456                                            | )          | (24,705 | ) | (10,479 | ) |
| Loss on early extinguishment of debt                     |          | —                                             |       | 690                                               |       | — |   | 10,939 |   |
| Foreign exchange loss (gain)                             |          | 2,497                                              |       | (18,080                                           | )          | (1,262 | ) | (19,233 | ) |
| Other                                                    |          | (135                                               | )          | (1,767                                            | )          | (353 | ) | (1,782 | ) |
| Income Before  Income Taxes                              |          | 289,881                                            |       | 216,629                                           |       | 787,478 |   | 656,630 |   |
| Income Tax  Expense                                      |          | 92,792                                             |       | 82,602                                            |       | 283,320 |   | 240,982 |   |
| Net Income                                               |          | 197,089                                            |       | 134,027                                           |       | 504,158 |   | 415,648 |   |
| Cumulative translation adjustment                        |          | (1,035                                             | )          | (3,617                                            | )          | 29,425 |   | (5,339 | ) |
| Change in fair value of derivatives, net of tax          |          | (3,060                                             | )          | 4,235                                             |       | (10,744 | ) | 7,320 |   |
| Comprehensive  income                                    |          | $                                                  | 192,994    |                                              | $          | 134,645 |   | $ | 522,839 |   | $ | 417,629 |   |
| Earnings per  Common Share                               | —Basic   |                                               | $          | 4.19                                              |       | $ | 2.81 |   | $ | 10.61 |   | $ | 8.52 |   |
|                                                     | —Diluted |                                               | $          | 4.15                                              |       | $ | 2.78 |   | $ | 10.51 |   | $ | 8.44 |   |
| Dividends Declared per  Common Share (Canadian  dollars) |          | $                                                  | 0.20       |                                              | $          | 0.14 |   | $ | 0.58 |   | $ | 0.40 |   |

 

**IPSCO Inc.CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (unaudited)**(thousandsof United States Dollars)

| ** **                                | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **Sept 30**                                   | ** ** | **Sept 30**                                  | ** ** | **Sept 30** | ** ** | **Sept 30** | ** ** |
| ** **                                | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Retained Earnings  at Beginning of Period |       | $                                                  | 1,557,694  |                                              | $          | 1,058,958 |   | $ | 1,341,659 |   | $ | 884,859 |   |
| Net Income                                |       | 197,089                                            |       | 134,027                                           |       | 504,158 |   | 415,648 |   |
| Common Share Repurchase                   |       | (2,029                                             | )          | (9,018                                            | )          | (77,125 | ) | (106,086 | ) |
| Dividends on Common Shares                |       | (8,457                                             | )          | (5,706                                            | )          | (24,395 | ) | (16,160 | ) |
| Retained Earnings at End  of Period       |       | $                                                  | 1,744,297  |                                              | $          | 1,178,261 |   | $ | 1,744,297 |   | $ | 1,178,261 |   |

 

2

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**IPSCO Inc.CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)**(thousandsof United States Dollars)

| ** **                                                                       | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                       | ** ** | **Sept 30**                                   | ** ** | **Sept 30**                                  | ** ** | **Sept 30** | ** ** | **Sept 30** | ** ** |
| ** **                                                                       | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Operating  Activities                                                            |       |                                               |       |                                              |       |   |   |   |   |
| Net income                                                                       |       | $                                                  | 197,089    |                                              | $          | 134,027 |   | $ | 504,158 |   | $ | 415,648 |   |
| Adjustments to reconcile net income to net cash  flows from operating activities |       |                                               |       |                                              |       |   |   |   |   |
| Stock-based compensation                                                         |       | 3,373                                              |       | 2,300                                             |       | 5,021 |   | 3,281 |   |
| Depreciation of capital assets                                                   |       | 18,936                                             |       | 19,901                                            |       | 52,231 |   | 59,991 |   |
| Amortization of deferred charges                                                 |       | 507                                                |       | 409                                               |       | 1,506 |   | 1,284 |   |
| Deferred income taxes                                                            |       | 1,259                                              |       | 17,935                                            |       | (4,874 | ) | 62,357 |   |
| Loss on early extinguishment of debt                                             |       | —                                             |       | 690                                               |       | — |   | 10,939 |   |
| Unrealized foreign exchange gain                                                 |       | —                                             |       | (18,714                                           | )          | — |   | (20,653 | ) |
| Changes in operating assets and liabilities                                      |       |                                               |       |                                              |       |   |   |   |   |
| Accounts receivable, less allowances                                             |       | 3,704                                              |       | (27,533                                           | )          | 2,575 |   | 57,915 |   |
| Inventories                                                                      |       | (103,337                                           | )          | 29,674                                            |       | (235,651 | ) | (24,831 | ) |
| Other                                                                            |       | 315                                                |       | (1,614                                            | )          | 3,049 |   | 2,528 |   |
| Accounts payable and accrued charges                                             |       | 50,333                                             |       | 29,142                                            |       | 19,398 |   | (39,132 | ) |
| Change in deferred pension liability                                             |       | (283                                               | )          | (660                                              | )          | (726 | ) | (315 | ) |
| Income taxes payable                                                             |       | (7,296                                             | )          | 33,521                                            |       | (44,746 | ) | 21,155 |   |
| Net cash provided  by operations                                                 |       | 164,600                                            |       | 219,078                                           |       | 301,941 |   | 550,167 |   |
| Investing  Activities                                                            |       |                                               |       |                                              |       |   |   |   |   |
| Expenditures for capital assets                                                  |       | (19,443                                            | )          | (19,545                                           | )          | (61,853 | ) | (41,716 | ) |
| Proceeds from mortgage receivable, net                                           |       | 7,425                                              |       | 1,955                                             |       | 8,396 |   | 3,782 |   |
| Acquisition costs                                                                |       | (4,371                                             | )          | 293                                               |       | (4,371 | ) | 194 |   |
| Net cash used for  investing activities                                          |       | (16,389                                            | )          | (17,297                                           | )          | (57,828 | ) | (37,740 | ) |
| Financing  Activities                                                            |       |                                               |       |                                              |       |   |   |   |   |
| Common share dividends                                                           |       | (8,457                                             | )          | (5,706                                            | )          | (24,395 | ) | (16,160 | ) |
| Common shares issued pursuant to share option plan                               |       | 2,330                                              |       | 4,387                                             |       | 7,813 |   | 20,810 |   |
| Common share repurchase                                                          |       | —                                             |       | (11,564                                           | )          | (85,500 | ) | (132,721 | ) |
| Repayment of long-term debt                                                      |       | 877                                                |       | (2,458                                            | )          | (4,114 | ) | (130,295 | ) |
| Net cash used for  financing activities                                          |       | (5,250                                             | )          | (15,341                                           | )          | (106,196 | ) | (258,366 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                    |       | (1,407                                             | )          | 2,742                                             |       | 22,565 |   | 4,248 |   |
| Increase in Cash  and Cash Equivalents                                           |       | 141,554                                            |       | 189,182                                           |       | 160,482 |   | 258,309 |   |
| Cash and Cash  Equivalents at Beginning of Period                                |       | 601,992                                            |       | 423,901                                           |       | 583,064 |   | 354,774 |   |
| Cash and Cash  Equivalents at End of Period                                      |       | $                                                  | 743,546    |                                              | $          | 613,083 |   | $ | 743,546 |   | $ | 613,083 |   |

 

3

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**IPSCO Inc.CONSOLIDATED BALANCE SHEETS (unaudited)**(thousandsof United States Dollars)

| ** **                                  | ** ** | **Sept 30** | ** ** | **Dec 31** | ** ** |
|---------------------------------------------|------------|------------------|------------|-----------------|------------|
| ** **                                  | ** ** | **2006**         | ** ** | **2005**        | ** ** |
| Current Assets                              |       |             |       |            |       |
| Cash and cash equivalents                   |       | $                | 743,546    |            | $          | 583,064 |   |
| Accounts receivable, less allowances        |       | 376,334          |       | 388,943         |       |
| Inventories                                 |       | 764,053          |       | 506,237         |       |
| Deferred income taxes                       |       | 37,999           |       | 30,227          |       |
| Other                                       |       | 5,406            |       | 8,615           |       |
|                                        |       | 1,927,338        |       | 1,517,086       |       |
| Non-Current  Assets                         |       |             |       |            |       |
| Capital assets                              |       | 1,063,291        |       | 1,056,186       |       |
| Other                                       |       | 56,710           |       | 65,747          |       |
|                                        |       | 1,120,001        |       | 1,121,933       |       |
| Total Assets                                |       | $                | 3,047,339  |            | $          | 2,639,019 |   |
| Current  Liabilities                        |       |             |       |            |       |
| Accounts payable and accrued charges        |       | $                | 335,975    |            | $          | 303,589 |   |
| Income and other taxes payable              |       | —           |       | 41,073          |       |
| Current portion of long-term debt           |       | 20,879           |       | 4,114           |       |
|                                        |       | 356,854          |       | 348,776         |       |
| Long-Term  Liabilities                      |       |             |       |            |       |
| Long-term debt                              |       | 292,175          |       | 313,053         |       |
| Other                                       |       | 44,538           |       | 44,584          |       |
| Deferred income taxes                       |       | 189,939          |       | 191,973         |       |
|                                        |       | 526,652          |       | 549,610         |       |
| Shareholders'  Equity                       |       |             |       |            |       |
| Common shares                               |       | 414,499          |       | 419,272         |       |
| Contributed surplus                         |       | 22,202           |       | 15,548          |       |
| Retained earnings                           |       | 1,744,297        |       | 1,341,659       |       |
| Accumulated other comprehensive loss        |       | (17,165          | )          | (35,846         | )          |
|                                        |       | 2,163,833        |       | 1,740,633       |       |
| Total Liabilities and  Shareholders' Equity |       | $                | 3,047,339  |            | $          | 2,639,019 |   |

 

4

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**IPSCO Inc.NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)**(thousands of United States Dollars)

1.                 Effective withthe fourth quarter of 2005, the Company prepares its financial statements inaccordance with the generally accepted accounting principles (GAAP) of theUnited States. A reconciliation of the differences between GAAP in Canada andthe United States as they apply to the Company is provided in note 10.

These unaudited consolidated financial statements havebeen prepared on a basis consistent with those used in the preparation of the mostrecent annual financial statements, except as described in note 5, and shouldbe read in the context of the consolidated financial statements and notesthereto filed with the Securities and Exchange Commission in the Company’s 2005Annual Report on Form 10-K. In the opinion of the Company, theinformation furnished herein reflects all known accruals and adjustmentsnecessary for a fair statement of the results for the periods reported herein.All such adjustments are of a normal recurring nature. These interim resultsare not necessarily indicative of expected results for the year.

In July 2006, the Financial Accounting StandardsBoard (FASB) issued FASB Interpretation No. 48, *Accounting for Uncertainty in**Income Taxes-anInterpretation of FASB Statement No. 109 *(FIN 48),which clarifies the accounting for uncertainty in tax positions. Thisinterpretation requires that the Company recognize in their financialstatements, the impact of a tax position, if that position is more likely thannot of being sustained on audit, based on the technical merits of the position.This interpretation is effective for fiscal years beginning afterDecember 15, 2006, with the cumulative effect of the change in accountingprinciple recorded as an adjustment to opening retained earnings. The Companyhas not yet determined the impact this interpretation will have on thefinancial statements.

InSeptember 2006, the FASB issued SFAS No. 158 “Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans” (SFAS 158). SFAS158 amends SFAS No. 87 “Employer’s Accounting for Pensions,” SFASNo. 88 “Employers’ Accounting for Settlements and Curtailments of DefinedBenefit Pension Plans and for Termination Benefits,” SFAS No. 106“Employers’ Accounting for Postretirement Benefits Other than Pensions” andSFAS No. 132 “Employers’ Disclosures about Pensions and OtherPostretirement Benefits.” The amendments retain most of the existingmeasurement and disclosure guidance and will not change the amount recognizedin the Company’s statement of operations. SFAS 158 requires companies torecognize a net asset or liability with an offset to equity for the amount, bywhich the defined-benefit-postretirement obligation is over or under-funded.SFAS 158 requires prospective application, and the recognition and disclosurerequirements will be effective for the Company’s fiscal year endingDecember 31, 2006. The Company is currently evaluating the impact SFAS 158will have on its consolidated balance sheet.

2.                 Inventories

| ** **      | ** ** | **Sept 30** | ** ** | **Dec 31** | ** ** |
|-----------------|------------|------------------|------------|-----------------|------------|
| ** **      | ** ** | **2006**         | ** ** | **2005**        | ** ** |
| Finished goods  |       | $                | 233,153    |            | $          | 148,650 |   |
| Work-in-process |       | 318,364          |       | 190,860         |       |
| Raw materials   |       | 117,170          |       | 99,706          |       |
| Supplies        |       | 95,366           |       | 67,021          |       |
|            |       | $                | 764,053    |            | $          | 506,237 |   |

 

5

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3.                 Pensions

Pensioncost attributable to the Company’s pension plans is as follows:

| ** **                                           | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **Sept 30**                                   | ** ** | **Sept 30**                                  | ** ** | **Sept 30** | ** ** | **Sept 30** | ** ** |
| ** **                                           | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Defined benefit  plans                               |       |                                               |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service cost                                         |       |                                               | $          | 2,120                                             |       |   |   | $ | 1,456 |   |   |   | $ | 6,297 |   |   |   | $ | 4,293 |   |   |   |
| Interest cost                                        |       |                                               | 3,260      |                                              |       |   | 2,789 |   |   |   | 9,683 |   |   |   | 8,223 |   |   |   |
| Expected return on plan assets                       |       |                                               | (3,296     | )                                                 |       |   | (2,607 | ) |   |   | (9,790 | ) |   |   | (7,686 | ) |   |   |
| Amortization of gains, losses and past service costs |       |                                               | 1,598      |                                              |       |   | 854 |   |   |   | 4,747 |   |   |   | 2,518 |   |   |   |
|                                                 |       |                                               | 3,682      |                                              |       |   | 2,492 |   |   |   | 10,937 |   |   |   | 7,348 |   |   |   |
| Defined  contribution plans                          |       |                                               | 1,182      |                                              |       |   | 1,010 |   |   |   | 3,967 |   |   |   | 3,251 |   |   |   |
|                                                 |       |                                               | $          | 4,864                                             |       |   |   | $ | 3,502 |   |   |   | $ | 14,904 |   |   |   | $ | 10,599 |   |   |   |

 

4.                 Earnings pershare

Basic earnings per share is calculated by dividing netincome available to common shareholders by the weighted average number of commonshares outstanding. Diluted earnings per share is calculated by dividing netincome by the weighted average shares outstanding plus share equivalents thatwould arise from the exercise of share options, deferred share units,restricted shares and performance units. The per share amounts disclosed arebased on the following:

| ** **                                              | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                              | ** ** | **Sept 30**                                   | ** ** | **Sept 30**                                  | ** ** | **Sept 30** | ** ** | **Sept 30** | ** ** |
| ** **                                              | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Numerator for  basic and diluted earnings per share     |       | $                                                  | 197,089    |                                              | $          | 134,027 |   | $ | 504,158 |   | $ | 415,648 |   |
| Common shares  outstanding—September 30       |       | 47,193,592                                         |       | 48,036,319                                        |       | 47,193,592 |   | 48,036,319 |   |
| Non-vested  restricted shares—September 30    |       | (163,884                                           | )          | (171,504                                          | )          | (163,884 | ) | (171,504 | ) |
| Weighted average  impact of shares repurchased (issued) |       | (13,422                                            | )          | (100,834                                          | )          | 466,945 |   | 921,441 |   |
| Denominator for  basic earnings per share               |       | 47,016,286                                         |       | 47,763,981                                        |       | 47,496,653 |   | 48,786,256 |   |
| Adjustment for  share options                           |       | 93,168                                             |       | 127,318                                           |       | 98,574 |   | 248,024 |   |
| Adjustment for  deferred share units                    |       | 119,717                                            |       | 112,205                                           |       | 118,193 |   | 108,861 |   |
| Adjustment for  restricted shares                       |       | 79,591                                             |       | 133,431                                           |       | 126,295 |   | 112,485 |   |
| Adjustment for  performance units                       |       | 169,675                                            |       | 24,849                                            |       | 109,078 |   | — |   |
| Denominator for diluted  earnings per share             |       | 47,478,437                                         |       | 48,161,784                                        |       | 47,948,793 |   | 49,255,626 |   |
|                                                         |            |                                                    |            |                                                   |            |  |  |  |  |  |  |  |  |

 

5.                 Stock BasedCompensation

Effective January 1, 2006, the Company adoptedSFAS No. 123 (revised, Share-Based Payment (SFAS 123(R)) using themodified prospective approach. Prior to the adoption of SFAS 123(R) theCompany accounted for share based awards in accordance with FASB StatementNo. 123, Accounting for Stock Based Compensation. Under the modifiedprospective approach, SFAS 123(R) applies to new awards and to awardsoutstanding on January 1, 2006 that are subsequently modified, repurchasedor cancelled. Under the modified prospective approach, compensation costrecognized in the first quarter 2006 includes compensation cost for all sharebased payments granted prior to, but not yet vested as of January 1, 2006,based on the grant-date fair value estimated in accordance with the originalprovisions of SFAS 123, and compensation cost for all share based paymentsgranted subsequent to January 1, 2006, based on the grant-date fair valueestimated in accordance with provisions of SFAS 123(R). The impact of adoptingSFAS 123(R) was not material to the financial statements.

6

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TheCompany has an incentive share plan under which common shares are reserved fordirectors, officers and employees. As of September 30, 2006 andSeptember 30, 2005, shares available for future grants are 599,149 and729,645, respectively. The restricted shares and performance units vest at theend of three years based on continued employment and achievement of certainCompany performance objectives. Restricted shares are entitled to dividendsdeclared on common shares during the vesting period and, upon vesting,performance units are entitled to an amount equal to dividends declared duringthe vesting period. The fair value of the grants is being amortized tocompensation expense over the vesting period. For the quarters endedSeptember 30, 2006 and September 30, 2005 compensation expense of$3,732 and $2,300 has been recorded, respectively. Compensation expense of $12,966and $3,281 has been recorded in the nine month periods ended September 30,2006 and September 30, 2005, respectively.

*Share Options*

Thefollowing is the continuity of granted options outstanding with weightedaverage exercise price in Canadian dollars:

| ** **                      | ** ** | **For the Three Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                      | ** ** | **September 30, 2006**                   | ** ** | **September 30, 2005**                   | ** ** |
| ** **                      | ** ** | **Number of  Shares**                         | ** ** | **Weighted  Average  Exercise Price**         | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Balance at  beginning of period |       |                                               | 150,625    |                                               |       |   | 23.44 |   |   |   | 369,170 |   |   |   | 26.30 |   |   |
| Options exercised               |       |                                               | (4,500     | )                                                  |       |   | 35.10 |   |   |   | (176,645 | ) |   |   | 29.84 |   |   |
| Balance at end of period        |       |                                               | 146,125    |                                               |       |   | 23.08 |   |   |   | 192,525 |   |   |   | 23.05 |   |   |

 

| ** **                      | ** ** | **For the Nine Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|---------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                      | ** ** | **September 30, 2006**                  | ** ** | **September 30, 2005**                  | ** ** |
| ** **                      | ** ** | **Number of  Shares**                        | ** ** | **Weighted  Average  Exercise Price**        | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Balance at  beginning of period |       |                                              | 175,025    |                                              |       |   | 23.50 |   |   | 1,205,065 |   |   | 24.90 |   |   |
| Options exercised               |       |                                              | (28,900    | )                                                 |       |   | 25.61 |   |   | (1,012,540 | ) |   | 25.26 |   |   |
| Balance at end of period        |       |                                              | 146,125    |                                              |       |   | 23.08 |   |   | 192,525 |   |   | 23.05 |   |   |

 

The September 30,2006 weighted average remaining contractual life of the outstanding options is4.4 years.

Intrinsic value for stockoptions is defined as the difference between the current market value and thegrant price. The total intrinsic value of the outstanding and exerciseableoptions at September 30, 2006 is CDN $10.8 million. The total intrinsicvalue of options exercised during the quarters ended September 30, 2006and 2005 was CDN $0.3 million and CDN $7.0 million, respectively. Thetotal intrinsic value of options exercised for the nine months endedSeptember 30, 2006 and 2005 was CDN $2.4 million and CDN $38.5 million, respectively.

*Performance Units*

Thefollowing is the continuity of performance units outstanding:

| ** **                                               | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                               | ** ** | **Sept 30**                                   | ** ** | **Sept 30**                                  | ** ** | **Sept 30** | ** ** | **Sept 30** | ** ** |
| ** **                                               | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Balance at  beginning of period                          |       |                                               | 187,746    |                                              |       |   | 145,985 |   |   |   | 242,766 |   |   |   | 133,985 |   |   |
| Performance units  granted                               |       |                                               | 88,817     |                                              |       |   | 96,926 |   |   |   | 99,217 |   |   |   | 108,926 |   |   |
| Performance units  cancelled                             |       |                                               | —     |                                              |       |   | (1,250 | ) |   |   | (625 | ) |   |   | (1,250 | ) |   |
| Performance units  converted to common shares on vesting |       |                                               | —     |                                              |       |   | — |   |   |   | (44,605 | ) |   |   | — |   |   |
| Performance units  paid in cash on vesting               |       |                                               | —     |                                              |       |   | — |   |   |   | (20,190 | ) |   |   | — |   |   |
| Balance at end of period                                 |       |                                               | 276,563    |                                              |       |   | 241,661 |   |   |   | 276,563 |   |   |   | 241,661 |   |   |

 

7

----

As of September 30,2006 the weighted average grant date fair value of the outstanding performanceunits is CDN $71.80.

Thetotal fair value of performance units which vested during the three and ninemonths ended September 30, 2006 was $nil and $6.2 million, respectively.

*Restricted Shares*

Thefollowing is the continuity of restricted shares outstanding:

| ** **                                                    | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                    | ** ** | **Sept 30**                                   | ** ** | **Sept 30**                                  | ** ** | **Sept 30** | ** ** | **Sept 30** | ** ** |
| ** **                                                    | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Balance at  beginning of period                               |       |                                               | 210,003    |                                              |       |   | 171,504 |   |   |   | 210,003 |   |   |   | 171,504 |   |   |
| Restricted shares  granted                                    |       |                                               | 30,798     |                                              |       |   | 38,499 |   |   |   | 30,798 |   |   |   | 38,499 |   |   |
| Restricted shares  converted to common shares on vesting |       |                                               | (49,287    | )                                                 |       |   | — |   |   |   | (49,287 | ) |   |   | — |   |   |
| Restricted shares  paid in cash on vesting                    |       |                                               | (27,630    | )                                                 |       |   | — |   |   |   | (27,630 | ) |   |   | — |   |   |
| Balance at end of period                                      |       |                                               | 163,884    |                                              |       |   | 210,003 |   |   |   | 163,884 |   |   |   | 210,003 |   |   |

 

The September 30, 2006 weighted average grantdate fair value of the restricted shares is CDN $58.98.

The total fair value of restricted shares which vestedduring the three and nine months ended September 30, 2006 was $6.6million.

At September 30, 2006, there was $25.7 million ofunrecognized compensation cost related to share-based payments which is expectedto be recognized over the weighted-average vesting period of 2.5 years.

In March 2005, the Company filed a normal courseissuer bid which entitled the Company to acquire approximately 4.2 million of itscommon shares between March 16, 2005 and March 15, 2006. Allpurchases were made on the open market at the market price at the time of thepurchase. All shares purchased under the bid were cancelled. During the quarterended September 30, 2005, 258,500 common shares were purchased for $11.6 million.During the nine months ended September 30, 2005, 2,751,900 common shareswere purchased for $132.7 million.

In May 2006,the Company filed a normal course issuer bid which entitled the Company toacquire up to 4.7 million of its common shares between May 9, 2006and May 8, 2007. All purchases were made on the open market at the marketprice at the time of the purchase. All shares purchased under the bid werecancelled. During the nine months ended September 30, 2006, 934,700 commonshares were purchased for $85.5 million. No shares were repurchased in thethird quarter 2006.

6.                 Income Taxes

Duringthe quarter ended September 30, 2006, the Company decreased its annualeffective income tax rate from 38.3% to 36% primarily due to the plannedreinvestment of U.S. earnings through the announced acquisition of NSGroup, Inc. (see Note 8). The change in the effective rate reduced incometax expense for the three months ended September 30, 2006 by $18.2 million($0.38 per diluted share). The 32% effective tax rate for the quarter endedSeptember 30, 2006 as compared to the 38.1% effective tax rate for thequarter ended September 30, 2005 reflects the reduction of U.S.withholding tax previously recorded.

7.                 SegmentedInformation

The Company is organized and managed as a singlebusiness segment, being steel products, and the Company is viewed as a singleoperating segment by the chief operating decision maker for the purposes ofresource allocation and assessing performance.

8

----

Financial information on the Company’s geographicareas follows. Sales are allocated to the country in which the third party customerreceives the product.

| ** **    | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|---------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **    | ** ** | **Sept 30  2006**                             | ** ** | **Sept 30  2005**                            | ** ** | **Sept 30  2006** | ** ** | **Sept 30  2005** | ** ** |
| Sales         |       |                                               |       |                                              |       |   |   |   |   |
| Canada        |       | $                                                  | 289,715    |                                              | $          | 266,721 |   | $ | 850,133 |   | $ | 683,945 |   |
| United States |       | 707,152                                            |       | 459,358                                           |       | 1,943,188 |   | 1,496,546 |   |
|          |       | $                                                  | 996,867    |                                              | $          | 726,079 |   | $ | 2,793,321 |   | $ | 2,180,491 |   |

 

| ** **     | ** ** | **Sept 30** | ** ** | **December 31** | ** ** |
|----------------|------------|------------------|------------|----------------------|------------|
| ** **     | ** ** | **2006**         | ** ** | **2005**             | ** ** |
| Capital Assets | ** ** | ** **       | ** ** | ** **           | ** ** |
| Canada         |       | $                | 223,507    |                 | $          | 213,621 |   |
| United States  |       | 839,784          |       | 842,565              |       |
|           |       | $                | 1,063,291  |                 | $          | 1,056,186 |   |

 

| ** **                                         | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                         | ** ** | **Sept 30  2006**                             | ** ** | **Sept 30  2005**                            | ** ** | **Sept 30  2006** | ** ** | **Sept 30  2005** | ** ** |
| Sales information  by product group is as follows: |       |                                               |       |                                              |       |   |   |   |   |
| Steel mill products                                |       | $                                                  | 566,479    |                                              | $          | 379,507 |   | $ | 1,623,547 |   | $ | 1,329,861 |   |
| Tubular products                                   |       | 430,388                                            |       | 346,572                                           |       | 1,169,774 |   | 850,630 |   |
|                                               |       | $                                                  | 996,867    |                                              | $          | 726,079 |   | $ | 2,793,321 |   | $ | 2,180,491 |   |

 

Tubular productsales volume in the first and second quarters can be negatively impacted byweather conditions in Western Canada.

8.                 BusinessCombination

On September 11, 2006, the Company announced thatit had entered into a definitive agreement with NS Group, Inc. to acquireall of the outstanding shares of NS Group for $66 per share for a total cost ofapproximately $1.5 billion plus transaction costs. The acquisition will befunded through a combination of cash on hand and debt obtained under a fullycommitted bank credit facility.

The transaction, subject to customary conditionsincluding approval of the holders of NS Group, Inc. common stock, andregulatory approval, is expected to close before December 31, 2006.

9

----

**9.**                 ConsolidatingFinancial Statements

The following informationpresents the condensed consolidating balance sheets as at September 30,2006 and December 31, 2005, and the condensed consolidating statements ofincome and cash flows for the three and nine months ended September 30,2006 and 2005. The condensed consolidating financial statements present theaccounts of IPSCO Inc. (“Parent”), and its Guarantor and Non-Guarantorsubsidiaries, as defined in the indenture dated as of June 18, 2003 to theIPSCO Inc. 83⁄4% Senior Notes due 2013 (“the Notes”) which were issued onJune 18, 2003. The Notes are fully and unconditionally guaranteed, on ajoint and several basis, by the Guarantor subsidiaries. The Guarantorsubsidiaries, all of which are wholly-owned by IPSCO Inc., are IPSCOSaskatchewan Inc., IPSCO Recycling Inc., IPSCO Enterprises Inc., IPSCOMinnesota Inc., IPSCO Texas Inc., IPSCO Tubulars Inc., IPSCO Steel Inc., andIPSCO Steel (Alabama) Inc. Non-Guarantor subsidiaries are IPSCO Direct Inc.,Western Steel Limited, General Scrap Partnership, IPSCO Sales Inc., IPSCOConstruction Inc. and General Scrap Inc.

**IPSCO Inc. Condensed Consolidating Statementsof Income**

ThreeMonths Ended September 30, 2006

(thousandsof United States dollars)

| ** **                            | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|---------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                            | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Total**        | ** ** |
| Sales                                 |       | $          | 212,003    |             | $          | 868,901           |       | $                | 177,540    |             | $          | (261,577 | ) | $ | 996,867 |   |
| Cost of sales                         |       | 179,878    |       | 616,132          |       | 154,061           |       | (267,781         | )          | 682,290          |       |
| Gross income                          |       | 32,125     |       | 252,769          |       | 23,479            |       | 6,204            |       | 314,577          |       |
| Selling, general  and administration  |       | 9,237      |       | 16,454           |       | 5                 |       | —           |       | 25,696           |       |
| Operating income                      |       | 22,888     |       | 236,315          |       | 23,474            |       | 6,204            |       | 288,881          |       |
| Other expenses (income)               |       |       |       |             |       |              |       |             |       |             |       |
| Interest on long-term debt            |       | 4,037      |       | 2,694            |       | —            |       | (611             | )          | 6,120            |       |
| Other interest (income) expense,  net |       | (1,391     | )          | (7,389           | )          | (702              | )          | —           |       | (9,482           | )          |
| Foreign exchange loss (gain)          |       | 1,028      |       | 1,432            |       | 35                |       | 2                |       | 2,497            |       |
| Intercompany interest/dividend        |       | 905        |       | (1,043           | )          | 137               |       | 1                |       | —           |       |
| Equity income                         |       | (167,630   | )          | (12,257          | )          | —            |       | 179,752          |       | (135             | )          |
| Other (income) expense                |       | (6,784     | )          | —           |       | —            |       | 6,784            |       | —           |       |
| Income (loss)  before income taxes    |       | 192,723    |       | 252,878          |       | 24,004            |       | (179,724         | )          | 289,881          |       |
| Income taxes                          |       | (4,366     | )          | 90,012           |       | 7,096             |       | 50               |       | 92,792           |       |
| NET INCOME (LOSS)                     |       | $          | 197,089    |             | $          | 162,866           |       | $                | 16,908     |             | $          | (179,774 | ) | $ | 197,089 |   |

 

10

----

**IPSCO Inc. Condensed Consolidating Statementsof Income**

**Nine Months EndedSeptember 30, 2006**

(thousands of UnitedStates dollars)

| ** **                            | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|---------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                            | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Total**        | ** ** |
| Sales                                 |       |       | $          | 598,880          |       |              |       | $                | 2,480,919  |             |       |   | $ | 457,477 |   |   |   | $ | (743,955 | ) |   |   | $ | 2,793,321 |   |   |
| Cost of sales                         |       |       | 520,847    |             |       |              | 1,780,430  |             |       |             | 399,005    |   |   |   | (762,556 | ) |   |   | 1,937,726 |   |   |
| Gross income                          |       |       | 78,033     |             |       |              | 700,489    |             |       |             | 58,472     |   |   |   | 18,601 |   |   |   | 855,595 |   |   |
| Selling, general  and administration  |       |       | 26,308     |             |       |              | 50,572     |             |       |             | (104       | ) |   |   | — |   |   |   | 76,776 |   |   |
| Operating income                      |       |       | 51,725     |             |       |              | 649,917    |             |       |             | 58,576     |   |   |   | 18,601 |   |   |   | 778,819 |   |   |
| Other expenses  (income)              |       |       |       |             |       |              |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Interest on long-term debt            |       |       | 12,084     |             |       |              | 8,070      |             |       |             | —     |   |   |   | (2,493 | ) |   |   | 17,661 |   |   |
| Other interest (income) expense,  net |       |       | (5,073     | )                |       |              | (18,185    | )                |       |             | (1,447     | ) |   |   | — |   |   |   | (24,705 | ) |   |
| Foreign exchange loss (gain)          |       |       | 1,782      |             |       |              | (3,036     | )                |       |             | (10        | ) |   |   | 2 |   |   |   | (1,262 | ) |   |
| Intercompany interest/dividend        |       |       | 4,574      |             |       |              | (3,690     | )                |       |             | 7          |   |   |   | (891 | ) |   |   | — |   |   |
| Equity income                         |       |       | (470,153   | )                |       |              | (31,030    | )                |       |             | —     |   |   |   | 500,830 |   |   |   | (353 | ) |   |
| Other (income) expense                |       |       | (20,173    | )                |       |              | (891       | )                |       |             | —     |   |   |   | 21,064 |   |   |   | — |   |   |
| Income (loss)  before income taxes    |       |       | 528,684    |             |       |              | 698,679    |             |       |             | 60,026     |   |   |   | (499,911 | ) |   |   | 787,478 |   |   |
| Income taxes                          |       |       | 24,526     |             |       |              | 237,828    |             |       |             | 20,571     |   |   |   | 395 |   |   |   | 283,320 |   |   |
| NET INCOME (LOSS)                     |       |       | $          | 504,158          |       |              |       | $                | 460,851    |             |       |   | $ | 39,455 |   |   |   | $ | (500,306 | ) |   |   | $ | 504,158 |   |   |

 

**IPSCO Inc. Condensed Consolidating Statementsof Income**Three Months Ended September 30, 2005(thousands of United States dollars)

| ** **                           | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|--------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                           | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Total**        | ** ** |
| Sales                                |       |       | $          | 216,141          |       |              |       | $                | 629,725    |             |       |   | $ | 92,197 |   |   |   | $ | (211,984 | ) |   |   | $ | 726,079 |   |   |
| Cost of sales                        |       |       | 199,527    |             |       |              | 443,784    |             |       |             | 81,764     |   |   |   | (223,871 | ) |   |   | 501,204 |   |   |
| Gross income                         |       |       | 16,614     |             |       |              | 185,941    |             |       |             | 10,433     |   |   |   | 11,887 |   |   |   | 224,875 |   |   |
| Selling, general and administration  |       |       | 9,994      |             |       |              | 13,591     |             |       |             | (145       | ) |   |   | (365 | ) |   |   | 23,075 |   |   |
| Operating income                     |       |       | 6,620      |             |       |              | 172,350    |             |       |             | 10,578     |   |   |   | 12,252 |   |   |   | 201,800 |   |   |
| Other expenses  (income)             |       |       |       |             |       |              |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Interest on long-term debt           |       |       | 6,015      |             |       |              | 2,769      |             |       |             | —     |   |   |   | — |   |   |   | 8,784 |   |   |
| Other interest (income) expense, net |       |       | (200       | )                |       |              | (3,994     | )                |       |             | (262       | ) |   |   | — |   |   |   | (4,456 | ) |   |
| Loss on early extinguishment of debt |       |       | 690        |             |       |              | —     |             |       |             | —     |   |   |   | — |   |   |   | 690 |   |   |
| Foreign exchange loss (gain)         |       |       | 8,929      |             |       |              | (26,994    | )                |       |             | (15        | ) |   |   | — |   |   |   | (18,080 | ) |   |
| Intercompany interest/dividend       |       |       | 1,005      |             |       |              | (916       | )                |       |             | (89        | ) |   |   | — |   |   |   | — |   |   |
| Equity income                        |       |       | (146,755   | )                |       |              | (12,330    | )                |       |             | —     |   |   |   | 159,181 |   |   |   | 96 |   |   |
| Other (income) expense               |       |       | (7,203     | )                |       |              | (1,202     | )                |       |             | (7         | ) |   |   | 6,549 |   |   |   | (1,863 | ) |   |
| Income (loss) before income taxes    |       |       | 144,139    |             |       |              | 215,017    |             |       |             | 10,951     |   |   |   | (153,478 | ) |   |   | 216,629 |   |   |
| Income taxes                         |       |       | 10,112     |             |       |              | 66,194     |             |       |             | 4,185      |   |   |   | 2,111 |   |   |   | 82,602 |   |   |
| NET INCOME (LOSS)                    |       |       | $          | 134,027          |       |              |       | $                | 148,823    |             |       |   | $ | 6,766 |   |   |   | $ | (155,589 | ) |   |   | $ | 134,027 |   |   |

 

11

----

IPSCO Inc. Condensed Consolidating Statements of Income

Nine Months EndedSeptember 30, 2005

(thousandsof United States dollars)

| ** **                            | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|---------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                            | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Total**        | ** ** |
| Sales                                 |       | $          | 521,656    |             | $          | 2,044,340         |       | $                | 206,296    |             | $          | (591,801 | ) | $ | 2,180,491 |   |
| Cost of sales                         |       | 490,243    |       | 1,425,264        |       | 182,369           |       | (640,200         | )          | 1,457,676        |       |
| Gross income                          |       | 31,413     |       | 619,076          |       | 23,927            |       | 48,399           |       | 722,815          |       |
| Selling, general  and administration  |       | 21,038     |       | 37,689           |       | (77               | )          | (1,097           | )          | 57,553           |       |
| Operating income                      |       | 10,375     |       | 581,387          |       | 24,004            |       | 49,496           |       | 665,262          |       |
| Other expenses (income)               |       |       |       |             |       |              |       |             |       |             |       |
| Interest on long-term debt            |       | 20,889     |       | 8,298            |       | —            |       | —           |       | 29,187           |       |
| Other interest (income) expense,  net |       | (588       | )          | (9,305           | )          | (586              | )          | —           |       | (10,479          | )          |
| Loss on early extinguishment of  debt |       | 10,939     |       | —           |       | —            |       | —           |       | 10,939           |       |
| Foreign exchange loss (gain)          |       | 983        |       | (20,207          | )          | (9                | )          | —           |       | (19,233          | )          |
| Intercompany interest/dividend        |       | (1,279     | )          | 2,921            |       | (1,642            | )          | —           |       | —           |       |
| Equity income                         |       | (430,939   | )          | (20,710          | )          | —            |       | 451,730          |       | 81               |       |
| Other (income) expense                |       | (17,246    | )          | (3,524           | )          | (20               | )          | 18,927           |       | (1,863           | )          |
| Income (loss)  before income taxes    |       | 427,616    |       | 623,914          |       | 26,261            |       | (421,161         | )          | 656,630          |       |
| Income taxes                          |       | 11,968     |       | 207,343          |       | 10,305            |       | 11,366           |       | 240,982          |       |
| NET INCOME (LOSS)                     |       | $          | 415,648    |             | $          | 416,571           |       | $                | 15,956     |             | $          | (432,527 | ) | $ | 415,648 |   |

 

12

----

**IPSCO Inc.Condensed Consolidating Statementsof Cash flows**

**ThreeMonths Ended September 30, 2006**

**(thousandsof United States dollars)**

| ** **                                                         | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                         | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Total**        | ** ** |
| Operating  activities                                              |       |       |       |             |       |              |       |             |       |             |       |
| Net income (loss)                                                  |       | $          | 197,089    |             | $          | 162,866           |       | $                | 16,908     |             | $          | (179,774 | ) | $ | 197,089 |   |
| Non-cash adjustments                                               |       | (162,756   | )          | 6,711            |       | 186               |       | 179,934          |       | 24,075           |       |
| Change in operating assets and liabilities                         |       | (14,078    | )          | (68,933          | )          | 25,849            |       | 598              |       | (56,564          | )          |
| Net cash provided by operating activities                          |       | 20,255     |       | 100,644          |       | 42,943            |       | 758              |       | 164,600          |       |
| Investing  activities                                              |       |       |       |             |       |              |       |             |       |             |       |
| Expenditures for capital assets                                    |       | (3,048     | )          | (15,321          | )          | (463              | )          | (611             | )          | (19,443          | )          |
| Proceeds from mortgage receivable, net                             |       | —     |       | 7,428            |       | (3                | )          | —           |       | 7,425            |       |
| Other investing activities                                         |       | —     |       | (4,371           | )          | —            |       | —           |       | (4,371           | )          |
| Net cash used for investing  activities                            |       | (3,048     | )          | (12,264          | )          | (466              | )          | (611             | )          | (16,389          | )          |
| Financing  activities                                              |       |       |       |             |       |              |       |             |       |             |       |
| Common share dividends                                             |       | (8,457     | )          | —           |       | —            |       | —           |       | (8,457           | )          |
| Common shares issued pursuant to share option  plan           |       | 2,330      |       | —           |       | —            |       | —           |       | 2,330            |       |
| Repayment of long-term debt                                        |       | —     |       | 877              |       | —            |       | —           |       | 877              |       |
| Net cash provided by (used for)  financing activities         |       | (6,127     | )          | 877              |       | —            |       | —           |       | (5,250           | )          |
| Effect of exchange rate changes on cash and  cash equivalents |       | 72         |       | (2,933           | )          | 1,601             |       | (147             | )          | (1,407           | )          |
| INCREASE IN CASH  AND CASH EQUIVALENTS                             |       | 11,152     |       | 86,324           |       | 44,078            |       | —           |       | 141,554          |       |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                  |       | 113,223    |       | 438,118          |       | 50,651            |       | —           |       | 601,992          |       |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                        |       | $          | 124,375    |             | $          | 524,442           |       | $                | 94,729     |             | $          | — |   | $ | 743,546 |   |

 

13

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**IPSCO Inc. Condensed Consolidating Statementsof Cash flows**

**NineMonths Ended September 30, 2006**

**(thousandsof United States dollars)**

| ** **                                                    | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Total**        | ** ** |
| Operating activities                                          |       |       |       |             |       |              |       |             |       |             |       |
| Net income (loss)                                             |       | $          | 504,158    |             | $          | 460,851           |       | $                | 39,455     |             | $          | (500,306 | ) | $ | 504,158 |   |
| Non-cash adjustments                                          |       | (445,813   | )          | (8,933           | )          | 7,054             |       | 501,576          |       | 53,884           |       |
| Change in operating assets and liabilities                    |       | 109,654    |       | (421,426         | )          | 54,337            |       | 1,334            |       | (256,101         | )          |
| Net cash provided by operating activities                     |       | 167,999    |       | 30,492           |       | 100,846           |       | 2,604            |       | 301,941          |       |
| Investing  activities                                         |       |       |       |             |       |              |       |             |       |             |       |
| Expenditures for capital assets                               |       | (8,903     | )          | (48,739          | )          | (1,718            | )          | (2,493           | )          | (61,853          | )          |
| Proceeds from mortgage receivable, net                   |       | —     |       | 8,399            |       | (3                | )          | —           |       | 8,396            |       |
| Other investing activities                                    |       | —     |       | (4,371           | )          | —            |       | —           |       | (4,371           | )          |
| Net cash used for investing activities                        |       | (8,903     | )          | (44,711          | )          | (1,721            | )          | (2,493           | )          | (57,828          | )          |
| Financing  activities                                         |       |       |       |             |       |              |       |             |       |             |       |
| Common share dividends                                        |       | (24,395    | )          | 13,992           |       | (13,992           | )          | —           |       | (24,395          | )          |
| Common shares issued pursuant to share option plan            |       | 7,813      |       | —           |       | —            |       | —           |       | 7,813            |       |
| Common share repurchase                                       |       | (85,500    | )          | —           |       | —            |       | —           |       | (85,500          | )          |
| Repayment of long-term debt                                   |       | —     |       | (4,114           | )          | —            |       | —           |       | (4,114           | )          |
| Net cash provided by (used for) financing activities          |       | (102,082   | )          | 9,878            |       | (13,992           | )          | —           |       | (106,196         | )          |
| Effect of exchange rate changes on cash and cash  equivalents |       | 9,995      |       | 14,184           |       | (1,503            | )          | (111             | )          | 22,565           |       |
| INCREASE IN CASH  AND CASH EQUIVALENTS                        |       | 67,009     |       | 9,843            |       | 83,630            |       | —           |       | 160,482          |       |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD             |       | 57,366     |       | 514,599          |       | 11,099            |       | —           |       | 583,064          |       |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                   |       | $          | 124,375    |             | $          | 524,442           |       | $                | 94,729     |             | $          | — |   | $ | 743,546 |   |

 

14

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**IPSCO Inc.Condensed Consolidating Statements of Cash flows**

**ThreeMonths Ended September 30, 2005**

**(thousandsof United States dollars)**

| ** **                                                    | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Total**        | ** ** |
| Operating  activities                                         |       |       |       |             |       |              |       |             |       |             |       |
| Net income (loss)                                             |       | $          | 134,027    |             | $          | 148,823           |       | $                | 6,766      |             | $          | (155,589 | ) | $ | 134,027 |   |
| Non-cash adjustments                                          |       | (137,200   | )          | 15,620           |       | (17,192           | )          | 161,293          |       | 22,521           |       |
| Change in operating assets and liabilities                    |       | 44,764     |       | (666             | )          | 23,835            |       | (5,403           | )          | 62,530           |       |
| Net cash provided by operating activities                     |       | 41,591     |       | 163,777          |       | 13,409            |       | 301              |       | 219,078          |       |
| Investing  activities                                         |       |       |       |             |       |              |       |             |       |             |       |
| Expenditures for capital assets                               |       | (245       | )          | (20,147          | )          | 847               |       | —           |       | (19,545          | )          |
| Proceeds from mortgage receivable, net                   |       | —     |       | 57               |       | 1,898             |       | —           |       | 1,955            |       |
| Other investing activities                                    |       | —     |       | 293              |       | —            |       | —           |       | 293              |       |
| Net cash provided by (used for) investing activities          |       | (245       | )          | (19,797          | )          | 2,745             |       | —           |       | (17,297          | )          |
| Financing  activities                                         |       |       |       |             |       |              |       |             |       |             |       |
| Common share dividends                                        |       | (5,706     | )          | —           |       | —            |       | —           |       | (5,706           | )          |
| Common shares issued pursuant to share option  plan      |       | 4,387      |       | —           |       | —            |       | —           |       | 4,387            |       |
| Common share repurchase                                       |       | (11,564    | )          | —           |       | —            |       | —           |       | (11,564          | )          |
| Issue (repayment) of long-term debt                           |       | (3,226     | )          | 768              |       | —            |       | —           |       | (2,458           | )          |
| Net cash provided by (used for) financing activities          |       | (16,109    | )          | 768              |       | —            |       | —           |       | (15,341          | )          |
| Effect of exchange rate changes on cash and cash  equivalents |       | (10,931    | )          | (844             | )          | 14,818            |       | (301             | )          | 2,742            |       |
| INCREASE IN CASH  AND CASH EQUIVALENTS                        |       | 14,306     |       | 143,904          |       | 30,972            |       | —           |       | 189,182          |       |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD             |       | 14,491     |       | 390,387          |       | 19,023            |       | —           |       | 423,901          |       |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                   |       | $          | 28,797     |             | $          | 534,291           |       | $                | 49,995     |             | $          | — |   | $ | 613,083 |   |

 

15

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**IPSCO Inc.Condensed Consolidating Statements of Cash flows**

**NineMonths Ended September 30, 2005**

**(thousandsof United States dollars)**

| ** **                                                    | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Total**        | ** ** |
| Operating  activities                                         |       |       |       |             |       |              |       |             |       |             |       |
| Net income (loss)                                             |       | $          | 415,648    |             | $          | 416,571           |       | $                | 15,956     |             | $          | (432,527 | ) | $ | 415,648 |   |
| Non-cash adjustments                                          |       | (423,129   | )          | 75,843           |       | 1,389             |       | 463,096          |       | 117,199          |       |
| Change in operating assets and liabilities                    |       | 273,192    |       | (230,224         | )          | 3,200             |       | (28,848          | )          | 17,320           |       |
| Net cash provided by operating activities                     |       | 265,711    |       | 262,190          |       | 20,545            |       | 1,721            |       | 550,167          |       |
| Investing  activities                                         |       |       |       |             |       |              |       |             |       |             |       |
| Expenditures for capital assets                               |       | (918       | )          | (41,125          | )          | 327               |       | —           |       | (41,716          | )          |
| Proceeds from mortgage receivable, net                   |       | —     |       | 1,921            |       | 1,861             |       | —           |       | 3,782            |       |
| Other investing activities                                    |       | —     |       | 194              |       | —            |       | —           |       | 194              |       |
| Net cash provided by (used for) investing activities          |       | (918       | )          | (39,010          | )          | 2,188             |       | —           |       | (37,740          | )          |
| Financing  activities                                         |       |       |       |             |       |              |       |             |       |             |       |
| Common share dividends                                        |       | (16,160    | )          | 12,429           |       | (12,429           | )          | —           |       | (16,160          | )          |
| Common shares issued pursuant to share option  plan      |       | 20,810     |       | —           |       | —            |       | —           |       | 20,810           |       |
| Common share repurchase                                       |       | (132,721   | )          | —           |       | —            |       | —           |       | (132,721         | )          |
| Issue (repayment) of long-term debt                           |       | (126,474   | )          | (3,821           | )          | —            |       | —           |       | (130,295         | )          |
| Net cash provided by (used for) financing activities          |       | (254,545   | )          | 8,608            |       | (12,429           | )          | —           |       | (258,366         | )          |
| Effect of exchange rate changes on cash and cash  equivalents |       | 4,272      |       | (2,282           | )          | 3,979             |       | (1,721           | )          | 4,248            |       |
| INCREASE IN CASH  AND CASH EQUIVALENTS                        |       | 14,520     |       | 229,506          |       | 14,283            |       | —           |       | 258,309          |       |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD             |       | 14,277     |       | 304,785          |       | 35,712            |       | —           |       | 354,774          |       |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                   |       | $          | 28,797     |             | $          | 534,291           |       | $                | 49,995     |             | $          | — |   | $ | 613,083 |   |

 

16

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**IPSCO Inc.Condensed Consolidating Balance Sheets**

**As atSeptember 30, 2006**

**(thousandsof United States dollars)**

| ** **                                       | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Total**        | ** ** |
| CURRENT ASSETS                                   |       |       |       |             |       |              |       |             |       |             |       |
| Cash and cash equivalents                        |       | $          | 124,375    |             | $          | 524,442           |       | $                | 94,729     |             | $          | — |   | $ | 743,546 |   |
| Accounts receivable, less allowances             |       | 84,571     |       | 244,004          |       | 47,759            |       | —           |       | 376,334          |       |
| Net intercompany balances                        |       | (132,980   | )          | 199,473          |       | (66,493           | )          | —           |       | —           |       |
| Inventories                                      |       | 278,799    |       | 484,369          |       | 16,639            |       | (15,754          | )          | 764,053          |       |
| Deferred income taxes                            |       | 31,732     |       | 4,788            |       | 1,479             |       | —           |       | 37,999           |       |
| Other                                            |       | 1,238      |       | 2,488            |       | 1,680             |       | —           |       | 5,406            |       |
|                                             |       | 387,735    |       | 1,459,564        |       | 95,793            |       | (15,754          | )          | 1,927,338        |       |
| NON-CURRENT  ASSETS                              |       |       |       |             |       |              |       |             |       |             |       |
| Capital assets                                   |       | 137,201    |       | 895,680          |       | 26,293            |       | 4,117            |       | 1,063,291        |       |
| Other                                            |       | 1,964,240  |       | 111,492          |       | 1,564             |       | (2,020,586       | )          | 56,710           |       |
|                                             |       | 2,101,441  |       | 1,007,172        |       | 27,857            |       | (2,016,469       | )          | 1,120,001        |       |
| TOTAL ASSETS                                     |       | $          | 2,489,176  |             | $          | 2,466,736         |       | $                | 123,650    |             | $          | (2,032,223 | ) | $ | 3,047,339 |   |
| CURRENT  LIABILITIES                             |       |       |       |             |       |              |       |             |       |             |       |
| Accounts payable and accrued  charges            |       | $          | 79,661     |             | $          | 249,206           |       | $                | 7,108      |             | $          | — |   | $ | 335,975 |   |
| Current portion of long-term debt                |       | 14,715     |       | 6,164            |       | —            |       | —           |       | 20,879           |       |
|                                             |       | 94,376     |       | 255,370          |       | 7,108             |       | —           |       | 356,854          |       |
| LONG-TERM  LIABILITIES                           |       |       |       |             |       |              |       |             |       |             |       |
| Long-term debt                                   |       | 153,855    |       | 138,320          |       | —            |       | —           |       | 292,175          |       |
| Other                                            |       | 16,949     |       | 27,589           |       | —            |       | —           |       | 44,538           |       |
| Deferred income taxes                            |       | 60,163     |       | 104,783          |       | 29,620            |       | (4,627           | )          | 189,939          |       |
|                                             |       | 230,967    |       | 270,692          |       | 29,620            |       | (4,627           | )          | 526,652          |       |
| SHAREHOLDERS’  EQUITY                       |       | 2,163,833  |       | 1,940,674        |       | 86,922            |       | (2,027,596       | )          | 2,163,833        |       |
| TOTAL LIABILITIES  AND SHAREHOLDERS’ EQUITY |       | $          | 2,489,176  |             | $          | 2,466,736         |       | $                | 123,650    |             | $          | (2,032,223 | ) | $ | 3,047,339 |   |

 

17

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**IPSCO Inc.Condensed Consolidating Balance Sheets**

**As at December 31,2005**

**(thousandsof United States dollars)**

| ** **                                      | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                      | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Total**        | ** ** |
| CURRENT ASSETS                                  |       |       |       |             |       |              |       |             |       |             |       |
| Cash and cash equivalents                       |       | $          | 57,366     |             | $          | 514,599           |       | $                | 11,099     |             | $          | — |   | $ | 583,064 |   |
| Accounts receivable, less allowances            |       | 93,245     |       | 262,293          |       | 33,405            |       | —           |       | 388,943          |       |
| Net intercompany balances                       |       | 80,349     |       | (83,755          | )          | 3,406             |       | —           |       | —           |       |
| Inventories                                     |       | 144,730    |       | 363,974          |       | 11,594            |       | (14,061          | )          | 506,237          |       |
| Deferred income taxes                           |       | 25,169     |       | 4,651            |       | 407               |       | —           |       | 30,227           |       |
| Other                                           |       | 5,156      |       | 2,410            |       | 1,049             |       | —           |       | 8,615            |       |
|                                            |       | 406,015    |       | 1,064,172        |       | 60,960            |       | (14,061          | )          | 1,517,086        |       |
| NON-CURRENT  ASSETS                             |       |       |       |             |       |              |       |             |       |             |       |
| Capital assets                                  |       | 138,449    |       | 894,130          |       | 22,086            |       | 1,521            |       | 1,056,186        |       |
| Other                                           |       | 1,470,677  |       | 104,284          |       | 3,182             |       | (1,512,396       | )          | 65,747           |       |
|                                            |       | 1,609,126  |       | 998,414          |       | 25,268            |       | (1,510,875       | )          | 1,121,933        |       |
| TOTAL ASSETS                                    |       | $          | 2,015,141  |             | $          | 2,062,586         |       | $                | 86,228     |             | $          | (1,524,936 | ) | $ | 2,639,019 |   |
| CURRENT  LIABILITIES                            |       |       |       |             |       |              |       |             |       |             |       |
| Accounts payable and accrued  charges           |       | $          | 53,428     |             | $          | 246,843           |       | $                | 3,318      |             | $          | — |   | $ | 303,589 |   |
| Income and other taxes payable                  |       | (11,794    | )          | 50,668           |       | 2,199             |       | —           |       | 41,073           |       |
| Current portion of long-term debt               |       | —     |       | 4,114            |       | —            |       | —           |       | 4,114            |       |
|                                            |       | 41,634     |       | 301,625          |       | 5,517             |       | —           |       | 348,776          |       |
| LONG-TERM LIABILITIES                           |       |       |       |             |       |              |       |             |       |             |       |
| Long-term debt                                  |       | 168,569    |       | 144,484          |       | —            |       | —           |       | 313,053          |       |
| Other                                           |       | 16,966     |       | 27,618           |       | —            |       | —           |       | 44,584           |       |
| Deferred income taxes                           |       | 47,339     |       | 127,623          |       | 21,843            |       | (4,832           | )          | 191,973          |       |
|                                            |       | 232,874    |       | 299,725          |       | 21,843            |       | (4,832           | )          | 549,610          |       |
| SHAREHOLDERS’  EQUITY                      |       | 1,740,633  |       | 1,461,236        |       | 58,868            |       | (1,520,104       | )          | 1,740,633        |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |       | $          | 2,015,141  |             | $          | 2,062,586         |       | $                | 86,228     |             | $          | (1,524,936 | ) | $ | 2,639,019 |   |

 

18

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10.          Differences betweenUnited States and Canadian generally accepted accounting principles

Reconciliation of the lineitems of the consolidated statements of income and cash flows and theconsolidated balance sheets from U.S. GAAP to Canadian GAAP follows.Information on the nature of these adjustments is provided in Note 21 to theCompany’s 2005 consolidated financial statements.

**CONSOLIDATED STATEMENTS OF INCOME (unaudited)**(thousands of United States Dollars except for per share andton data)

| ** **                                                                  | ** **    | **For the Three Months Ended September  30, 2006** | ** ** | **For the Three Months Ended September  30, 2005** | ** ** |
|-----------------------------------------------------------------------------|---------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                  | ** **    | **U.S. GAAP**                                                               | ** ** | **Ref**                                                                          | ** ** | **Amount** | ** ** | **Canadian  GAAP** | ** ** | **U.S. GAAP** | ** ** | **Ref** | ** ** | **Amount** | ** ** | **Canadian  GAAP** | ** ** |
| Plate and Coil Tons Produced (thousands)                                    |          | 946.8                                                                            |       |                                                                             |       |   |   |   |   | 946.8 |   | 759.3 |   |   |   |   |   |   |   | 759.3 |   |
| Finished Tons Shipped (thousands)                                           |          | 1,041.7                                                                          |       |                                                                             |       |   |   |   |   | 1,041.7 |   | 847.8 |   |   |   |   |   |   |   | 847.8 |   |
| Sales                                                                       |          | $                                                                                | 996,867    |                                                                             |       | a) |   |   | $ | (48,653 | ) | $ | 948,214 |   | $ | 726,079 |   |   | a) |   |   | $ | (20,914 | ) | $ | 705,165 |   |
| Cost of sales                                                               |          | 682,290                                                                          |       |                                                                             | a)         |   |   | (48,653 | ) | 636,409 |   | 501,204 |   |   | a) |   |   | (20,914 | ) | 483,268 |   |
|                                                                        |          |                                                                             |       |                                                                             | b)         |   |   | 1,248 |   |   |   |   |   |   | b) |   |   | 1,247 |   |   |   |
|                                                                        |          |                                                                             |       |                                                                             | c)         |   |   | (134 | ) |   |   |   |   |   | c) |   |   | 96 |   |   |   |
|                                                                        |          |                                                                             |       |                                                                             | d)         |   |   | 1,658 |   |   |   |   |   |   | d) |   |   | 1,635 |   |   |   |
| Gross income                                                                |          | 314,577                                                                          |       |                                                                             |       |   |   | (2,772 | ) | 311,805 |   | 224,875 |   |   |   |   |   | (2,978 | ) | 221,897 |   |
| Selling, general and administration                                         |          | 25,696                                                                           |       |                                                                             |       |   |   |   |   | 25,696 |   | 23,075 |   |   |   |   |   |   |   | 23,075 |   |
| Operating income                                                            |          | 288,881                                                                          |       |                                                                             |       |   |   | (2,772 | ) | 286,109 |   | 201,800 |   |   |   |   |   | (2,978 | ) | 198,822 |   |
| Other expenses (income):                                                    |          |                                                                             |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest on long-term debt                                                  |          | 6,120                                                                            |       |                                                                             | b)         |   |   | (2,116 | ) | 4,004 |   | 8,784 |   |   | b) |   |   | (2,191 | ) | 6,593 |   |
| Net interest income                                                         |          | (9,482                                                                           | )          |                                                                             |       |   |   |   |   | (9,482 | ) | (4,456 | ) |   |   |   |   |   |   | (4,456 | ) |
| Foreign exchange loss (gain)                                                |          | 2,497                                                                            |       |                                                                             |       |   |   |   |   | 2,497 |   | (18,080 | ) |   |   |   |   |   |   | (18,080 | ) |
| Gain on sale of assets held for sale                                        |          | —                                                                           |       |                                                                             |       |   |   |   |   | — |   | (1,863 | ) |   |   |   |   |   |   | (1,863 | ) |
| Other (income) expenses                                                     |          | (135                                                                             | )          |                                                                             | c)         |   |   | 135 |   | — |   | 96 |   |   | c) |   |   | (96 | ) | — |   |
| Loss on early extinguishment of debt                                        |          | —                                                                           |       |                                                                             |       |   |   |   |   | — |   | 690 |   |   |   |   |   |   |   | 690 |   |
| Income before income taxes and cumulative effect  of accounting change |          | 289,881                                                                          |       |                                                                             |       |   |   | (791 | ) | 289,090 |   | 216,629 |   |   |   |   |   | (691 | ) | 215,938 |   |
| Income tax expense                                                          |          | 92,792                                                                           |       |                                                                             | b)         |   |   | 325 |   | 92,496 |   | 82,602 |   |   | b) |   |   | 340 |   | 82,353 |   |
|                                                                        |          |                                                                             |       |                                                                             | d)         |   |   | (621 | ) |   |   |   |   |   | d) |   |   | (589 | ) |   |   |
| Net Income                                                                  |          | $                                                                                | 197,089    |                                                                             |       |   |   |   | $ | (495 | ) | $ | 196,594 |   | $ | 134,027 |   |   |   |   |   | $ | (442 | ) | $ | 133,585 |   |
| Earnings Per Common Share                                                   | —Basic   |                                                                             | $          | 4.19                                                                             |       |   |   |   |   |   |   | $ | 4.18 |   | $ | 2.81 |   |   |   |   |   |   |   | $ | 2.80 |   |
|                                                                        | —Diluted |                                                                             | $          | 4.15                                                                             |       |   |   |   |   |   |   | $ | 4.14 |   | $ | 2.78 |   |   |   |   |   |   |   | $ | 2.77 |   |

----

             a)Freight invoiced to customers

             b)2000 sale-leaseback transaction

             c)Joint venture

             d)Amortization of difference in amounts capitalized

             e)Translation of convenience

             f)Capitalization of interest

             g)Capitalization of commissioning costs

             h)Derivatives

             i)Minimum pension liability

19

----

**CONSOLIDATED STATEMENTS OF INCOME (unaudited)**(thousands of United States Dollars except for per share andton data)

 

| ** **                                                             | ** **    | **For the Nine Months Ended September 30, 2006** | ** ** | **For the Nine Months Ended September 30, 2005** | ** ** |
|------------------------------------------------------------------------|---------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                             | ** **    | **U.S. GAAP**                               | ** ** | **Ref**                                          | ** ** | **Amount** | ** ** | **Canadian  GAAP** | ** ** | **U.S. GAAP** | ** ** | **Ref** | ** ** | **Amount** | ** ** | **Canadian  GAAP** | ** ** |
| Plate and Coil Tons Produced (thousands)                               |          | 2,794.9                                          |       |                                             |       |   |   |   |   | 2,794.9 |   | 2,434.5 |   |   |   |   |   |   |   | 2,434.5 |   |
| Finished Tons Shipped (thousands)                                      |          | 3,048.1                                          |       |                                             |       |   |   |   |   | 3,048.1 |   | 2,507.1 |   |   |   |   |   |   |   | 2,507.1 |   |
| Sales                                                                  |          | $                                                | 2,793,321  |                                             |       | a) |   |   | $ | (107,451 | ) | $ | 2,685,870 |   | $ | 2,180,491 |   |   | a) |   |   | $ | (62,617 | ) | $ | 2,117,874 |   |
| Cost of sales                                                          |          | 1,937,726                                        |       |                                             | a)         |   |   | (107,451 | ) | 1,842,299 |   | 1,457,676 |   |   | a) |   |   | (62,617 | ) | 1,403,782 |   |
|                                                                   |          |                                             |       |                                             | b)         |   |   | 3,742 |   |   |   |   |   |   | b) |   |   | 3,742 |   |   |   |
|                                                                   |          |                                             |       |                                             | c)         |   |   | (353 | ) |   |   |   |   |   | c) |   |   | 76 |   |   |   |
|                                                                   |          |                                             |       |                                             | d)         |   |   | 8,635 |   |   |   |   |   |   | d) |   |   | 4,905 |   |   |   |
| Gross income                                                           |          | 855,595                                          |       |                                             |       |   |   | (12,024 | ) | 843,571 |   | 722,815 |   |   |   |   |   | (8,723 | ) | 714,092 |   |
| Selling, general and administration                                    |          | 76,776                                           |       |                                             |       |   |   |   |   | 76,776 |   | 57,553 |   |   |   |   |   |   |   | 57,553 |   |
| Operating income                                                       |          | 778,819                                          |       |                                             |       |   |   | (12,024 | ) | 766,795 |   | 665,262 |   |   |   |   |   | (8,723 | ) | 656,539 |   |
| Other expenses (income):                                               |          |                                             |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest on long-term debt                                             |          | 17,661                                           |       |                                             | b)         |   |   | (6,337 | ) | 11,324 |   | 29,187 |   |   | b) |   |   | (6,564 | ) | 22,623 |   |
| Net interest income                                                    |          | (24,705                                          | )          |                                             |       |   |   |   |   | (24,705 | ) | (10,479 | ) |   | c) |   |   | 5 |   | (10,474 | ) |
| Foreign exchange loss (gain)                                           |          | (1,262                                           | )          |                                             |       |   |   |   |   | (1,262 | ) | (19,233 | ) |   |   |   |   |   |   | (19,233 | ) |
| Gain on sale of assets held for sale                                   |          | —                                           |       |                                             |       |   |   |   |   | — |   | (1,863 | ) |   |   |   |   |   |   | (1,863 | ) |
| Other (income) expenses                                                |          | (353                                             | )          |                                             | c)         |   |   | 353 |   | — |   | 81 |   |   | c) |   |   | (81 | ) | — |   |
| Loss on early extinguishment of debt                                   |          | —                                           |       |                                             |       |   |   |   |   | — |   | 10,939 |   |   |   |   |   |   |   | 10,939 |   |
| Income before income taxes and cumulative effect of  accounting change |          | 787,478                                          |       |                                             |       |   |   | (6,040 | ) | 781,438 |   | 656,630 |   |   |   |   |   | (2,083 | ) | 654,547 |   |
| Income tax expense                                                     |          | 283,320                                          |       |                                             | b)         |   |   | 985 |   | 280,990 |   | 240,982 |   |   | b) |   |   | 1,016 |   | 240,232 |   |
|                                                                   |          |                                             |       |                                             | d)         |   |   | (3,315 | ) |   |   |   |   |   | d) |   |   | (1,766 | ) |   |   |
| Net Income                                                             |          | $                                                | 504,158    |                                             |       |   |   |   | $ | (3,710 | ) | $ | 500,448 |   | $ | 415,648 |   |   |   |   |   | $ | (1,333 | ) | $ | 414,315 |   |
| Earnings Per Common Share                                              | —Basic   |                                             | $          | 10.61                                            |       |   |   |   |   |   |   | $ | 10.54 |   | $ | 8.52 |   |   |   |   |   |   |   | $ | 8.49 |   |
|                                                                   | —Diluted |                                             | $          | 10.51                                            |       |   |   |   |   |   |   | $ | 10.44 |   | $ | 8.44 |   |   |   |   |   |   |   | $ | 8.41 |   |

20

----

**CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)**(thousands of United States Dollars)

| ** **                                                                       | ** ** | **For the Three  Months Ended September 30, 2006** | ** ** | **For the Three  Months Ended September 30, 2005** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                       | ** ** | **U.S. GAAP**                                 | ** ** | **Ref**                                            | ** ** | **Amount** | ** ** | **Canadian  GAAP** | ** ** | **U.S. GAAP** | ** ** | **Ref** | ** ** | **Amount** | ** ** | **Canadian  GAAP** | ** ** |
| Operating Activities                                                             |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                       |       | $                                                  | 197,089    |                                               |       |   |   |   | $ | (495 | ) | $ | 196,594 |   | $ | 134,027 |   |   |   |   |   | $ | (442 | ) | $ | 133,585 |   |
| Adjustments to reconcile  net income to net cash flows from operating activities |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation of  capital assets                                                  |       | 18,936                                             |       |                                               | b)         |   |   | (2,224 | ) | 18,404 |   | 19,901 |   |   | b) |   |   | (2,224 | ) | 19,431 |   |
|                                                                             |       |                                               |       |                                               | c)         |   |   | 34 |   |   |   |   |   |   | c) |   |   | 119 |   |   |   |
|                                                                             |       |                                               |       |                                               | d)         |   |   | 1,658 |   |   |   |   |   |   | d) |   |   | 1,635 |   |   |   |
| Amortization of  deferred charges                                                |       | 507                                                |       |                                               |       |   |   |   |   | 507 |   | 409 |   |   |   |   |   |   |   | 409 |   |
| Stock based  compensation                                                        |       | 3,373                                              |       |                                               |       |   |   |   |   | 3,373 |   | 2,300 |   |   |   |   |   |   |   | 2,300 |   |
| Deferred income  taxes                                                           |       | 1,259                                              |       |                                               | b)         |   |   | 325 |   | 963 |   | 17,935 |   |   | b) |   |   | 340 |   | 17,686 |   |
|                                                                             |       |                                               |       |                                               | d)         |   |   | (621 | ) |   |   |   |   |   | d) |   |   | (589 | ) |   |   |
| Gain on sale of  assets held for sale                                            |       | —                                             |       |                                               |       |   |   |   |   | — |   | (1,863 | ) |   |   |   |   |   |   | (1,863 | ) |
| Unrealized foreign  exchange gain                                                |       | —                                             |       |                                               |       |   |   |   |   | — |   | (18,714 | ) |   |   |   |   |   |   | (18,714 | ) |
| Loss on early  extinguishment of debt                                            |       | —                                             |       |                                               |       |   |   |   |   | — |   | 690 |   |   |   |   |   |   |   | 690 |   |
| Changes in  operating assets and liabilities                                     |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts  receivable                                                             |       | 3,704                                              |       |                                               | c)         |   |   | 8 |   | 3,712 |   | (27,533 | ) |   | c) |   |   | 234 |   | (27,299 | ) |
| Inventories                                                                      |       | (103,337                                           | )          |                                               | c)         |   |   | 24 |   | (103,313 | ) | 29,674 |   |   | c) |   |   | (13 | ) | 29,661 |   |
| Other current  assets                                                            |       | 315                                                |       |                                               | c)         |   |   | (42 | ) | 273 |   | 249 |   |   |   |   |   |   |   | 249 |   |
| Accounts payable  and accrued charges                                            |       | 50,333                                             |       |                                               | b)         |   |   | 2,234 |   | 52,845 |   | 29,142 |   |   | b) |   |   | 2,048 |   | 31,159 |   |
|                                                                             |       |                                               |       |                                               | c)         |   |   | 278 |   |   |   |   |   |   | c) |   |   | (31 | ) |   |   |
| Change in deferred  pension liability                                            |       | (283                                               | )          |                                               |       |   |   |   |   | (283 | ) | (660 | ) |   |   |   |   |   |   | (660 | ) |
| Income and other  taxes payable                                                  |       | (7,296                                             | )          |                                               | c)         |   |   | — |   | (7,296 | ) | 33,521 |   |   | c) |   |   | — |   | 33,521 |   |
| Net cash provided  by operations                                                 |       | 164,600                                            |       |                                               |       |   |   | 1,179 |   | 165,779 |   | 219,078 |   |   |   |   |   | 1,077 |   | 220,155 |   |
| Investing Activities                                                             |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Expenditures for  capital assets, net of litigation settlement                   |       | (19,443                                            | )          |                                               | c)         |   |   | (220 | ) | (19,663 | ) | (21,091 | ) |   | c) |   |   | (7 | ) | (21,098 | ) |
| Proceeds from sale  of capital assets                                            |       | —                                             |       |                                               |       |   |   |   |   | — |   | 1,546 |   |   |   |   |   |   |   | 1,546 |   |
| Proceeds from  mortgage receivable, net                                          |       | 7,425                                              |       |                                               |       |   |   |   |   | 7,425 |   | 1,955 |   |   |   |   |   |   |   | 1,955 |   |
| Investments                                                                      |       | —                                             |       |                                               | c)         |   |   | — |   | — |   | 293 |   |   | c) |   |   | (293 | ) | — |   |
| Expenditures for  other long-term assets                                         |       | (4,371                                             | )          |                                               |       |   |   |   |   | (4,371 | ) | — |   |   |   |   |   |   |   | — |   |
| Net cash used for  investing activities                                          |       | (16,389                                            | )          |                                               |       |   |   | (220 | ) | (16,609 | ) | (17,297 | ) |   |   |   |   | (300 | ) | (17,597 | ) |
| Financing Activities                                                             |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common shares  issued pursuant to share option plan                              |       | 2,330                                              |       |                                               |       |   |   |   |   | 2,330 |   | 4,387 |   |   |   |   |   |   |   | 4,387 |   |
| Tax benefit share  option plan                                                   |       | —                                             |       |                                               |       |   |   |   |   | — |   | — |   |   |   |   |   |   |   | — |   |
| Common share  dividends                                                          |       | (8,457                                             | )          |                                               |       |   |   |   |   | (8,457 | ) | (5,706 | ) |   |   |   |   |   |   | (5,706 | ) |
| Common share  repurchase                                                         |       | —                                             |       |                                               |       |   |   |   |   | — |   | (11,564 | ) |   |   |   |   |   |   | (11,564 | ) |
| Repayment of  long-term debt                                                     |       | 877                                                |       |                                               | b)         |   |   | (877 | ) | — |   | (2,458 | ) |   | b) |   |   | (768 | ) | (3,226 | ) |
| Net cash (used  for) provided by financing activities                            |       | (5,250                                             | )          |                                               |       |   |   | (877 | ) | (6,127 | ) | (15,341 | ) |   |   |   |   | (768 | ) | (16,109 | ) |
| Effect of exchange  rate changes on cash and cash equivalents                    |       | (1,407                                             | )          |                                               |       |   |   |   |   | (1,407 | ) | 2,742 |   |   |   |   |   |   |   | 2,742 |   |
| Increase in Cash  and Cash Equivalents                                           |       | 141,554                                            |       |                                               |       |   |   | 82 |   | 141,636 |   | 189,182 |   |   |   |   |   | 9 |   | 189,191 |   |
| Cash and Cash  Equivalents at Beginning of Period                                |       | 601,992                                            |       |                                               | c)         |   |   | 151 |   | 602,143 |   | 423,901 |   |   | c) |   |   | 322 |   | 424,223 |   |
| Cash and Cash  Equivalents at End of Period                                      |       | $                                                  | 743,546    |                                               |       |   |   |   | $ | 233 |   | $ | 743,779 |   | $ | 613,083 |   |   |   |   |   | $ | 331 |   | $ | 613,414 |   |
|                                                                             |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

21

----

**CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)**(thousands of United States Dollars)

| ** **                                                                            | ** ** | **For the Nine  Months Ended September 30, 2006** | ** ** | **For the Nine  Months Ended September 30, 2005** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                            | ** ** | **U.S. GAAP**                                | ** ** | **Ref**                                           | ** ** | **Amount** | ** ** | **Canadian  GAAP** | ** ** | **U.S. GAAP** | ** ** | **Ref** | ** ** | **Amount** | ** ** | **Canadian  GAAP** | ** ** |
| Operating Activities                                                                  |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                            |       | $                                                 | 504,158    |                                              |       |   |   |   | $ | (3,710 | ) | $ | 500,448 |   | $ | 415,648 |   |   |   |   |   | $ | (1,333 | ) | $ | 414,315 |   |
| Adjustments  to reconcile net income to net cash flows from operating activities |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation of capital assets                                                        |       | 52,231                                            |       |                                              | b)         |   |   | (6,671 | ) | 54,313 |   | 59,991 |   |   | b) |   |   | (6,671 | ) | 58,344 |   |
|                                                                                  |       |                                              |       |                                              | c)         |   |   | 118 |   |   |   |   |   |   | c) |   |   | 119 |   |   |   |
|                                                                                  |       |                                              |       |                                              | d)         |   |   | 8,635 |   |   |   |   |   |   | d) |   |   | 4,905 |   |   |   |
| Amortization of deferred charges                                                      |       | 1,506                                             |       |                                              |       |   |   |   |   | 1,506 |   | 1,284 |   |   |   |   |   |   |   | 1,284 |   |
| Stock based compensation                                                              |       | 5,021                                             |       |                                              |       |   |   |   |   | 5,021 |   | 3,281 |   |   |   |   |   |   |   | 3,281 |   |
| Deferred income taxes                                                                 |       | (4,874                                            | )          |                                              | b)         |   |   | 985 |   | (7,204 | ) | 62,357 |   |   | b) |   |   | 1,016 |   | 61,607 |   |
|                                                                                  |       |                                              |       |                                              | d)         |   |   | (3,315 | ) |   |   |   |   |   | d) |   |   | (1,766 | ) |   |   |
| Gain on sale of assets held for sale                                                  |       | —                                            |       |                                              |       |   |   |   |   | — |   | (1,863 | ) |   |   |   |   |   |   | (1,863 | ) |
| Unrealized foreign exchange gain                                                      |       | —                                            |       |                                              |       |   |   |   |   | — |   | (20,653 | ) |   |   |   |   |   |   | (20,653 | ) |
| Loss on early extinguishment of debt                                                  |       | —                                            |       |                                              |       |   |   |   |   | — |   | 10,939 |   |   |   |   |   |   |   | 10,939 | ) |
| Changes  in operating assets and liabilities                                          |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable                                                                   |       | 2,575                                             |       |                                              | c)         |   |   | (191 | ) | 2,384 |   | 57,915 |   |   | c) |   |   | 265 |   | 58,180 |   |
| Inventories                                                                           |       | (235,651                                          | )          |                                              | c)         |   |   | (23 | ) | (235,674 | ) | (24,831 | ) |   | c) |   |   | 4 |   | (24,827 | ) |
| Other current assets                                                                  |       | 3,049                                             |       |                                              | c)         |   |   | (3 | ) | 3,046 |   | 4,391 |   |   |   |   |   |   |   | 4,391 |   |
| Accounts payable and accrued charges                                                  |       | 19,398                                            |       |                                              | b)         |   |   | (38 | ) | 19,668 |   | (39,132 | ) |   | b) |   |   | 28 |   | (39,169 | ) |
|                                                                                  |       |                                              |       |                                              | c)         |   |   | 308 |   |   |   |   |   |   | c) |   |   | (65 | ) |   |   |
| Change in deferred pension liability                                                  |       | (726                                              | )          |                                              |       |   |   |   |   | (726 | ) | (315 | ) |   |   |   |   |   |   | (315 | ) |
| Income and other taxes payable                                                        |       | (44,746                                           | )          |                                              |       |   |   |   |   | (44,746 | ) | 21,155 |   |   |   |   |   |   |   | 21,155 |   |
| Net cash provided by operations                                                       |       | 301,941                                           |       |                                              |       |   |   | (3,905 | ) | 298,036 |   | 550,167 |   |   |   |   |   | (3,498 | ) | 546,669 |   |
| Investing Activities                                                                  |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Expenditures for capital assets, net of litigation  settlement                        |       | (61,853                                           | )          |                                              | c)         |   |   | (120 | ) | (61,973 | ) | (43,262 | ) |   | c) |   |   | (101 | ) | (43,363 | ) |
| Proceeds from sale of capital assets                                                  |       | —                                            |       |                                              |       |   |   |   |   | — |   | 1,546 |   |   |   |   |   |   |   | 1,546 |   |
| Proceeds from mortgage receivable, net                                                |       | 8,396                                             |       |                                              |       |   |   |   |   | 8,396 |   | 3,782 |   |   |   |   |   |   |   | 3,782 |   |
| Investments                                                                           |       | —                                            |       |                                              |       |   |   |   |   | — |   | 194 |   |   | c) |   |   | (194 | ) | — |   |
| Expenditures for other long-term assets                                               |       | (4,371                                            | )          |                                              |       |   |   |   |   | (4,371 | ) | — |   |   |   |   |   |   |   | — |   |
| Net cash used for investing activities                                                |       | (57,828                                           | )          |                                              |       |   |   | (120 | ) | (57,948 | ) | (37,740 | ) |   |   |   |   | (295 | ) | (38,035 | ) |
| Financing Activities                                                                  |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common shares issued pursuant to share option plan                                    |       | 5,141                                             |       |                                              |       |   |   |   |   | 5,141 |   | 20,810 |   |   |   |   |   |   |   | 20,810 |   |
| Tax benefit share option plan                                                         |       | 2,672                                             |       |                                              |       |   |   |   |   | 2,672 |   | — |   |   |   |   |   |   |   | — |   |
| Common share dividends                                                                |       | (24,395                                           | )          |                                              |       |   |   |   |   | (24,395 | ) | (16,160 | ) |   |   |   |   |   |   | (16,160 | ) |
| Common share repurchase                                                               |       | (85,500                                           | )          |                                              |       |   |   |   |   | (85,500 | ) | (132,721 | ) |   |   |   |   |   |   | (132,721 | ) |
| Current portion of long-term debt                                                     |       | 2,050                                             |       |                                              | b)         |   |   | (2,050 | ) | — |   | — |   |   |   |   |   |   |   | — |   |
| Repayment of long-term debt                                                           |       | (6,164                                            | )          |                                              | b)         |   |   | 6,164 |   | — |   | (130,295 | ) |   | b) |   |   | 3,821 |   | (126,474 | ) |
| Net cash (used for) provided by financing activities                                  |       | (106,196                                          | )          |                                              |       |   |   | 4,114 |   | (102,082 | ) | (258,366 | ) |   |   |   |   | 3,821 |   | (254,545 | ) |
| Effect of exchange rate changes on cash and cash  equivalents                         |       | 22,565                                            |       |                                              |       |   |   |   |   | 22,565 |   | 4,248 |   |   |   |   |   |   |   | 4,248 |   |
| Increase in Cash and Cash Equivalents                                                 |       | 160,482                                           |       |                                              |       |   |   | 89 |   | 160,571 |   | 258,309 |   |   |   |   |   | 28 |   | 258,337 |   |
| Cash and Cash Equivalents at Beginning of Period                                      |       | 583,064                                           |       |                                              | c)         |   |   | 144 |   | 583,208 |   | 354,774 |   |   | c) |   |   | 303 |   | 355,077 |   |
| Cash and Cash  Equivalents at End of Period                                           |       | $                                                 | 743,546    |                                              |       |   |   |   | $ | 233 |   | $ | 743,779 |   | $ | 613,083 |   |   |   |   |   | $ | 331 |   | $ | 613,414 |   |

 

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**CONSOLIDATED BALANCE SHEETS**(unaudited)

(thousands of UnitedStates Dollars)

| ** **                                       | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **U.S. GAAP**               | ** ** | **Ref**                         | ** ** | **Amount** | ** ** | **Canadian  GAAP** | ** ** | **U.S. GAAP** | ** ** | **Ref** | ** ** | **Amount** | ** ** | **Canadian  GAAP** | ** ** |
| Current Assets                                   |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                        |       | $                                | 743,546    |                            |       | c) |   |   | $ | 233 |   | $ | 743,779 |   | $ | 583,064 |   |   | c) |   |   | $ | 144 |   | $ | 583,208 |   |
| Accounts receivable, less allowances             |       | 376,334                          |       |                            | c)         |   |   | 745 |   | 377,124 |   | 388,943 |   |   | c) |   |   | 222 |   | 377,324 |   |
|                                             |       |                             |       |                            | h)         |   |   | 45 |   |   |   |   |   |   | h) |   |   | (11,841 | ) |   |   |
| Inventories                                      |       | 764,053                          |       |                            | c)         |   |   | 173 |   | 764,226 |   | 506,237 |   |   | c) |   |   | 150 |   | 506,387 |   |
| Future income taxes                              |       | 37,999                           |       |                            |       |   |   |   |   | 37,999 |   | 30,227 |   |   |   |   |   |   |   | 30,227 |   |
| Other                                            |       | 5,406                            |       |                            | c)         |   |   | 25 |   | 5,431 |   | 8,615 |   |   | c) |   |   | 22 |   | 8,637 |   |
|                                             |       | 1,927,338                        |       |                            |       |   |   | 1,221 |   | 1,928,559 |   | 1,517,086 |   |   |   |   |   | (11,303 | ) | 1,505,783 |   |
| Non-Current Assets                               |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital assets                                   |       | 1,063,291                        |       |                            | b)         |   |   | (106,133 | ) | 1,070,702 |   | 1,056,186 |   |   | b) |   |   | (112,804 | ) | 1,065,558 |   |
|                                             |       |                             |       |                            | c)         |   |   | 2,572 |   |   |   |   |   |   | c) |   |   | 2,569 |   |   |   |
|                                             |       |                             |       |                            | d)         |   |   | (15,163 | ) |   |   |   |   |   | d) |   |   | (6,528 | ) |   |   |
|                                             |       |                             |       |                            | f)         |   |   | 13,902 |   |   |   |   |   |   | f) |   |   | 13,902 |   |   |   |
|                                             |       |                             |       |                            | g)         |   |   | 112,233 |   |   |   |   |   |   | g) |   |   | 112,233 |   |   |   |
| Other                                            |       | 56,710                           |       |                            | c)         |   |   | (3,244 | ) | 60,574 |   | 65,747 |   |   | c) |   |   | (2,776 | ) | 70,033 |   |
|                                             |       |                             |       |                            | i)         |   |   | 7,108 |   |   |   |   |   |   | i) |   |   | 7,062 |   |   |   |
|                                             |       | 1,120,001                        |       |                            |       |   |   | 11,275 |   | 1,131,276 |   | 1,121,933 |   |   |   |   |   | 13,658 |   | 1,135,591 |   |
| Total Assets                                     |       | $                                | 3,047,339  |                            |       |   |   |   | $ | 12,496 |   | $ | 3,059,835 |   | $ | 2,639,019 |   |   |   |   |   | $ | 2,355 |   | $ | 2,641,374 |   |
| Current  Liabilities                             |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts payable and accrued charges             |       | $                                | 335,975    |                            |       | b) |   |   | $ | (6,640 | ) | $ | 324,919 |   | $ | 303,589 |   |   | b) |   |   | $ | (6,602 | ) | $ | 297,318 |   |
|                                             |       |                             |       |                            | c)         |   |   | 549 |   |   |   |   |   |   | c) |   |   | 331 |   |   |   |
|                                             |       |                             |       |                            | h)         |   |   | (4,965 | ) |   |   |   |   |   |   |   |   |   |   |   |   |
| Income and other taxes payable                   |       | —                           |       |                            |       |   |   |   |   | — |   | 41,073 |   |   |   |   |   |   |   | 41,073 |   |
| Current portion of long-term debt                |       | 20,879                           |       |                            | b)         |   |   | (6,164 | ) | 14,715 |   | 4,114 |   |   | b) |   |   | (4,114 | ) | — |   |
|                                             |       | 356,854                          |       |                            |       |   |   | (17,220 | ) | 339,634 |   | 348,776 |   |   |   |   |   | (10,385 | ) | 338,391 |   |
| Long-Term Liabilities                            |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                   |       | 292,175                          |       |                            | b)         |   |   | (110,320 | ) | 181,855 |   | 313,053 |   |   | b) |   |   | (116,483 | ) | 196,570 |   |
| Other                                            |       | 44,538                           |       |                            | i)         |   |   | (44,538 | ) | — |   | 44,584 |   |   | i) |   |   | (44,584 | ) | — |   |
| Future income taxes                              |       | 189,939                          |       |                            | b)         |   |   | 6,275 |   | 256,350 |   | 191,973 |   |   | b) |   |   | 5,290 |   | 254,652 |   |
|                                             |       |                             |       |                            | d)         |   |   | (6,166 | ) |   |   |   |   |   | d) |   |   | (2,851 | ) |   |   |
|                                             |       |                             |       |                            | f)         |   |   | 5,172 |   |   |   |   |   |   | f) |   |   | 5,172 |   |   |   |
|                                             |       |                             |       |                            | g)         |   |   | 41,751 |   |   |   |   |   |   | g) |   |   | 41,751 |   |   |   |
|                                             |       |                             |       |                            | h)         |   |   | 1,716 |   |   |   |   |   |   | h) |   |   | (4,346 | ) |   |   |
|                                             |       |                             |       |                            | i)         |   |   | 17,663 |   |   |   |   |   |   | i) |   |   | 17,663 |   |   |   |
|                                             |       | 526,652                          |       |                            |       |   |   | (88,447 | ) | 438,205 |   | 549,610 |   |   |   |   |   | (98,388 | ) | 451,222 |   |
| Shareholders’ Equity                        |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common shares                                    |       | 414,499                          |       |                            | e)         |   |   | (40,733 | ) | 373,766 |   | 419,272 |   |   | e) |   |   | (40,733 | ) | 378,539 |   |
| Contributed surplus                              |       | 22,202                           |       |                            |       |   |   |   |   | 22,202 |   | 15,548 |   |   |   |   |   |   |   | 15,548 |   |
| Retained earnings                                |       | 1,744,297                        |       |                            | b)         |   |   | 10,720 |   | 1,777,532 |   | 1,341,659 |   |   | b) |   |   | 9,110 |   | 1,378,603 |   |
|                                             |       |                             |       |                            | d)         |   |   | (8,997 | ) |   |   |   |   |   | d) |   |   | (3,678 | ) |   |   |
|                                             |       |                             |       |                            | e)         |   |   | (47,700 | ) |   |   |   |   |   | e) |   |   | (47,700 | ) |   |   |
|                                             |       |                             |       |                            | f)         |   |   | 8,730 |   |   |   |   |   |   | f) |   |   | 8,730 |   |   |   |
|                                             |       |                             |       |                            | g)         |   |   | 70,482 |   |   |   |   |   |   | g) |   |   | 70,482 |   |   |   |
| Accumulated other comprehensive loss             |       | (17,165                          | )          |                            | e)         |   |   | 88,433 |   | 108,496 |   | (35,846 | ) |   | e) |   |   | 88,433 |   | 79,071 |   |
| Cumulative translation adjustment                |       |                             |       |                            | h)         |   |   | 3,245 |   |   |   |   |   |   | h) |   |   | (7,495 | ) |   |   |
|                                             |       |                             |       |                            | i)         |   |   | 33,983 |   |   |   |   |   |   | i) |   |   | 33,979 |   |   |   |
|                                             |       | 2,163,833                        |       |                            |       |   |   | 118,163 |   | 2,281,996 |   | 1,740,633 |   |   |   |   |   | 111,128 |   | 1,851,761 |   |
| Total Liabilities  and Shareholders’ Equity |       | $                                | 3,047,339  |                            |       |   |   |   | $ | 12,496 |   | $ | 3,059,835 |   | $ | 2,639,019 |   |   |   |   |   | $ | 2,355 |   | $ | 2,641,374 |   |

 

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**Item 2.       **Management’s Discussion andAnalysis of Financial Condition and Results of Operations

**Forward-LookingStatements**

Statements made in this report that are not statementsof historical fact are “forward-looking statements” within the meaning of Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”).Forward-looking statements include, without limitation, any statements that mayproject, indicate or imply future results, events, performance or achievementsand can be identified bythe use of forward-looking words such as “believes,” “expects,” “may,” “will,”“should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or“anticipates” or the negative of these terms or other comparable words, or bydiscussions of strategy, plans or intentions.

Forward-looking information reflects management’scurrent views of future events and financial performance that involve a numberof risks and uncertainties. The factors that could cause actual results todiffer materially include, but are not limited to, the following:(1) general economic conditions; (2) changes in financial markets;(3) political conditions and developments, including conflict in theMiddle East and the war on terrorism; (4) changes in the supply and demandfor steel and our specific steel products; (5) the level of demand outsideof North America for steel and steel products; (6) equipment performanceat our manufacturing facilities; (7) the occurrence of any materiallawsuits; (8) the availability of capital; (9) our ability toproperly and efficiently staff our manufacturing facilities; (10) domesticand international competitive factors, including the level of steel importsinto the Canadian and U.S. markets; (11) economic conditions in steel exportingnations; (12) trade sanction activities and the enforcement of trade sanctionremedies; (13) supply and demand for scrap steel and iron, alloys and other rawmaterials; (14) supply,****demand andpricing for the electricity and natural gas that we use; (15) changes inenvironmental and other regulations, including regulations arising from theCanadian Parliament’s ratification of the Kyoto Protocol, and the magnitude offuture environmental expenditures; (16) inherent uncertainties in thedevelopment and performance of new or modified equipment or technologies; (17)North American interest rates; and (18) exchange rates.

This list is not exhaustive of the factors that mayimpact our forward-looking statements. These and other factors should beconsidered carefully and users should not place undue reliance on ourforward-looking statements. As a result of the foregoing and other factors, noassurance can be given as to any such future results, levels of activity orachievements and neither we nor any other person assumes responsibility for theaccuracy and completeness of these forward-looking statements.

We refer you to thesections captioned “Statement Regarding Forward-Looking Information” and “RiskFactors” in our Annual Report on Form 10-K for the year endedDecember 31, 2005, incorporated herein by reference, for a more detaileddiscussion of some of the many factors, variables, risks, and uncertaintiesthat could cause actual results to differ materially from those we may haveexpected or anticipated. We caution that any forward-looking statement reflectsonly our reasonable belief at the time the statement is made. The Companyundertakes no obligation to publicly update forward-looking statements, whetheras a result of new information, future events or otherwise. You are advised,however, to consult any further disclosures the Company makes on relatedsubjects as may be detailed in our other filings made from time to time withthe Securities and Exchange Commission.

**General**

The following discussionand analysis presents factors which affected the Company’s consolidated resultsof operations for the three-month and nine-month periods endedSeptember 30, 2006 and September 30, 2005, and the Company’sconsolidated financial position at September 30, 2006. We continue tooperate and report our business as a single business segment. The followinginformation should be read in conjunction with the Consolidated FinancialStatements and Notes thereto included in this Form10-Q and in theCompany’s Form 10-K for the year-ended December 31, 2005. Asused in this report, IPSCO Inc. and its subsidiaries, unless otherwisespecified, are collectively referred to as “IPSCO” or the “Company”, and unlessthe context otherwise requires, the terms “we”, “us”, “our” and similar referencesrefer to the Company.

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**Recent Developments**

***Acquisition of NS Group, Inc.***

We entered into a definitive merger agreement, datedSeptember 10, 2006 (the “Merger Agreement”), among the Company, NS Group, Inc.(“NS Group”) and PI Acquisition Corporation (“PI Acquisition”), a wholly-ownedsubsidiary of the Company. Under the terms of the Merger Agreement, PIAcquisition will be merged with and into NS Group and each outstanding share ofNS Group (other than dissenting shares) will be converted into the right to receive$66 per share in cash, without interest. Taking into account the amount of netcash of NS Group assumed to be available at the date of the merger, aggregateconsideration, net of NS Group cash, will be approximately $1.46 billion. NSGroup has a combined annual capacity of 820 thousand short tons of steel pipe,including 250 thousand tons of seamless pipe capacity, with a size range from1.9 inches to 16 inches, and has approximately 1,480 employees.  In 2005, NS Group reported net revenues ofapproximately $600 million, of which 94% were from its energy tubular products.The transaction is subject to the approval by the holders of a majority of theoutstanding shares of NS Group common stock, the receipt of regulatoryapprovals and other customary closing conditions. On October 16, 2006, the30-day waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of1976, as amended, expired.  Theexpiration of the Hart-Scott-Rodino waiting period satisfies one of theconditions to our acquisition of NS Group. 

The transaction is notconditioned on financing and is expected to close by year end. We expect tofinance the NS Group acquisition through a combination of cash-on-hand and debtobtained under a fully committed five year unsecured bank credit facility (the“Bank Credit Facility”) arranged through Banc of America Securities, LLC inaggregate principal amount of up to $1.25 billion. We are also considering theissuance of fixed-rate bonds, which would reduce the amount of bank debt neededfor the funding of the acquisition. If we enter into the Bank Credit Facilityor issue bonds as noted above, the relevant documentation would containcustomary terms and covenants that may limit, in certain circumstances, ourability to, among other things, pay dividends or make other restrictedpayments. The loan documentation associated with the Bank Credit Facility wouldalso require us and our subsidiaries to meet certain financial covenants,ratios and other tests. 

**Overview: ThirdQuarter Operating Results 2006 vs. 2005**

Third quarter 2006 sales were a record$996.9 million, $270.8 million or 37% higher than the third quarterof 2005. Steel mill product revenue of $566.5 million increased 49% or $187.0 millionover the third quarter 2005. Steel mill product revenue increases were drivenby higher sales volumes and higher average pricing. The average price per tonof steel mill product increased $101 per ton or 14% from the prior year.Tubular product sales of $430.4 million increased $83.8 million or24% from the same quarter last year, driven by higher sales volumes of large diameterpipe, increased energy tubular sales in the U.S. and higher average tubularproduct pricing.  

IPSCO shipped a record 1,042,000 tons of finishedproducts, up 194,000 tons or 23% from the 848,000 tons shipped duringthe same period last year. Steel mill product shipments in the third quarter were691,000 tons, 163,000 tons or 31% more than the same period lastyear.  Total tubular product shipmentswere a record 351,000 tons, 31,000 tons or 9.5% higher compared tolast year’s third quarter. Within the tubular product line, energy tubular shipmentswere nearly flat at 216,000 tons while non energy tubular shipments of 53,000tons declined modestly from the prior year. Large diameter pipe shipmentshowever were 82,000 tons, up 36,000 tons from third quarter of 2005.

Gross income of $314.6 million for the thirdquarter of 2006 was $89.7 million higher than the same period last year due tovolume increases, and higher average product pricing.   Margins as a percent to sales increased from31% to 32% due to a favorable tubular mix and higher average product pricing inmost product lines.   

The average per ton cost of scrap consumed in thethird quarter of 2006 increased 33% from the third quarter of 2005. Aggregateconversion costs for the three steelworks were 3% higher than the same periodlast year due to small increases in energy costs, yield loss and maintenanceexpense. The average cost per ton of all products sold increased 

25

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to $655 per ton, $64 perton higher than the same quarter last year. Despite the increase in conversion costs operating income per ton in thethird quarter was $277 per ton compared to $238 per ton in the prior year dueto the mix and pricing factors previously referenced. 

Plate and coil tons produced in the third quarterof 2006 were 947,000 tons compared to 759,000 tons in third quarterof 2005. Steel mill production was impacted in third quarter 2005 by HurricanesKatrina and Dennis and planned maintenance outages which resulted in lowervolumes in 2005. However, quarterly production volumes have been increasing inthe last year as the result of capital spending related to efficiencies, aswell as and other best practice improvement efforts.  

Selling, general and administration expenses were$25.7 million during the third quarter of 2006, as compared to$23.1 million during the same period in 2005, an increase of$2.6 million, or 11%, due to higher outside professional fees, charitablecontributions, and share-based payment expense. Selling, general andadministrative expenses represented 2.6% of sales compared to 3.2% in 2005.

Interest expense on long-term debt was$6.1 million, down 30% from $8.8 million in the third quarter of2005. The lower interest expense for the quarter is the result of significantreduction in long-term debt during 2005 from scheduled payments, redemptionsand open market purchases.  Interestincome increased $5.0 million to $9.5 million due to higher averagecash balances and higher interest rates compared to the prior period.

Changes in the Canadian to U.S. dollar exchange rateimpact reported earnings. The third quarter 2006 foreign exchange loss was$2.5 million compared to a gain in 2005 of $18.1 million.

In the third quarter, the estimate of the 2006 annualeffective tax rate was reduced to 36.0%, resulting in an effective tax rate forthe quarter of 32.0%. The third quarter tax rate, compared to the prior year’sthird quarter tax rate of 38.1%, is primarily due to the planned reinvestmentof U.S. earnings through the announced acquisition of NS Group and theresulting decrease of the U.S. withholding tax liability. The current quartereffective tax rate increased net earnings by $0.37 per diluted share ascompared to the third quarter of 2005.

Net income for the thirdquarter of 2006 was $197.1 million or $4.15 per diluted share compared to$134.0 million or $2.78 per diluted share for the third quarter of 2005.Net income increased in the third quarter compared with the third quarter of2005 due to higher volumes, selling price increases in excess of cost increases,decreased interest expenses, higher interest income, and a lower effective taxrate. Record sales volumes and average pricing along with a lower effective taxrate resulted in record earnings per share that were 49% higher than the thirdquarter of last year. 

**First Nine MonthsOperating Results 2006 vs. 2005**

Sales were $2.8 billion, $612.8 million or28% higher than the $2.2 billion reported for the first nine months of 2005.Average selling price increased to $916 per ton in the first nine months of2006 compared to $870 per ton in the first nine months of 2005, whiletotal tons shipped increased 22%.

For the first nine months of 2006, IPSCO shipped3,048,000 tons of finished products, up 541,000 tons from the2,507,000 tons reported for the same period last year. Steel mill productshad shipments in the first nine months of 2,051,000 tons,326,000 tons or 19% more than the prior year. Tubular products shipmentsin the first nine months were 997,000 tons, 215,000 tons or 28%higher than the same period last year. Energy tubular shipments were605,000 tons, up 49,000 tons from the same period last year. Largediameter pipe shipments were 218,000 tons, up 156,000 tons from thefirst nine months of 2005.

Plate and coil tons produced in the first ninemonths of 2006 were 2,795,000 tons compared to 2,434,000 tons in thefirst nine months of 2005. Fewer maintenance and weather related outages andproductivity improvements related to recent capital expenditures resulted inhigher production at our steel facilities. 

Gross income of $855.6 million for the first ninemonths of 2006 was $132.8 million higher than the same period last year.Year-to-date gross margin declined from 33% to 31% due to increases in inputand conversion costs in excess of increases in average realized pricing.

26

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Selling, general and administration expenses were$76.8 million during the first nine months of 2006, as compared to$57.6 million during the same period in 2005, an increase of $19.2 million,or 33%. The impact of share price appreciation and adoption of FAS123(R) increased administration expenses by $6.9 million compared tothe prior year. Higher outside professional fees and charitable contributions alsocontributed to the increase year over year. Selling, general and administrative expenses represented 2.7% of salescompared to 2.6% in 2005.

Operating income per ton in the first nine months of2006 was $256 per ton compared to $265 per ton in the same period last year dueto the factors previously discussed.

Interest expense on long-term debt was$17.7 million, down 39% from $29.2 million in the first nine monthsof 2005. This reduction in the first nine months of 2006 compared to the firstnine months of 2005 is the result of the reduction in long-term debt during2005 and 2006 from scheduled payments, redemptions and open market purchases.Interest income increased $14.2 million to $24.7 million due tohigher average cash balances and interest rate increases compared to the priorperiod.

Our annual effective income tax rate was reduced to36% for the first nine months of 2006 versus 36.7% in the first nine months of2005. 

Net income for the firstnine months of 2006 was $504.2 million, or $10.51 per diluted share, comparedto $415.6 million, or $8.44 per diluted share for the first nine months of2005.  Net income increased due to highervolumes, decreased interest expense, higher interst income and a lower effectietax rate. 

**Outlook**

We expect end-user demandfor plate and energy tubular goods will continue to be strong. While energyprices have fallen recently we expect them to remain at levels sufficient tomaintain high drilling activity and resultant demand for OCTG products.However, demand from service centers and distributor customers is declining inthe fourth quarter as these customers reduce inventories. As previouslyannounced, we will be adjusting our production accordingly, utilizing thisopportunity to accelerate maintenance of our equipment that has been running atcapacity during this record year and to better align our own inventories.

We expect total shipmentlevels to remain comparable to the prior quarter. However, unabsorbed overheadand higher maintenance expenses resulting from these production curtailmentsand a less favorable product mix related to lower large diameter sales willcause some margin compression. While demand for large diameter spiral pipecontinues to be exceptionally strong, actual fourth quarter sales are expectedto be lower than in the third quarter. Excluding any impact of the NS Groupacquisition, foreign exchange gains or losses, and share price volatility, andassuming an effective tax rate of 36%, we forecast the fourth quarter earningsto be in the range of $3.30 to $3.50 per diluted share.

The NS Group transactioncontinues to be on schedule for closing prior to year end. The expiration ofthe Hart-Scott-Rodino waiting period satisfies one of the conditions to ouracquisition of NS Group. Consummation of the merger, which is expected to occurin the fourth quarter 2006, remains subject to other customary closingconditions, including approval of the merger by NS Group’s shareholders.

**Financial Positionand Liquidity**

Cash at September 30, 2006 was $743.5 million, anincrease of $141.6 million in the quarter. Net cash generated by operatingactivities for the three months ended September 30, 2006 was $164.6 millioncompared to $219.1 million generated by operating activities for the sameperiod in 2005. This decrease of $54.5 million was primarily due to anincrease in inventory of $103.3 million in the third quarter of 2006 versus areduction in inventory of $29.7 million in the third quarter 2005.  This was partially offset by increased netincome and accounts payable and reduced accounts receivable, while income taxespayable used $40.8 million. Higher inventory levels will be reduced in thefourth quarter through some production decreases. 

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Capital expenditures in the third quarter of 2006 were$19.4 million, compared with $19.5 million in the same period in2005. Capital expenditures are anticipated to total approximately $85 millionin 2006. During the third quarter, $7.4 million was generated from thecollection of mortgage receivables and $4.4 million was invested in theacquisition of NS Group.

In May 2006, the Company announced a new sharerepurchase program to purchase up to 4.7 million of our common shares. Inthe third quarter of 2006, no common shares were repurchased under the newrepurchase program compared to 258,500 common shares purchased totaling $11.6 millionin the same quarter last year under the previous repurchase program. 

On July 27, 2006, IPSCO’s Board of Directorsdeclared a CDN $0.20 per share cash dividend on the Company’s common shares,payable September 29, 2006 to shareholders of record on September 15,2006.

On September 11, 2006,IPSCO announced an agreement to purchase NS Group, Inc for $66.00 per share incash. The transaction is valued at approximately $1.46 billion, net of NS Groupcash.  IPSCO expects to fund thisacquisition through a combination of cash on hand and debt obtained under acommitted bank credit facility.  

**Item 3.**                        Quantitativeand Qualitative Disclosures About Market Risk

We are exposed to variousmarket risks, including commodity price risk, foreign currency risk andinterest rate risk. To help manage the volatility related to these risks, fromtime to time we enter into various derivative contracts, the majority of whichare settled in cash. Such settlements have not had a significant effect on ourliquidity in the past, nor are they expected to be significant in the future.We do not use derivatives for speculative or trading purposes.

**Commodity PriceRisk**

IPSCO manages a portion ofour exposure to price risk related to natural gas purchases by using derivativefinancial instruments. Changes in the market value of these derivativeinstruments have a high correlation to changes in the spot price of naturalgas. Gains and losses from the use of these instruments are deferred inaccumulated other comprehensive losson the consolidated balance sheets and recognized into production costs in thesame period as the underlying transaction is concluded. At September 30, 2006,accumulated other comprehensive loss includes $3.2 million in unrealizednet-of-tax losses****for the fair value of theseinstruments. A sensitivity analysis indicates that the reduction in the fairvalue of these instruments at September 30, 2006, due to hypotheticaldeclines of 10% and 25% in market prices of natural gas at that time would be $3.1 million and $7.8 million,respectively (at September 30, 2005 - $3.1 million and $7.6 million,respectively). Any resulting changes in fair value would be recorded asadjustments to other comprehensive income, net of tax. Because theseinstruments are hedges, these hypothetical losses would be offset by thebenefit of lower prices paid for the natural gas used in the normal productioncycle.

**Interest Rate Risk**

IPSCO’s outstanding debtis fixed rate debt and IPSCO’s investment practice is to invest in highlyliquid money market funds or securities with short remaining maturities. As aresult, changes in interest rates are not expected to have a significant impacton the value of these investments. As such, future changes in interest ratesare not expected to impact interest expense or the value of cash equivalentinvestments. IPSCO has not engaged in interest swaps to manage interest rateexposure.

**Foreign CurrencyRisk**

IPSCO is subject to theimpact of changes in exchange rates on revenues and operating costs, firmcommitments for capital expenditures and existing assets or liabilities(including certain inter-company balances), particularly changes in the valueof the U.S. dollar versus the Canadian dollar. At September 30, 2006, therewere no foreign exchange contracts outstanding.

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**Item 4.        Controls and Procedures**

**Evaluation ofDisclosure Controls and Procedures**

Management, under thesupervision of the President and Chief Executive Officer and Senior VicePresident and Chief Financial Officer, has evaluated the effectiveness of theCompany’s disclosure controls and procedures as of September 30, 2006.Based on such evaluation, IPSCO’s President and Chief Executive Officer andSenior Vice President and Chief Financial Officer have concluded that thedisclosure controls and procedures were effective as of September 30, 2006, andthat there have been no significant changes in such controls and procedures, orin other factors, that could significantly affect these controls subsequent totheir evaluation date.

**Changes in InternalControl**

There were no changes in our internal control overfinancial reporting during the quarter ended September 30, 2006 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

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**PART II—OTHERINFORMATION**

**Item 1.**                        LegalProceedings

In October 2006, NS Group,its directors, IPSCO and PI Acquisition were named as defendants in a classaction lawsuit filed in the Campbell Circuit Court of the Commonwealth ofKentucky, Case # 06-CI-01422 #2. The plaintiff, a purported shareholder of theNS Group, has alleged, among other things, that the merger consideration to bepaid to the shareholders of NS Group in the merger is unfair and inadequate, asa result of alleged breaches of fiduciary duty by NS Group and its directors. Accordingto the complaint, NS Group’s directors agreed to an allegedly unfair andinadequate price and agreed to a termination fee, which is alleged to serve asa substantial deterrent to other prospective buyers, because of the directors’interest in “quickly” signing the merger agreement in order to obtain allegedly“improper” personal benefits from the acceleration of various stock options andincentive plans and the indemnification provision of the merger agreement and,in the case of certain directors, salary continuation agreements. The complaintfurther alleges that the NS Group defendants breached an alleged duty of “fulland fair disclosure” by failing to disclose in a previously filed preliminaryproxy statement certain allegedly material information regarding thenegotiation of the merger agreement, including information relating to NS Groupand its directors’ consideration of alternative transactions, additionalinformation regarding the criteria that Raymond James utilized in certainaspects of its financial analysis, as well as the percentage of its fee that iscontingent on consummation of the merger. The complaint alleges that IPSCOaided and abetted NS Group and its directors in the breaches of their duties toNS Group’s shareholders. The complaint seeks, among other relief, compensatoryand/or rescissory damages to the class, and an award of attorneys’ fees andexpenses to the plaintiff. We believe the resolution of this matter will nothave a material adverse effect on our consolidated financial condition orresults of operations. Apart from the foregoing, there have been no materialchanges in legal proceedings since the issuance of the Company’s Form 10-Kfor the year ended December 31, 2005.

**Item 1A.**                RiskFactors

In addition to the other information set forth in thisreport, you should carefully consider the risk factors described below alongwith the factors discussed in Item 1A of Part 1 of the Company’sForm 10-K for the year ended December 31, 2005, which couldmaterially affect our business, financial condition or future results. Thesecautionary statements are to be used as a reference in connection with anyforward-looking statements. The factors, risks and uncertainties identified inthese cautionary statements are in addition to those contained in any othercautionary statements, written or oral, which may be made or otherwiseaddressed in connection with a forward-looking statement or contained in any ofour subsequent filings with the Securities and Exchange Commission.

***Timely completionof the NS Group acquisition, including receipt of shareholder approval, and theability to integrate NS Group’s business and achieve synergies may not besuccessful and may reduce our profitability***

The proposed acquisitionof NS Group involves risks, including that the acquisition may not becompleted. The transaction involves numerous risks, including the diversion ofour management’s attention from other business concerns, the possibility thatcurrent operating and financial systems and controls may be inadequate to dealwith our growth, the possibility of increased leverage and the potential lossof key employees. If the acquisition is completed there may be risks relatingto the difficulty of integrating our business, operations, products andservices with those of NS Group.  Thesuccess of this transaction depends on our ability to successfully mergecorporate cultures and operational and financial systems and controls; realizemarketing and cost reduction synergies; and as necessary, retain key managementmembers and technical personnel of NS Group. If we fail to integrate the NSGroup business successfully, or to manage our growth, that failure could have amaterial adverse effect on our business. Although we have conducted what webelieve to be a prudent investigation in connection with the transaction, anunavoidable level of risk remains regarding any undisclosed or unknownliabilities or issues concerning the NS Group.

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**Item 2.**                        UnregisteredSales of Equity Securities and Use of Proceeds

**Company Purchasesof Equity Securities**

In May 2006, IPSCOfiled a normal course issuer bid (the “Bid”) with Canadian regulators torepurchase, by way of open market purchases on the TSX and NYSE, up to4.7 million of our common shares between May 9, 2006 and May 8,2007. During the quarter ended September 30, 2006, we made no purchasesunder the Bid.  There remain 3,765,300shares that may yet be purchased under the Bid.

**Item 3.**                        DefaultsUpon Senior Securities

None.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

None.

**Item 5.**                        OtherInformation

None.

**Item 6.**                        Exhibits

| 2.1   |   | Agreement and Plan of Merger, dated September 10,  2006, between IPSCO Inc., NS Group, Inc. and PI Acquisition Company  (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K,  filed with the SEC on September 11, 2006). |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1   |   | Articles of Continuance of IPSCO Inc., incorporated  by reference to Exhibit 3.1 to Form F-4/A filed November 3,  2003 (Registration No. 333-108820).                                                                        |
| 3.2   |   | Article of Incorporation of IPSCO Inc., incorporated  by reference to Exhibit 3.2 to Form F-4/A filed November 3,  2003 (Registration No. 333-108820).                                                                       |
| 3.3   |   | Bylaws of IPSCO Inc. incorporated by reference to  Exhibit 3.13 to Form F-4/A filed November 3, 2003  (Registration No. 333-108820).                                                                                         |
| 10.1* |   | IPSCO Enterprises Inc. U.S. Supplemental Executive  Retirement Plan (As Amended and Restated Effective January 1, 2005), approved  by the Company’s Board of Directors on February 24, 2006.                                                |
| 31.1* |   | Certification of President and Chief Executive  Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                          |
| 31.2* |   | Certification of Senior Vice President and Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                             |
| 32.1* |   | Certification Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                   |

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* Filed herewith

 

 

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Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.
|                        | **IPSCO INC.  (Registrant)** |
|------------------------|------------------------------|
| Date: November 8, 2006 | **By:**                      | **/s/ DAVID S. SUTHERLAND** |
|                   |                         | David S. Sutherland |
|                   | * *                     | *President and Chief Executive Officer* |
| Date: November 8, 2006 | **By:**                      | **/s/ VICKI L. AVRIL** |
|                   |                         | Vicki L. Avril |
|                   | * *                     | *Senior Vice President and Chief Financial Officer* |

 

 

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