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 quarter ended June 30, 2006





**OR**





o
            **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 o





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 filero
            Accelerated
                filero
            Non-accelerated
                filerx





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act). Yes o 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 o





As
      of
      August 10, 2006, there were 9,810,999 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 June 30, 2006 and December 31,
                2005
            3Unaudited
                consolidated statements of operations and
                comprehensive income (loss) for the three months ended June 30, 2006
                and
                June 30, 2005 and for the six months ended June 30, 2006 and June
                30,
                2005
            4Unaudited
                consolidated statements of cash flows for the six
                months ended June 30, 2006 and June 30, 2005
            5Notes
                to consolidated financial
                statements
            6Item
                2.
            Management's
                Discussion and Analysis of Financial Condition
                and Results of Operations
            24Item
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            36Item
                4.
            Controls
                and Procedures
            36PART
                II - OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            37Item
                6.
            Exhibits
            37




2
 *Table
          of Contents*


**VISKASE
      COMPANIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**(In
      Thousands, Except for Number of Shares and Per Share
      Amounts)**





June
                30,2006
            
            December
                31, 2005ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            3,317
            
            $
            11,904Restricted
                cash
            
            
            3,268
            
            
            3,251Receivables,
                net
            
            
            32,529
            
            
            29,664Inventories
            
            
            43,463
            
            
            36,419Other
                current assets
            
            
            17,096
            
            
            15,563Total
                current assets
            
            
            99,673
            
            
            96,801Property,
                plant and equipment
            
            
            125,228
            
            
            116,509Less
                accumulated depreciation
            
            
            28,172
            
            
            22,988Property,
                plant and equipment, net
            
            
            97,056
            
            
            93,521Deferred
                financing costs, net
            
            
            3,324
            
            
            3,667Other
                assets
            
            
            3,440
            
            
            3,851Total
                Assets
            
            $
            203,493
            
            $
            197,840LIABILITIES
                AND STOCKHOLDERS' DEFICITCurrent
                liabilities:Short-term
                debt including current portion of long-term debt and capital
                leases
            
            $
            8,532
            
            $
            182Accounts
                payable
            
            
            18,488
            
            
            17,958Accrued
                liabilities
            
            
            33,975
            
            
            32,031Current
                deferred tax liabilties
            
            
            710
            
            
            710Total
                current liabilities
            
            
            61,705
            
            
            50,881Long-term
                debt, net of current maturities
            
            
            104,575
            
            
            103,299Accrued
                employee benefits
            
            
            54,475
            
            
            61,429Deferred
                tax liabilties
            
            
            8,379
            
            
            8,357Deferred
                revenue
            
            
            395
            
            
            553Commitments
                and contingenciesStockholders’
                deficit:Preferred
                stock, $.01 par value; none outstandingCommon
                stock, $.01 par value; 10,681,892 shares issued and 9,800,499 outstanding
                at June 30, 2006;and 10,651,123 shares issued and 9,715,954 shares
                outstanding at December 31, 2005
            
            
            106
            
            
            106Additional
                paid in capital
            
            
            2,029
            
            
            1,895Accumulated
                (deficit)
            
            
            (24,919
            )
            
            (23,467
            )Less
                805,270 treasury shares, at cost
            
            
            (298
            )
            
            (298
            )Accumulated
                other comprehensive income
            
            
            (2,949
            )
            
            (4,907
            )Unearned
                restricted stock issued for future service
            
            
            (5
            )
            
            (8
            )Total
                stockholders' (deficit)
            
            
            (26,036
            )
            
            (26,679
            )Total
                Liabilities and Stockholders' Deficit
            
            $
            203,493
            
            $
            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 June 30, 2006
            
            3
                Months Ended June 30, 2005
            
            6
                Months Ended June 30, 2006
            
            6
                Months Ended June 30, 2005NET
                SALES
            
            
            53,451
            
            $
            52,100
            
            $
            103,921
            
            $
            101,624Cost
                of sales
            
            
            41,852
            
            
            40,982
            
            
            82,811
            
            
            80,974GROSS
                MARGIN
            
            
            11,599
            
            
            11,118
            
            
            21,110
            
            
            20,650Selling,
                general and administrative
            
            
            7,021
            
            
            7,011
            
            
            14,723
            
            
            14,413Amortization
                of intangibles
            
            
            116
            
            
            118
            
            
            233
            
            
            387Restructuring
                expense
            
            
            114
            
            
            1,787
            
            
            412
            
            
            2,174OPERATING
                INCOME
            
            
            4,348
            
            
            2,202
            
            
            5,742
            
            
            3,676Interest
                income
            
            
            53
            
            
            113
            
            
            134
            
            
            312Interest
                expense
            
            
            3,352
            
            
            3,193
            
            
            6,669
            
            
            6,259Other
                expense (income), net
            
            
            640
            
            
            2,043
            
            
            226
            
            
            784INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            409
            
            
            (2,921
            )
            
            (1,019
            )
            
            (3,055
            )Income
                tax provision (benefit)
            
            
            539
            
            
            (658
            )
            
            434
            
            
            336NET
                (LOSS) INCOME
            
            
            (130
            )
            
            (2,263
            )
            
            (1,453
            )
            
            (3,391
            )Other
                comprehensive income(loss):Foreign
                currency translation adjustments
            
            $
            1,409
            
            $
            (1,425
            )
            $
            1,958
            
            $
            (2,763
            )COMPREHENSIVE
                INCOME (LOSS)
            
            $
            1,279
            
            $
            (3,688
            )
            $
            505
            
            $
            (6,154
            )WEIGHTED
                AVERAGE COMMON SHARES-
                BASIC AND DILUTED
            
            
            9,755,621
            
            
            9,714,863
            
            
            9,735,897
            
            
            9,680,144PER
                SHARE AMOUNTS:(LOSS)
                EARNINGS PER SHARE-
                BASIC AND DILUTED
            
            $
            (0.01
            )
            $
            (0.23
            )
            $
            (0.15
            )
            $
            (0.35
            )





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** )




6
                Months Ended June 30, 2006
            
            6
                Months Ended June 30, 2005Cash
                flows from operating activities:Net
                (loss)
            
            $
            (1,453
            )
            $
            (3,391
            )Adjustments
                to reconcile net (loss) to net cash (used in) provided by operating
                activities:Depreciation
                and amortization under capital lease
            
            
            4,818
            
            
            5,621Stock-based
                compensation
            
            
            134Amortization
                of intangibles
            
            
            233
            
            
            384Amortization
                of deferred financing fees
            
            
            361
            
            
            349Postretirement
                curtailment gain and amortization
            
            
            (3,961
            )(Decrease)
                increase in deferred income taxes
            
            
            (337
            )
            
            (976
            )Foreign
                currency translation (gain) loss
            
            
            (624
            )
            
            533(Gain)
                on disposition of assets
            
            
            (17
            )
            
            (278
            )Bad
                debt provision
            
            
            101
            
            
            55Non-cash
                interest on 8% notes and 11.5% notes
            
            
            1,267
            
            
            1,159Changes
                in operating assets and liabilities:Receivables
            
            
            (1,751
            )
            
            (1,054
            )Inventories
            
            
            (5,884
            )
            
            (4,046
            )Other
                current assets
            
            
            (1,086
            )
            
            (632
            )Accounts
                payable and accrued liabilities
            
            
            1,473
            
            
            (5,124
            )Other
            
            
            (3,905
            )
            
            3,665Total
                adjustments
            
            
            (9,178
            )
            
            (344
            )Net
                cash (used in) operating activities before reorganization
                expense
            
            
            (10,631
            )
            
            (3,735
            )Cash
                flows from investing activities:Capital
                expenditures
            
            
            (6,647
            )
            
            (4,821
            )Reacquistion
                of leased assets
            
            
            
            
            
            (644
            )Proceeds
                from disposition of assets
            
            
            27
            
            
            1,114Restricted
                cash
            
            
            (17
            )
            
            1,284Net
                cash (used in) investing activities
            
            
            (6,637
            )
            
            (3,067
            )Cash
                flows from financing activities:Proceeds
                from revolving loan and long term borrowings
            
            
            8,418Deferred
                financing costs
            
            
            (18
            )
            
            (302
            )Repayment
                of long-term borrowings and capital obligation
            
            
            (82
            )
            
            (85
            )Net
                cash (used in) financing activities
            
            
            8,318
            
            
            (387
            )Effect
                of currency exchange rate changes on cash
            
            
            363
            
            
            (752
            )Net
                (decrease) in cash and equivalents
            
            
            (8,587
            )
            
            (7,941
            )Cash
                and equivalents at beginning of period
            
            
            11,904
            
            
            30,255Cash
                and equivalents at end of period
            
            $
            3,317
            
            $
            22,314Supplemental
                cash flow information:Interest
                paid less capitalized interest
            
            $
            6,058
            
            $
            4,738Income
                taxes paid
            
            $
            89
            
            $
            35





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 $189 and $10,711 of short-term
      investments at June 30, 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.


6
 *Table
          of Contents*




**VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**


**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.





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 June 30, 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
      $895 and $1,427 at June 30, 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 June 30, 2006 the remaining balance
      of
      deferred revenue was $711, 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 on
      or
      before March 31, 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 on or after April 1, 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 terminates
      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 $3,961 was recorded as a reduction to cost of sales during the
      first six months 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
      Income (Loss) Per Share**





Net
      income (loss) 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
      began 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
      an 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 June 30, 2005
            
            6
                Months Ended June 30, 2005Net
                (loss), as reported
            
            $
            (2,263
            )
            $
            (3,391
            )Deduct:
                Total stock-based compensation expense under a fair value based method,
                net of related tax effects
            
            
            (67
            )
            
            (134
            )Net
                (loss), pro forma
            
            $
            (2,330
            )
            $
            (3,525
            )Basic
                (loss) earnings per share, as reported
            
            $
            (0.23
            )
            $
            (0.35
            )Diluted
                (loss) earnings per share, as reported
            
            $
            (0.23
            )
            $
            (0.35
            )Basic
                (loss) earnings per share, pro forma
            
            $
            (0.25
            )
            $
            (0.36
            )Diluted
                (loss) earnings per share, pro forma
            
            $
            (0.25
            )
            $
            (0.36
            )




9
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          of Contents*




**VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**


**New
      Accounting Pronouncements**





In
      December 2004, the FASB issued SFAS No. 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 also requires the benefits of tax deductions in excess
      of recognized compensation expense to be reported as a financing cash flow,
      rather than as an operating cash flow as prescribed under the prior accounting
      rules. This requirement reduces net operating cash flows and increases net
      financing cash flows in periods after adoption. Total cash flow remains
      unchanged from what would have been reported under prior accounting rules.
      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.
      Prior to the adoption of SFAS 123R, the Company followed the intrinsic value
      method in accordance with APB No. 25 to account for its employee stock options
      and share-based awards in 2005. Accordingly, no compensation expense was
      recognized for share-based awards granted in connection with the issuance of
      stock options under the Company’s equity incentive plans. The adoption of SFAS
      123R primarily resulted in a change in the Company’s method of recognizing the
      fair value of share-based compensation and estimating forfeitures for all
      unvested awards. Specifically, the adoption of SFAS 123R resulted in the Company
      recording compensation expense for employee stock options and employee
      share-based awards granted prior to the adoption using the Black-Scholes pricing
      valuation model.




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.





In
      May
      2005, the FASB issued SFAS No. 154 ("SFAS
      154") ,
      "Accounting Changes and Error Corrections." SFAS 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 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
      154 also addresses the reporting of a correction of an error by restating
      previously issued financial statements. SFAS 154 is effective for accounting
      changes and corrections of errors made in fiscal years beginning after December
      15, 2005.





In
      June
      2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in
      Income Taxes--an Interpretation of FASB Statement No. 109" ("FIN48"). FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in a
      company's financial statements in accordance with SFAS No. 109, "Accounting
      for
      Income Taxes." FIN 48 prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return. FIN 48 is effective
      for
      fiscal years beginning after December 15, 2006. We are currently reviewing
      this
      new standard to determine its effects, if any, on our results of operations
      or
      financial position.





**2.**
            **Cash
                and Cash Equivalents**





June
                30, 2006
            
            December
                31, 2005Cash
                and cash equivalents
            
            $
            3,317
            
            $
            11,904Restricted
                cash
            
            
            3,268
            
            
            3,251$
            6,585
            
            $
            15,155




As
        of
        June 30, 2006, cash equivalents and restricted cash of $189 were invested
        in
        short-term investments.




10
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          of Contents*




**VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**


**3.**
            **Inventories**





Inventories
      consisted of:





June
                30, 2006
            
            December
                31, 2005Raw
                materials
            
            $
            6,534
            
            $
            5,880Work
                in process
            
            
            21,708
            
            
            16,772Finished
                products
            
            
            15,221
            
            
            13,767$
            43,463
            
            $
            36,419





Approximately
      48.86% of the Company’s inventories at June 30, 2006 were valued at LIFO.
      Remaining inventories, primarily foreign, are valued at the lower of FIFO cost
      or market.





**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:





June
                30, 2006
            
            December
                31, 2005Short-term
                debt including current maturities of long-term debt:Revolving
                Credit Facility
            
            $
            8,418Current
                maturities of capital leases
            
            
            114
            
            $
            182Total
                short-term debt
            
            $
            8,532
            
            $
            182Long-term
                debt:11.5%
                Senior Secured Notes
            
            
            89,285
            
            $
            89,2148%
                Subordinated Notes
            
            
            15,152
            
            
            13,956Other
            
            
            138
            
            
            129Total
                long-term debt
            
            $
            104,575
            
            $
            103,299




Revolving
      Credit Facility





On
      June
      29, 2004, the Company entered into a $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 currently set at 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.





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, will be contractually *pari
      passu* with the
      liens securing the 11.5% Senior Secured Notes and such guarantees pursuant
      to
      such intercreditor agreement.


11
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          of Contents*




**VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**


The
      Revolving Credit Facility contains various covenants that 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 Company was in compliance with the
      minimum EBITDA and permitted capital expenditures covenants as of June 30,
      2006.





The
      average interest rate on short-term borrowing for the first six-months of 2006
      was 8.11%





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 1% through June 29, 2007.





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.


12
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          of Contents*


**VISKASE
          COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
          Thousands)**


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.
      As
      of June 30, 2006, the Company’s unrestricted cash and amount available under the
      Revolving Credit Facility were less than the $15,000. The Company was in
      compliance with the minimum annual level of EBITDA as of June 30, 2006.





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 June 30, 2006 is approximately 116%.





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. We
      do not
      expect there will be any Excess Cash Flow (as defined) for the 2006 fiscal
      year.




13
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          of Contents*


**VISKASE
          COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
          Thousands)**


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.





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 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 quarters ended March 31, 2006 and June
      30,
      2006, interest on the 8% Subordinated Notes was paid entirely in the form of
      8%
      Subordinated Notes (paid-in-kind). We expect to pay all of the interest payable
      in 2006 in the form of 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 June 30, 2006 is $15,152.





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




14
 *Table
          of Contents*




**VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**


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 June 30,
      2006.





The
      Company finances its working capital needs through a combination of internally
      generated cash from operations, cash on hand and our Revolving Credit Facility.
      The availability of funds under the Revolving Credit Facility is subject to
      the
      Company’s compliance with certain covenants, borrowing base limitations measured
      by accounts receivable and inventory of the Company, and reserves that may
      be
      established at the discretion of the lender.





The
      aggregate maturities of debt (1) for each
      of the next five years are:





2006
            
            2007
            
            2008
            
            2009
            
            2010
            
            ThereafterRevolving
                Credit Facility
            
            $
            8,41811.5%
                Senior Secured Notes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            90,0008%
                Subordinated Notes
            
            
            
            
            
            
            
            $
            18,684Other
            
            
            114
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,016$
            8,532
            
            
            
            
            $
            18,684
            
            
            
            
            
            
            
            $
            91,016





(1) The
          aggregate maturities of debt represent amounts to be paid at maturity and
          not
          the current carrying value of the debt.





**5.**
            **Pension
                and Postretirement**





Pension
      contributions





The
      Company paid $2,909 during the second quarter of 2006, and expects to contribute
      an additional $8,837 during the remainder of the year.





3
                Months Ended June 30, 2006
            
            3
                Months Ended June 30, 2005
            
            6
                Months Ended June 30, 2006
            
            6
                Months Ended June 30, 2005Component
                of net period benefit costService
                cost
            
            $
            537
            
            $
            643
            
            $
            1,074
            
            $
            1,277Interest
                cost
            
            
            1,755
            
            
            1,827
            
            
            3,604
            
            
            3,654Expected
                return on plan assets
            
            
            (1,783
            )
            
            (1,700
            )
            
            (3,565
            )
            
            (3,400
            )Amortization
                of prior service cost
            
            
            (48
            )
            
            (92
            )
            
            (96
            )
            
            (184
            )Total
                net periodic benefit cost
            
            $
            461
            
            $
            678
            
            $
            1,017
            
            $
            1,347





The
      Company expects its pension expense to be $2,123 for the year.


15
 *Table
          of Contents*




**VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**


Postretirement
      benefits





The
      Company paid $123 during the second quarter of 2006, and expects to contribute
      an additional $317 during the remainder of the year.





3
                Months Ended June 30, 2006
            
            3
                Months Ended June 30, 2005
            
            6
                Months Ended June 30, 2006
            
            6
                Months Ended June 30, 2005Component
                of net period benefit costService
                cost
            
            $
            17
            
            $
            60
            
            $
            21
            
            $
            120Interest
                cost
            
            
            276
            
            
            299
            
            
            401
            
            
            545Amortization
                of actuarial (gain) loss
            
            
            (1,969
            )
            
            (52
            )
            
            (3,950
            )
            
            (52
            )Total
                net periodic benefit cost
            
            $
            (1,676
            )
            $
            307
            
            $
            (3,528
            )
            $
            613





The
      Company expects its postretirement benefits amortization benefit to be ($7,050)
      for the year.





**6.**
            **Restructuring
                Charges**





During
      the first and second quarters of 2006, the Company committed to restructuring
      plans to continue to address the Company's competitive environment. The plans
      resulted in before tax charges of $298 and $114, respectively.





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 $16,000, 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.





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.


16
 *Table
          of Contents*




**VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**


**Restructuring
      Reserves**





The
      following table provides details of the 2006 and 2005 restructuring reserves
      for
      the period ended June 30, 2006 (dollars in millions):





Restructuring
                reserves as of December 31, 2005
            
            2006Charge
            
            Payments
            
            Other
                adjustments
            
            Restructuring
                reserves as ofJune 30, 20062006
                employee costs
            
            
            
            
            $
            0.4
            
            $
            (0.3
            )
            
            
            
            $
            0.12005
                employee costs
            
            $
            1.6
            
            
            
            
            
            (0.1
            )
            
            
            
            $
            1.5Total
                restructuring activity
            
            $
            1.6
            
            $
            0.4
            
            $
            (0.4
            )
            
            
            
            $
            1.6





**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 10,681,892 shares of common stock were issued
      and 9,800,499 shares of common stock were outstanding as of June 30, 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 Company’s plan of reorganization that was consummated on April 3,
      2003 (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 six-month periods ended June 30, 2006 and June
      30,
      2005 is $3 and $3, 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.





**9.**
            **Warrants
                (Dollars in Thousands, Except Per Share and Per Warrant
                Amounts)**





Pursuant
      to the Bankruptcy Plan, holders of the previously outstanding Common Stock
      received Warrants to purchase shares of Common Stock of the reorganized company.
      As of June 30, 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.





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. As of June 30,
      2006, 86,250 New Warrants, which entitle the holders to purchase 771,679 shares
      of the Company’s common stock, were outstanding.


17
 *Table
          of Contents*


**VISKASE
          COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
          Thousands)**


**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.  On June 21, 2006, the Bankruptcy Court issued an order granting
      in part and denying in part the IDR claim. The Bankruptcy Court order determined
      the amount of interest due through May 2006 to be $301. On June 29, 2006, the
      IDR appealed the Bankruptcy Court November 16, 2006 order with regard to the
      principal tax liability in 1988 and 1999. The Company intends to vigorously
      defend its position on the utilization of the carryback of subsequent net
      operating losses to eliminate the principal tax liabilities in 1988 and 1989.
      The IDR 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.


18
 *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 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
      $7,546 and $7,423, respectively, at exchange rates in effect on July 24, 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 $86 and $769, respectively, at exchange rates in effect
      on July 24, 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. Viskase Brazil strongly denies the allegations set forth in the
      tax
      assessments and intends to vigorously defend itself.





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.


19
 *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 June 30, 2006
            
            3
                Months Ended June 30, 2005
            
            6
                Months Ended June 30, 2006
            
            6
                Months Ended June 30, 2005NUMERATOR:(Loss)
                income available to common stockholders:Net
                (loss) income
            
            $
            (130
            )
            $
            (2,263
            )
            $
            (1,453
            )
            $
            (3,391
            )Net
                (loss) income available to common stockholders for basic and diluted
                EPS
            
            $
            (130
            )
            $
            (2,263
            )
            $
            (1,453
            )
            $
            (3,391
            )DENOMINATOR:Weighted
                average shares outstanding for basic EPS
            
            
            9,755,621
            
            
            9,714,863
            
            
            9,735,897
            
            
            9,680,144





Common
      stock equivalents, calculated on a weighted average basis, consisting of the
      New
      Warrants and the stock options issued to the President and Chief Executive
      Officer, are dilutive. The effect of these securities has not been included
      in
      weighted average shares for diluted EPS because they are anti-dilutive due
      to
      the net loss in the periods reported.





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.


20
 *Table
          of Contents*


**VISKASE
          COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
          Thousands)**


**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 June 30, 2006 equals $134.





The
      following table sets forth the pro forma amounts of net income and earnings
      per
      share for the six months ended June 30, 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.





3
                Months Ended June 30, 2005
            
            6
                Months Ended June 30, 2005Net
                (loss):As
                reported
            
            $
            (2,263
            )
            $
            (3,391
            )Pro
                forma
            
            $
            (2,330
            )
            $
            (3,525
            )Basic
                and diluted (loss) earnings per share:As
                reported
            
            $
            (0.23
            )
            $
            (0.35
            )Pro
                forma
            
            $
            (0.25
            )
            $
            (0.36
            )





The
      fair
      values of the options granted during 2005 were estimated on the date of grant
      using the binomial option pricing model. There have been 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.


21
 *Table
          of Contents*




**VISKASE
        COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
        Thousands)**


The
      Company's outstanding options were:





Shares
                Under Option
            
            Weighted
                Average Exercise PriceOutstanding,
                December 31, 2005
            
            
            985,000
            
            $
            2.65GrantedExercisedForfeited
            
            
            (1,666
            )
            $
            2.90Outstanding,
                June 30, 2006
            
            
            983,334
            
            $
            2.65





Exercisable
      options as of June 30, 2006 were 328,345.


22
 *Table
          of Contents*


**VISKASE
          COMPANIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
          Thousands)**


**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 June 30, 2006 and June 30, 2005
      includes net foreign exchange transaction gains (losses) of approximately $520
      and $(970), respectively.





Geographic
      Area Information:





6
                Months Ended June 30, 2006
            
            6
                Months Ended June 30, 2005Net
                sales:United
                States
            
            $
            64,511
            
            $
            64,082South
                America
            
            
            6,625
            
            
            3,958Europe
            
            
            44,883
            
            
            41,882Other
                and eliminations
            
            
            (12,098
            )
            
            (8,298
            )$
            103,921
            
            $
            101,624Operating
                income (loss):United
                States
            
            $
            4,472
            
            $
            4,194Canada
            
            
            (186
            )
            
            (21
            )South
                America
            
            
            888
            
            
            (249
            )Europe
            
            
            568
            
            
            (248
            )Other$
            5,742
            
            $
            3,676Identifiable
                assets:United
                States
            
            $
            120,363
            
            $
            114,468Canada
            
            
            (4
            )
            
            37South
                America
            
            
            9,903
            
            
            7,806Europe
            
            
            73,231
            
            
            77,363$
            203,493
            
            $
            199,674United
                States export sales:(reported
                in United States net sales above)Asia
            
            $
            8,449
            
            $
            9,241South
                and Central America
            
            
            3,315
            
            
            2,548Canada
            
            
            4,331
            
            
            4,078Other
                international
            
            
            1,714
            
            
            6,148$
            17,809
            
            $
            22,015


23
 *Table
          of Contents*


ITEM2.
            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 61% 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;


·
            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%.


24
 *Table
          of Contents*


Comparison
      of Results of Operations for Fiscal Quarters Ended June 30, 2006 and
      2005 .





The
      following discussion compares the results of operations for the fiscal quarter
      ended June 30, 2006 to the results of operations for the fiscal quarter ended
      June 30, 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 June 30, 2006
            
            Quarter
                Ended June 30, 2005
            
            %
                Change Over 2005NET
                SALES
            
            $
            53.5
            
            $
            52.1
            
            
            2.5
            %COST
                AND EXPENSESCost
                of sales
            
            
            41.9
            
            
            41.0
            
            
            2.1
            %Selling,
                general and administrative
            
            
            7.0
            
            
            7.0
            
            
            0.1
            %Amortization
                of intangibles
            
            
            .1
            
            
            .1
            
            
            -1.7
            %Restructuring
                expense
            
            
            .1
            
            
            1.8
            
            
            -1467.5
            %OPERATING
                INCOME
            
            
            4.3
            
            
            2.2
            
            
            49.4
            %Interest
                income
            
            
            .1
            
            
            .1
            
            
            -113.2
            %Interest
                expense
            
            
            3.4
            
            
            3.2
            
            
            4.7
            %Other
                expense, net
            
            
            .6
            
            
            2.0
            
            
            -219.2
            %Income
                tax provision (benefit)
            
            
            .5
            
            
            (.7
            )
            
            NMNET
                (LOSS) INCOME
            
            $
            (.1
            )
            $
            (2.3
            )
            
            -1640.8
            %





NM
      = Not
      meaningful when comparing positive to negative numbers or to zero.





Net
      Sales. Our net sales for the second quarter 2006 were $53.5 million, which
      represents an increase of $1.4 million or 2.5% from the comparable prior
      quarter. Net sales benefited $2.1 million due to volume and a $0.3 million
      due
      to foreign currency translation offset by a $1.0 million decrease due to price
      and mix. 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 expects to benefit
      by the transition of finishing to Mexico.





Cost
      of
      Sales. Cost of sales for second quarter 2006 increased 2.1% from the prior
      year
      due to increased sales level for the same period. The increase can also be
      attributed to an increase in raw materials, labor costs, and 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 $0.6 million during
      the second quarter of 2006. Cost of sales for the second quarter of 2006
      includes higher than normal costs in the Monterrey facility; these costs were
      not classified as start-up costs.





Selling,
      General and Administrative Expenses. Selling, general and administrative
      expenses were $7.0 million
      in the second quarter 2005 and the second quarter 2006. Selling, general and
      administrative expenses in the second quarter 2006 include start-up expense
      of
      our Monterrey, Mexico facility of $0.9 million and a $0.3 million decrease
      in
      gain on asset disposals versus the comparable prior year period offset by
      reductions from our continuous cost saving programs.





Restructuring
      Expenses. Restructuring expenses of $0.1 million in second quarter of 2006
      resulted from approved plans to reduce headcount to address the Company’s
      competitive environment.





Operating
      Income. The operating income for 2006 was $4.3 million, representing an increase
      of $2.1 million from the prior year. The increase in the operating income
      resulted primarily from decreased restructuring expenses and increased gross
      margin.


25
 *Table
          of Contents*


Interest
      Expense. Interest expense, net of interest income, for 2006 was $3.3 million,
      representing an increase of $0.2 million. The increase is primarily from higher
      interest expense on the debt, including revolver debt and a reduction in
      capitalized interest charged to our capital projects.





Other
      Expense (Income). Other expense of for the second quarter 2006 was $ 0.6
      million compared to $2.0 million for the second quarter of 2005. The
      decrease in other expense consists principally of a reduction in the net loss
      related to foreign currency transactions offset by expense related to strategic
      planning initiatives.





Income
      Tax Provision (Benefit). An income tax provision of $0.5 million was recognized
      on the income before taxes of $0.4 million for the second quarter of 2006
      resulting principally from an income tax provision for income earned by foreign
      subsidiaries.





Primarily
      as a result of the factors discussed above, net loss was $0.1 million for the
      second quarter of 2006 compared to net loss of $2.3 million for comparable
      prior
      year period.





Comparison
      of Results of Operations for Six Months Ended June 30, 2006 and
      2005 *.*





** The
      following discussion compares the results of operations for the fiscal six
      months ended June 30, 2006 to the results of operations for the fiscal six
      months ended June 30, 2005. We have provided the table below in order to
      facilitate an understanding of this discussion. The table (dollars in millions)
      is as follows:





Six
                Months Ended June 30, 2006
            
            Six
                Months Ended June 30, 2005
            
            %
                Change Over 2005NET
                SALES
            
            $
            103.9
            
            $
            101.6
            
            
            2.2
            %COST
                AND EXPENSESCost
                of sales
            
            
            82.8
            
            
            81.0
            
            
            2.2
            %Selling,
                general and administrative
            
            
            14.7
            
            
            14.4
            
            
            2.1
            %Amortization
                of intangibles
            
            
            .2
            
            
            .4
            
            
            -66.1
            %Restructuring
                expense
            
            
            .4
            
            
            2.2
            
            
            -427.7
            %OPERATING
                INCOME
            
            
            5.7
            
            
            3.7
            
            
            36.0
            %Interest
                income
            
            
            .1
            
            
            .3
            
            
            -132.8
            %Interest
                expense
            
            
            6.7
            
            
            6.3
            
            
            6.1
            %Other
                expense, net
            
            
            .2
            
            
            .8
            
            
            -246.9
            %Income
                tax provision
            
            
            .4
            
            
            .3
            
            
            22.6
            %NET
                (LOSS)
            
            $
            (1.5
            )
            $
            (3.4
            )
            
            -133.4
            %





NM
      = Not
      meaningful when comparing positive to negative numbers or to zero.





Net
      Sales *.* Our
      net
      sales for the first six months of 2006 were $103.9 million, which represents
      an
      increase of $2.3 million, or 2.2%, from the comparable prior year first six
      months. Net sales benefited $4.6 million from an increase in volume offset
      by
      $1.2 million due to foreign currency translation loss and a $1.1 million
      decrease due to price and mix.





Cost
      of
      Sales *.* Cost of
      sales for the first six months of 2006 increased 2.2% from the comparable prior
      year first six months, but remained level as a percent of net sales (79.7%
      in
      2005 and 2006). The
      increase can be attributed to an increase in raw materials, labor costs, and
      costs associated with the start-up of the Monterrey, Mexico finishing facility
      offset by operating efficiencies and a $4.0 million reduction from the
      elimination of certain postretirement medical benefits. Costs associated with
      the start-up of the Monterrey, Mexico finishing facility were approximately
      $1.0
      million during the first six months of 2006. Cost of sales for the second
      quarter of 2006 includes higher than normal costs in the Monterrey facility;
      these costs were not classified as start-up costs .


26
 *Table
          of Contents*


Selling,
      General and Administrative Expenses *.* Selling,
      general and administrative expenses increased from $14.4 million
      for the first six-months of 2005 to $14.7 million for the first six-months
      of
      2006. Selling, general and administrative expenses in the first six-months
      of
      2006 include start-up expense of our Monterrey, Mexico facility of $1.8 million
      and a $0.3 million decrease in gain on asset disposals versus the comparable
      prior year period offset by reductions from our continuous cost saving programs.





Operating
      Income *.* The
      operating income for the first six months of 2006 was $5.7 million, representing
      an increase of $2.0 million from the prior year first six months. The increase
      in the operating income resulted primarily increased sales and decreased
      restructuring expenses. Operating income for the first six months of 2005
      includes a restructuring charge of $2.2 million of which $1.7 million was
      related to one-time employee costs related to our transfer of Kentland, Indiana
      finishing operations to Monterrey, Mexico. Operating income the first six months
      of 2006 includes a restructuring charge of $0.4 million.





Interest
      Expense *.* Interest
      expense, net of interest income, for the first six months of 2006 was $6.6
      million, or an increase of $0.6 comparable to the prior year period. The
      increase is primarily from a reduction in capitalized interest charged to our
      capital projects and higher interest expense on the debt, including debt under
      the Revolving Credit Facility.





Other
      Expense *.* Other
      expense of approximately $0.2 million for the first six months of 2006 consists
      principally of a $0.5 million net income related to foreign currency transaction
      offset by expenses related to strategic planning initiatives. Other expense
      for
      the comparable period of 2005 of $0.8 million consists principally of a $1.0
      million net loss related to foreign currency transaction.





Income
      Tax Provision. ** During
      2006, an income tax provision of $0.4 million was recognized on the loss before
      income taxes of $1.0 million resulting principally from an income tax provision
      for income earned by our foreign subsidiaries.





Primarily
      as a result of the factors discussed above, loss for the first six months of
      2006 was $1.5 million compared to net loss of $3.4 million for the first six
      months of 2005.





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 $2.0 million in 2006 and decreased comprehensive income by $2.8 million
      for
      the comparable period in 2005.





Liquidity
      and Capital Resources





Cash
      and
      cash equivalents decreased by $8.6 million during the first six months of 2006.
      Cash flows used in operating activities were $10.6 million and used in
      investi ng
      activities were $6.6 million. Cash flows provided by financing activities were
      $8.3 million. 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
      June 30, 2006 the
      Company had positive working capital of approximately $38.0 million including
      restricted cash of $3.3
      million, with
      additional amounts available under its Revolving Credit Facility.





As
      of
      August 10, 2006, the Company had borrowed $9.7 million under its Revolving
      Credit Facility and had additional availability of $7.5 million with respect
      to
      its Revolving Credit Facility.




27
 *Table
          of Contents*




We
      are in
      the process of restructuring 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 has been funded by use of cash, cash equivalents and
      borrowing under our 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.





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. As
      of
      June 30, 2006, the Company’s unrestricted cash and the amount available under
      the Revolving Credit Facility were less than the $15,000. The Company was in
      compliance with the minimum annual level of EBITDA as of June 30, 2006.





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%.


28
 *Table
          of Contents*


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. We do not expect
      there will be any Excess Cash Flow (as defined) for the 2006 fiscal
      year.





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 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
      Company was in compliance with the minimum EBITDA and permitted capital
      expenditures covenants as of June 30, 2006.





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 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 set at 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


29
 *Table
          of Contents*


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.





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 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 quarters ended March 31, 2006 and June
      30,
      2006, interest on the 8% Subordinated Notes was paid entirely in the form of
      8%
      Subordinated Notes (paid-in-kind). We expect to pay all of the interest payable
      in 2006 in the form of 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 June 30, 2006 is $15.2
      million.





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 June 30,
      2006.





We
      finance our working capital needs through a combination of internally generated
      cash from operations, cash on hand and our Revolving Credit Facility. The
      availability of funds under the Revolving Credit Facility is subject to the
      Company’s compliance with certain covenants, borrowing base limitations measured
      by accounts receivable and inventory of the Company, and reserves that may
      be
      established at the discretion of the lender.





We
      are in
      the process of restructuring 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 $16.0 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, and as of June 30 2006,
      we
      have made capital expenditures of approximately $8.9 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 six months of 2006 and the first six months for
      2005
      totaled $6.6 million and $4.8 million, respectively. The 2006 capital
      expenditures are principally related to the relocation of finishing operations
      to Mexico.


30
 *Table
          of Contents*


During
      the first six months of 2006, we spent approximately $1.2 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 $54.5 million
      at June 30, 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





Other





As
      of
      June 30, 2006, the aggregate maturities of debt (1) for each
      of the next five years are (in thousands):





2006
            
            2007
            
            2008
            
            2009
            
            2010
            
            ThereafterRevolving
                Credit Facility
            
            $
            8,41811.5%
                Senior Secured Notes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            90,0008%
                Subordinated Notes
            
            
            
            
            
            
            
            $
            18,684Other
            
            
            114
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,016$
            8,532
            
            
            
            
            $
            18,684
            
            
            
            
            
            
            
            $
            91,016





(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.




31
 *Table
          of Contents*


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 on
      or
      prior to March 31, 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.





United
      States employees hired on or after April 1, 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 $0.974
      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 terminates
      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.


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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. 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.





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 June 30, 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 $0.270 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.
       On June 21, 2006, the Bankruptcy Court issued an order granting in part
      and denying in part the IDR claim. The Bankruptcy Court order determined the
      amount of interest due through May 2006 to be $0.301 million. On June 29, 2006,
      the IDR appealed the Bankruptcy Court November 16, 2006 order with regard to
      the
      principal tax liability in 1988 and 1999. The Company intends to vigorously
      defend its position on the utilization of the carryback of subsequent net
      operating losses to eliminate the principal tax liabilities in 1988 and 1989.
      The IDR 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.


33
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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 $7.5 million and $7.4 million, respectively at exchange
      rates
      in effect on July 24, 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 July
      24,
      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.





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 FASB issued SFAS No. 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 also requires the benefits of tax deductions in excess
      of recognized compensation expense to be reported as a financing cash flow,
      rather than as an operating cash flow as prescribed under the prior accounting
      rules. This requirement reduces net operating cash flows and increases net
      financing cash flows in periods after adoption. Total cash flow remains
      unchanged from what would have been reported under prior accounting rules.
      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.
      Prior to the adoption of SFAS 123R, the Company followed the intrinsic value
      method in accordance with APB No. 25 to account for its employee stock options
      and share-based awards in 2005. Accordingly, no compensation expense was
      recognized for share-based awards granted in connection with the issuance of
      stock options under the Company’s equity incentive plans. The adoption of SFAS
      123R primarily resulted in a change in the Company’s method of recognizing the
      fair value of share-based compensation and estimating forfeitures for all
      unvested awards. Specifically, the adoption of SFAS 123R resulted in the Company
      recording compensation expense for employee stock options and employee
      share-based awards granted prior to the adoption using the Black-Scholes pricing
      valuation model.


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 *Table
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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.





In
      May
      2005, the FASB issued SFAS No. 154 ("SFAS
      154") ,
      "Accounting Changes and Error Corrections." SFAS 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 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
      154 also addresses the reporting of a correction of an error by restating
      previously issued financial statements. SFAS 154 is effective for accounting
      changes and corrections of errors made in fiscal years beginning after December
      15, 2005.





In
      June
      2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in
      Income Taxes--an Interpretation of FASB Statement No. 109" ("FIN48"). FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in a
      company's financial statements in accordance with SFAS No. 109, "Accounting
      for
      Income Taxes." FIN 48 prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return. FIN 48 is effective
      for
      fiscal years beginning after December 15, 2006. We are currently reviewing
      this
      new standard to determine its effects, if any, on our results of operations
      or
      financial position.





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:





•
            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;


35
 *Table
          of Contents*


•
            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 June 30, 2006, a 10% devaluation of the U.S. dollar would decrease
      the Company’s consolidated financial position by approximately $0.073 million
      for 2006 and $0.144 million for the comparable period 2005. Exchange rate
      fluctuations increased comprehensive income by $1.958 million for 2006 and
      decreased income by $2.763 million for the comparable period 2005.





From
      time
      to time 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 second 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
      June
      30, 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.





There
      were no changes in the Company's internal controls over financial reporting
      that
      occurred during the quarter ended June 30, 2006, that have materially affected,
      or are reasonably likely to materially affect, the Company's internal controls
      over financial reporting.


36
 *Table
          of Contents*


PART
      II.
      OTHER INFORMATION





Item
      1 - Legal
      Proceedings





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.


37
 *Table
          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:
      August 14, 2006






38