UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D.C. 20549
 
 FORM
        10-Q
  x
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
  For
        the
        fiscal year ended March 31, 2006
  **OR**
   ̈
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
  For
        the
        transition period from __________ to ____________
  Commission
        file number 0-5485
 
 **VISKASE
        COMPANIES, INC**.
 (Exact
        name of registrant as specified in its charter)
  **Delaware**
              
              **95-2677354**(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)**8205
                  South Cass Ave., Suite 115, Darien, IL**
              
              **60561**(Address
                  of principal executive offices)
              
              (Zip
                  Code)
 
 Registrant's
        telephone number, including area code: **(630)
        874-0700**
 
  Indicate
        by check mark whether the registrant: (1) has filed all reports required
        to be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.   Yes x  No  ̈
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
  Large
                  accelerated filer ̈
              Accelerated
                  filer ̈
              Non-accelerated
                  filerx
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Act).   Yes  ̈ No x
  APPLICABLE
        ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING
        FIVE
        YEARS: Indicate by check mark whether the registrant has filed all documents
        and
        reports required to be filed by Section 12, 13 or 15(d) of the Securities
        Exchange Act of 1934 subsequent to the distribution of securities under a
        plan
        confirmed by a court. Yes x No  ̈
  As
        of May
        10, 2006, there were 9,766,825 shares outstanding of the registrant's Common
        Stock, $.01 par value.
  1
  **VISKASE
        COMPANIES, INC.**
 
 Table
        of
        Contents
 
 PART
                  I - FINANCIAL INFORMATION
              PageItem
                  1.
              Consolidated
                  Financial StatementsConsolidated
                  balance sheets at March 31, 2006 and December 31,
                  2005
              3Unaudited
                  consolidated statements of operations and
                  comprehensive income (loss) for the three months ended March 31,
                  2006 and
                  March 31, 2005
              4Unaudited
                  consolidated statements of cash flows for the three
                  months ended March 31, 2006 and March 31, 2005
              5Notes
                  to consolidated financial
                  statements
              6Item
                  2.
              Management's
                  Discussion and Analysis of Financial Condition and
                  Results of Operations
              22Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              32Item
                  4.
              Controls
                  and Procedures
              33PART
                  II - OTHER INFORMATIONItem
                  1.
              Legal
                  Proceedings
              34Item
                  6.
              Exhibits
              34
  2
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 **(In
        Thousands, Except for Number of Shares and Per Share
        Amounts)**
 
 March
                  31, 2006
              
              December
                  31, 2005ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              5,505
              
              $
              11,904Restricted
                  cash
              
              
              3,259
              
              
              3,251Receivables,
                  net
              
              
              30,356
              
              
              29,664Inventories
              
              
              40,015
              
              
              36,419Other
                  current assets
              
              
              16,632
              
              
              15,563Total
                  current assets
              
              
              95,767
              
              
              96,801Property,
                  plant and equipment
              
              
              120,849
              
              
              116,509Less
                  accumulated depreciation
              
              
              25,517
              
              
              22,988Property,
                  plant and equipment, net
              
              
              95,332
              
              
              93,521Deferred
                  financing costs, net
              
              
              3,489
              
              
              3,667Other
                  assets
              
              
              3,556
              
              
              3,851Total
                  Assets
              
              $
              198,144
              
              $
              197,840LIABILITIES
                  AND STOCKHOLDERS' DEFICITCurrent
                  liabilities:Short-term
                  debt including current portion of long-term debt and capital
                  leases
              
              $
              146
              
              $
              182Accounts
                  payable
              
              
              18,098
              
              
              17,958Accrued
                  liabilities
              
              
              36,420
              
              
              32,031Current
                  deferred tax liabilties
              
              
              710
              
              
              710Total
                  current liabilities
              
              
              55,374
              
              
              50,881Long-term
                  debt, net of current maturities
              
              
              103,929
              
              
              103,299Accrued
                  employee benefits
              
              
              57,566
              
              
              61,429Deferred
                  tax liabilties
              
              
              8,185
              
              
              8,357Deferred
                  revenue
              
              
              474
              
              
              553Commitments
                  and contingenciesStockholders’
                  deficit:Preferred
                  stock, $.01 par value; none outstandingCommon
                  stock, $.01 par value; 10,648,347 shares issued and 9,715,954 outstanding
                  at March 31, 2006; and 10,651,123 shares issued and 9,715,954 shares
                  outstanding at December 31, 2005
              
              
              106
              
              
              106Additional
                  paid in capital
              
              
              1,962
              
              
              1,895Accumulated
                  (deficit)
              
              
              (24,790
              )
              
              (23,467
              )Less
                  805,270 treasury shares, at cost
              
              
              (298
              )
              
              (298
              )Accumulated
                  other comprehensive income
              
              
              (4,358
              )
              
              (4,907
              )Unearned
                  restricted stock issued for future service
              
              
              (6
              )
              
              (8
              )Total
                  stockholders' (deficit)
              
              
              (27,384
              )
              
              (26,679
              )Total
                  Liabilities and Stockholders' Deficit
              
              $
              198,144
              
              $
              197,840
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
  3
 *Table
            of Contents*
 
 **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)**
 **(In
        Thousands, Except for Number of Shares and Per Share
        Amounts** )
  3
                    Months Ended March
                
                3
                    Months Ended March31,
                    2006
                
                31,
                    2005NET
                    SALES
                
                $
                50,470
                
                $
                49,524Cost
                    of sales
                
                
                40,959
                
                
                39,992GROSS
                    MARGIN
                
                
                9,511
                
                
                9,532Selling,
                    general and administrative
                
                
                7,709
                
                
                7,396Amortization
                    of intangibles
                
                
                117
                
                
                269Restructuring
                    expense
                
                
                298
                
                
                387OPERATING
                    INCOME (LOSS)
                
                
                1,387
                
                
                1,480Interest
                    income
                
                
                (81
                )
                
                (199
                )Interest
                    expense
                
                
                3,317
                
                
                3,066Other
                    (income) expense, net
                
                
                (421
                )
                
                (1,253
                )(LOSS)
                    BEFORE INCOME TAXES
                
                
                (1,428
                )
                
                (134
                )Income
                    tax (benefit) provision
                
                
                (105
                )
                
                994NET
                    (LOSS)
                
                
                (1,323
                )
                
                (1,128
                )Other
                    comprehensive income(loss):Foreign
                    currency translation adjustments
                
                
                549
                
                
                (1,338
                )COMPREHENSIVE
                    (LOSS)
                
                $
                (774
                )
                $
                (2,466
                )WEIGHTED
                    AVERAGE COMMON SHARES-
                    BASIC AND DILUTED
                
                
                9,715,954
                
                
                9,645,039PER
                    SHARE AMOUNTS:(LOSS)
                    EARNINGS PER SHARE-
                    BASIC AND DILUTED
                
                $
                (0.14
                )
                $
                (0.12
                )
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
  4
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(In
        Thousands** )
 
 3
                  Months Ended March 31, 2006
              
              3
                  Months Ended March 31, 2005Cash
                  flows from operating activities:Net
                  (loss)
              
              $
              (1,323
              )
              $
              (1,128
              )Adjustments
                  to reconcile net (loss) to net cash (used in) provided by operating
                  activities:Depreciation
                  and amortization under capital lease
              
              
              2,387
              
              
              2,767Stock-based
                  compensation
              
              
              67Amortization
                  of intangibles
              
              
              119
              
              
              269Amortization
                  of deferred financing fees
              
              
              178
              
              
              173(Decrease)
                  increase in deferred income taxes
              
              
              (300
              )
              
              193Foreign
                  currency translation (gain) loss
              
              
              (122
              )
              
              244(Gain)
                  loss on disposition of assets
              
              
              (7
              )
              
              6Bad
                  debt provision
              
              
              37
              
              
              61Non-cash
                  interest on 8% notes and 11.5% notes
              
              
              627
              
              
              577Changes
                  in operating assets and liabilities:Receivables
              
              
              (79
              )
              
              111Inventories
              
              
              (4,372
              )
              
              (2,040
              )Other
                  current assets
              
              
              1,477
              
              
              119Accounts
                  payable and accrued liabilities
              
              
              3,499
              
              
              (620
              )Other
              
              
              (5,128
              )
              
              127Total
                  adjustments
              
              
              (1,617
              )
              
              1,987Net
                  cash (used in) operating activities before reorganization
                  expense
              
              
              (2,940
              )
              
              859Cash
                  flows from investing activities:Capital
                  expenditures
              
              
              (3,639
              )
              
              (2,788
              )Proceeds
                  from disposition of assets
              
              
              13
              
              
              18Restricted
                  cash
              
              
              (8
              )
              
              877Net
                  cash (used in) investing activities
              
              
              (3,634
              )
              
              (1,893
              )Cash
                  flows from financing activities:Deferred
                  financing costs
              
              
              
              
              
              (268
              )Repayment
                  of long-term borrowings and capital obligation
              
              
              (39
              )
              
              (43
              )Net
                  cash (used in) financing activities
              
              
              (39
              )
              
              (311
              )Effect
                  of currency exchange rate changes on cash
              
              
              214
              
              
              (316
              )Net
                  (decrease) in cash and equivalents
              
              
              (6,399
              )
              
              (1,661
              )Cash
                  and equivalents at beginning of period
              
              
              11,904
              
              
              30,255Cash
                  and equivalents at end of period
              
              $
              5,505
              
              $
              28,594Supplemental
                  cash flow information:Interest
                  paid less capitalized interest
              
              $
              (138
              )
              $
              (278
              )Income
                  taxes paid
              
              
              (6
              )
              $
              561
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
  5
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**
 
 **1.**
              **Summary
                  of Significant Accounting
                  Policies**
 
 **General**
 
 Viskase
        Companies, Inc. (formerly Envirodyne Industries, Inc.) is a Delaware corporation
        organized in 1970. As used herein, the "Company" means Viskase Companies,
        Inc.
        and its subsidiaries.
 
 **Nature
        of Operations**
 
 The
        Company is a producer of non-edible cellulosic and plastic casings and specialty
        plastic bags used to prepare and package processed meat products, and provides
        value-added support services relating to these products, for some of the
        largest
        global consumer products companies. The Company operates eight manufacturing
        facilities and eight distribution centers in North America, Europe and South
        America and, as a result, is able to sell its products in most countries
        throughout the world.
 
 **Principles
        of Consolidation**
 
 The
        consolidated financial statements include the accounts of the Company.
        Intercompany accounts and transactions have been eliminated in
        consolidation.
 
 **Reclassification**
 
 Reclassifications
        have been made to the prior years’ financial statements to conform to the 2006
        presentation.
 
 **Use
        of Estimates in the Preparation of Financial Statements**
 
 The
        preparation of financial statements includes the use of estimates and
        assumptions that affect a number of amounts included in the Company’s financial
        statements, including, among other things, pensions and other postretirement
        benefits and related disclosures, inventories valued under the last-in,
        first-out method, reserves for excess and obsolete inventory, allowance for
        doubtful accounts, restructuring charges and income taxes. Management bases
        its
        estimates on historical experience and other assumptions that they believe
        are
        reasonable. If actual amounts are ultimately different from previous estimates,
        the revisions are included in the Company’s results for the period in which the
        actual amounts become known. Historically, the aggregate differences, if
        any,
        between the Company’s estimates and actual amounts in any year have not had a
        significant effect on the Company’s consolidated financial
        statements.
 
 **Cash
        Equivalents**
 
 For
        purposes of the statement of cash flows, the Company considers cash equivalents
        to consist of all highly liquid debt investments purchased with an initial
        maturity of approximately three months or less. Due to the short-term nature
        of
        these instruments, the carrying values approximate the fair market value.
        Cash
        equivalents and restricted cash include $5,870 and $10,711 of short-term
        investments at March 31, 2006 and December 31, 2005, respectively. Restricted
        cash is principally cash held as collateral for outstanding letters of credit
        with a commercial bank.
 
 **Inventories**
 
 Domestic
        inventories are valued primarily at the lower of last-in, first-out (“LIFO”)
        cost or market. Remaining inventories, primarily foreign, are valued at the
        lower of first-in, first-out (“FIFO”) cost or market.
 
 **Property,
        Plant and Equipment**
 
 The
        Company carries property, plant and equipment at cost less accumulated
        depreciation. Property and equipment additions include acquisition of property
        and equipment and costs incurred for computer software purchased for internal
        use including related external direct costs of materials and services and
        payroll costs for employees directly associated with the project. Upon
        retirement or other disposition, cost and related accumulated depreciation
        are
        removed from the accounts, and any gain or loss is included in results of
        operations. Depreciation is computed on the straight-line method over the
        estimated useful lives of the assets ranging from (i) building and improvements
        - 10 to 32 years, (ii) machinery and equipment - 4 to 12 years, (iii) furniture
        and fixtures - 3 to 12 years and (iv) auto and trucks - 2 to 5
        years.
  6
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**
  In
        the
        ordinary course of business, we lease certain equipment, and certain real
        property, consisting of manufacturing and distribution facilities and office
        facilities. Substantially all such leases as of March 31, 2006 were operating
        leases, with the majority of those leases requiring us to pay maintenance,
        insurance and real estate taxes.
 
 **Deferred
        Financing Costs**
 
 Deferred
        financing costs are amortized on a straight-line basis over the expected
        term of
        the related debt agreement. Amortization of deferred financing costs is
        classified as interest expense.
 
 **Patents**
 
 Patents
        are amortized on the straight-line method over an estimated average useful
        life
        of 10 years.
 
 **Long-Lived
        Assets**
 
 The
        Company continues to evaluate the recoverability of long-lived assets including
        property, plant and equipment, patents and other intangible assets. Impairments
        are recognized when the expected undiscounted future operating cash flows
        derived from long-lived assets are less than their carrying value. If impairment
        is identified, valuation techniques deemed appropriate under the particular
        circumstances will be used to determine the asset’s fair value. The loss will be
        measured based on the excess of carrying value over the determined fair value.
        The review for impairment is performed at least once a year or when
        circumstances warrant.
 
 **Accounts
        Payable**
 
 The
        Company’s cash management system provides for the daily replenishment of its
        bank accounts for check-clearing requirements. The outstanding check balances
        of
        $1,197 and $1,427 at March 31, 2006 and December 31, 2005, respectively,
        are not
        deducted from cash but are reflected in Accounts payable on the consolidated
        balance sheets.
 
 **Deferred
        Revenue**
 
 License
        fees paid in advance are deferred and recognized on a straight line basis
        over
        the life of the applicable patent. As of March 31, 2006 the remaining balance
        of
        deferred revenue was $790, including $316 of short-term license fees included
        in
        Other current liabilities.
 
 **Pensions
        and Other Postretirement Benefits**
 
 The
        North
        American operations have defined benefit retirement plans that cover
        substantially all salaried and full-time hourly employees who were hired
        prior
        to April 1, 2003 and a fixed defined contribution plan and a discretionary
        profit sharing plan that cover substantially all salaried and full-time hourly
        employees who were hired on or after April 1, 2003. The operations in Germany
        have a defined benefit retirement plan that covers substantially all salaried
        and full-time hourly employees. Pension cost is computed using the projected
        unit credit method. The discount rate used approximates the average yield
        for
        high quality corporate bonds as of the valuation date. Our funding policy
        is
        consistent with funding requirements of the applicable federal and foreign
        laws
        and regulations.
  7
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**
 
 United
        States employees hired after March 31, 2003 who are not covered by a collective
        bargaining agreement and United States employees hired after September 30,
        2004
        who are covered by a collective bargaining agreement are eligible for a defined
        contribution benefit equal to three percent of base earnings (as defined
        by the
        plan), in lieu of the defined benefit retirement plans.
 
 The
        Company recognized a one-time $974
        curtailment gain recorded in the consolidated statements of operations and
        reduction in the unfunded pension liability included in Accrued employee
        benefits on the consolidated balance sheet related to the announced closing
        of
        our Kentland, Indiana finishing operations. This curtailment gain was recognized
        as of December 31, 2005.
 
 The
        United States and Canadian operations of the Company historically provided
        postretirement health care and life insurance benefits. The Company accrues
        for
        the accumulated postretirement benefit obligation that represents the actuarial
        present value of the anticipated benefits. Measurement is based on assumptions
        regarding such items as the expected cost of providing future benefits and
        any
        cost sharing provisions. The Company terminated postretirement medical benefits
        as of December 31, 2004 for all active employees and retirees in the United
        States who are not covered by a collective bargaining agreement. The termination
        of the United States postretirement medical benefits resulted in a $34,055
        curtailment gain and reduction in the unfunded postretirement liability included
        in “Accrued employee benefits” on the consolidated balance sheets in
        2004.
 
 On
        September 30, 2005 employees in the U.S. covered by a collective bargaining
        agreement ratified a new agreement which contained a provision that terminated
        postretirement medical benefits as of December 31, 2006 for all active employees
        and retirees covered by the collective bargaining agreement. The
        termination of the United States postretirement medical benefits for employees
        covered by the collective bargaining agreement resulted in a $668 curtailment
        gain and reduction in the unfunded postretirement medical liability included
        in
        Accrued employee benefits on the consolidated balance sheets in 2005. In
        addition, the Company will amortize the remaining unrecognized prior service
        costs and net actuarial loss related to these postretirement medical benefits
        over the 15 month period from October 1, 2005 through December 31, 2006.
        Approximately $1,981 was recorded as a reduction to cost of sales during
        the
        first quarter of 2006 and a total of $7,929 will be recognized during
        2006.
 
 **Income
        Taxes**
 
 Deferred
        tax assets and liabilities are measured using enacted tax laws and tax rates
        expected to apply to taxable income in the years in which those temporary
        differences are expected to be recovered or settled. The effect on deferred
        tax
        assets and liabilities due to a change in tax rates is recognized in income
        in
        the period that includes the enactment date. In addition, the amounts of
        any
        future tax benefits are reduced by a valuation allowance to the extent such
        benefits are not expected to be realized on a more likely than not
        basis.
 
 **Off-Balance
        Sheet Arrangements**
 
 We
        do not
        have off-balance sheet arrangements, financing or other relations with
        unconsolidated entities or other persons.
 
 **Net
        (Loss) Income Per Share**
 
 Net
        (loss) income per share of common stock is based upon the weighted-average
        number of shares of common stock outstanding during the quarter.
  8
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**
 
 **Other
        Comprehensive Income**
 
 Comprehensive
        income includes all other non-shareholder changes in equity. Changes in other
        comprehensive income resulted from changes in foreign currency translation
        adjustments in 2006 and 2005 and also minimum pension liability in
        2005.
 
 **Revenue
        Recognition**
 
 The
        Company’s revenues are recognized at the time products are shipped to the
        customer, under F.O.B. Shipping Point terms or under F.O.B. Port terms. Revenues
        are net of any discounts, rebates and allowances. The Company records all
        labor,
        raw materials, in-bound freight, plant receiving and purchasing, warehousing,
        handling and distribution costs as a component of cost of goods
        sold.
 
 **Accounting
        for Stock-Based Compensation**
 
 During
        the first quarter of fiscal 2006, the Company adopted the provisions of,
        and
        accounting for stock-based compensation in accordance with, the Financial
        Accounting Standards Board’s (“FASB”) Statement of Financial Accounting
        Standards No. 123—revised 2004 (“SFAS 123R”), “Share-Based Payment” which
        replaced Statement of Financial Accounting Standards No. 123 (“SFAS 123”),
“Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25
        (“APB 25”), “Accounting for Stock Issued to Employees.” Under the fair value
        recognition provisions of this statement, stock-based compensation cost is
        measured at the grant date based on fair value of the award and is recognized
        as
        expense on a straight-line basis over the requisite service period, which
        is the
        vesting period. We elected the modified-prospective method, under which prior
        periods are not revised for comparative purposes. The valuation provisions
        of
        SFAS 123R apply to new grants and to grants that were outstanding as of the
        effective date and are subsequently modified. Estimated compensation for
        grants
        that were outstanding as of the effective date will be recognized over the
        remaining service period using the compensation cost estimated for the SFAS
        123
        pro forma disclosures.
 
 Prior
        to
        the adoption of SFAS 123R, the Company used a fair value method to account
        for
        options granted to employees for the purchase of common stock. No compensation
        expense was recognized on the grant date, since at that date, the option
        price
        equals the market price of the underlying common stock. The pro forma effect
        of
        accounting for stock options under a fair value method, prior to the adoption
        of
        SFAS 123R, was as follows:
  (Dollars
                    in Thousands, Except Per Share Amounts)
                
                3
                    Months Ended March 31, 2005Net
                    (loss), as reported
                
                $
                (1,128
                )Deduct:
                    Total stock-based compensation expense under a fair value based
                    method,
                    net of related tax effects
                
                
                (67
                )Net
                    (loss), pro forma
                
                $
                (1,195
                )Basic
                    (loss) earnings per share, as reported
                
                $
                (0.12
                )Diluted
                    (loss) earnings per share, as reported
                
                $
                (0.12
                )Basic
                    (loss) earnings per share, pro forma
                
                $
                (0.12
                )Diluted
                    (loss) earnings per share, pro forma
                
                $
                (0.12
                )
 
 **New
        Accounting Pronouncements**
 
 In
        December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
        123 (revised 2004) ("SFAS 123R"), "Share-Based Payment." SFAS 123R sets
        accounting requirements for "share-based" compensation to employees, requires
        companies to recognize in the income statement the grant-date fair value
        of
        stock options and other equity-based compensation issued to employees and
        disallows the use of the intrinsic value method of accounting for stock
        compensation. SFAS 123R is applicable for annual, rather than interim, periods
        beginning after June 15, 2005, and as such the Company adopted SFAS 123R
        in
        January 2006. The Company expects the effect of adopting this standard using
        the
        modified prospective methodology will be
        to expense $268 and $245 in 2006 and 2007, respectively.
  9
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**
 
 In
        May
        2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections."
        SFAS No. 154 replaced Accounting Principles Board Opinion, or APB, No. 20,
        "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
        Financial Statements" and establishes retrospective application as the required
        method for reporting a change in accounting principle. SFAS No. 154 provided
        guidance for determining whether retrospective application of a change in
        accounting principle is impracticable and for reporting a change when
        retrospective application is impracticable. SFAS No. 154 also addresses the
        reporting of a correction of an error by restating previously issued financial
        statements. SFAS No. 154 is effective for accounting changes and corrections
        of
        errors made in fiscal years beginning after December 15, 2005.
 
 In
        November 2004, the FASB issued SFAS No. 151 ("SFAS 151"), "Inventory Costs
        - an
        Amendment of ARB No. 43 Chapter 4." SFAS 151 requires that items such as
        idle
        facility expense, excessive spoilage, double freight, and rehandling be
        recognized as current-period charges rather than being included in inventory
        regardless of whether the costs meet the criterion of abnormal as defined
        in ARB
        43. SFAS 151 is applicable for inventory costs incurred during fiscal years
        beginning after June 15, 2005. The Company adopted this standard beginning
        the
        first quarter of fiscal year 2006. The adoption of this standard did not
        have a
        material effect on our financial statements as such costs have historically
        been
        expensed as incurred.
 
 **2.**
              **Cash
                  and Cash Equivalents**
  March
                  31, 2006
              
              December
                  31,2005Cash
                  and cash equivalents
              
              $
              5,505
              
              $
              11,904Restricted
                  cash
              
              
              3,259
              
              
              3,251$
              8,764
              
              $
              15,155
 
 As
        of
        March 31, 2006, cash equivalents and restricted cash of $5,870, are invested
        in
        short-term investments.
 
 **3.**
              **Inventories**
 
 Inventories
        consisted of:
 March
                  31, 2006
              
              December
                  31, 2005Raw
                  materials
              
              $
              6,340
              
              $
              5,880Work
                  in process
              
              
              18,504
              
              
              16,772Finished
                  products
              
              
              15,171
              
              
              13,767$
              40,015
              
              $
              36,419
  Approximately
        51.46% of the Company’s inventories at March 31, 2006 were valued at LIFO.
        Remaining inventories, primarily foreign, are valued at the lower of FIFO
        cost
        or market. At March 31, 2006 the LIFO values exceeded current manufacturing
        cost
        by approximately ($625).
  10
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**
 
 **4.**
              **Debt
                  Obligations (Dollars in Thousands, Except For Number of Shares
                  and
                  Warrants, and Per Share, Per Warrant and Per Bond
                  Amounts)**
 
 Outstanding
        short-term and long-term debt consisted of:
 
 March
                  31, 2006
              
              December
                  31, 2005Short-term
                  debt including current maturities of long-term debt:Current
                  maturities of capital leases
              
              $
              146
              
              $
              182Total
                  short-term debt
              
              $
              146
              
              $
              182Long-term
                  debt:11.5%
                  Senior Secured Notes
              
              $
              89,250
              
              $
              89,2148%
                  Notes
              
              
              14,547
              
              
              13,956Other
              
              
              132
              
              
              129Total
                  long-term debt
              
              $
              103,929
              
              $
              103,299
  Revolving
        Credit Facility
 
 On
        June
        29, 2004, the Company entered into a new $20,000 secured revolving credit
        facility (“Revolving Credit Facility”). The Revolving Credit Facility includes a
        letter of credit subfacility of up to $10,000 of the total $20,000 maximum
        facility amount. The Revolving Credit Facility expires on June 29, 2009.
        Borrowings under the loan and security agreement governing this Revolving
        Credit
        Facility are subject to a formula based on percentages of eligible domestic
        receivables and eligible domestic inventory. Under the Revolving Credit
        Facility, we will be able to choose between two per annum interest rate options:
        (i) the lender’s prime rate and (ii) LIBOR plus a margin of 2.25% currently
        (which margin will be subject to performance based increases up to 2.50%
        and
        decreases down to 2.00%); provided that the minimum interest rate shall be
        at
        least equal to 3.00%. Letter of credit fees will be charged a per annum rate
        equal to the then applicable LIBOR rate margin less 50 basis points. The
        Revolving Credit Facility also provides for an unused line fee of 0.375%
        per
        annum. There were no borrowings under the Revolving Credit Facility in 2005
        and
        through March 31, 2006.
 
 Indebtedness
        under the Revolving Credit Facility is secured by liens on substantially
        all of
        the Company and the Company’s domestic subsidiaries’ assets, with liens (i) on
        inventory, accounts receivable, lockboxes, deposit accounts into which payments
        are deposited and proceeds thereof, will be contractually senior to the liens
        securing the 11.5% Senior Secured Notes and the related guarantees pursuant
        to
        an intercreditor agreement, (ii) on real property, fixtures and improvements
        thereon, equipment and proceeds thereof, will be contractually subordinate
        to
        the liens securing the 11.5% Senior Secured Notes and such guarantees pursuant
        to such intercreditor agreement, (iii) on all other assets, will be
        contractually *pari
        passu* with the
        liens securing the 11.5% Senior Secured Notes and such guarantees pursuant
        to
        such intercreditor agreement.
 
 The
        Revolving Credit Facility contains various covenants which will restrict
        the
        Company’s ability to, among other things, incur indebtedness, enter into mergers
        or consolidation transactions, dispose of assets (other than in the ordinary
        course of business), acquire assets, make certain restricted payments, prepay
        any of the 8% Subordinated Notes at a purchase price in excess of 90% of
        the
        aggregate principal amount thereof (together with accrued and unpaid interest
        to
        the date of such prepayment), create liens on our assets, make investments,
        create guarantee obligations and enter into sale and leaseback transactions
        and
        transactions with affiliates, in each case subject to permitted exceptions.
        The
        Revolving Credit Facility also requires that we comply with various financial
        covenants, including meeting a minimum EBITDA requirement and limitations
        on
        capital expenditures in the event our usage of the Revolving Credit Facility
        exceeds 30% of the facility amount. The Revolving Credit Facility also requires
        payment of a prepayment premium in the event that it is terminated prior
        to
        maturity. The prepayment premium, as a percentage of the $20,000 facility
        amount, is 2% through June 29, 2006 and 1% through June 29, 2007.
  11
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**
 
 On
        March 28, 2006, the Company entered into an amendment of the Revolving
        Credit Facility. Pursuant thereto, the Revolving Credit Facility as amended
        in
        certain respects in order to facilitate the continued relocation of certain
        of
        the Company’s finishing operations from its facility in Kentland, Indiana to a
        new facility in Monterrey, Mexico operated by Viskase del Norte, S.A. de
        C.V.
        (“Mexico Project”). Pursuant to the amendment, the lender also waived certain
        technical events of default and provided certain consents, each relating
        to the
        Mexico Project.
 
 11.5%
        Senior Secured Notes
 
 On
        June
        29, 2004, the Company issued $90,000 of 11.5% Senior Secured Notes due 2011
        (“11.5% Senior Secured Notes”) and 90,000 warrants (“New Warrants”) to purchase
        an aggregate of 805,230 shares of common stock of the Company. The 11.5%
        Senior
        Secured Notes have a maturity date of, and the New Warrants expire on, June
        15,
        2011. Interest
        on the 11.5% Senior Secured Notes is payable semi-annually in cash on June
        15
        and December 15 of each year.
 
 Each
        of
        the 90,000 New Warrants entitles the holder to purchase 8.947 shares of the
        Company’s common stock at an exercise price of $.01 per share. The New Warrants
        were valued at $11.117 per warrant for accounting purposes using a fair value
        method for an aggregate fair value of $1,001. The remaining $88,899 of aggregate
        proceeds was allocated to the carrying value of the 11.5% Senior Secured
        Notes
        as of June 29, 2004.
 
 The
        11.5%
        Senior Secured Notes will be guaranteed on a senior secured basis by all
        of our
        future domestic restricted subsidiaries that are not immaterial subsidiaries
        (as
        defined). The 11.5% Senior Secured Notes and the related guarantees (if any)
        are
        secured by substantially all of the tangible and intangible assets of the
        Company and guarantor subsidiaries (if any); and includes the pledge of the
        capital stock directly owned by the Company or the guarantors; provided that
        no
        such pledge will include more than 65% of any foreign subsidiary directly
        owned
        by the Company or the guarantor. The Indenture and the security documents
        related thereto provide that, to the extent that any rule is adopted, amended
        or
        interpreted that would require the filing with the SEC (or any other
        governmental agency) of separate financial statements for any of our
        subsidiaries due to the fact that such subsidiary’s capital stock secures the
        Notes, then such capital stock will automatically be deemed not to be part
        of
        the collateral securing the Notes to the extent necessary to not be subject
        to
        such requirement. In such event, the security documents may be amended, without
        the consent of any holder of Notes, to the extent necessary to release the
        liens
        on such capital stock.
 
 With
        limited exceptions, the 11.5% Senior Secured Notes require that the Company
        maintain a minimum annual level of EBITDA calculated at the end of each fiscal
        quarter as follows:
 
 **Fiscal
                  quarter ending**
              
              **Amount**September
                  30, 2004 through September 30, 2006
              
              $
              16,000December
                  31, 2006 through September 30, 2008
              
              $
              18,000December
                  31, 2008 and thereafter
              
              $
              20,000
 
 unless
        the sum of (i) unrestricted cash of the Company and its restricted subsidiaries
        as of such day and (ii) the aggregate amount of advances that the Company
        is
        actually able to borrow under the Revolving Credit Facility on such day (after
        giving effect to any borrowings thereunder on such day) is at least $15,000. The
        minimum annual level of EBITDA covenant is not in effect as of March 31,
        2006 as
        the Company’s unrestricted cash and the amount of available credit under the
        Revolving Credit Facility exceed $15.0 million.
  12
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**
  The
        11.5%
        Senior Secured Notes limit the ability of the Company to (i) incur additional
        indebtedness; (ii) pay dividends, redeem subordinated debt, or make other
        restricted payments, (iii) make certain investments or acquisitions; (iv)
        issue
        stock of subsidiaries; (v) grant or permit to exist certain liens; (vi) enter
        into certain transactions with affiliates; (vii) merge, consolidate, or transfer
        substantially all of our assets; (viii) incur dividend or other payment
        restrictions affecting certain subsidiaries; (ix) transfer, sell or acquire
        assets, including capital stock of subsidiaries; and (x) change the nature
        of
        our business.
 
 At
        any
        time prior to June 15, 2008, the Company may redeem, at its option, some
        or all
        of the 11.5% Senior Secured Notes at a make-whole redemption price equal
        to the
        greater of (i) 100% of the aggregate principal amount of the 11.5% Senior
        Secured Notes being redeemed and (ii) the sum of the present values of 105
        3/4%
        of the aggregate principal amount of such 11.5% Senior Secured Notes and
        scheduled payments of interest on such 11.5% Senior Secured Notes to and
        including June 15, 2008, discounted to the date of redemption on a semi-annual
        basis (assuming a 360-day year consisting of twelve 30-day months) at the
        Treasury Rate plus 50 basis points, together with, in each case, accrued
        and
        unpaid interest and additional interest, if any, to the date of redemption.
        The
        make-whole redemption price as of March 31, 2006 is approximately 118%.
 
 On
        or
        after June 15, 2008, the Company may redeem, at its option, some or all of
        the
        11.5% Senior Secured Notes at the following redemption
        prices, plus accrued and unpaid interest to the date of redemption:
 
 **For
                  the periods below**
              
              **Percentage**On
                  or after June 15, 2008
              
              
              105
                  3/4
              %On
                  or after June 15, 2009
              
              
              102
                  7/8
              %On
                  or after June 15, 2010
              
              
              100
              %
 
 Prior
        to
        June 15, 2007, the Company may redeem, at its option, up to 35% of the aggregate
        principal amount of the 11.5% Senior Secured Notes with the net proceeds
        of any
        equity offering at 111 1/2% of their principal amount, plus accrued and unpaid
        interest to the date of redemption, provided that at least 65% of the aggregate
        principal amount of the 11.5% Senior Secured Notes remains outstanding
        immediately following the redemption.
 
 Within
        90
        days after the end of each fiscal year ending in 2006 and thereafter, for
        which
        the Company’s Excess Cash Flow (as defined) was greater than or equal to $2.0
        million, the Company must offer to purchase a portion of the 11.5% Senior
        Secured Notes at 101% of principal amount, together with accrued and unpaid
        interest to the date of purchase, with 50% of our Excess Cash Flow from such
        fiscal year (“Excess Cash Flow Offer Amount”); except that no such offer shall
        be required if the Revolving Credit Facility prohibits such offer from being
        made because, among other things, a default or an event of default is then
        outstanding thereunder. The Excess Cash Flow Offer Amount shall be reduced
        by
        the aggregate principal amount of 11.5% Senior Secured Notes purchased in
        eligible open market purchases as provided in the indenture.
 
 If
        the
        Company undergoes a change of control (as defined), the holders of the 11.5%
        Senior Secured Notes will have the right to require the Company to repurchase
        their 11.5% Senior Secured Notes at 101% of their principal amount, plus
        accrued
        and unpaid interest to the date of purchase.
 
 If
        the
        Company engages in asset sales, it must either invest the net cash proceeds
        from
        such sales in its business within a certain period of time (subject to certain
        exceptions), prepay indebtedness under the Revolving Credit Facility (unless
        the
        assets that are the subject of such sales are comprised of real property,
        fixtures or improvements thereon or equipment) or make an offer to purchase
        a
        principal amount of the 11.5% Senior Secured Notes equal to the excess net
        cash
        proceeds. The purchase price of each 11.5% Senior Secured Note so purchased
        will
        be 100% of its principal amount, plus accrued and unpaid interest to the
        date of
        purchase.
  13
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**
 
 8%
        Subordinated Notes
 
 The
        8%
        Subordinated Notes bear interest at a rate of 8% per year, and accrue interest
        from December 1, 2001, payable semi-annually (except annually with respect
        2005
        and quarterly with respect to 2006), with interest payable in the form of
        8%
        Subordinated Notes (paid-in-kind) through at least 2004. Interest for 2005
        and
        2006 will be payable in cash to the extent of available cash flow, as defined,
        and the balance in the form of 8% Subordinated Notes (paid-in-kind). For
        the
        year ended December 31, 2005 and the quarter ended March 31, 2006, interest
        on
        the 8% Subordinated Notes was or will be paid entirely in the form of 8%
        Subordinated Notes (paid-in-kind). We expect to pay all or a majority of
        interest payable in 2006 in the form of an 8% Subordinated Notes (paid-in-kind). Thereafter,
        interest will be payable in cash. The 8% Subordinated Notes mature on December
        1, 2008.
 
 On
        June
        29, 2004, the holders contractually subordinated the Company’s obligations under
        the 8% Subordinated Notes to obligations under certain indebtedness, including
        the 11.5% Senior Secured Notes and the Revolving Credit Facility. The carrying
        amount of the 8% Subordinated Notes outstanding at March 31, 2006 is $14,547.
 
 The
        8%
        Subordinated Notes were valued at market in fresh-start accounting. The discount
        to face value is being amortized using the effective-interest rate methodology
        through maturity with an effective interest rate of 10.46%.
 
 The
        following table summarizes the carrying value of the 8% Subordinated Notes
        at
        December 31 assuming interest through 2006 is paid in the form of 8%
        Subordinated Notes (paid-in-kind):
 
 2006
              
              20078%
                  Subordinated NotesPrincipal
              
              $
              18,684
              
              $
              18,684Discount
              
              
              (2,283
              )
              
              (1,148
              )Carrying
                  value
              
              $
              16,401
              
              $
              17,536
 
 Letter
        of Credit Facility
 
 Letters
        of credit in the amount of $2,419 were outstanding under letter of credit
        facilities with commercial banks, and were cash collateralized at March 31,
        2006.
 
 The
        Company finances its working capital needs through a combination of internally
        generated cash from operations, cash on hand and the Revolving Credit Facility.
 
 The
        aggregate maturities of debt (1) for each
        of the next five years are:
 
 2006
              
              2007
              
              2008
              
              2009
              
              2010
              
              Thereafter11.5%
                  Senior Secured Notes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              90,0008%
                  Subordinated Notes
              
              
              
              
              
              
              
              $
              18,684Other
              
              $
              146
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              971$
              146
              
              
              
              
              $
              18,684
              
              
              
              
              
              
              
              $
              90,971
 
 (1)  The
        aggregate maturities of debt represent amounts to be paid at maturity and
        not
        the current carrying value of the debt.
  14
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**
  **5.**
              **Pension
                  and Postretirement**
  Pension
        contributions
 
 The
        Company paid $1,209 during the first quarter of 2006, and expects to contribute
        an additional $12,012 during the remainder of the year.
  3
                  Months Ended March 31, 2006
              
              3
                  Months Ended March 31, 2005Component
                  of net period benefit costService
                  cost
              
              $
              537
              
              $
              634Interest
                  cost
              
              
              1,849
              
              
              1,827Expected
                  return on plan assets
              
              
              (1,782
              )
              
              (1,700
              )Amortization
                  of prior service cost
              
              
              (48
              )
              
              (92
              )Total
                  net periodic benefit cost
              
              $
              556
              
              $
              669
 
 The
        Company has expensed $556 in the first quarter of 2006 and expects its pension
        expense to be $2,092 for the year.
 
 Postretirement
        benefits
 
 The
        Company paid $222 during the first quarter of 2006, and expects to contribute
        an
        additional $654 during the remainder of the year.
  3
                  Months Ended March 31, 2006
              
              3
                  Months Ended March 31, 2005Component
                  of net period benefit costService
                  cost
              
              $
              4
              
              $
              60Interest
                  cost
              
              
              125
              
              
              246Amortization
                  of actuarial (gain) loss
              
              
              (1,981
              )Total
                  net periodic benefit cost
              
              
              ($1,852
              )
              $
              306
 
 The
        Company has a benefit of ($1,852) in the first quarter of 2006 and expects
        its
        postretirement benefits amortization benefit to be ($7,074) for the
        year.
 
 **6.**
              **Restructuring
                  Charges**
 
 During
        the first quarter of 2006, the Company committed to a restructuring plan
        to
        continue to address the Company's competitive environment. The plan resulted
        in
        a before tax charge of $298.
 
 During
        the second quarter of 2005, our board of directors approved a plan under
        which
        we will restructure our finishing operations by relocating finishing operations
        from our facility in Kentland, Indiana to a facility in Mexico. We expect
        to
        complete the restructuring by the end of 2006. The relocation of the finishing
        operations is intended to lower costs and optimize operations. The total
        cost of
        the restructuring, exclusive of capital expenditures, is expected to be
        approximately $10,000, substantially all of which will result in cash
        expenditures. We also expect to make capital expenditures of approximately
        $10,000 in connection with the restructuring. We began incurring a substantial
        portion of these costs and capital expenditures in the second quarter of
        2005
        and expect to continue to incur them through the end of 2006.
  15
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**
 
 A
        $1,787
        charge for one-time employee costs related to the Kentland, Indiana relocation
        was recorded during the second quarter of 2005.
 
 During
        the first quarter of 2005, the Company committed to a restructuring plan
        to
        continue to address the Company's competitive environment. The plan resulted
        in
        a before tax charge of $387.
 
 **Restructuring
        Reserves**
 
 The
        following table provides details of the 2006 and 2005 restructuring reserves
        for
        the period ended March 31, 2006 (dollars in millions):
 
 Restructuring
                  reserves as of December 31, 2005
              
              2006
                  Charge
              
              Payments
              
              Other
                  adjustments
              
              Restructuring
                  reserves as of March 31, 20062006
                  employee costs
              
              
              
              
              $
              0.3
              
              $
              (0.1
              )
              
              
              
              $
              0.22005
                  employee costs
              
              $
              1.6
              
              
              
              
              
              
              
              
              
              
              $
              1.6Total
                  restructuring activity
              
              $
              1.6
              
              $
              0.3
              
              $
              (0.1
              )
              $
              0.0
              
              $
              1.8
 
 **7.**
              **Capital
                  Stock and Paid in Capital**
 
 Authorized
        shares of preferred stock $(0.01 par value per share) and common stock $(0.01
        par value per share) for the Company are 50,000,000 shares and 50,000,000
        shares, respectively. A total of 10,648,347 shares of common stock were issued
        and 9,715,954 shares of common stock were outstanding as of March 31, 2006.
        A
        total of 10,651,123 shares of common stock were issued and 9,715,954 shares
        of
        common stock were outstanding as of December 31, 2005.
 
 Under
        terms of the Bankruptcy Plan, 660,000 shares of common stock were reserved
        for
        grant to management and employees under the Viskase Companies, Inc. Restricted
        Stock Plan. On April 3, 2003, the Company granted 330,070 shares of restricted
        common stock (“Restricted Stock”) under the Restricted Stock Plan. Shares
        granted under the Restricted Stock Plan vested 12.5% on grant date; 17.5%
        on the
        first anniversary of grant date; 20% on the second anniversary of grant date;
        20% on the third anniversary; and, 30% on the fourth anniversary of the grant
        date, subject to acceleration upon the occurrence of certain events. The
        Restricted Stock expense for three-month periods ended March 31, 2006 and
        March
        31, 2005 is $2 and $2, respectively. The value of the Restricted Stock was
        calculated based on the fair market value of approximately $0.10 per share
        for
        the new common stock upon emergence from bankruptcy using a multiple of cash
        flow calculation to determine enterprise value and the related equity
        value.
 
 **8.**
              **Treasury
                  Stock**
 
 On
        June
        29, 2004, the Company purchased 805,270 shares of its common stock for $298.
        The
        common stock has been accounted for as treasury stock. The treasury shares
        are
        being held for use in connection with any exercise of the New
        Warrants.
 
 **9.**
              **Warrants
                  (Dollars in Thousands, Except Per Share and Per Warrant
                  Amounts)**
 
 Pursuant
        to the Company’s plan of reorganization that was consummated on April 3, 2003,
        holders of the previously outstanding Common Stock received Warrants to purchase
        shares of Common Stock of the reorganized company. As of March 31, 2006,
        304,127
        Warrants are outstanding. The Warrants have a seven-year term expiring on
        April
        2, 2010, and have an exercise price of $10.00 per share.
  16
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**
 
 On
        June
        29, 2004 in conjunction with the issuance of the 11.5% Senior Secured Notes,
        the
        Company issued 90,000 New Warrants to purchase an aggregate of 805,230 shares
        of
        common stock of the Company. Each of the New Warrants entitles the holder
        to
        purchase 8.947 shares of the Company's common stock at an exercise price
        of $.01
        per share through the June 15, 2011 expiration date. The New Warrants were
        valued at $11.117 per warrant for accounting purposes using a fair value
        method
        for an aggregate fair value of the warrant issuance of $1,001.
 
 **10.**
              **Contingencies**
 
 In
        1988,
        Viskase Canada Inc. (“Viskase Canada”), a subsidiary of the Company, commenced a
        lawsuit against Union Carbide
        Canada Limited and Union Carbide Corporation (“Union Carbide”) in the Ontario
        Superior Court of Justice, Court File No.: 292270188, seeking damages resulting
        from Union Carbide’s breach of environmental representations and warranties
        under the Amended and Restated Purchase and Sale Agreement, dated January
        31,
        1986 (“Agreement”). Pursuant to the Agreement, Viskase Corporation and various
        affiliates (including Viskase Canada) purchased from Union Carbide and Union
        Carbide Films Packaging, Inc., its cellulosic casings business and plastic
        barrier films business, which purchase included a facility in Lindsay, Ontario,
        Canada (“Site”). Viskase Canada is claiming that Union Carbide breached several
        representations and warranties and deliberately and/or negligently failed
        to
        disclose to Viskase Canada the existence of contamination on the Site. In
        November 2000, the Ontario Ministry of the Environment (“MOE”) notified Viskase
        Canada that it had evidence to suggest that the Site was a source of
        polychlorinated biphenyl (“PCB”) contamination. Viskase Canada and The Dow
        Chemical Company, corporate successor to Union Carbide (“Dow”), have worked with
        the MOE in investigating the PCB contamination.
 
 The
        Company and Dow reached an agreement for resolution of all outstanding matters
        between them whereby Dow repurchased the Site for $1,375 (Canadian), and
        is
        responsible for, and assumed the cost of remediation of the Site, and
        indemnified Viskase C anada
        and
        its affiliates, including the Company, in relation to all related environmental
        liabilities at the Site and Viskase Canada dismissed the action referred
        to
        above. The transaction was closed during May 2005, and resulted in a gain
        of
        $279 (U.S.).
 
 In
        1993,
        the Illinois Department of Revenue (“IDR”) filed a proof of claim against
        Envirodyne Industries, Inc. (now known as Viskase Companies, Inc.) and its
        subsidiaries in the United States Bankruptcy Court for the Northern District
        of
        Illinois ("Bankruptcy Court"), Bankruptcy Case Number 93 B 319, for alleged
        liability with respect to the IDR’s denial of the Company’s allegedly incorrect
        utilization of certain loss carry-forwards of certain of its subsidiaries. 
The IDR asserted it was owed, as of the petition date, $998 in taxes,
        $357 in interest and $271 in penalties.  The Company objected to the
        claim on various grounds.  In September 2001, the Bankruptcy Court denied
        the IDR’s claim and determined the debtors were not responsible for 1998 and
        1999 tax liabilities, interest and penalties. IDR appealed the Bankruptcy
        Court’s decision to the United States District Court, Northern District of
        Illinois, Case Number 01 C 7861, and in February 2002,
        the District Court affirmed the Bankruptcy Court’s
        order denying the IDR claim.   IDR appealed
        the District Court’s order to United States Court of Appeals for the
        Seventh Circuit, Case Number 02-1632. On January 6, 2004, the appeals court
        reversed the judgment of the District Court and remanded the case for
        further proceedings on the Company’s other objections to the claim. On
        November 16, 2005 the Bankruptcy Court issued an opinion in which
        it denied the IDR’s claim to the extent it seeks principal tax
        liability and found that no principal tax liability remains
        due.   However, because of certain timing issues with respect to
        the carryback of subsequent net operating loss used to eliminate the
        principal tax liabilities in 1988 and 1989, the issue of the amount of
        interest and  penalties (for approximately 14 years), if any, has not
        yet been determined by the Bankruptcy Court.  The IDR
        has asserted that as of February 2006, approximately $432 was owed in
        interest.  The Company disputes this amount and intends to vigorously
        defend its position on interest due. The IDR may appeal the Bankruptcy Court
        order and has asserted that if it were successful on appeal, that the Company
        would have liability to the IDR as of the beginning of 2005 in the amount
        of
        approximately $2,900.
  17
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**
 
 In
        August
        2001, the Department of Revenue of the Province of Quebec, Canada issued
        an
        assessment against Viskase Canada in the amount of $2.7 million (Canadian)
        plus
        interest and possible penalties. This assessment is based upon Viskase Canada’s
        failure to collect and remit sales tax during the period July 1, 1997 to
        May 31,
        2001. During this period, Viskase Canada did not collect and remit sales
        tax in
        Quebec on reliance of the written advice of its outside accounting firm.
        Viskase
        Canada filed a Notice of Objection in November 2001 with supplementary
        submission in October 2002. The Notice of Objection found in favor of the
        Department of Revenue. The Company appealed the decision. The ultimate liability
        for the Quebec sales tax lies with the customers of Viskase Canada during
        the
        relevant period. Viskase Canada could be required to pay the amount of the
        underlying sales tax prior to receiving reimbursement for such tax from our
        customers. Viskase Canada made a settlement offer, whereby Viskase Canada
        would
        pay $300 (Canadian), but would not be required to collect the underlying
        sales
        tax from the customers of Viskase Canada. The settlement offer was accepted
        by
        the Deputy Minister of Revenue of Quebec during November 2005. A settlement
        agreement has been executed between Viskase Canada Inc. and the Deputy Minister
        of Revenue of Quebec and in January 2006 the parties filed a Declaration
        of
        Settlement out of Court to dismiss the action.
 
 During
        2005, Viskase Brasil Embalagens Ltda. (“Viskase Brazil”) received three tax
        assessments by São Paulo tax authorities with respect to Viskase Brazil’s
        alleged failure to pay Value Added and Sales and Services Tax (“ICMS”) levied on
        the importation of raw materials and sales of goods in and out of the State
        of
        São Paulo. Two of the tax assessments relate to ICMS on the importation by
        Viskase Brazil of raw materials through the State of Espírito Santo (“Import
        Assessments”), and the disputed amount with respect to such assessments
        aggregates R$16,588 for taxes and R$16,318 for penalties and interest, or
        about
        $7,647 and $7,522, respectively, at exchange rates in effect on March 23,
        2006.
        The third tax assessment also relates to ICMS and alleges that Viskase Brazil
        arranged for the remittance of goods to addresses other than those indicated
        on
        the relevant tax documents (“Documentation Assessment”). The disputed amount
        under the Documentation Assessment is R$188 for taxes and R$1,690 for penalties
        and interest, or about $87 and $779, respectively, at exchange rates in effect
        on March 23, 2006. The attorneys representing Viskase Brazil on these tax
        disputes have advised the Company that the likelihood of liability with respect
        to the tax assessments is remote. In view of the magnitude of the assessments,
        Viskase Brazil sought the advice of another law firm with respect to one
        of the
        Import Assessments and with respect to the Document Assessment. The second
        law
        firm expressed its belief (i) that the likelihood of liability on the Import
        Assessment it reviewed either was possible tending to probable or was possible,
        depending on the theory of liability pursued by the tax authorities, and
        (ii)
        that the likelihood of liability on the Documentation Assessment was probable.
        Viskase believes that the two Import Assessments raise essentially the same
        issues and therefore did not seek advice from the second law firm with respect
        to the other Import Assessment. The Company has provided a reserve in the
        amount
        of $2,000 as of December 31, 2005. Viskase Brazil strongly denies the
        allegations set forth in the tax assessments and intends to vigorously defend
        itself.
 
 Under
        the
        Clean Air Act Amendments of 1990, various industries, including casings
        manufacturers, are or will be required to meet maximum achievable control
        technology (“MACT”) air emissions standards for certain chemicals. MACT
        standards applicable to all U.S. cellulosic casing manufacturers were
        promulgated June 11, 2002. The Company submitted extensive comments to the
        EPA
        during the public comment period. Compliance with these new rules was required
        by June 13, 2005, although the Company has obtained a one-year extension
        for
        both of its facilities. To date, the Company has spent approximately $10,348
        in
        capital expenditures for MACT, and expects to spend an additional $200, over
        the
        next 6 months, to become compliant with MACT rules at our two U.S. extrusion
        facilities.
 
 In
        addition, the Company is involved in various other legal proceedings arising
        out
        of our business and other environmental matters, none of which are expected
        to
        have a material adverse effect upon results of operations, cash flows or
        financial condition.
  18
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**
 
 **12.**
              **Earnings
                  Per Share**
 
 Following
        are the reconciliations of the numerators and denominators of the basic and
        diluted EPS (in thousands, except for number of shares and per share
        amounts):
  3
                  Months Ended March 31, 2006
              
              3
                  Months Ended March 31, 2005NUMERATOR:(Loss)
                  income available to common stockholders:Net
                  (loss) income
              
              $
              (1,323
              )
              $
              (1,128
              )Net
                  (loss) income available to common stockholders for basic and diluted
                  EPS
              
              $
              (1,323
              )
              $
              (1,128
              )DENOMINATOR:Weighted
                  average shares outstanding for basic EPS
              
              
              9,715,954
              
              
              9,645,039
 
 Common
        stock equivalents, consisting of the New Warrants for 805,230 and the 985,000
        stock options issued to the President and Chief Executive Officer and management
        are dilutive; however, the effect of these dilutive securities have not been
        included in weighted average shares for diluted EPS because they are
        anti-dilutive due to the net loss.
 
 The
        vested portion of the Restricted Stock is included in the weighted-average
        shares outstanding for basic earnings per share. Non-vested shares that vest
        based solely on continued employment and are not subject to any performance
        contingency are included in the computation of diluted EPS using the treasury
        stock method; however, the effect of these dilutive securities have not been
        included in weighted average shares for diluted EPS because they are
        anti-dilutive due to the net loss.
 
 **13.**
              **Stock-Based
                  Compensation (Dollars i****n
                  Thousands, Except Per Share
                  Amounts)**
 
 In
        accordance with SFAS 123R, compensation expense for stock option grants
        recognized in the period ended March 31, 2006 equals $67.
 
 The
        following table sets forth the pro forma amounts of net income and earnings
        per
        share for the three months ended March 31, 2005. The Company's net income
        and
        net income per common share would have been reduced to the pro forma amounts
        indicated below if compensation cost for the Company's stock option plan
        had
        been determined based on the fair value at the grant date for awards in
        accordance with the provisions of SFAS No. 123.
  19
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**
 
 3
                  Months Ended March 31, 2005Net
                  (loss):As
                  reported
              
              $
              (1,128
              )Pro
                  forma
              
              $
              (1,195
              )Basic
                  (loss) earnings per share:As
                  reported
              
              $
              (0.12
              )Pro
                  forma
              
              $
              (0.12
              )Diluted
                  (loss) earnings per share:As
                  reported
              
              $
              (0.12
              )Pro
                  forma
              
              $
              (0.12
              )
 
 The
        fair
        values of the options granted during 2005 were estimated on the date of grant
        using the binomial option pricing model. There were no options granted during
        2006. The assumptions used and the estimated fair values are as
        follows:
 
 2005Expected
                  term
              
              
              10
                  yearsExpected
                  stock volatility
              
              
              14.88
              %Risk-free
                  interest rate
              
              
              4.17
              %Fair
                  value
              
              $
              1.09
 
 The
        Company has granted non-qualified stock options to its Chief Executive Officer
        for the purchase of 500,000 shares of its common stock under an employment
        agreement. The Company originally granted non-qualified stock options to
        its
        management for the purchase of 495,000 shares of its common stock. Options
        were
        granted at, or above, the fair market value at date of grant and one-third
        vests
        on each of the first, second and third anniversaries of the employment
        agreement, subject to acceleration in certain events. These options for the
        Chief Executive Officer and those granted to management expire five years
        and
        ten years, respectively, from the date of grant.
 
 The
        Company's outstanding options were:
 
 Shares
                  Under
              
              Weighted
                  AverageOption
              
              Exercise
                  PriceOutstanding,
                  January 1, 2005
              
              
              985,000
              
              $
              2.65Granted
              
              
              0Exercised
              
              
              0Forfeited
              
              
              0Outstanding,
                  March 31, 2006
              
              
              985,000
              
              $
              2.65
 
 Exercisable
        options as of March 31, 2006 were 325,011.
 
 **14.**
              **Business
                  Segment Information and Geographic Area
                  Information**
 
 The
        Company primarily manufactures and sells cellulosic food casings. The Company’s
        operations are primarily in North America, South America and Europe.
        Intercompany sales and charges (including royalties) have been reflected
        as
        appropriate in the following information. Certain items are maintained at
        the
        Company’s corporate headquarters and are not allocated geographically. They
        include most of the Company’s debt and related interest expense and income tax
        benefits. Other expense for the quarter ended March 31, 2006 and March 31,
        2005
        includes net foreign exchange transaction gains (losses) of approximately
        $396
        and $1,014, respectively.
  20
 *Table
            of Contents*
  **VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**
  Geographic
        Area Information
 3
                  Months Ended March 31, 2006
              
              3
                  Months Ended March 31, 2005Net
                  sales:United
                  States
              
              $
              30,986
              
              $
              31,434South
                  America
              
              
              3,147
              
              
              2,038Europe
              
              
              21,320
              
              
              20,695Other
                  and eliminations
              
              
              (4,983
              )
              
              (4,643
              )$
              50,470
              
              $
              49,524Operating
                  income (loss):United
                  States
              
              $
              1,428
              
              $
              1,978Canada
              
              
              (143
              )
              
              (164
              )South
                  America
              
              
              372
              
              
              (108
              )Europe
              
              
              (270
              )
              
              (226
              )Other$
              1,387
              
              $
              1,480Identifiable
                  assets:United
                  States
              
              $
              119,429
              
              $
              118,623Canada
              
              
              15
              
              
              2,416South
                  America
              
              
              8,859
              
              
              7,471Europe
              
              
              69,841
              
              
              80,743$
              198,144
              
              $
              209,253United
                  States export sales:(reported
                  in United States net sales above)Asia
              
              $
              4,398
              
              $
              4,599South
                  and Central America
              
              
              1,383
              
              
              1,294Canada
              
              
              2,022
              
              
              1,845Other
                  international
              
              
              820
              
              
              1,396$
              8,623
              
              $
              9,134
  21
 *Table
            of Contents*
  ITEM
        2.  MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
 Results
        of Operations
 
 Company
        Overview
 
 We
        are a
        worldwide leader in the manufacture and sale of cellulosic, fibrous and plastic
        casings for the processed meat industry. We currently operate eight manufacturing
        facilities and eight distribution centers throughout North America, Europe
        and
        South America and we derive approximately 66% of total net sales from customers
        located outside the United States. We believe we are one of the two largest
        manufacturers of non-edible cellulose casings for small-diameter processed
        meats
        and one of the three largest manufacturers of non-edible fibrous casings.
        During
        2006, we re-entered the market for the manufacture and sale of heat-shrinkable
        plastic bags for the meat, poultry and cheese industry. Our management believes
        that the factors most critical to the success of our business are:
 
 ·
              maintainingand
                  building upon our reputation for providing a high level of customer
                  and
                  technical services;
 ·
              maintainingand building upon our long-standing customer relationships, many
                  of which
                  have continued for decades;
 ·
              developingadditional sources of revenue through new products and
                  services;
 ·
              penetrating
                  new regional markets; and
 ·
              continuingto
                  streamline our cost structure.
 
 Our
        net
        sales are driven by consumer demand for meat products and the level of demand
        for casings by processed meat manufacturers, as well as the average selling
        prices of our casings. Specifically, demand for our casings is dependent
        on
        population growth, overall consumption of processed meats and the types of
        meat
        products purchased by consumers. Average selling prices are dependent on
        overall
        supply and demand for casings and our product mix.
 
 Our
        cellulose and fibrous casing extrusion operations are capital-intensive and
        are
        characterized by high fixed costs. Our plastic casing extrusion and finishing
        operations are characterized by relatively high labor costs. The industry’s
        operating results have historically been sensitive to the global balance
        of
        capacity and demand. The industry’s extrusion facilities produce casings under a
        timed chemical process and operate continuously. We believe that the industry's
        current output is in the process of balancing with global demand and the
        recent
        downward trend in casing prices has stabilized during the past few
        years.
 
 Our
        contribution margin varies with changes in selling price, input material
        costs,
        labor costs and manufacturing efficiencies. The total contribution margin
        increases as demand for our casings increases. Our financial results benefit
        from increased volume because we do not have to increase our fixed cost
        structure in proportion to increases in demand. For certain products, we
        operate
        at near capacity in our existing facilities. We regularly evaluate our capacity
        and projected market demand. During 2005, the company announced that we were
        restarting extrusion capacity at our Thâon-les-Vosges, France facility. The
        Company made the decision to selectively increase our extrusion capacity
        through
        a restart of Thâon-les-Vosges, France extrusion capacity to meet the worldwide
        demand for small-diameter casing. This capacity came on-line during the fourth
        quarter of 2005.
 
 We
        operate in a competitive environment. During the mid-1990's, we experienced
        significant pricing pressure and volume loss with the entrance of a foreign
        competitor into the United States market. The market for cellulosic casings
        experienced declines in selling price over the last ten years; we believe
        selling price has stabilized over the past few years and in 2006 industry
        prices
        have begun to increase. Our overall market volume has expanded during this
        period; however, our financial performance generally moves in direct relation
        to
        our average selling price.
 
 We
        have
        continued to reduce our fixed cost structure in response to market and economic
        conditions. Since 1998, we have reduced annual fixed costs by approximately
        $40.0 million by:
 
 ·
              closing
                  our Chicago, Illinois plant and selling the
                  facility;
  22
 *Table
            of Contents*
 
 ·
              reconfiguring
                  our Loudon, Tennessee, Thâon-les-Vosges, France and Beauvais, France
                  plants;
 ·
              discontinuing
                  our Nucel® operations;
 ·
              closing
                  our Lindsay, Ontario, Canada facility;
                  and
 ·
              reducing
                  the number of employees by approximately
                  30%.
 
 Comparison
        of Results of Operations for Fiscal Quarters Ended March 31, 2006 and
        2005 .
 
 The
        following discussion compares the results of operations for the fiscal quarter
        ended March 31, 2006 to the results of operations for the fiscal quarter
        ended
        March 31, 2005. We have provided the table below in order to facilitate an
        understanding of this discussion. The table (dollars in millions) is as
        follows:
 
 Quarter
                  Ended March 31, 2006
              
              Quarter
                  Ended March 31, 2005
              
              %
                  Change Over 2005NET
                  SALES
              
              $
              50.5
              
              $
              49.5
              
              
              1.9
              %COST
                  AND EXPENSESCost
                  of sales
              
              
              41.0
              
              
              40.0
              
              
              2.4
              %Selling,
                  general and administrative
              
              
              7.7
              
              
              7.4
              
              
              4.1
              %Amortization
                  of intangibles
              
              
              .1
              
              
              .3
              
              
              -129.9
              %Restructuring
                  expense
              
              
              .3
              
              
              .4
              
              
              -29.9
              %OPERATING
                  INCOME
              
              
              1.4
              
              
              1.5
              
              
              -6.7
              %Interest
                  income
              
              
              (.1
              )
              
              (.2
              )
              
              -145.7
              %Interest
                  expense
              
              
              3.3
              
              
              3.1
              
              
              7.6
              %Other
                  (income) expense, net
              
              
              (.4
              )
              
              (1.3
              )
              
              -197.6
              %Income
                  tax (benefit)
              
              
              (.1
              )
              
              1.0
              
              
              NMNET
                  (LOSS)
              
              $
              (1.3
              )
              $
              (1.1
              )
              
              14.7
              %
 
 Quarter
        Ended March 31, 2006 Versus Quarter Ended March 31, 2005
 
 Net
        Sales. Our net sales for the first quarter 2006 were $50.5 million, which
        represents an increase of $1.0 million or 1.9% from the comparable prior
        quarter. Net sales benefited $2.5 million due to volume offset by a $1.5
        million decrease in foreign currency translation. Our net sales have been
        affected by our transition to our Monterrey, Mexico finishing facility; sales
        volume would have been higher if the machine movements were not taking place.
        In
        the long run the company will benefit by the transition of finishing to Mexico.
 
 Cost
        of
        Sales. Cost of sales for first quarter 2006 increased 2.4% from the prior
        year
        due to increased sales level for the same period, and increased as a percent
        of
        net sales (from 80.8% in 2005 to 81.2% in 2006). The increase as a percent
        of
        sales can be attributed to an increase in energy, raw material, labor costs,
        costs associated with the start-up of the Monterrey, Mexico finishing facility
        offset by operating efficiencies and a $2.0 million reduction from the
        elimination of certain postretirement medical benefits. Costs associated
        with
        the start-up of the Monterrey, Mexico finishing facility were approximately
        $0.4
        million during the first quarter of 2006. Cost of sales for the first quarter
        of
        2006 includes higher than normal costs in the Monterrey facility, these costs
        were not classified as start-up costs quantified above.
 
 Selling,
        General and Administrative Expenses. Selling, general and administrative
        expenses increased from $7.4 million
        in 2005 to $7.7 million in 2006. This can be attributed to start up expense
        of
        our Monterrey, Mexico facility of $.9 million offset by reductions from our
        continuous cost saving programs.
  23
 *Table
            of Contents*
 
 Restructuring
        Expenses. Restructuring expenses of $0.3 million in first quarter of 2006
        and
        $0.4 million in the prior year quarter result from approved plans to reduce
        headcount to address the Company’s competitive environment.
 
 Operating
        Income. The operating income for 2006 was $1.4 million, representing a decrease
        of $.1 million from the prior year. The decrease in the operating income
        resulted primarily from increased restructuring expenses and lower gross
        margin,
        which were partially offset by improvements in selling, general and
        administrative expenses.
 
 Interest
        Expense. Interest expense, net of interest income, for 2006 was $3.2 million,
        representing an increase of $0.3 million. The increase is primarily from
        a $0.1
        million decrease in interest income and a $0.1 million reduction in interest
        capitalized and charged to our capital projects.
 
 Other
        (Income) Expense. Other income of approximately $ 0.4
        million for 2006 consists principally of a $0.4
        million net gain related to foreign currency translation. Other income for
        2005
        of $1.3 million consists principally of a $1.0 million net gain related to
        foreign currency translation.
 
 Income
        Tax (Benefit). An income tax benefit of $0.1 million was recognized on the
        loss
        before income taxes of $1.4 million for the first quarter of 2006.
 
 Primarily
        as a result of the factors discussed above, net loss was $1.3 million for
        the
        first quarter of 2006 compared to net loss of $1.1 million for comparable
        prior
        year period.
 
 Effect
        of Changes in Exchange Rates
 
 In
        general, our results of operations are affected by changes in foreign exchange
        rates. Subject to market conditions, we price our products in our foreign
        operations in local currencies, with the exception of the Brazilian export
        market and the U.S. export markets, which are priced in U.S. dollars. As
        a
        result, a decline in the value of the U.S. dollar relative to the local
        currencies of profitable foreign subsidiaries can have a favorable effect
        on our
        profitability, and an increase in the value of the U.S. dollar relative to
        the
        local currencies of profitable foreign subsidiaries can have a negative effect
        on our profitability. Exchange rate fluctuations increased comprehensive
        income
        by $.5 million in 2006 and decreased comprehensive income by $1.3 million
        for
        the comparable period in 2005.
 
 Liquidity
        and Capital Resources
 
 Cash
        and
        cash equivalents decreased by $6.4 million during the first three months
        of
        2006. Cash flows used in operating activities were $2.9 million and used
        in
        investi ng
        activities were $3.6 million. Cash flows used in financing activities were
        not
        significant. Cash flows used in operating
        activities were principally attributable to net loss, increase in working
        capital, decrease in deferred taxes and postretirement curtailment gain offset
        by depreciation and amortization, non-cash interest and foreign translation
        losses. Cash flows used in investing activities were principally attributable
        to
        capital expenditures offset by proceeds from the disposition of assets and
        the
        release of restricted cash. Cash flows used in financing activities principally
        consisted of the repayment of debt.
 
 As
        of
        March 31, 2006 the
        Company had positive working capital of approximately $40.4 million including
        restricted cash of $3.3
        million, with
        additional amounts available under its revolving credit facility.
 
 On
        June
        29, 2004, the Company issued $90.0 million of 11.5% Senior Secured Notes
        due
        2011 and 90,000 warrants to purchase an aggregate of 805,230 shares of common
        stock of the Company. The 11.5% Senior Secured Notes have a maturity date
        of,
        and the New Warrants expire on, June 15, 2011. Interest on the 11.5% Senior
        Secured Notes is payable semi-annually in cash on June 15 and December 15
        of
        each year. Also on June 29, 2004, the Company entered into a Loan and Security
        Agreement (“Loan and Security Agreement”) and related documentation with respect
        to the R evolving
        Credit Facility that provides for loans of up to $20.0 million.
 
 The
        11.5%
        Senior Secured Notes will be guaranteed on a senior secured basis by all
        of our
        future domestic restricted subsidiaries that are not immaterial subsidiaries
        (as
        defined). The 11.5% Senior Secured Notes and the related guarantees (if any)
        are
        secured by substantially all of the tangible and intangible assets of the
        Company and guarantor subsidiaries (if any); and includes the pledge of the
        capital stock directly owned by the Company or the guarantors; provided that
        no
        such pledge will include more than 65% of any foreign subsidiary directly
        owned
        by the Company or the guarantor. The Indenture and the security documents
        related thereto provide that, to the extent that any rule is adopted, amended
        or
        interpreted that would require the filing with the SEC (or any other
        governmental agency) of separate financial statements for any of our
        subsidiaries due to the fact that such subsidiary’s capital stock secures the
        Notes, then such capital stock will automatically be deemed not to be part
        of
        the collateral securing the Notes to the extent necessary to not be subject
        to
        such requirement. In such event, the security documents may be amended, without
        the consent of any holder of Notes, to the extent necessary to release the
        liens
        on such capital stock.
  24
 *Table
            of Contents*
  With
        limited exceptions, the 11.5% Senior Secured Notes require that the Company
        maintain a minimum annual level of EBITDA calculated at the end of each fiscal
        quarter as follows:
 
 **Fiscal
                  quarter ending**
              
              **Amount**September
                  30, 2004 through September 30, 2006
              
              $
              16.0
                  millionDecember
                  31, 2006 through September 30, 2008
              
              $
              18.0
                  millionDecember
                  31, 2008 and thereafter
              
              $
              20.0
                  million
 
 unless
        the sum of (i) unrestricted cash of the Company and its restricted subsidiaries
        as of such day and (ii) the aggregate amount of advances that the Company
        is
        actually able to borrow under the Revolving Credit Facility on such day (after
        giving effect to any borrowings thereunder on such day) is at least $15.0
        million. The minimum annual level of EBITDA covenant is not in effect as
        of
        March 31, 2006 as the Company’s unrestricted cash and the amount of available
        credit under the Revolving Credit Facility exceed $15.0 million.
 
 The
        11.5%
        Senior Secured Notes limit the ability of the Company to (i) incur additional
        indebtedness; (ii) pay dividends, redeem subordinated debt, or make other
        restricted payments, (iii) make certain investments or acquisitions; (iv)
        issue
        stock of subsidiaries; (v) grant or permit to exist certain liens; (vi) enter
        into certain transactions with affiliates; (vii) merge, consolidate, or transfer
        substantially all of our assets; (viii) incur dividend or other payment
        restrictions affecting certain subsidiaries; (ix) transfer, sell or acquire
        assets, including capital stock of subsidiaries; and (x) change the nature
        of
        our business.
 
 At
        any
        time prior to June 15, 2008, the Company may redeem, at its option, some
        or all
        of the 11.5% Senior Secured Notes at a make-whole redemption price equal
        to the
        greater of (i) 100% of the aggregate principal amount of the 11.5% Senior
        Secured Notes being redeemed and (ii) the sum of the present values of 105
        3/4%
        of the aggregate principal amount of such 11.5% Senior Secured Notes and
        scheduled payments of interest on such 11.5% Senior Secured Notes to and
        including June 15, 2008, discounted to the date of redemption on a semi-annual
        basis (assuming a 360-day year consisting of twelve 30-day months) at the
        Treasury Rate plus 50 basis points, together with, in each case, accrued
        and
        unpaid interest and additional interest, if any, to the date of redemption.
        The
        make-whole redemption price as of March 31, 2006 is approximately
        118%.
 
 On
        or
        after June 15, 2008, the Company may redeem, at its option, some or all of
        the
        11.5% Senior Secured Notes at the following redemption prices, plus accrued
        and
        unpaid interest to the date of redemption:
 
 **For
                  the periods below**
              
              **Percentage**On
                  or after June 15, 2008
              
              
              105
                  3/4
              %On
                  or after June 15, 2009
              
              
              102
                  7/8
              %On
                  or after June 15, 2010
              
              
              100
              %
 
 Prior
        to
        June 15, 2007, the Company may redeem, at its option, up to 35% of the aggregate
        principal amount of the 11.5% Senior Secured Notes with the net proceeds
        of any
        equity offering at 111 1/2% of their principal amount, plus accrued and unpaid
        interest to the date of redemption, provided that at least 65% of the aggregate
        principal amount of the 11.5% Senior Secured Notes remains outstanding
        immediately following the redemption.
 
 Within
        90
        days after the end of each fiscal year ending in 2006 and thereafter, for
        which
        the Company’s Excess Cash Flow (as defined) was greater than or equal to $2.0
        million, the Company must offer to purchase a portion of the 11.5% Senior
        Secured Notes at 101% of principal amount, together with accrued and unpaid
        interest to the date of purchase, with 50% of our Excess Cash Flow from such
        fiscal year (“Excess Cash Flow Offer Amount”); except that no such offer shall
        be required if the Revolving Credit Facility prohibits such offer from being
        made because, among other things, a default or an event of default is then
        outstanding thereunder. The Excess Cash Flow Offer Amount shall be reduced
        by
        the aggregate principal amount of 11.5% Senior Secured Notes purchased in
        eligible open market purchases as provided in the indenture.
  25
 *Table
            of Contents*
 
 If
        the
        Company undergoes a change of control (as defined), the holders of the 11.5%
        Senior Secured Notes will have the right to require the Company to repurchase
        their 11.5% Senior Secured Notes at 101% of their principal amount, plus
        accrued
        and unpaid interest to the date of purchase.
 
 If
        the
        Company engages in asset sales, it must either invest the net cash proceeds
        from
        such sales in its business within a certain period of time (subject to certain
        exceptions), prepay indebtedness under the Revolving Credit Facility (unless
        the
        assets that are the subject of such sales are comprised of real property,
        fixtures or improvements thereon or equipment) or make an offer to purchase
        a
        principal amount of the 11.5% Senior Secured Notes equal to the excess net
        cash
        proceeds. The purchase price of each 11.5% Senior Secured Note so purchased
        will
        be 100% of its principal amount, plus accrued and unpaid interest to the
        date of
        purchase.
 
 The
        Revolving Credit Facility contains various covenants which will restrict
        the
        Company’s ability to, among other things, incur indebtedness, enter into mergers
        or consolidation transactions, dispose of assets (other than in the ordinary
        course of business), acquire assets, make certain restricted payments, prepay
        any of the 8% Subordinated Notes at a purchase price in excess of 90% of
        the
        aggregate principal amount thereof (together with accrued and unpaid interest
        to
        the date of such prepayment), create liens on our assets, make investments,
        create guarantee obligations and enter into sale and leaseback transactions
        and
        transactions with affiliates, in each case subject to permitted exceptions.
        The
        Revolving Credit Facility also requires that we comply with various financial
        covenants, including meeting a minimum EBITDA requirement and limitations
        on
        capital expenditures in the event our usage of the Revolving Credit Facility
        exceeds 30% of the facility amount. The Revolving Credit Facility also requires
        payment of a prepayment premium in the event that it is terminated prior
        to
        maturity. The prepayment premium, as a percentage of the $20.0 million facility
        amount, is 2% through June 29, 2006, and 1% through June 29, 2007.
 
 Borrowings
        under the Loan and Security Agreement governing the Revolving Credit Facility
        are subject to a formula based on percentages of eligible domestic receivables
        and eligible domestic inventory. Under the Revolving Credit Facility, we
        will be
        able to choose between two per annum interest rate options: (i) the lender’s
        prime rate and (ii) LIBOR plus a margin currently of 2.25% (which margin
        will be
        subject to performance based increases up to 2.50% and decreases down to
        2.00%);
        provided that the minimum interest rate shall be at least equal to 3.00%.
        Letter
        of credit fees will be charged a per annum rate equal to the then applicable
        LIBOR rate margin less 50 basis points. The Revolving Credit Facility also
        provides for an unused line fee of 0.375% per annum. There
        were no borrowings under the Revolving Credit Facility in 2005 and through
        March
        31, 2006.
 
 Indebtedness
        under the Revolving Credit Facility is secured by liens on substantially
        all of
        the Company’s and the Company’s domestic subsidiaries’ assets, with liens (i) on
        inventory, accounts receivable, lockboxes, deposit accounts into which payments
        are deposited and proceeds thereof, which will be contractually senior to
        the
        liens securing the 11.5% Senior Secured Notes and the related guarantees
        pursuant to an intercreditor agreement, (ii) on real property, fixtures and
        improvements thereon, equipment and proceeds thereof, which will be
        contractually subordinate to the liens securing the 11.5% Senior Secured
        Notes
        and such guarantees pursuant to such intercreditor agreement, (iii) on all
        other
        assets, which will be contractually *pari
        passu* with the
        liens securing the 11.5% Senior Secured Notes and such guarantees pursuant
        to
        such intercreditor agreement.
 
 On
        March
        28, 2006, the Company entered into the First Amendment to Loan and Security
        Agreement (“First Amendment”) with respect to the Revolving Credit Facility.
        Pursuant to the First Amendment, the Loan and Security Agreement was amended
        in
        certain respects in order to facilitate the continued relocation of certain
        of
        the Company’s finishing operations from its facility in Kentland, Indiana to a
        new facility in Monterrey, Mexico operated by Viskase del Norte, S.A. de
        C.V.
        (“Mexico Project”). Pursuant to the First Amendment, the lender also waived
        certain technical events of default and provided certain consents, each relating
        to the Mexico Project.
 
 The
        8%
        Subordinated Notes bear interest at a rate of 8% per year, and accrue interest
        from December 1, 2001, payable semi-annually (except annually with respect
        2005
        and quarterly with respect to 2006), with interest payable in the form of
        8%
        Subordinated Notes (paid-in-kind) through at least 2004. Interest for 2005
        and
        2006 will be payable in cash to the extent of available cash flow, as defined,
        and the balance in the form of 8% Subordinated Notes (paid-in-kind). For
        the
        year ended December 31, 2005 and the quarter ended March 31, 2006, interest
        on
        the 8% Subordinated Notes was or will be paid entirely in the form of 8%
        Subordinated Notes (paid-in-kind). We expect to pay all or a majority of
        interest payable in 2006 in the form of an 8% Subordinated Notes (paid-in-kind). Thereafter,
        interest will be payable in cash. The 8% Subordinated Notes mature on December
        1, 2008.
  26
 *Table
            of Contents*
 
 On
        June
        29, 2004, the holders contractually subordinated the Company’s obligations under
        the 8% Subordinated Notes to obligations under certain indebtedness, including
        the 11.5% Senior Secured Notes and the Revolving Credit Facility. The carrying
        amount of the 8% Subordinated Notes outstanding at March 31, 2006 is $14,547.
 
 The
        8%
        Subordinated Notes were valued at market in fresh-start accounting. The discount
        to face value is being amortized using the effective-interest rate methodology
        through maturity with an effective interest rate of 10.46%. The
        following table summarizes the carrying value (in thousands) of the 8%
        Subordinated Notes at December 31 assuming interest through 2006 is paid
        in the
        form of 8% Subordinated Notes (paid-in-kind):
 
 2006
              
              20078%
                  Subordinated NotesPrincipal
              
              $
              18,684
              
              $
              18,684Discount
              
              
              (2,283
              )
              
              (1,148
              )Carrying
                  value
              
              $
              16,401
              
              $
              17,536
 
 Letters
        of credit in the amount of $2.4 million were outstanding under letter of
        credit
        facilities with commercial banks, and were cash collateralized at March 31,
        2006.
 
 We
        finance our working capital needs through a combination of internally generated
        cash from operations, cash on hand and our Revolving Credit Facility.
 
 Our
        board
        of directors has approved a plan under which we will restructure our finishing
        operations by relocating finishing operations from our facility in Kentland,
        Indiana to a facility in Mexico. We expect to complete the restructuring
        by the
        end of 2006. The relocation of the finishing operations is intended to lower
        costs and optimize operations. The total cost of the restructuring, exclusive
        of
        capital expenditures, is expected to be approximately $10.0 million,
        substantially all of which will result in cash expenditures. We also expect
        to
        make capital expenditures of approximately $10.0 million in connection with
        the
        restructuring. As of March 31 2005, we have made capital expenditures of
        approximately $8.3 million. We began to incur these costs and capital
        expenditures in the second quarter of 2005 and expect to continue to incur
        them
        through the end of 2006. We believe that the restructuring will yield annual
        operating cost reductions of between $7.0 million and $8.0 million when the
        Mexico relocation is complete.
 
 Capital
        expenditures for the first three months of 2006 and the first three months
        for
        2005 totaled $3.6 million and $2.8 million, respectively. The 2006 capital
        expenditures are principally related to the relocation of finishing operations
        to Mexico.
 
 In
        2005,
        we spent approximately $2.3 million on research and development programs,
        including product and process development, and on new technology development.
        The 2006 research and development and product introduction expenses are expected
        to be approximately $2.8 million. Among the projects included in the current
        research and development efforts are specialty plastic films, Smoke MasterTM
small diameter and fibrous casings, VISMOKETM casings, VISCOATTM casings and the
        application of certain patents and technology for license by
        Viskase.
 
 Pension
        and Postretirement Benefits
 
 Our
        long-term pension and postretirement benefit liabilities totaled $57.6 million
        at March 31, 2006.
 
 Expected
        annual cash contributions for pension and postretirement benefit liabilities
        are
        expected to be (in
        millions):
 
 2006
              
              2007
              
              2008
              
              2009
              
              2010Pension
              
              $
              12.6
              
              $
              9.0
              
              $
              7.6
              
              $
              7.6
              
              $
              7.6Postretirement
                  benefits
              
              
              0.9
              
              
              0.8
              
              
              0.7
              
              
              0.7
              
              
              0.7Total
              
              $
              13.5
              
              $
              9.8
              
              $
              8.3
              
              $
              8.3
              
              $
              8.3
  27
 *Table
            of Contents*
 
 Other
 
 As
        of
        March 31, 2006, the aggregate maturities of debt (1) for each
        of the next five years are (in thousands):
 
 2006
              
              2007
              
              2008
              
              2009
              
              2010
              
              Thereafter11.5%
                  Senior Secured Notes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              90,0008%
                  Subordinated Notes
              
              
              
              
              
              
              
              $
              18,684Other
              
              $
              146
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              971$
              146
              
              
              
              
              $
              18,684
              
              
              
              
              
              
              
              $
              90,971
 
 (1)
              The
                  aggregate maturities of debt represent amounts to be paid at maturity
                  and
                  not the current carrying value.
 
 Critical
        Accounting Policies
 
 The
        preparation of financial statements includes the use of estimates and
        assumptions that affect a number of amounts included in the Company’s financial
        statements, including, among other things, pensions and other postretirement
        benefits and related disclosures, inventories valued under the last-in,
        first-out method, reserves for excess and obsolete inventory, allowance for
        doubtful accounts, restructuring charges and income taxes. Management bases
        its
        estimates on historical experience and other assumptions that it believes
        are
        reasonable. If actual amounts are ultimately different from previous estimates,
        the revisions are included in the Company’s results for the period in which the
        actual amounts become known. Historically, the aggregate differences, if
        any,
        between the Company’s estimates and actual amounts in any year have not had a
        significant effect on the Company’s consolidated financial
        statements.
 
 Revenue
        Recognition
 
 The
        Company’s revenues are recognized at the time products are shipped to the
        customer, under F.O.B. Shipping Point terms or under F.O.B. Port terms. Revenues
        are net of any discounts, rebates and allowances. The Company records all
        labor,
        raw materials, in-bound freight, plant receiving and purchasing, warehousing,
        handling and distribution costs as a component of cost of goods
        sold.
 
 Allowance
        for Doubtful Accounts Receivable
  Accounts
        receivable have been reduced by an allowance for amounts that may become
        uncollectible in the future. This estimated allowance is primarily based
        upon
        our evaluation of the financial condition of each customer, each customer’s
        ability to pay and historical write-offs.
 
 Allowance
        for Obsolete and Slow Moving Inventories
 
 Inventories
        are valued at the lower of cost or market. The inventories have been reduced
        by
        an allowance for slow moving and obsolete inventories. The estimated allowance
        is based upon management’s estimate of specifically identified items, the age of
        the inventory and historical write-offs of obsolete and excess inventories.
 
 Deferred
        Income Taxes
 
 Deferred
        tax assets and liabilities are measured using enacted tax laws and tax rates
        expected to apply to taxable income in the years in which those temporary
        differences are expected to be recovered or settled. The effect on deferred
        tax
        assets and liabilities due to a change in tax rates is recognized in income
        in
        the period that includes the enactment date. In addition, the amounts of
        any
        future tax benefits are reduced by a valuation allowance to the extent such
        benefits are not expected to be realized on a more likely than not basis.
 
 Pension
        Plans and Other Postretirement Benefit Plans
 
 Our
        North
        American operations have defined benefit retirement plans that cover
        substantially all salaried and full-time hourly employees who were hired
        prior
        to April 1, 2003 and a fixed defined contribution plan and a discretionary
        profit sharing plan that covers substantially all salaried and full-time
        hourly
        employees who were hired on or after April 1, 2003. Our operations in Germany
        have a defined benefit retirement plan that covers substantially all salaried
        and full-time hourly employees. Pension cost is computed using the projected
        unit credit method. The discount rate used approximates the average yield
        for
        high quality corporate bonds as of the valuation date. Our funding policy
        is
        consistent with funding requirements of the applicable federal and foreign
        laws
        and regulations.
  28
 *Table
            of Contents*
 
 United
        States employees hired after March 31, 2003 who are not covered by a collective
        bargaining agreement and United States employees hired after September 30,
        2004
        who are covered by a collective bargaining agreement are eligible for a defined
        contribution benefit equal to three percent of base earnings (as defined
        by the
        plan), in lieu of the defined benefit retirement plans.
 
 The
        Company recognized a one-time $.974
        million curtailment gain recorded in the consolidated statements of operations
        and reduction in the unfunded pension liability included in Accrued employee
        benefits on the consolidated balance sheets related to the announced closing
        of
        its Kentland, Indiana finishing operations. This curtailment gain was recognized
        as of December 31, 2005.
 
 The
        United States and Canadian operations of the Company historically provided
        postretirement health care and life insurance benefits. The Company accrues
        for
        the accumulated postretirement benefit obligation that represents the actuarial
        present value of the anticipated benefits. Measurement is based on assumptions
        regarding such items as the expected cost of providing future benefits and
        any
        cost sharing provisions. The Company terminated postretirement medical benefits
        as of December 31, 2004 for all active employees and retirees in the United
        States who are not covered by a collective bargaining agreement. The termination
        of the United States postretirement medical benefits resulted in a $34.055
        million curtailment gain and reduction in the unfunded postretirement liability
        included in Accrued employee benefits on the consolidated balance sheets
        in
        2004.
 
 On
        September 30, 2005, employees in the U.S. covered by a collective bargaining
        agreement ratified a new agreement which contained a provision that terminated
        postretirement medical benefits as of December 31, 2006 for all active employees
        and retirees covered by the collective bargaining agreement. The
        termination of the United States postretirement medical benefits for employees
        covered by the collective bargaining agreement resulted in a $0.668 million
        curtailment gain and reduction in the unfunded postretirement medical liability
        included in “Accrued employee benefits” on the consolidated balance sheets in
        2005. In addition, the Company will amortize the remaining unrecognized prior
        service costs and net actuarial loss related to these postretirement medical
        benefits over the 15 month period from October 1, 2005 through December 31,
        2006. Approximately $1.981 million was recorded as a reduction to cost of
        sales
        during the first quarter of 2006 and will recognize a total of $7.929 million
        during 2006.
 
 The
        weighted average plan asset allocation at December 31, 2005 and 2004, and
        target
        allocation (not weighted) for 2006, are as follows:
  Percentage
                  of Plan Assets
              
              2006
                  TargetAsset
                  Category
              
              2005
              
              2004
              
              AllocationEquity
                  Securities
              
              
              77.2
              %
              
              62.5
              %
              
              60.0
              %Debt
                  Securities
              
              
              21.2
              %
              
              35.2
              %
              
              40.0
              %Other
              
              
              1.6
              %
              
              2.3
              %
              
              0.0
              %Total
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
 
 As
        of
        January 1, 2006, we have assumed that the expected long-term rate of return
        on
        plan assets will be 8.5 %.
        This is
        unchanged from the level
        assumed for 2005 and represents
        a decrease from the 8.75 %
        level
        assumed for 2004. To develop the expected long-term rate of return on assets
        and
        assumptions, we considered historical returns and future expectations.
 
 Property,
        Plant and Equipment
 
 The
        Company carries property, plant and equipment at cost less accumulated
        depreciation. Property and equipment additions include acquisition of property
        and equipment and costs incurred for computer software purchased for internal
        use including related external direct costs of materials and services and
        payroll costs for employees directly associated with the project. Depreciation
        is computed on the straight-line method over the estimated useful lives of
        the
        assets ranging from (i) building and improvements - 10 to 32 years, (ii)
        machinery and equipment - 4 to 12 years, (iii) furniture and fixtures - 3
        to 12
        years and (iv) auto and trucks - 2 to 5 years. Upon retirement or other
        disposition, cost and related accumulated depreciation are removed from the
        accounts, and any gain or loss is included in results of
        operations.
  29
 *Table
            of Contents*
 
 In
        the
        ordinary course of business, we lease certain equipment, and certain real
        property, consisting of manufacturing and distribution facilities and office
        facilities. Substantially all such leases as of March 31, 2006 were operating
        leases, with the majority of those leases requiring us to pay maintenance,
        insurance and real estate taxes.
 
 Long-Lived
        Assets
 
 The
        Company continues to evaluate the recoverability of long-lived assets including
        property, plant and equipment, patents and other intangible assets. Impairments
        are recognized when the expected undiscounted future operating cash flows
        derived from long-lived assets are less than their carrying value. If impairment
        is identified, valuation techniques deemed appropriate under the particular
        circumstances will be used to determine the asset’s fair value. The loss will be
        measured based on the excess of carrying value over the determined fair value.
        The review for impairment is performed at least once a year or when
        circumstances warrant.
 
 Off-Balance
        Sheet Arrangements
 
 We
        do not
        have off-balance sheet arrangements, financing or other relations with
        unconsolidated entities or other persons.
 
 Contingencies
 
 In
        1993,
        the Illinois Department of Revenue (“IDR”) filed a proof of claim against
        Envirodyne Industries, Inc. (now known as Viskase Companies, Inc.) and its
        subsidiaries in the United States Bankruptcy Court for the Northern District
        of
        Illinois ("Bankruptcy Court"), Bankruptcy Case Number 93 B 319, for alleged
        liability with respect to the IDR’s denial of the Company’s allegedly incorrect
        utilization of certain loss carry-forwards of certain of its subsidiaries. 
The IDR asserted it was owed, as of the petition date, $0.998 million in
        taxes,
        $0.356 million in interest and $.270 million penalties.  The Company
        objected to the claim on various grounds.  In September 2001, the
        Bankruptcy Court denied the IDR’s claim and determined the debtors were not
        responsible for 1998 and 1999 tax liabilities, interest and penalties. IDR
        appealed the Bankruptcy Court’s decision to the United States District Court,
        Northern District of Illinois, Case Number 01 C 7861, and in February 2002,
        the District Court affirmed the Bankruptcy Court’s
        order denying the IDR claim.   IDR appealed
        the District Court’s order to United States Court of Appeals for the
        Seventh Circuit, Case Number 02-1632. On January 6, 2004, the appeals court
        reversed the judgment of the District Court and remanded the case for
        further proceedings on the Company’s other objections to the claim. On
        November 16, 2005, the Bankruptcy Court issued an opinion in which
        it denied the IDR’s claim to the extent it seeks principal tax
        liability and found that no principal tax liability remains
        due.   However, because of certain timing issues with respect to
        the carryback of subsequent net operating loss used to eliminate the
        principal tax liabilities in 1988 and 1989, the issue of the amount of
        interest and  penalties (for approximately 14 years), if any, has not
        been determined by the Bankruptcy Court.  The IDR has asserted
        that as of February 2006, approximately $0.432 million was owed in interest. The
        Company disputes this amount and intends to vigorously defend its position
        on interest due. The IDR may appeal the Bankruptcy Court order and has asserted
        that if it were successful on appeal, that the Company would have liability
        to
        the IDR as of the beginning of 2005 in the amount of approximately $2.9
        million.
 
 During
        2005, Viskase Brasil Embalagens Ltda. (“Viskase Brazil”) received three tax
        assessments by São Paulo tax authorities with respect to Viskase Brazil’s
        alleged failure to pay Value Added and Sales and Services Tax (“ICMS”) levied on
        the importation of raw materials and sales of goods in and out of the State
        of
        São Paulo. Two of the tax assessments relate to ICMS on the importation by
        Viskase Brazil of raw materials through the State of Espírito Santo (“Import
        Assessments”), and the disputed amount with respect to such assessments
        aggregates R$16.6 million for taxes and R$16.3 million for penalties and
        interest, or about $7.6 million and $7.5 million, respectively at exchange
        rates
        in effect on March 23, 2006. The third tax assessment also relates to ICMS
        and
        alleges that Viskase Brazil arranged for the remittance of goods to addresses
        other than those indicated on the relevant tax documents (“Documentation
        Assessment”). The disputed amount under the Documentation Assessment is R$0.2
        million for taxes and R$1.7 million for penalties and interest, or about
        $0.1
        million and $0.8 million, respectively, at exchange rates in effect on March
        23,
        2006. The attorneys representing Viskase Brazil on these tax disputes have
        advised the Company that the likelihood of liability with respect to the
        tax
        assessments is remote. In view of the magnitude of the assessments, Viskase
        Brazil sought the advice of another law firm with respect to one of the Import
        Assessments and with respect to the Documentation Assessment. The second
        law
        firm expressed its belief (i) that the likelihood of liability on the Import
        Assessment it reviewed either was possible tending to probable or was possible,
        depending on the theory of liability pursued by the tax authorities, and
        (ii)
        that the likelihood of liability on the Documentation Assessment was probable.
        Viskase believes that the two Import Assessments raise essentially the same
        issues and therefore did not seek advice from the second law firm with respect
        to the other Import Assessment. The Company has provided a reserve in the
        amount
        of $2.0 million. Viskase Brazil strongly denies the allegations set forth
        in the
        tax assessments and intends to vigorously defend itself.
  30
 *Table
            of Contents*
 
 Under
        the
        Clean Air Act Amendments of 1990, various industries, including casings
        manufacturers, are or will be required to meet maximum achievable control
        technology (“MACT”) air emissions standards for certain chemicals. MACT
        standards applicable to all U.S. cellulosic casing manufacturers were
        promulgated June 11, 2002. The Company submitted extensive comments to the
        EPA
        during the public comment period. Compliance with these new rules was required
        by June 13, 2005, although the Company has obtained a one-year extension
        for
        both of its facilities. To date, the Company has spent approximately $10.3
        million in capital expenditures for MACT, and expects to spend an additional
        $0.2 million, over the next 6 months, to become compliant with MACT rules
        at our
        two U.S. extrusion facilities.
 
 In
        addition, the Company is involved in various other legal proceedings arising
        out
        of our business and other environmental matters, none of which are expected
        to
        have a material adverse effect upon results of operations, cash flows or
        financial condition.
 
 New
        Accounting Pronouncements
 
 In
        December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
        123 (revised 2004) ("SFAS 123R"), "Share-Based Payment." SFAS 123R sets
        accounting requirements for "share-based" compensation to employees, requires
        companies to recognize in the income statement the grant-date fair value
        of
        stock options and other equity-based compensation issued to employees and
        disallows the use of the intrinsic method of accounting for stock compensation.
        SFAS 123R is applicable for annual, rather than interim, periods beginning
        after
        June 15, 2005, and as such the Company adopted SFAS 123R in January 2006.
        The
        Company expects the effect of adopting this standard using the modified
        prospective methodology will be to expense $0.268 million and $0.245 million
        in
        2006 and 2007, respectively.
 
 In
        May
        2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections."
        SFAS No. 154 replaced Accounting Principles Board Opinion, or APB, No. 20,
        "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
        Financial Statements" and establishes retrospective application as the required
        method for reporting a change in accounting principle. SFAS No. 154 provided
        guidance for determining whether retrospective application of a change in
        accounting principle is impracticable and for reporting a change when
        retrospective application is impracticable. SFAS No. 154 also addresses the
        reporting of a correction of an error by restating previously issued financial
        statements. SFAS No. 154 is effective for accounting changes and corrections
        of
        errors made in fiscal years beginning after December 15, 2005.
 
 In
        November 2004, the FASB issued SFAS No. 151 ("SFAS 151"), "Inventory Costs
        - an
        Amendment of ARB No. 43 Chapter 4." SFAS 151 requires that items such as
        idle
        facility expense, excessive spoilage, double freight, and rehandling be
        recognized as current-period charges rather than being included in inventory
        regardless of whether the costs meet the criterion of abnormal as defined
        in ARB
        43. SFAS 151 is applicable for inventory costs incurred during fiscal years
        beginning after June 15, 2005. The Company adopted this standard beginning
        the
        first quarter of fiscal year 2006. The adoption of this standard did not
        have a
        material effect on our financial statements as such costs have historically
        been
        expensed as incurred.
 
 Forward-looking
        Statements
 
 This
        report includes “forward-looking statements.” Forward-looking statements are
        those that do not relate solely to historical fact. Forward-looking statements in this report are made pursuant to the safe harbor
        provisions of the Private Securities Litigation Reform Act of 1995. These
        statements relate to future events or our future financial performance and
        implicate known and unknown risks, uncertainties and other factors that may
        cause the actual results, performances or levels of activity of our business
        or
        our industry to be materially different from that expressed or implied by
        any
        such forward-looking statements and are not
        guarantees of future performance . **** They
        include, but are not limited to, any statement that may predict, forecast,
        indicate or imply future results, performance, achievements or events. In
        some
        cases, you can identify forward-looking statements by use of words such as
        “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,”
“will,” “would,” “could,” “predict,” “propose,” “potential,” “may” or words or
        phrases of similar meaning. Statements concerning our financial position,
        business strategy and measures to implement that strategy, including changes
        to
        operations, competitive strengths, goals, plans, references to future success
        and other similar matters are forward-looking statements. Forward-looking
        statements may relate to, among other things:
  31
 *Table
            of Contents*
 
 •
              our
                  ability to meet liquidity requirements and to fund necessary capital
                  expenditures;
 
 •
              the
                  strength of demand for our products, prices for our products and
                  changes
                  in overall demand;
 
 •
              assessment
                  of market and industry conditions and changes in the relative market
                  shares of industry participants;
 
 •
              consumption
                  patterns and consumer preferences;
 
 •
              the
                  effects of competition;
 
 •
              our
                  ability to realize operating improvements and anticipated cost
                  savings,
                  including with respect to the planned termination of certain
                  postretirement medical and pension benefits and our finishing operations
                  restructuring;
 
 •
              pending
                  or future legal proceedings and regulatory matters, including but
                  not
                  limited to proceedings, claims or problems related to environmental
                  issues, or the impact of any adverse outcome of any currently pending
                  or
                  future litigation on the adequacy of our reserves or tax liabilities;
 
 •
              general
                  economic conditions and their effect on our
                  business;
 
 •
              changes
                  in the cost or availability of raw materials and changes in other
                  costs;
 
 •
              pricing
                  pressures for our products;
 
 •
              the
                  cost of and compliance with environmental laws and other governmental
                  regulations;
 
 •
              our
                  results of operations for future periods;
 
 •
              our
                  anticipated capital expenditures;
 
 •
              the
                  timing and cost of our finishing operations
                  restructuring;
 
 •
              our
                  ability to pay, and our intentions with respect to the payment
                  of,
                  dividends on shares of our capital stock;
 
 •
              our
                  ability to protect our intellectual property; and
 
 •
              our
                  strategy for the future,
                  includingopportunities that may be presented to and pursued by us.
 
 ITEM
        3.  QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK
 
 The
        Company is exposed to certain market risks related to foreign currency exchange
        rates. In order to manage the risk associated with this exposure to such
        fluctuations, the Company occasionally uses derivative financial instruments.
        The Company does not enter into derivatives for trading purposes.
 
 The
        Company also prepared sensitivity analyses to determine the impact of a
        hypothetical 10% devaluation of the U.S. dollar relative to the European
        receivables and payables denominated in U.S. dollars. Based on its sensitivity
        analyses at March 31, 2006, a 10% devaluation of the U.S. dollar would benefit
        the Company’s consolidated financial position by approximately $0.092 million
        for 2006 and $.049 million for the comparable period 2005. Exchange rate
        fluctuations increased comprehensive income by $.549 million for 2006 and
        decreased $1.338 million for the comparable period 2005.
  32
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 The
        Company purchases gas futures contracts to lock in set rates on gas purchases.
        The Company uses this strategy to minimize its exposure to volatility in
        natural
        gas. These products are not linked to specific assets and liabilities that
        appear on the balance sheet or to a forecasted transaction and, therefore,
        do
        not qualify for hedge accounting. As such, the loss on the change of fair
        value
        of the future contracts open during the first the quarter of 2005 was recorded
        in Other (income) expense, net and was immaterial. There were no open gas
        contracts during the first quarter of 2006.
 
 ITEM
        4.  CONTROLS
        AND PROCEDURES
 
 We
        maintain a system of disclosure controls and procedures designed to provide
        reasonable assurance that information we are required to disclose in the
        reports
        we file or submit under the Securities Exchange Act of 1934, as amended,
        is
        recorded, processed, summarized and reported within the time periods specified
        in Securities and Exchange Commission rules and forms. Our management, with
        the
        participation of our Chief Executive Officer and our Chief Financial Officer,
        evaluated the effectiveness of our disclosure controls and procedures as
        of
        March 31, 2006. Based on that evaluation, the Chief Executive Officer and
        our
        Chief Financial Officer concluded that our disclosure controls and procedures
        were effective at a reasonable assurance level.
 
 We
        identified the following control deficiency which constituted a “significant
        deficiency” (as defined by standards established by the Public Company
        Accounting Oversight Board): during the first quarter of 2006, we discovered
        that certain incorrect journal entries had been made in the Company’s European
        operations in the fourth quarters of 2004 and 2005. During the first quarter
        of
        2006, we implemented additional review and analytical procedures by the
        Company’s European managing director and the Company’s CFO in the United States
        to address the appropriate recording of journal entries and evaluation of
        the
        operating results of the Company’s European operations.
  33
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            of Contents*
  PART
        II.
        OTHER INFORMATION
 
 Item
        1 - LegalProceedings
 
 For
        a
        description of pending litigation and other contingencies, see Part 1, Note
        10,
        Contingencies in Notes to Consolidated Financial Statements for Viskase
        Companies, Inc. and Subsidiaries.
 
 Item
        2 - Unregistered
        Sales of Equity Securities and Use of Proceeds
 
 None.
 
 Item
        3 - Defaults
        Upon Senior Securities
 
 None.
 
 Item
        4 - Submission
        of Matters to a Vote of Security Holders
 
 None.
 
 Item
        5 - Other
        Information
 
 None.
 
 Item
        6 - Exhibits
 
 31.1
              Certification
                  of Principal Executive Officer Pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.
 
 31.2
              Certification
                  of Principal Financial Officer Pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.
 
 32.1
              Certification
                  of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350,
                  as
                  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.
 
 32.2
              Certification
                  of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350,
                  as
                  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.
  34
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            of Contents*
 
 SIGNATURES
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
  VISKASE
                  COMPANIES, INC.RegistrantBy:
              /s/
                  Gordon S. DonovanGordon
                  S. DonovanVice
                  President and Chief Financial Officer(Duly
                  authorized officer and principal financial officer of the
                  registrant)
 
 
 Date:
        May
        15, 2006
  35