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 September 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
      November 10, 2006, there were 9,936,775 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 September 30, 2006 (unaudited)
                and December 31, 2005
            
            3Unaudited
                consolidated statements of operations and
                comprehensive income (loss) for the three months ended September
                30, 2006
                and September 30, 2005 and for the nine months ended September 30,
                2006
                and September 30, 2005
            
            4Unaudited
                consolidated statements of cash flows for the nine
                months ended September 30, 2006 and September 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)**






September
                30, 2006
            
            December
                31, 2005ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            3,513
            
            $
            11,904Restricted
                cash
            
            
            3,268
            
            
            3,251Receivables,
                net
            
            
            34,999
            
            
            29,664Inventories
            
            
            43,964
            
            
            36,419Other
                current assets
            
            
            14,538
            
            
            15,563Total
                current assets
            
            
            100,282
            
            
            96,801Property,
                plant and equipment
            
            
            127,335
            
            
            116,509Less
                accumulated depreciation
            
            
            30,590
            
            
            22,988Property,
                plant and equipment, net
            
            
            96,745
            
            
            93,521Deferred
                financing costs, net
            
            
            3,181
            
            
            3,667Other
                assets
            
            
            3,334
            
            
            3,851Total
                Assets
            
            $
            203,542
            
            $
            197,840LIABILITIES
                AND STOCKHOLDERS' DEFICITCurrent
                liabilities:Short-term
                debt including current portion of long-term debt and capital
                leases
            
            $
            14,101
            
            $
            182Accounts
                payable
            
            
            17,436
            
            
            17,958Accrued
                liabilities
            
            
            34,906
            
            
            32,031Current
                deferred tax liabilties
            
            
            710
            
            
            710Total
                current liabilities
            
            
            67,153
            
            
            50,881Long-term
                debt, net of current maturities
            
            
            105,228
            
            
            103,299Accrued
                employee benefits
            
            
            50,667
            
            
            61,429Deferred
                tax liabilties
            
            
            8,240
            
            
            8,357Deferred
                revenue
            
            
            316
            
            
            553Commitments
                and contingenciesStockholders’
                deficit:Preferred
                stock, $.01 par value; none outstandingCommon
                stock, $.01 par value; 10,689,240 shares issued and 9,813,332 outstanding
                at September 30, 2006; and 10,651,123 shares issued and 9,715,954
                shares
                outstanding at December 31, 2005
            
            
            107
            
            
            106Additional
                paid in capital
            
            
            2,095
            
            
            1,895Accumulated
                (deficit)
            
            
            (27,881
            )
            
            (23,467
            )Less
                805,270 treasury shares, at cost
            
            
            (298
            )
            
            (298
            )Accumulated
                other comprehensive income
            
            
            (2,082
            )
            
            (4,907
            )Unearned
                restricted stock issued for future service
            
            
            (3
            )
            
            (8
            )Total
                stockholders' (deficit)
            
            
            (28,062
            )
            
            (26,679
            )Total
                Liabilities and Stockholders' Deficit
            
            $
            203,542
            
            $
            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
              September
              30,
                2006
            
            3
                Months
              Ended
              September
              30,
                2005
            
            9
                Months
              Ended
              September
              30,
                2006
            
            9
                Months
              Ended
              September
              30,
                2005NET
                SALES
            
            $
            54,726
            
            $
            52,232
            
            $
            158,647
            
            $
            153,856Cost
                of sales
            
            
            44,484
            
            
            41,842
            
            
            127,295
            
            
            122,816GROSS
                MARGIN
            
            
            10,242
            
            
            10,390
            
            
            31,352
            
            
            31,040Selling,
                general and administrative
            
            
            7,911
            
            
            7,287
            
            
            22,634
            
            
            21,700Amortization
                of intangibles
            
            
            116
            
            
            117
            
            
            349
            
            
            504Restructuring
                expense
            
            
            531
            
            
            
            
            
            943
            
            
            2,174OPERATING
                INCOME
            
            
            1,684
            
            
            2,986
            
            
            7,426
            
            
            6,662Interest
                income
            
            
            44
            
            
            205
            
            
            178
            
            
            517Interest
                expense
            
            
            3,679
            
            
            3,199
            
            
            10,348
            
            
            9,458Post-retirement
                benefits curtailment gain
            
            
            
            
            
            (668
            )
            
            
            
            
            (668
            )Other
                expense (income), net
            
            
            702
            
            
            (763
            )
            
            928
            
            
            21INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            (2,653
            )
            
            1,423
            
            
            (3,672
            )
            
            (1,632
            )Income
                tax provision (benefit)
            
            
            308
            
            
            (2,186
            )
            
            742
            
            
            (1,850
            )NET
                (LOSS) INCOME
            
            
            (2,961
            )
            
            3,609
            
            
            (4,414
            )
            
            218Other
                comprehensive income (loss):Foreign
                currency translation adjustments
            
            
            867
            
            
            (364
            )
            $
            2,825
            
            
            ($3,127
            )COMPREHENSIVE
                (LOSS) INCOME
            
            
            ($2,094
            )
            $
            3,245
            
            
            ($1,589
            )
            
            ($2,909
            )WEIGHTED
                AVERAGE COMMON SHARES-
                BASIC
            
            
            9,808,571
            
            
            9,715,954
            
            
            9,770,387
            
            
            9,692,212PER
                SHARE AMOUNTS:(LOSS)
                EARNINGS PER SHARE-
                BASIC
            
            
            ($0.30
            )
            $
            0.37
            
            
            ($0.45
            )
            $
            0.02WEIGHTED
                AVERAGE COMMON SHARES-
                DILUTED
            
            
            9,808,571
            
            
            10,517,668
            
            
            9,770,387
            
            
            10,547,767PER
                SHARE AMOUNTS:(LOSS)
                EARNINGS PER SHARE-
                DILUTED
            
            
            ($0.30
            )
            $
            0.34
            
            
            ($0.45
            )
            $
            0.02





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** )




9
                Months
              Ended
              September
              30,
                2006
            
            9
                Months
              Ended
              September
              30,
                2005Cash
                flows from operating activities:Net
                (loss) income
            
            
            ($4,414
            )
            $
            218Adjustments
                to reconcile net (loss) income to net cash (used in) provided by
                operating
                activities:Depreciation
                and amortization under capital lease
            
            
            7,202
            
            
            8,289Stock-based
                compensation
            
            
            201Amortization
                of intangibles
            
            
            350
            
            
            503Amortization
                of deferred financing fees
            
            
            547
            
            
            529Postretirement
                curtailment gain and amortization
            
            
            (5,882
            )
            
            (668
            )Decrease
                in deferred income taxes
            
            
            (479
            )
            
            (3,711
            )Foreign
                currency translation (gain) loss
            
            
            (824
            )
            
            578Gain
                on disposition of assets
            
            
            (2
            )
            
            (278
            )Bad
                debt provision
            
            
            153
            
            
            93Non-cash
                interest on 8% notes and 11.5% notes
            
            
            1,920
            
            
            1,748Changes
                in operating assets and liabilities:Receivables
            
            
            (4,097
            )
            
            (2,554
            )Inventories
            
            
            (6,325
            )
            
            (4,504
            )Other
                current assets
            
            
            1,508
            
            
            (6,076
            )Accounts
                payable and accrued liabilities
            
            
            1,308
            
            
            11,979Other
            
            
            (5,164
            )
            
            (3,472
            )Total
                adjustments
            
            
            (9,584
            )
            
            2,456Net
                cash (used in) provided by operating activities before reorganization
                expense
            
            
            (13,998
            )
            
            2,674Cash
                flows from investing activities:Capital
                expenditures
            
            
            (8,661
            )
            
            (9,756
            )Reacquistion
                of leased assets
            
            
            
            
            
            (645
            )Proceeds
                from disposition of assets
            
            
            55
            
            
            1,114Restricted
                cash
            
            
            (17
            )
            
            217Net
                cash (used in) investing activities
            
            
            (8,623
            )
            
            (9,070
            )Cash
                flows from financing activities:Proceeds
                from revolving loan and long term borrowings
            
            
            14,027Deferred
                financing costs
            
            
            (61
            )
            
            (309
            )Repayment
                of long-term borrowings and capital obligations
            
            
            (123
            )
            
            (123
            )Net
                cash provided by (used in) financing activities
            
            
            13,843
            
            
            (432
            )Effect
                of currency exchange rate changes on cash
            
            
            387
            
            
            (660
            )Net
                decrease in cash and equivalents
            
            
            (8,391
            )
            
            (7,488
            )Cash
                and equivalents at beginning of period
            
            
            11,904
            
            
            30,255Cash
                and equivalents at end of period
            
            $
            3,513
            
            $
            22,767Supplemental
                cash flow information:Interest
                paid less capitalized interest
            
            $
            5,164
            
            $
            4,595Income
                taxes paid
            
            
            ($1,835
            )
            $
            16





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 difference, 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. During
      the fourth quarter of 2006, the Company will implement the guidance in SAB
      108
      and reflect in retained earnings the cumulative adjustments to reserves and
      other accounts that would have been made in previous years using the “dual
      approach” method of evaluating the materiality of unrecorded adjustments to the
      financial statements. The effect of this is expected to be a reduction of
      reserves and allowances of approximately$300.





**Cash
      Equivalents**





For
      purposes of the consolidated 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 $3,679 and $10,711 of
      short-term investments at September 30, 2006 and December 31, 2005,
      respectively. Restricted cash is principally cash held as collateral for
      outstanding letters of credit with commercial banks.





**Inventories**





6
 *Table
            of Contents*




**VISKASE
      COMPANIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(In
      Thousands)**






Domestic
      inventories are valued primarily at the lower of last-in, first-out (“LIFO”)
      cost or market. Remaining inventories, primarily foreign, are valued at the
      lower of first-in, first-out (“FIFO”) cost or market.





**Property,
      Plant and Equipment**





The
      Company carries property, plant and equipment at cost less accumulated
      depreciation. Property and equipment additions include acquisition of property
      and equipment and costs incurred for computer software purchased for internal
      use including related external direct costs of materials and services and
      payroll costs for employees directly associated with the project. Upon
      retirement or other disposition, cost and related accumulated depreciation
      are
      removed from the accounts, and any gain or loss is included in results of
      operations. Depreciation is computed on the straight-line method over the
      estimated useful lives of the assets ranging from (i) building and improvements
      - 10 to 32 years, (ii) machinery and equipment - 4 to 12 years, (iii) furniture
      and fixtures - 3 to 12 years and (iv) auto and trucks - 2 to 5
      years.





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 September 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 and when
      circumstances warrant. As a result of the Company’s move to Mexico for the
      production of certain products, an evaluation of the realizability of certain
      of
      its facilities and other fixed assets will be completed in the fourth quarter
      of
      2006. This evaluation could result in a non-cash charge to earnings at that
      time.





**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
      $969 and $1,427 at September 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 September 30, 2006 the remaining
      balance of deferred revenue was $632, including $316 of short-term license
      fees
      included in “Other current liabilities.”





7
 *Table
            of Contents*





**VISKASE
      COMPANIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(In
      Thousands)**






**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.





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
      plan.





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 sheet 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 sheet 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 $5,882 was recorded as a reduction to cost of sales during the
      first nine months of 2006 and a total of $7,843 will be recognized during
      2006.




Effective
      December 31, 2006, the Viskase non-contributory defined benefit retirement
      plan
      for U. S. employees  who
      are
      not covered by a collective bargaining agreement will be frozen and participants
      will no longer earn additional benefits under the plan. In addition, the defined
      contribution plan for employees hired on or after April 1, 2003 that provided
      a
      three percent (3%) defined contribution benefit will be terminated. Effective
      January 1, 2007, employees who are not covered by a collective bargaining
      agreement will be eligible for a variable profit sharing contribution of up
      to
      8% of eligible earnings based upon the Company’s achievement of its annual
      EBITDA target. This plan will replace the existing variable profit sharing
      plan
      for employees who are not covered by a collective bargaining agreement that
      has
      a maximum payout of 3% of eligible earnings based upon the Company’s achievement
      of its annual EBITDA target.


In
        addition, the Company will (i) cease to provide postretirement life insurance
        benefits for current and future retirees of its United States operations
        who are
        not covered by a collective bargaining agreement and (ii) cease to
        provide postretirement medical and life insurance benefits for retirees of
        it's Canadian operations as of December 31, 2006. The elimination of these
        United States and Canadian postretirement life and medical benefits will
        result
        in a projected $11,500 curtailment gain and reduction of the unfunded
        postretirement liability included in “Accrued employee benefits” on the
        consolidated balance sheet as of December 31, 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.




8
 *Table
            of Contents*





**VISKASE
      COMPANIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(In
      Thousands)**






**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.





**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.





**Taxes
      Collected from Customers and Remitted to Governmental
      Authorities**





Taxes
      collected from customers and remitted to governmental authorities are recorded
      on the net method.





**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.





9
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            of Contents*





**VISKASE
      COMPANIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(In
      Thousands)**






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
            
            9
                MonthsEnded
                September
            
            Ended
                September30,
                2005
            
            30,
                2005Net
                income, as reported
            
            $
            3,609
            
            $
            218Deduct:
                Total stock-based compensation expense under a fair value based method,
                net of related tax effects
            
            
            (67
            )
            
            (201
            )Net
                income, pro forma
            
            $
            3,542
            
            $
            17Basic
                earnings per share, as reported
            
            $
            0.37
            
            $
            0.02Diluted
                earnings per share, as reported
            
            $
            0.34
            
            $
            0.02Basic
                earnings per share, pro forma
            
            $
            0.36
            
            $
            0.00Diluted
                earnings per share, pro forma
            
            $
            0.34
            
            $
            0.00





**New
      Accounting Pronouncements**





In
      September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements.”  SAB 108 was issued to
      provide consistency between how registrants quantify financial statement
      misstatements.





Historically,
      there have been two widely-used methods for quantifying the effects of financial
      statement misstatements.  These methods are referred to as the “roll-over”
and “iron curtain” method.  The roll-over method quantifies the amount by
      which the current year income statement is misstated.  Exclusive reliance
      on an income statement approach can result in the accumulation of errors on
      the
      balance sheet that may not have been material to any individual income
      statement, but which may misstate one or more balance sheet accounts.  The “iron
      curtain” method quantifies the error as the cumulative amount by which the
      current year balance sheet is misstated.   Exclusive reliance on a
      balance sheet approach can result in disregarding the effects of errors in
      the
      current year income statement that results from the correction of an error
      existing in previously issued financial statements.  We currently use the
“roll-over” method for quantifying identified financial statement
      misstatements.





SAB
      108
      established an approach that requires quantification of financial statement
      misstatements based on the effects of the misstatement on each of the company’s
      financial statements and the related financial statement disclosures.  This
      approach is commonly referred to as the “dual approach” because it requires
      quantification of errors under both the “roll-over”
      and “iron curtain” methods.





SAB
      108
      allows registrants to initially apply the dual approach either by (1)
      retroactively adjusting prior financial statements as if the dual approach
      had
      always been used or by (2) recording the cumulative effect of initially applying
      the dual approach as adjustments to the carrying values of assets and
      liabilities as of January 1, 2006 with an offsetting adjustment recorded to
      the
      opening balance of retained earnings.    Use of this “cumulative
      effect” transition method requires detailed disclosure of the nature and amount
      of each individual error being corrected through the cumulative adjustment
      and
      how and when it arose.





10
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            of Contents*





**VISKASE
      COMPANIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(In
      Thousands)**





We
      will
      initially apply SAB 108 using the cumulative effect transition method in
      connection with the preparation of our annual financial statements for the
      year
      ending December 31, 2006.  When we initially apply the provisions of SAB
      108, we expect to record an increase in “Receivables,
      net” of approximately $0.3 million and a decrease in “Accumulated Deficit” of
      approximately $0.3 million as of January 1, 2006.  The accompanying
      financial statements do not reflect these adjustments.





In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements
      No. 87, 88, 106, and 132(R),” which requires employers to: (a) recognize in its
      statement of financial position an asset for a plan’s overfunded status or a
      liability for a plan’s underfunded status; (b) measure a plan’s assets and its
      obligations that determine its funded status as of the end of the employer’s
      fiscal year; and (c) recognize changes in the funded status of a defined benefit
      postretirement plan in the year in which the changes occur. Those changes will
      be reported in comprehensive income of a business entity. The requirement to
      recognize the funded status of a benefit plan and the disclosure requirements
      are effective as of the end of the fiscal year ending after December 15, 2006,
      for entities with publicly traded equity securities. The requirement to measure
      plan assets and benefit obligations as of the date of the employer’s fiscal
      year-end statement of financial position is effective for fiscal years ending
      after December 15, 2008. The company is assessing SFAS No. 158 and has not
      determined yet the impact that the adoption of SFAS No. 158 will have on its
      result of operations or financial position.





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.





11
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            of Contents*





**VISKASE
      COMPANIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(In
      Thousands)**





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**




September
                30, 2006
            
            December
                31,2005Cash
                and cash equivalents
            
            $
            3,513
            
            $
            11,904Restricted
                cash
            
            
            3,268
            
            
            3,251$
            6,781
            
            $
            15,155





As
      of
      September 30, 2006, cash equivalents and restricted cash of $3,679 were invested
      in short-term investments.





**3****.**
            **Inventories**





Inventories
      consisted of:




September
                30, 2006
            
            December
                31, 2005Raw
                materials
            
            $
            7,120
            
            $
            5,880Work
                in process
            
            
            20,555
            
            
            16,772Finished
                products
            
            
            16,289
            
            
            13,767$
            43,964
            
            $
            36,419





Approximately
      48.30% of the Company’s inventories at September 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:





12
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            of Contents*





**VISKASE
      COMPANIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(In
      Thousands)**








September
                30, 2006
            
            December
                31, 2005Short-term
                debt including current maturities of long-term debt:Revolving
                Credit Facility
            
            $
            14,027Current
                maturities of capital leases
            
            
            74
            
            $
            182Total
                short-term debt
            
            $
            14,101
            
            $
            182Long-term
                debt:11.5%
                Senior Secured Notes
            
            $
            89,321
            
            $
            89,2148%
                Subordinated Notes
            
            
            15,769
            
            
            13,956Other
            
            
            138
            
            
            129Total
                long-term debt
            
            $
            105,228
            
            $
            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.





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 September
      30,
      2006.





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            of Contents*





**VISKASE
      COMPANIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(In
      Thousands)**





On
      November 7, 2006, the Company entered into an amendment of the Revolving Credit
      Facility. Pursuant thereto, the Revolving Credit Facility was amended (i) to
      permit the issuance and redemption of $24,000 of Series A Preferred Stock,
      (ii)
      to permit the offering of $24,000 of Common Stock by the Company in connection
      in connection with and to redeem the Series A Preferred Stock, (iii) to add
      or
      modify the definitions of Maquiladora, Maquila Program, Capital Expenditures,
      Notes and Permitted Investments, (iv) to increase the amount of the existing
      Permitted Investment and Permitted Indebtedness baskets, and (v) to permit
      issuance of additional 11.5% Senior Secured Notes to refinance the 8%
      Subordinated Notes due 2008.





The
      average interest rate on short-term borrowing for the first nine months of
      2006
      was 8.14%.





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.





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
            
            $
            15,000December
                31, 2008 and thereafter
            
            $
            20,000




14
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            of Contents*





**VISKASE
      COMPANIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(In
      Thousands)**








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 $10,000.
      The
      Company was in compliance with the minimum annual level of EBITDA as of
      September 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 September 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 that 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.





15
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            of Contents*





**VISKASE
      COMPANIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(In
      Thousands)**





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.





On
      November 7, 2006, the Company entered into a First Supplemental Indenture to
      amend the provisions of the 11.5% Senior Notes Indenture. Pursuant thereto,
      the
      Indenture was amended (i) to permit the issuance and redemption of $24,000
      of
      Series A Preferred Stock, (ii) to permit the offering of $24,000 of Common
      Stock
      by the Company in connection in connection with and to redeem the Series A
      Preferred Stock, (iii) to modify the definitions of Consolidated Net Income,
      Permitted Indebtedness and Permitted Investment, (iv) to reduce the minimum
      annual level of EBITDA for the fiscal quarters ending December 31, 2006 though
      September 30, 2008 from $16,000 to $15,000, (v) to modify the proviso that
      such
      minimum annual level of EBITDA covenant is in effect only when the amount of
      unrestricted cash and availability under the Revolving Credit Facility is below
      $10,000, (vi) to revise the required reporting to holders, (vii) to modify
      the
      Consolidated Net Worth and Fixed Charge Coverage Ratio requirement related
      to a
      merger, consolidation or sale of assets and (viii) to permit the possible
      issuance of additional 11.5% Senior Secured Notes to refinance the 8%
      Subordinated Notes due 2008.





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 three quarters ended September 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.





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%.





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 September 30, 2006 is
      $15,769.





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








16
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            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 September
      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
            
            $
            14,02711.5%
                Senior Secured Notes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            90,0008%
                Subordinated Notes
            
            
            
            
            
            
            
            $
            18,684Other
            
            
            74
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,019$
            14,101
            
            
            
            
            $
            18,684
            
            
            
            
            
            
            
            $
            91,019




(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 $6,799 during the third quarter of 2006, and expects to contribute
      an additional $1,557 during the remainder of the year.








3
                Months
              Ended
              September
                30,
              2006
            
            3
                Months
              Ended
              September
                30,
              2005
            
            9
                Months
              Ended
              September
                30,
              2006
            
            9
                Months
              Ended
              September
                30,
              2005Component
                of net period benefit costService
                cost
            
            $
            609
            
            $
            575
            
            $
            1,683
            
            $
            1,852Interest
                cost
            
            
            1,911
            
            
            1,827
            
            
            5,515
            
            
            5,481Expected
                return on plan assets
            
            
            (1,784
            )
            
            (1,699
            )
            
            (5,349
            )
            
            (5,099
            )Amortization
                of prior service cost
            
            
            98
            
            
            (88
            )
            
            2
            
            
            (272
            )Total
                net periodic benefit cost
            
            $
            834
            
            $
            615
            
            $
            1,851
            
            $
            1,962





The
      Company expects its pension expense to be $2,468 for the year.




17
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            of Contents*





**VISKASE
      COMPANIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(In
      Thousands)**








Postretirement
      benefits





The
      Company paid $355 during the third quarter of 2006, and expects to contribute
      an
      additional $243 during the remainder of the year.





3
                Months
              Ended
              September
                30,
              2006
            
            3
                Months
              Ended
              September
                30,
              2005
            
            9
                Months
              Ended
              September
                30,
              2006
            
            9
                Months
              Ended
              September
                30,
              2005Component
                of net period benefit costService
                cost
            
            $
            11
            
            $
            60
            
            $
            32
            
            $
            180Interest
                cost
            
            
            195
            
            
            272
            
            
            596
            
            
            817Amortization
                of actuarial (gain) loss
            
            
            (1,940
            )
            
            (26
            )
            
            (5,890
            )
            
            (78
            )Net
                periodic benefit cost
            
            
            (1,734
            )
            
            306
            
            
            (5,262
            )
            
            919Effect
                of curtailment
            
            
            
            
            
            (668
            )
            
            
            
            
            (668
            )Total
                net periodic benefit cost
            
            
            ($1,734
            )
            
            ($362
            )
            
            ($5,262
            )
            $
            251





The
      Company expects its postretirement benefits amortization benefit to be ($7,020)
      for the year.





Effective
      December 31, 2006, the Viskase non-contributory defined benefit retirement
      plan
      for U. S. employees  who
      are
      not covered by a collective bargaining agreement will be frozen and participants
      will no longer earn additional benefits under the plan. In addition, the defined
      contribution plan for employees hired on or after April 1, 2003 that provided
      a
      three percent (3%) defined contribution benefit will be terminated. Effective
      January 1, 2007, employees who are not covered by a collective bargaining
      agreement will be eligible for a variable profit sharing contribution of up
      to
      8% of eligible earnings based upon the Company’s achievement of its annual
      EBITDA target. This plan will replace the existing variable profit sharing
      plan
      for employees who are not covered by a collective bargaining agreement that
      has
      a maximum payout of 3% of eligible earnings based upon the Company’s achievement
      of its annual EBITDA target.




In
      addition, the Company will (i) cease to provide postretirement life
      insurance benefits for current and future retirees of its United States
      operations who are not covered by a collective bargaining agreement and
      (ii) cease to provide postretirement medical and life insurance
      benefits for retirees of its Canadian operations as of December 31, 2006.
      The elimination of these United States and Canadian postretirement life and
      medical benefits will result in a projected $11,500 curtailment gain and
      reduction of the unfunded postretirement liability included in “Accrued employee
      benefits” on the consolidated balance sheet as of December 31,
      2006.





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





During
      the first, second and third quarters of 2006, the Company committed to
      restructuring plans to continue to address the Company's competitive
      environment. The restructuring plans resulted in before tax charges of $531
      for
      the third quarter and $943 year to date.





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
      substantiallycomplete the move 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 first quarter of 2007.





18
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            of Contents*





**VISKASE
      COMPANIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(In
      Thousands)**





A
      $1,787
      charge for one-time employee costs related to the Kentland, Indiana relocation
      was recorded during the second quarter of 2005.





During
      the first quarter of 2005, the Company committed to a restructuring plan to
      continue to address the Company's competitive environment. The plan resulted
      in
      a before tax charge of $387.





**Restructuring
      Reserves**





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





Restructuring
              reserves
                as of
              December
                31,
              2005
            
            2006
              Charge
            
            Payments
            
            Other
              adjustments
            
            Restructuring
              reserves
                as of
              September
                30,
              20062006
                employee costs
            
            
            
            
            $
            0.9
            
            
            ($0.8
            )
            
            
            
            $
            0.12005
                employee costs
            
            $
            1.6
            
            
            
            
            
            (0.2
            )
            
            
            
            $
            1.4Total
                restructuring activity
            
            $
            1.6
            
            $
            0.9
            
            
            ($1.0
            )
            
            
            
            $
            1.5





**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 10,689,240 shares of common stock were issued
      and 9,813,332 shares of common stock were outstanding as of September 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 the nine-month periods ended September 30, 2006
      and
      September 30, 2005 is $5 and $5, 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 September 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.





19
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            of Contents*





**VISKASE
      COMPANIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(In
      Thousands)**








A
      $1,787
      charge for one-time employee costs related to the Kentland, Indiana relocation
      was recorded 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 September 30, 2006, 85,425 New Warrants,
      which
      entitle the holders to purchase 764,298 shares of the Company’s common stock,
      were outstanding.





**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





20
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            of Contents*





**VISKASE
      COMPANIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(In
      Thousands)**








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’s November 16,
      2005 order with regard to the principal tax liability in 1988 and 1999. On
      October 31, 2006, the United States District Court affirmed the Bankruptcy
      Court
      order. 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 if the District Court’s opinion is
      appealed. 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.





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 and Viskase Canada paid the $300
      (Canadian) 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
      $7,755 and $7,628, respectively, at exchange rates in effect on October 26,
      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 $88 and $790, respectively, at
      exchange rates in effect on October 26, 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. On October 25, 2006, Viskase Brazil presented oral
      arguments before the Brazilian administrative tax panel, which panel is expected
      to rule within 30 days.





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.





21
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            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
              September
              30,
                2006
            
            3
                Months
              Ended
              September
              30,
                2005
            
            9
                Months
              Ended
              September
              30,
                2006
            
            9
                Months
              Ended
              September
              30,
                2005NUMERATOR:(Loss)
                income available to common stockholders:Net
                (loss) income
            
            
            ($2,961
            )
            $
            3,609
            
            
            ($4,414
            )
            $
            218Net
                (loss) income available to common stockholders for basic and diluted
                EPS
            
            
            ($2,961
            )
            $
            3,609
            
            
            ($4,414
            )
            $
            218DENOMINATOR:Weighted
                average shares outstanding for basic EPS
            
            
            9,808,571
            
            
            9,715,954
            
            
            9,770,387
            
            
            9,692,212Weighted
                average shares outstanding for weighted EPS
            
            
            9,808,571
            
            
            10,517,668
            
            
            9,770,387
            
            
            10,547,767





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. In periods where a net loss is reported, the effect
      of
      these securities have not been included in weighted average shares for diluted
      EPS because they are anti-dilutive when there is a net loss.





The
      vested portion of the Restricted Stock is included in the weighted-average
      shares outstanding for basic earnings per share. Non-vested shares that vest
      based solely on continued employment and are not subject to any performance
      contingency are included in the computation of diluted EPS using the treasury
      stock method; however, the effects of these dilutive securities have not been
      included in weighted average shares for diluted EPS in the periods where a
      net
      loss is reported because they are anti-dilutive when there is a net
      loss.





**13****.**
            **Stock-Based
                Compensation (Dollars in Thousands, Except Per Share
                Amounts)**





In
      accordance with SFAS 123R, compensation expense for stock option grants
      recognized in the period ended September 30, 2006 equals $201.





The
      following table sets forth the pro forma amounts of net income and earnings
      per
      share for the three and nine-month periods ended September 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.




22
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            of Contents*





**VISKASE
      COMPANIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(In
      Thousands)**








(Dollars
                in Thousands, Except Per Share Amounts)
            
            3
                Months
            
            9
                MonthsEnded
                September
            
            Ended
                September30,
                2005
            
            30,
                2005Net
                income, as reported
            
            $
            3,609
            
            $
            218Deduct:
                Total stock-based compensation expense under a fair value based method,
                net of related tax effects
            
            
            (67
            )
            
            (201
            )Net
                income, pro forma
            
            $
            3,542
            
            $
            17Basic
                earnings per share, as reported
            
            $
            0.37
            
            $
            0.02Diluted
                earnings per share, as reported
            
            $
            0.34
            
            $
            0.02Basic
                earnings per share, pro forma
            
            $
            0.36
            
            $
            0.00Diluted
                earnings per share, pro forma
            
            $
            0.34
            
            $
            0.00








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.





The
      Company's outstanding options were:





Shares
                Under
              Option
            
            Weighted
                Average Exercise PriceOutstanding,
                December 31, 2005
            
            
            985,000
            
            $
            2.65GrantedExercisedForfeited
            
            
            (51,666
            )
            $
            2.90Outstanding,
                September 30, 2006
            
            
            933,334
            
            $
            2.63








Exercisable
      options as of September 30, 2006 were 311,678.





23
 *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 September 30, 2006 and September
      30, 2005 includes net foreign exchange transaction gains (losses) of
      approximately $5 and $(143), respectively.





Geographic
      Area Information:





9
                Months
              Ended
              September
                30,
              2006
            
            9
                Months
              Ended
              September
                30,
              2005Net
                sales:United
                States
            
            $
            87,577
            
            $
            88,704South
                America
            
            
            10,361
            
            
            6,220Europe
            
            
            60,709
            
            
            58,932$
            158,647
            
            $
            153,856Operating
                income (loss):United
                States
            
            $
            6,651
            
            $
            8,299Canada
            
            
            (308
            )
            
            (412
            )South
                America
            
            
            1,373
            
            
            (395
            )Europe
            
            
            (290
            )
            
            (1,108
            )$
            7,426
            
            $
            6,384Identifiable
                assets:United
                States
            
            $
            120,504
            
            $
            120,572Canada
            
            
            21
            
            
            28South
                America
            
            
            10,043
            
            
            8,083Europe
            
            
            72,974
            
            
            77,538$
            203,542
            
            $
            206,221United
                States export sales:(reported
                in United States net sales above)Asia
            
            $
            12,858
            
            $
            14,096South
                and Central America
            
            
            5,224
            
            
            3,687Canada
            
            
            6,517
            
            
            6,102Other
                international
            
            
            2,637
            
            
            3,092$
            27,236
            
            $
            26,977




24
 *Table
            of Contents*





**15.**
            **Subsequent
                Events**





Effective
      December 31, 2006, the Viskase non-contributory defined benefit retirement
      plan
      for U. S. employees who are not covered by a collective bargaining agreement
      will be frozen and participants will no longer earn additional benefits under
      the plan. In addition, the defined contribution plan for employees hired on
      or
      after April 1, 2003 that provided a three percent (3%) defined contribution
      benefit will be terminated. Effective January 1, 2007, employees who are not
      covered by a collective bargaining agreement will be eligible for a variable
      profit sharing contribution of up to
      8% of
      eligible earnings based upon the Company’s achievement of its annual EBITDA
      target. This plan will replace the existing variable profit sharing plan for
      employees who are not covered by a collective bargaining agreement that has
      a
      maximum payout of 3% of eligible earnings based upon the Company’s achievement
      of its annual EBITDA target.




In
      addition, the Company will (i) cease to provide postretirement life
      insurance benefits for current and future retirees of its United States
      operations who are not covered by a collective bargaining agreement and
      (ii) cease to provide postretirement medical and life insurance
      benefits for retirees of its Canadian operations as of December 31, 2006.
      The elimination of these United States and Canadian postretirement life and
      medical benefits will result in a projected $11,500 curtailment gain and
      reduction of the unfunded postretirement liability included in “Accrued employee
      benefits” on the consolidated balance sheet as of December 31,
      2006.




On
      November 7, 2006, the Company entered into a Series A Preferred Stock Purchase
      Agreement (the “SPA”) with Koala Holding LLC (“Koala”), Grace Brothers, Ltd.
      (“Grace Brothers”) and Northeast Investors Trust (“Northeast” and together with
      Koala and Grace Brothers, the “Investors”), pursuant to which the Investors
      agreed to purchase 12,307,692 shares of Series A Preferred Stock, par value
      $0.01 per share (the “Series A Preferred Stock”), of the Company at a purchase
      price of $1.95 per share. Koala agreed to purchase 10,769,231 shares for a
      purchase price of $21,000,000.45, Grace Brothers agreed to purchase 1,025,641
      shares for a purchase price of $1,999,999.95 and Northeast agreed to purchase
      512,820 shares for a purchase price of $999,999.00. Koala is an affiliate of
      Carl C. Icahn. Other affiliates of Mr. Icahn own 2,868,005 shares of the
      Company’s Common Stock, par value $0.01 per share (the “Common Stock”). Grace
      Brothers and Northeast also own Common Stock. The closing of the purchase and
      sale of the Series A Preferred Stock under the SPA occurred on November 8,
      2006.





Under
      the
      terms of the SPA, the Company has agreed to use commercially reasonable efforts
      to initiate a rights offering by no later than February 5, 2007 and to
      complete the rights offering by no later than May 6, 2007. The rights are
      expected to be outstanding for a period of sixty (60) days after the initiation
      of the rights offering. Pursuant to the rights offering, the Company would
      offer
      up to 12,307,692 shares of Common Stock at a purchase price of $1.95 per share.
      If the holders of rights, other than the Investors, exercise rights for
      $10,000,000 or more of Common Stock, then the Investors are required to exercise
      a ratable portion of their rights equal to the percentage of rights exercised
      by
      non-Investor holders of rights. The proceeds of such rights offering are
      required to be used to redeem Series A Preferred Stock.





The
      Series A Preferred Stock has an aggregate initial liquidation preference of
      $24,000,000. Each share of Series A Preferred Stock purchased pursuant to the
      SPA will accrue a minimum dividend of $0.219375 from the date of issuance to
      the
      earlier of the expiration or earlier termination of the rights offering or
      the
      six-month anniversary of the date of issuance. Thereafter, such shares will
      accrue dividends at the rate of 15% per annum. At the discretion of the Company,
      dividends on the Series A Preferred Stock may be paid in additional shares
      of
      Series A Preferred Stock in lieu of cash dividends. The holders of the Series
      A
      Preferred Stock are entitled to vote their shares on an as-converted basis
      as a
      single class together with the holders of the Common Stock. The ability of
      the
      Company to declare or pay dividends on the Common Stock will be restricted
      in
      the event that the Company fails to declare and pay full dividends on the Series
      A Preferred Stock.





The
      Series A Preferred Stock is both redeemable and convertible into common stock.
      Beginning on the six-month anniversary of the closing date, (i) the Series
      A
      Preferred Stock is convertible into Common Stock at the election of the holder
      at a conversion price of $1.365 per share and (ii) the Series A Preferred Stock
      is convertible into Common Stock in whole upon the written request of the
      holders of a majority of the Series A Preferred Stock at a conversion price
      of
      $1.365 per share. Provided that the rights offering has been initiated no later
      than ninety (90) days after the date of initial issuance of the Series A
      Preferred Stock, the Series A Preferred Stock not redeemed from the proceeds
      of
      the rights offering will automatically, shortly after the expiration or early
      termination of the rights offering, convert into Common Stock at a conversion
      price of $1.365 per share. The conversion prices are subject to anti-dilution
      adjustments.






25
 *Table
            of Contents*


The
        Company is required to redeem Series A Preferred Stock with the proceeds
        from
        the rights offering. In addition, the Series A Preferred Stock is redeemable
        at
        the election of the Company, and the holders shall have the right to require
        the
        Company to redeem Series A Preferred Stock, at any time after September 30,
        2011. The redemption price is the liquidation preference plus accrued but
        unpaid
        dividends.


The
      holders of Series A Preferred Stock will have the registration rights set forth
      in that certain Registration Rights Agreement entered into on November 7, 2006
      by and between the Company and the Investors (the “ Registration
      Rights Agreement ”).
      Under
      the Registration Rights Agreement, the Company is obligated to provide demand,
      piggyback and shelf resale registration rights for the Registrable Securities
      (as defined therein), in each case, subject to the terms and conditions set
      forth therein.





On
      November 6, 2006, the Company completed its consent solicitation of the holders
      of its 11.5% Senior Secured Notes due 2011 to the proposed amendments of certain
      provisions of the (a) Indenture, dated as of June 29, 2004, among the
      Company and LaSalle Bank National Association, as Trustee and Collateral Agent,
      (b) Security Agreement, dated as of June 29, 2004, among the Company and
      LaSalle Bank National Association, as Collateral Agent and
      (c) Intercreditor Agreement, dated as of June 29, 2004, among the Company,
      the Collateral Agent and Wells Fargo Foothill, Inc. Accordingly, on November
      7,
      2006, the Company entered into a First Supplemental Indenture with LaSalle
      Bank
      National Association, as Trustee and Collateral Agent, a First Amendment to
      Security Agreement with the Collateral Agent, and a First Amendment to
      Intercreditor Agreement with the Collateral Agent and Wells Fargo Foothill,
      Inc.
      These amendments, among other things, increase the general indebtedness basket
      and the foreign subsidiary investment basket, revise the terms upon which the
      Company’s 8% Subordinated Notes due 2008 may be redeemed, make conforming
      amendments for the possible issuance of additional 111⁄2 Senior Secured Notes due
      2011 to refinance the 8% Subordinated Notes due 2008 and make conforming changes
      for the issuance of the Series A Preferred Stock and the completion of the
      rights offering. The Company also entered into a Consent and Second Amendment
      to
      Loan and Security Agreement with Wells Fargo Foothill, Inc. on November 7,
      2006,
      amending that certain Loan and Security Agreement dated as of June 29,
      2004. This amendment, among other things, increases the existing general
      indebtedness basket and makes conforming amendments to permit the issuance
      of
      the Series A Preferred Stock and the completion of the rights offering.





26
 *Table
            of Contents*





ITEM
                2.
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS





Results
      of Operations





Company
      Overview





We
      are a
      worldwide leader in the manufacture and sale of cellulosic, fibrous and plastic
      casings for the processed meat industry. We currently operate eight manufacturing
      facilities and eight distribution centers throughout North America, Europe
      and
      South America and we derive approximately 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
      the 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;


·
            transfer
                  of the finishing operations from Kentland, Indiana to Monterrey,
                  Mexico;
                  and


·
            reducing
                the number of employees by approximately
                30%.




27
 *Table
            of Contents*





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





The
      following discussion compares the results of operations for the fiscal quarter
      ended September 30, 2006 to the results of operations for the fiscal quarter
      ended September 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:





Three
                Months
              Ended
              September
                30,
              2006
            
            Three
                Months
              Ended
              September
                30,
              2005
            
            %
              Change
              Over
              2005NET
                SALES
            
            $
            54.7
            
            $
            52.2
            
            
            4.6
            %COST
                AND EXPENSESCost
                of sales
            
            
            44.5
            
            
            41.8
            
            
            5.9
            %Selling,
                general and administrative
            
            
            7.9
            
            
            7.3
            
            
            7.9
            %Amortization
                of intangibles
            
            
            .1
            
            
            .1
            
            
            -0.9
            %Restructuring
                expense
            
            
            .5
            
            
            
            
            
            100.0
            %OPERATING
                INCOME
            
            
            1.7
            
            
            3.0
            
            
            -77.3
            %Interest
                income
            
            
            .0
            
            
            .2
            
            
            -365.9
            %Interest
                expense
            
            
            3.7
            
            
            3.2
            
            
            13.0
            %Post-retirement
                benefits curtailment gain
            
            
            
            
            
            (.7
            )
            
            NMOther
                expense (income), net
            
            
            .7
            
            
            (.8
            )
            
            NMIncome
                tax provision (benefit)
            
            
            .3
            
            
            (2.2
            )
            
            NMNET
                (LOSS) INCOME
            
            
            ($3.0
            )
            $
            3.6
            
            
            NM




Net
      Sales. Our net sales for the third quarter of 2006 were $54.7 million, which
      represents an increase of $2.5 million or 4.6% over the comparable prior
      quarter. Net sales benefited $0.7 million due to volume, $1.5 million due to
      foreign currency translation, and $0.3 million 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 relocation
      of certain machinery and equipmentwere not taking place. The Company
      expects to benefit from the transition of finishing to Mexico.





Cost
      of
      Sales. Cost of sales for third quarter of 2006 increased 5.9% 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 $1.9 million reduction from the elimination of
      certain postretirement medical benefits. Start-up costs associated with the
      Monterrey, Mexico finishing facility were approximately $1.7 million during
      the
      third quarter of 2006. Cost of sales for the third quarter of 2006 includes
      higher than normal costs in the Monterrey and Kentland facilities; these costs
      were not classified as start-up costs.





Selling,
      General and Administrative Expenses. Selling, general and administrative
      expenses increased $0.7 million
      during the third quarter of 2006 as compared to the third quarter of 2005.
      Selling, general and administrative expenses in the third quarter of 2006
      include start-up expense for our Monterrey, Mexico facility of $1.1 million
      offset by reductions from our continuous cost saving programs.





Restructuring
      Expenses. Restructuring expenses of $0.5 million in the third quarter of 2006
      resulted from approved plans to reduce headcount to address the Company’s
      competitive environment.





Operating
      Income. The operating income for the third quarter of 2006 was $1.7 million,
      representing a decrease of $1.3 million from the prior year. The decrease in
      the
      operating income resulted primarily from increased restructuring expenses and
      increased costs associated with the start-up of
      the
      Monterrey, Mexico finishing facility.





28
 *Table
            of Contents*





Interest
      Expense. Interest expense, net of interest income, for the third quarter of
      2006
      was $3.7 million, representing an increase of $0.7 million compared
      to the prior year period. The increase is primarily from higher
      interest expense on the paid-in-kind debt, interest on borrowings under our
      Revolving Credit Facility and reductions in the amount of capitalized interest
      charged to our capital projects and interest income.





Other
      Expense (Income). Other expense for the third quarter of 2006 was $ 0.7
      million compared to other income of $0.8 million for the third quarter of
      2005. The
      increase in other expense consists principally of an increase in the net loss
      related to foreign currency transactions.





Income
      Tax Provision (Benefit). An income tax provision of $0.3 million was recognized
      on the loss before income taxes of $2.8 million for the third 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 $3.0 million for the
      third quarter of 2006 compared to net income of $3.6 million for comparable
      prior year period.





Comparison
      of Results of Operations for the Nine Months Ended September 30, 2006 and
      September 30, 2005 *.*





** The
      following discussion compares the results of operations for the nine months
      ended September 30, 2006 to the results of operations for the nine months ended
      September 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:





Nine
                Months
              Ended
              September
                30,
              2006
            
            Nine
                Months
              Ended
              September
                30,
              2005
            
            %
              Change
              Over
              2005NET
                SALES
            
            $
            158.6
            
            $
            153.9
            
            
            3.0
            %COST
                AND EXPENSESCost
                of sales
            
            
            127.3
            
            
            122.8
            
            
            3.5
            %Selling,
                general and administrative
            
            
            22.6
            
            
            21.7
            
            
            4.1
            %Amortization
                of intangibles
            
            
            .3
            
            
            .5
            
            
            -44.4
            %Restructuring
                expense
            
            
            .9
            
            
            2.2
            
            
            -130.5
            %OPERATING
                INCOME
            
            
            7.4
            
            
            6.7
            
            
            10.3
            %Interest
                income
            
            
            .2
            
            
            .5
            
            
            -190.4
            %Interest
                expense
            
            
            10.3
            
            
            9.5
            
            
            8.6
            %Post-retirement
                benefits curtailment gain
            
            
            
            
            
            (.7
            )Other
                expense, net
            
            
            .9
            
            
            .0
            
            
            97.7
            %Income
                tax provision
            
            
            .7
            
            
            (1.9
            )
            
            NMNET
                (LOSS)
            
            
            ($4.4
            )
            $
            .2
            
            
            NM





Net
      Sales *.* Our
      net
      sales for the first nine months of 2006 were $158.6 million, which represents
      an
      increase of $4.7 million, or 3.0%, from the comparable prior year nine-month
      period. Net sales benefited $5.2 million from an increase in volume and $0.3
      million due to foreign currency translation gain offset by a $0.8 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 relocation
      of certain machinery and equipment were not taking place. The Company
      expects to benefit from the transition of finishing to Mexico.




29
 *Table
            of Contents*





Cost
      of
      Sales *.* Cost of
      sales for the first nine months of 2006 increased 3.5% from the comparable
      prior
      year nine-month period, but remained level as a percent of net sales (80% in
      both 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 $5.9 million reduction from the
      elimination of certain postretirement medical benefits. Start-up costs
      associated with the Monterrey, Mexico finishing facility were approximately
      $2.4
      million during the first nine months of 2006. Cost of sales for the first nine
      months of 2006 includes higher than normal costs in the Monterrey and Kentland
      facilities; these costs were not classified as start-up costs .





Selling,
      General and Administrative Expenses *.* Selling,
      general and administrative expenses increased $2.7 million
      for the first nine-months of 2006 to $44.5 million as compared to the first
      nine-months of 2005. Selling, general and administrative expenses in the first
      nine-months of 2006 include start-up expense of our Monterrey, Mexico facility
      of $2.9 million offset by reductions from our continuous cost saving programs.





Operating
      Income *.* The
      operating income for the first nine months of 2006 was $7.4 million,
      representing an increase of $0.7 million from the prior year first nine months.
      The increase in the operating income resulted primarily of decreased
      restructuring expenses offset by higher selling, general, and administrative
      expenses. Operating income for the first nine 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 nine months of
      2006
      includes a restructuring charge of $0.9 million.





Interest
      Expense *.* Interest
      expense, net of interest income, for the first nine months of 2006 was $10.1
      million, or an increase of $1.1 compared
      to the prior year period. The increase is primarily higher interest expense
      on
      the paid-in-kind debt, interest on borrowings under our Revolving Credit
      Facility and from a $0.4 million reduction in capitalized interest charged
      to
      our capital projects.





Other
      Expense *.* Other
      expense of approximately $0.9 million for the first nine months of 2006 consists
      principally of a $0.5 million related to expenses for strategic planning
      initiatives.





Income
      Tax Provision. ** During
      2006, an income tax provision of $0.7 million was recognized on the loss before
      income taxes of $3.8 million resulting principally from an income tax provision
      for income earned by our foreign subsidiaries.





Primarily
      as a result of the factors discussed above, net loss for the first nine months
      of 2006 was $4.4 million compared to net income of $0.2 million for the first
      nine 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 $2.8 million in 2006 and decreased comprehensive income by $3.1 million
      during the comparable period in 2005.





Liquidity
      and Capital Resources





Cash
      and
      cash equivalents decreased by $8.4 million during the first nine months of
      2006.
      Cash flows used in operating activities were $14.0 million and used in
      investi ng
      activities were $8.6 million. Cash flows provided by financing activities were
      $13.8 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. Cash flows provided by financing activities principally
      consisted of borrowing under our Revolving Credit Facility.





As
      of
      September 30, 2006 the
      Company had positive working capital of approximately $33.1 million including
      restricted cash of $3.3
      million, with
      additional amounts available under its Revolving Credit Facility.





30
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As
      of
      November 8, 2006, following the completion of the Company’s Series A Preferred
      Stock issuance, the Company had no borrowings under its Revolving Credit
      Facility and had availability in excess of $14 million with respect to its
      Revolving Credit Facility.





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 substantiallycomplete the move by the end of 2006 and to incur start-up costs through
      the first quarter of 2007. The relocation of the finishing operations has been
      funded by use of cash, cash equivalents, and borrowing under our Revolving
      Credit Facility and equity proceeds.





As
      a
      result of the Company’s move to Mexico for the production of certain products,
      an evaluation of the realizability of certain of its facilities and other fixed
      assets will be completed in the fourth quarter of 2006. This evaluation could
      result in a non-cash charge to earnings at that time.





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
            
            $
            15.0
                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 $10.0
      million. The
      Company was in compliance with the minimum annual level of EBITDA as of
      September 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 September 30, 2006 is approximately
      116%.




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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
      that 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.





On
      November 7, 2006, the Company entered into a First Supplemental Indenture to
      amend the provisions of the 11.5% Senior Notes Indenture. Pursuant thereto,
      the
      Indenture was amended (i) to permit the issuance and redemption of $24.0 million
      of Series A Preferred Stock, (ii) to permit the offering of $24.0 million of
      Common Stock by the Company in connection in connection with and to redeem
      the
      Series A Preferred Stock, (iii) to modify the definitions of Consolidated Net
      Income, Permitted Indebtedness and Permitted Investment, (iv) to reduce the
      minimum annual level of EBITDA for the fiscal quarters ending December 31,
      2006
      though September 30, 2008 from $16.0 million to $15.0 million (v) to modify
      the
      proviso that such minimum annual level of EBITDA covenant is in effect only
      when
      the amount of unrestricted cash and availability under the Revolving Credit
      Facility is below $10.0 million, (vi) to revise the required reporting to
      holders, (vii) to modify the Consolidated Net Worth and Fixed Charge Coverage
      Ratio requirement related to a merger, consolidation or sale of assets and
      (viii) to permit the possible issuance of additional 11.5% Senior Secured Notes
      to refinance the 8% Subordinated Notes due 2008.




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 September 30, 2006.





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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





Indebtedness
      under the Revolving Credit Facility is secured by liens on substantially all
      of
      the Company’s and the Company’s domestic subsidiaries’ assets, with liens: (i)
      on inventory, accounts receivable, lockboxes, deposit accounts into which
      payments are deposited and proceeds thereof, which will be contractually senior
      to the liens securing the 11.5% Senior Secured Notes and the related guarantees
      pursuant to an intercreditor agreement; (ii) on real property, fixtures and
      improvements thereon, equipment and proceeds thereof, which will be
      contractually subordinate to the liens securing the 11.5% Senior Secured Notes
      and such guarantees pursuant to such intercreditor agreement; (iii) on all
      other
      assets, which will be contractually *pari
      passu* with the
      liens securing the 11.5% Senior Secured Notes and such guarantees pursuant
      to
      such intercreditor agreement.





On
      November 7, 2006, the Company entered into an amendment of the Revolving Credit
      Facility. Pursuant thereto, the Revolving Credit Facility was amended (i) to
      permit the issuance and redemption of $24.0 million of Series A Preferred Stock,
      (ii) to permit the offering of $24.0 million of Common Stock by the Company
      in
      connection in connection with and to redeem the Series A Preferred Stock, (iii)
      to add or modify the definitions of Maquiladora, Maquila Program, Capital
      Expenditures, Notes and Permitted Investments, (iv) to increase the amount
      of
      the existing Permitted Investment and Permitted Indebtedness baskets, and (v)
      to
      permit issuance of additional 11.5% Senior Secured Notes to refinance the 8%
      Subordinated Notes due 2008.





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 three quarters ended September 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 September 30, 2006 is $15.8
      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 September
      30,
      2006.





33
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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 substantiallycomplete the move 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 September 30, 2006,
      we
      have made capital expenditures of approximately $9.6 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 first
      quarter of 2007. 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 nine months of 2006 and the first nine months of
      2005
      totaled $8.7 million and $9.8 million, respectively. The 2006 capital
      expenditures are principally related to the relocation of finishing operations
      to Mexico.





During
      the first nine months of 2006, we spent approximately $1.8 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 $50.7 million
      at September 30, 2006.





Expected
      annual cash contributions for pension and postretirement benefit liabilities
      are
      expected to be (in
      millions):





2006
            
            2007
            
            2008
            
            2009
            
            2010Pension
            
            $
            12.5
            
            $
            11.2
            
            $
            9.1
            
            $
            7.7
            
            $
            7.3Postretirement
                benefits
            
            
            0.9
            
            
            0.2
            
            
            0.1
            
            
            0.1
            
            
            0.1Total
            
            $
            13.4
            
            $
            11.4
            
            $
            9.2
            
            $
            7.8
            
            $
            7.4





Other





As
      of
      September 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
            
            $
            14,02711.5%
                Senior Secured Notes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            90,0008%
                Subordinated Notes
            
            
            
            
            
            
            
            $
            18,684Other
            
            
            74
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,019$
            14,101
            
            
            
            
            $
            18,684
            
            
            
            
            
            
            
            $
            91,019





(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.





34
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Revenue
      Recognition





The
      Company’s revenues are recognized at the time products are shipped to the
      customer, under F.O.B. Shipping Point terms or under F.O.B. Port terms. Revenues
      are net of any discounts, rebates and allowances. The Company records all labor,
      raw materials, in-bound freight, plant receiving and purchasing, warehousing,
      handling and distribution costs as a component of cost of goods
      sold.





Allowance
      for Doubtful Accounts Receivable


Accounts
      receivable have been reduced by an allowance for amounts that may become
      uncollectible in the future. This estimated allowance is primarily based upon
      our evaluation of the financial condition of each customer, each customer’s
      ability to pay and historical write-offs.





Allowance
      for Obsolete and Slow Moving Inventories





Inventories
      are valued at the lower of cost or market. The inventories have been reduced
      by
      an allowance for slow moving and obsolete inventories. The estimated allowance
      is based upon management’s estimate of specifically identified items, the age of
      the inventory and historical write-offs of obsolete and excess inventories.





Deferred
      Income Taxes





Deferred
      tax assets and liabilities are measured using enacted tax laws and tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. The effect on deferred
      tax
      assets and liabilities due to a change in tax rates is recognized in income
      in
      the period that includes the enactment date. In addition, the amounts of any
      future tax benefits are reduced by a valuation allowance to the extent such
      benefits are not expected to be realized on a more likely than not basis.





Pension
      Plans and Other Postretirement Benefit Plans





Our
      North
      American operations have defined benefit retirement plans that cover
      substantially all salaried and full-time hourly employees who were hired 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 sheet 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 sheet in
      2004.





35
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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 sheet 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 $5.882 million was recorded as a reduction to cost of sales
      during the first three quarters of 2006 and the Company will recognize a total
      of $7.856 million during 2006.





Effective
      December 31, 2006, the Viskase non-contributory defined benefit retirement
      plan
      for U. S. employees who are not covered by a collective bargaining agreement
      will be frozen and participants will no longer earn additional benefits under
      the plan. In addition, the defined contribution plan for employees hired on
      or
      after April 1, 2003 that provided a three percent (3%) defined contribution
      benefit will be terminated. Effective January 1, 2007, employees who are not
      covered by a collective bargaining agreement will be eligible for a variable
      profit sharing contribution of up to 8% of eligible earnings based upon the
      Company’s achievement of its annual EBITDA target. This plan will replace the
      existing variable profit sharing plan for employees who are not covered by
      a
      collective bargaining agreement that has a maximum payout of 3% of eligible
      earnings based upon the Company’s achievement of its annual EBITDA target.




In
      addition, the Company will (i) cease to provide postretirement life
      insurance benefits for current and future retirees of its United States
      operations who are not covered by a collective bargaining agreement and
      (ii) cease to provide postretirement medical and life insurance
      benefits for retirees of its Canadian operations as of December 31, 2006.
      The elimination of these United States and Canadian postretirement life and
      medical benefits will result in a projected $11.5 million curtailment gain
      and
      reduction of the unfunded postretirement liability included in “Accrued employee
      benefits” on the consolidated balance sheet as of December 31,
      2006.





The
      weighted average plan asset allocation at December 31, 2005 and 2004, and target
      allocation (not weighted) for 2006, are as follows:





Percentage
                of Plan
              Assets
            
            2006
              TargetAsset
                Category
            
            2005
            
            2004
            
            AllocationEquity
                Securities
            
            
            77.2
            %
            
            62.5
            %
            
            60.0
            %Debt
                Securities
            
            
            21.2
            %
            
            35.2
            %
            
            40.0
            %Other
            
            
            1.6
            %
            
            2.3
            %
            
            0.0
            %Total
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %





As
      of
      January 1, 2006, we have assumed that the expected long-term rate of return
      on
      plan assets will be 8.5 %.
      This is
      unchanged from the level
      assumed for 2005. 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.





36
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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 September 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 and when
      circumstances warrant. As
      a
      result of the Company’s move to Mexico for the production of certain products,
      an evaluation of the realizability of certain of its facilities and other fixed
      assets will be completed in the fourth quarter of 2006. This evaluation could
      result in a non-cash charge to earnings at that time.





Off-Balance
      Sheet Arrangements





We
      do not
      have off-balance sheet arrangements, financing or other relations with
      unconsolidated entities or other persons.





Taxes
      Collected from Customers and Remitted to Governmental
      Authorities





Taxes
      collected from customers and remitted to governmental authorities are recorded
      on the net method .





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’s November 16, 2005 order with regard to
      the principal tax liability in 1988 and 1999. On October 31, 2006, the United
      States District Court affirmed the Bankruptcy Court order. 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 if the District Court’s opinion is appealed. 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.





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 $7.8 million and $7.6 million, respectively at exchange
      rates
      in effect on October 26, 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 October
      26, 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. On October 25, 2006,
      Viskase Brazil presented oral arguments before the Brazilian administrative
      tax
      panel, which panel is expected to rule within 30 days.





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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
      September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements.”  SAB 108 was issued to
      provide consistency between how registrants quantify financial statement
      misstatements.





Historically,
      there have been two widely-used methods for quantifying the effects of financial
      statement misstatements.  These methods are referred to as the “roll-over”
and “iron curtain” method.  The roll-over method quantifies the amount by
      which the current year income statement is misstated.  Exclusive reliance
      on an income statement approach can result in the accumulation of errors on
      the
      balance sheet that may not have been material to any individual income
      statement, but which may misstate one or more balance sheet accounts.  The
“iron curtain” method quantifies the error as the cumulative amount by which the
      current year balance sheet is misstated.   Exclusive reliance on a
      balance sheet approach can result in disregarding the effects of errors in
      the
      current year income statement that results from the correction of an error
      existing in previously issued financial statements.  We currently use the
“roll-over” method for quantifying identified financial statement
      misstatements.





SAB
      108
      established an approach that requires quantification of financial statement
      misstatements based on the effects of the misstatement on each of the company’s
      financial statements and the related financial statement disclosures.  This
      approach is commonly referred to as the “dual approach” because it requires
      quantification of errors under both the roll-over and iron curtain
      methods.





SAB
      108
      allows registrants to initially apply the dual approach either by (1)
      retroactively adjusting prior financial statements as if the “dual approach” had
      always been used or by (2) recording the cumulative effect of initially applying
      the dual approach as adjustments to the carrying values of assets and
      liabilities as of January 1, 2006 with an offsetting adjustment recorded to
      the
      opening balance of retained earnings.    Use of this “cumulative
      effect” transition method requires detailed disclosure of the nature and amount
      of each individual error being corrected through the cumulative adjustment
      and
      how and when it arose.





We
      will
      initially apply SAB 108 using the cumulative effect transition method in
      connection with the preparation of our annual financial statements for the
      year
      ending December 31, 2006.  When we initially apply the provisions of SAB
      108, we expect to record an increase in Receivables of approximately $0.3
      million and an increase in retained earnings of approximately $0.3 million
      as of
      January 1, 2006.  The accompanying financial statements do not reflect
      these adjustments.





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In
      September 2006, FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements
      No. 87, 88, 106, and 132(R),” which requires employers to: (a) recognize in its
      statement of financial position an asset for a plan’s overfunded status or a
      liability for a plan’s underfunded status; (b) measure a plan’s assets and its
      obligations that determine its funded status as of the end of the employer’s
      fiscal year; and (c) recognize changes in the funded status of a defined benefit
      postretirement plan in the year in which the changes occur. Those changes will
      be reported in comprehensive income of a business entity. The requirement to
      recognize the funded status of a benefit plan and the disclosure requirements
      are effective as of the end of the fiscal year ending after December 15, 2006,
      for entities with publicly traded equity securities. The requirement to measure
      plan assets and benefit obligations as of the date of the employer’s fiscal
      year-end statement of financial position is effective for fiscal years ending
      after December 15, 2008. The company is assessing SFAS No. 158 and has not
      determined yet the impact that the adoption of SFAS No. 158 will have on its
      result of operations or financial position.





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.




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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;





•
            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.





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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 September 30, 2006, a 10% devaluation of the U.S. dollar would
      increase the Company’s consolidated financial position by approximately $0.029
      million for 2006 and $0.246 million for the comparable period 2005. Exchange
      rate fluctuations increased comprehensive income by $2.825 million for 2006
      and
      decreased income by $3.127 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 gain on the change of fair
      value of the future contracts open during the fourth the quarter of 2006 was
      recorded in “Other (income) expense”, net and was immaterial.





ITEM4.
            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
      September 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 September 30, 2006, that have materially
      affected, or are reasonably likely to materially affect, the Company's internal
      controls over financial reporting.




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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.




42
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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:
      November 14, 2006




43