SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

 X      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934 - For the fiscal year ended December 31, 2005

Commission file number      1-3919
                           --------

                     Keystone Consolidated Industries, Inc.
             (Exact name of registrant as specified in its charter)

         Delaware                                             37-0364250
--------------------------------                        -----------------------
(State or other jurisdiction of                              (IRS Employer
incorporation or organization)                             Identification No.)

5430 LBJ Freeway, Suite 1740
Three Lincoln Centre, Dallas, TX                                   75240-2697
--------------------------------------------                     -------------
(Address of principal executive offices)                          (Zip Code)

Registrant's telephone number, including area code:           (972) 458-0028
                                                            ------------------

Securities registered pursuant to Section 12(b) of the Act:

         None.

Securities registered pursuant to Section 12(g) of the Act:

                              Title of each class
                          ------------------------------
                           Common Stock, $.01 par value

  Indicate by check mark:

     If the Registrant is a well-known  seasoned issuer,  as defined in Rule 405
     of the Securities Act. Yes     No X

     If the Registrant is not required to file reports pursuant to Section 13 or
     Section 15(d) of the Act. Yes  No X

     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 and (2) has been  subject to such filing  requirements
     for the past 90 days. Yes X     No

     If disclosure of delinquent  filers  pursuant to Item 405 of Regulation S-K
     is not  contained  herein,  and  will  not be  contained,  to the  best  of
     registrant's  knowledge,  in  definitive  proxy or  information  statements
     incorporated by reference in Part III of this Form 10-K or any amendment to
     this Form 10-K. [ ]

     Whether the Registrant is a large  accelerated  filer, an accelerated filer
     or a  non-accelerated  filer (as  defined in Rule 12b-2 of the Act).  Large
     accelerated filer Accelerated filer           Non-accelerated filer X .

     Whether the  Registrant is a shell company (as defined in Rule 12b-2 of the
     Exchange Act). Yes        No X

     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 .

The  aggregate  market  value of the  5,077,832  shares of voting  stock held by
nonaffiliates  of the Registrant,  as of June 30, 2005 (the last business day of
the  Registrant's   most-recently   completed   second  fiscal   quarter),   was
approximately $508,000.

As of March 31, 2006 10,000,000 shares of common stock were outstanding.

                       Documents incorporated by reference
                       -----------------------------------

The  information  required by Part III is  incorporated  by  reference  from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to  Regulation  14A not later  than 120 days  after the end of the  fiscal  year
covered by this report.
<PAGE>

                                     PART I

ITEM 1. BUSINESS.

Bankruptcy

     On February 26, 2004, Keystone Consolidated Industries, Inc. ("Keystone" or
the  "Company")  and five of its  direct  and  indirect  subsidiaries  filed for
voluntary  protection under Chapter 11 of the Federal Bankruptcy Code.  Keystone
and its filing  subsidiaries filed their petitions in the U.S.  Bankruptcy Court
for the Eastern  District of Wisconsin in Milwaukee  (the  "Court").  Keystone's
amended plan of reorganization  was accepted by the impacted  constituencies and
confirmed by the Court on August 10, 2005 and  Keystone  emerged from Chapter 11
on August 31, 2005.

     Keystone attributed the need to reorganize to weaknesses in product selling
prices over the last several  years,  unprecedented  increases in ferrous  scrap
costs,  Keystone's  primary raw material,  and  significant  liquidity  needs to
service employee and retiree medical costs. These problems substantially limited
Keystone's  liquidity and  undermined its ability to obtain  sufficient  debt or
equity capital to operate as a going concern.

     Significant   provisions  of  Keystone's  amended  plan  of  reorganization
included, among other things:

     o    Assumption of the  previously  negotiated  amendment to the collective
          bargaining  agreement with the Independent Steel Workers Alliance (the
          "ISWA"),  Keystone's  largest  labor union that  related  primarily to
          greater employee participation in healthcare costs;
     o    Assumption  of  the  previously  negotiated  agreements  reached  with
          certain  retiree  groups  that  will  provide  relief  by  permanently
          reducing  healthcare  related  payments to these  retiree  groups from
          pre-petition levels;
     o    The Company's  obligations due to  pre-petition  secured lenders other
          than its Debtor-In-Possession  lenders were reinstated in full against
          reorganized Keystone;
     o    All shares of Keystone's common and preferred stock outstanding at the
          petition date (February 26, 2004) were cancelled;
     o    Pre-petition  unsecured creditors with allowed claims against Keystone
          will receive,  on a pro rata basis, in the aggregate,  $5.2 million in
          cash, a $4.8 million secured promissory note and 49% of the new common
          stock of reorganized Keystone;
     o    Certain  operating  assets and  existing  operations  of Sherman  Wire
          Company ("Sherman Wire"), one of Keystone's pre-petition  wholly-owned
          subsidiaries,  will be sold at fair  market  value to  Keystone  (fair
          market value and book value both approximate  $2.0 million),  and will
          then be  used  to  form  and  operate  a  newly  created  wholly-owned
          subsidiary of  reorganized  Keystone named Keystone Wire Products Inc.
          ("KWP");
     o    Sherman Wire was also  reorganized  and the proceeds of the  operating
          asset sale to Keystone and  liquidation  of Sherman  Wire's  remaining
          real estate assets (book value  approximately  $1.6 million) and other
          funds will be  distributed,  on a pro rata  basis,  to Sherman  Wire's
          pre-petition   unsecured   creditors   as  their  claims  are  finally
          adjudicated;
     o    Sherman Wire's pre-petition wholly-owned  non-operating  subsidiaries,
          J.L. Prescott Company,  and DeSoto Environmental  Management,  Inc. as
          well as Sherman Wire of Caldwell,  Inc., a wholly-owned  subsidiary of
          Keystone, will ultimately be liquidated and the pre-petition unsecured
          creditors  with allowed  claims  against  these  entities will receive
          their  pro-rata  share  of the  respective  entity's  net  liquidation
          proceeds;
     o    Pre-petition  unsecured creditors with allowed claims against FV Steel
          & Wire Company,  another one of Keystone's wholly-owned  subsidiaries,
          will receive cash in an amount equal to their allowed claims;
     o    One of Keystone's Debtor-In-Possession lenders, EWP Financial, LLC (an
          affiliate  of  Contran  Corporation  ("Contran"),  Keystone's  largest
          pre-petition  shareholder)  converted  $5  million  of its DIP  credit
          facility,  certain of its pre-petition unsecured claims and all of its
          administrative  claims  against  Keystone  into 51% of the new  common
          stock of reorganized Keystone; and
     o    The Board of Directors of  reorganized  Keystone now consists of seven
          individuals,  two each of which were  designated  by  Contran  and the
          Official Committee of Unsecured Creditors (the "OCUC"),  respectively.
          The remaining three directors qualify as independent directors (two of
          the  independent  directors  were appointed by Contran with the OCUC's
          consent and one was appointed by the OCUC with Contran's consent).

In addition,  Keystone has obtained an $80 million  secured credit facility from
Wachovia Capital Finance (Central). Proceeds from this credit facility were used
to extinguish Keystone's existing Debtor-In-Possession ("DIP") credit facilities
and to provide  working  capital  for  reorganized  Keystone.  See Note 2 to the
Consolidated Financial Statements.

General

     Keystone believes it is a leading domestic manufacturer of steel fabricated
wire  products,  wire  mesh,  nails,  industrial  wire  and  wire  rod  for  the
agricultural,  industrial,  construction,  original  equipment  manufacturer and
retail consumer markets, and believes it is one of the largest  manufacturers of
fabricated  wire  products in the United  States based on tons shipped  (101,000
tons in 2005). Keystone is vertically integrated,  converting  substantially all
of its fabricated wire products,  wire mesh, nails and industrial wire from wire
rod produced in its steel  mini-mill.  The Company's  vertical  integration  has
historically  allowed it to benefit  from the  higher  and more  stable  margins
associated  with fabricated wire products and wire mesh as compared to wire rod,
as well  as  from  lower  production  costs  of  wire  rod as  compared  to wire
fabricators  that  purchase  wire rod in the open market.  Moreover,  management
believes Keystone's  downstream  fabricated wire products,  wire mesh, nails and
industrial  wire  businesses  better  insulate  it from the  effects of wire rod
imports as compared to non-integrated wire rod producers.  In 2005, Keystone had
net sales of $367.5 million.  Approximately  65% of the Company's net sales were
generated  from  sales  of  fabricated  wire  products,  wire  mesh,  nails  and
industrial wire with the balance generated  primarily from sales of wire rod not
used in Keystone's own downstream operations.

     The Company's fabricated wire products, which comprised 30% of its 2005 net
sales, include agricultural fencing,  barbed wire, hardware cloth and woven wire
mesh.  These  products  are  sold  to  agricultural,  construction,  industrial,
consumer  do-it-yourself  and other  end-user  markets.  Keystone  serves  these
markets through distributors,  agricultural  retailers,  building supply centers
and consumer do-it-yourself chains such as Tractor Supply Co., Lowe's Companies,
Inc., and Ace Hardware Corporation.  A significant  proportion of these products
are sold to  agricultural,  consumer  do-it-yourself  and other end-user markets
which in  management's  opinion  are  typically  less  cyclical  than many steel
consuming  end-use markets such as the automotive,  construction,  appliance and
machinery manufacturing industries. Management believes the Company's ability to
service these  customers with a wide range of fabricated  wire products  through
multiple  production  and  distribution  locations  provides  it  a  competitive
advantage in accessing these growing and less cyclical markets.

     Keystone   sells  bulk  and  packaged  nails   primarily  to   construction
contractors and building product  manufacturers  and  distributors.  The Company
sells  approximately  26% of its nails  through  PrimeSource,  Inc.,  one of the
largest nail distributors in the United States, under PrimeSource's Grip-Rite(R)
label. During 2005, nails accounted for approximately 3% of Company net sales.

     Approximately  84% of Keystone's net sales of fabricated  wire products and
nails are generated by sales under the RED BRAND trademark,  a widely recognized
brand name in the agricultural  fencing and  construction  marketplaces for more
than 80 years.

     The Company  manufactures a wide variety of wire mesh rolls and sheets used
to form wire  reinforcement  in  concrete  construction  projects  such as pipe,
precast boxes and other applications,  including use in roadways,  buildings and
bridges through its  wholly-owned  subsidiary,  Engineered  Wire Products,  Inc.
("EWP").  The Company's largest wire mesh customers include pipe  manufacturers,
culvert  manufacturers,  rebar fabricators and steel  reinforcing  distributors.
Sales of wire mesh accounted for approximately 17% of the Company's consolidated
net sales during 2005.

     The Company also sells industrial wire, an intermediate product used in the
manufacture of fabricated wire products,  to third parties who are generally not
competitors.  Keystone's  industrial  wire customers  include  manufacturers  of
nails,  coat hangers,  barbecue grills,  air  conditioners,  tools,  containers,
refrigerators and other appliances.  In 2005,  industrial wire accounted for 14%
of Company net sales. In addition, Keystone also sells carbon steel rod into the
open market  that it is not able to consume in its  downstream  fabricated  wire
products,  wire mesh,  nails and industrial wire  operations.  During 2005, open
market sales of wire rod accounted for 32% of Company net sales.

     Prior to July 2003,  the  Company  owned a 51%  interest in Garden Zone LLC
("Garden  Zone"),  a  distributor  of wire,  plastic  and wood  lawn and  garden
products to  retailers.  In July 2003,  Garden  Zone  purchased  Keystone's  51%
ownership in Garden Zone.  During 2003, sales by Garden Zone accounted for 4% of
Company net sales.  In addition,  Keystone is engaged in ferrous scrap recycling
through its  unconsolidated  50%  interest in Alter  Recycling  Company,  L.L.C.
("ARC"). See Notes 3 and 4 to the Consolidated Financial Statements.

     See "Business -- Products, Markets and Distributions" and Notes 3 and 14 to
the Consolidated Financial Statements.

     The Company's annual billet production  capacity is 820,000 tons.  However,
since  Keystone's  rod  production is constrained by the 800,000 ton capacity of
its rod mill, the Company  anticipates any excess billet production will be sold
externally.

     The Company is the successor to Keystone  Steel & Wire  Company,  which was
founded in 1889.  Contran owns 51% of the Company's common stock at December 31,
2005.  Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and  grandchildren of Mr. Harold
C. Simmons,  of which Mr. Simmons is sole trustee,  or is held by Mr. Simmons or
persons or other entities related to Mr. Simmons.  Consequently, Mr. Simmons may
be deemed to  control  the  Company.  See Note 2 to the  Consolidated  Financial
Statements.

     As  provided  by the  safe  harbor  provisions  of the  Private  Securities
Litigation  Reform Act of 1995, the Company cautions that the statements in this
Annual  Report on Form 10-K  relating to matters that are not  historical  facts
including,  but not limited to,  statements  found in this Item 1 -  "Business",
Item 1A - "Risk Factors",  Item 3 - "Legal Proceedings",  Item 7 - "Management's
Discussion And Analysis Of Financial  Condition And Results Of Operations",  and
Item 7A - "Quantitative  and  Qualitative  Disclosures  About Market Risk",  are
forward-looking  statements that represent  management's beliefs and assumptions
based on currently  available  information.  Forward-looking  statements  can be
identified by the use of words such as "believes",  "intends",  "may", "should",
"could", "anticipates", "expected", or comparable terminology, or by discussions
of strategies or trends.  Although Keystone believes the expectations  reflected
in such forward-looking statements are reasonable, it cannot give any assurances
that these  expectations  will prove to be  correct.  Such  statements  by their
nature involve  substantial  risks and  uncertainties  that could  significantly
mpact expected  results,  and actual future results could differ materially from
those described in such forward-looking statements.  While it is not possible to
identify all factors,  Keystone  continues to face many risks and uncertainties.
Among the factors that could cause actual  future  results to differ  materially
are the  risks and  uncertainties  discussed  in this  Annual  Report  and those
described  from time to time in the Company's  other filings with the Securities
and Exchange Commission (the "SEC"), including, but not limited to:

     o    Future  supply  and  demand  for  the  Company's  products  (including
          cyclicality thereof),
     o    Customer inventory levels,
     o    Changes in raw  material  and other  operating  costs (such as ferrous
          scrap and energy),
     o    The possibility of labor disruptions,
     o    General global economic and political conditions,
     o    Competitive products and substitute products,
     o    Customer and competitor strategies,
     o    The impact of pricing and production decisions,
     o    Environmental  matters (such as those requiring emission and discharge
          standards for existing and new facilities),
     o    Government regulations and possible changes therein,
     o    Significant  increases  in the cost of providing  medical  coverage to
          employees,
     o    The ultimate resolution of pending litigation,
     o    International  trade policies of the United States and certain foreign
          countries,
     o    Operating  interruptions  (including,   but  not  limited  to,  fires,
          explosions,  unscheduled  or  unplanned  downtime  and  transportation
          interruptions),
     o    The ability of the Company to renew or refinance credit facilities,
     o    Any possible future litigation, and
     o    Other risks and  uncertainties  as  discussed  in this Annual  Report,
          including, without limitation, the sections referenced above.

Should one or more of these risks  materialize  (or the  consequences  of such a
development  worsen),  or should the  underlying  assumptions  prove  incorrect,
actual  results  could  differ  materially  from those  forecasted  or expected.
Keystone  disclaims  any  intention  or  obligation  to  update  or  revise  any
forward-looking statement whether as a result of new information,  future events
or otherwise.


Manufacturing

     The Company's  manufacturing  operations consist of an electric arc furnace
mini-mill,  a rod mill and three wire and wire product  fabrication  facilities.
The  manufacturing  process  commences at the  Company's  Keystone  Steel & Wire
("KSW")  facility in Peoria,  Illinois  with ferrous  scrap being loaded into an
electric  arc  furnace  where  it  is  converted  into  molten  steel  and  then
transferred to a ladle refining  furnace where  chemistries and temperatures are
monitored and adjusted to specifications  prior to casting. The Company believes
it is one of the largest  recyclers  of ferrous  scrap in the State of Illinois.
The  molten  steel  is  transferred  from  the  ladle  refining  furnace  into a
six-strand  continuous  casting machine which produces  five-inch square strands
referred to as billets that are cut to  predetermined  lengths.  These  billets,
along with any billets  purchased,  if any,  from  outside  suppliers,  are then
transferred to the adjoining rod mill.

     Upon entering the rod mill, the billets are brought to rolling  temperature
in a reheat furnace and are fed to the rolling mill,  where they are finished to
a variety of diameters and specifications. After rolling, the wire rod is coiled
and  cooled.  After  cooling,  the  coiled  wire rod passes  through  inspection
stations for  metallurgical,  surface and diameter  checks.  Finished  coils are
compacted and tied, and either transferred to the Company's other facilities for
processing into industrial  wire,  nails and fabricated wire products or shipped
to wire rod customers.

     While the Company  does not  maintain a  significant  "shelf"  inventory of
finished wire rod, it generally has on hand  approximately a one-month supply of
industrial  wire,  nails and fabricated  wire products  inventory  which enables
Keystone to fill customer orders and respond to shifts in product demand.

Products, Markets and Distribution

     The  following  table sets forth  certain  information  with respect to the
Company's steel and wire product mix in each of the last three years.

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                 -----------------------------------------------------------------------------
                                           2003                        2004                        2005
                                 ----------------------      ----------------------     ----------------------

                                  Percent       Percent       Percent       Percent      Percent       Percent
                                  of Tons          Of         of Tons         of         of Tons          of
           Product                Shipped        Sales        Shipped        Sales       Shipped        Sales
           -------                -------        -----        -------        -----       -------        -----

Fabricated wire
<S>                                <C>           <C>           <C>           <C>          <C>           <C>
  products                         22.0%         36.0%         22.6%         31.4%        19.2%         30.1%
Wire mesh                          10.7          12.0          13.8          16.3         13.6          17.2
Nails                               8.6          10.0           5.4           5.8          3.2           3.4
Industrial wire                    14.9          14.0          16.0          16.1         13.7          14.4
Wire rod                           41.0          26.8          38.9          29.6         44.9          32.4
Billets                             2.8           1.2           3.3            .8          5.4           2.5
                                  -----         -----         -----         -----        -----         -----
                                  100.0%        100.0%        100.0%        100.0%       100.0%        100.0%
                                  =====         =====         =====         =====        =====         =====
</TABLE>


     Fabricated Wire Products.  Keystone is one of the leading  suppliers in the
United  States of  agricultural  fencing,  barbed  wire,  stockade  panels and a
variety of woven wire mesh,  fabric and netting for  agricultural,  construction
and industrial applications.  The Company produces these products at KSW and KWP
(formerly known as Sherman Wire ("Sherman")) facilities,  in Sherman, Texas. The
Company's  fabricated  wire products are  distributed  by Keystone  through farm
supply distributors,  agricultural retailers,  building supply centers, building
and industrial materials distributors and consumer do-it-yourself chains such as
Tractor Supply Co., Lowe's Companies,  Inc., and Ace Hardware Corporation.  Many
of the  Company's  fencing and related  wire  products  are  marketed  under the
Company's RED BRAND label,  a recognized  trademark of Keystone for more than 80
years.  As  part  of  its  marketing  strategy,   Keystone  designs  merchandise
packaging,  and  supportive  product  literature  for  marketing  many of  these
products to the retail consumer market.  Keystone also manufactures products for
residential  and  commercial  construction,  including  rebar ty wire and stucco
netting,  at  KSW  and  KWP.  The  primary  customers  for  these  products  are
construction contractors and building materials manufacturers and distributors.

     Keystone  believes its fabricated wire products are less susceptible to the
cyclical  nature of the steel business than nails,  industrial  wire or wire rod
because  the  commodity-priced  raw  materials  used in such  products,  such as
ferrous  scrap,  represent  a  lower  percentage  of  the  total  cost  of  such
value-added  products  when  compared  to wire  rod or  other  less  value-added
products.

     Wire Mesh.  The Company  manufactures a wide variety of wire mesh rolls and
sheets used to form wire reinforcement in concrete construction projects such as
pipe,  precast  boxes  and  other  applications,   including  use  in  roadways,
buildings, and bridges at EWP in Upper Sandusky, Ohio. EWP's wire mesh customers
include pipe manufacturers,  culvert manufacturers, rebar fabricators, and steel
reinforcing distributors. EWP was not one of the Company's subsidiaries included
in  Keystone's  2004  Chapter  11 filing.  Like its  fabricated  wire  products,
Keystone  believes  its wire  mesh  products  are also less  susceptible  to the
cyclical  nature of the steel business than nails,  industrial  wire or wire rod
because  the  commodity-priced  raw  materials  used in such  products,  such as
ferrous  scrap,  represent  a  lower  percentage  of  the  total  cost  of  such
value-added  products  when  compared  to wire  rod or  other  less  value-added
products.

     Nails.  Keystone  manufacturers  bulk and  packaged  nails at KSW and sells
these nails primarily to construction  contractors,  building  manufacturers and
distributors  and  do-it-yourself  retailers.  During  2005,  the  Company  sold
approximately  26% of its nails through  PrimeSource,  Inc.,  one of the largest
nail distributors in the United States, under PrimesSource's Grip-Rite(R) label.

     Industrial Wire. Keystone is one of the largest manufacturers of industrial
wire in the United  States.  At KSW and KWP the  Company  produces  custom-drawn
industrial  wire in a variety of  gauges,  finishes  and  packages  for  further
consumption  by Keystone's  fabricated  wire products  operations or for sale to
industrial  fabrication  and  original  equipment  manufacturer  customers.  The
Company's  industrial  wire is used by  customers in the  production  of a broad
range of finished goods,  including nails,  coat hangers,  barbecue grills,  air
conditioners, tools, containers,  refrigerators and other appliances. Management
believes  that with a few  exceptions,  its  industrial  wire  customers  do not
generally compete with Keystone.

     Wire Rod.  Keystone  produces  primarily low carbon steel wire rod at KSW's
rod mill. Low carbon steel wire rod, with carbon content of up to 0.38%, is more
easily  shaped and formed  than higher  carbon  wire rod and is  suitable  for a
variety of applications  where ease of forming is a  consideration.  High carbon
steel wire rod,  with carbon  content of up to 0.65%,  is used for high  tensile
wire applications as well as for furniture and bedding springs. Although KWP and
EWP on occasion buy wire rod from outside suppliers,  during 2005, approximately
56% of the wire rod  manufactured  by the Company was used internally to produce
industrial wire, nails, wire mesh and fabricated wire products. The remainder of
Keystone's  wire rod production  was sold directly to producers of  construction
products,  fabricated  wire products and  industrial  wire,  including  products
similar to those manufactured by the Company.

     Billets.  KSW's annual billet production capacity is 820,000 tons. However,
since KSW's rod production is constrained by the 800,000 ton capacity of its rod
mill,  periodic  excess  billet  production  is sold  externally to producers of
products manufactured from low carbon steel. Keystone sold 17,000 tons of excess
billets  during each of 2003 and 2004 and 29,000 tons of excess  billets  during
2005.

     Business Dispositions. Prior to July 2003, the Company owned a 51% interest
in Garden  Zone LLC, a  distributor  of wire,  plastic  and wood lawn and garden
products. In July 2003, Garden Zone purchased Keystone's 51% ownership in Garden
Zone for approximately  $1.1 million.  Keystone recorded a gain of approximately
$800,000 as a result of the sale.  Garden Zone's  revenues and operating  profit
during 2003 were approximately $11.2 million and $700,000, respectively.

     Prior to August 2003, the Company  manufactured  and  distributed  collated
nails at its Keystone Fasteners  division.  In August 2003, the Company sold the
Keystone Fasteners division to a third party for approximately $2.2 million. The
Company  recorded  a gain of  approximately  $300,000  as a result  of the sale.
Keystone  Fasteners'  revenues and operating loss during 2003  approximated $7.3
million and $900,000, respectivey.

Industry and Competition

     The fabricated wire products,  wire mesh,  nails,  industrial wire and wire
rod  businesses  in the United States are highly  competitive  and are comprised
primarily of several large mini-mill wire rod producers,  many small independent
wire companies and a few large diversified wire producers.  Keystone's principal
competitors in the fabricated  wire products,  nails and industrial wire markets
are  Leggett  and  Platt,  Deacero,   Merchants  Metals,  Inc.  and  Davis  Wire
Corporation.  Competition in the fabricated wire products,  nails and industrial
wire  markets  is  based  on  a  variety  of  factors,   including  channels  of
distribution,  price, delivery performance,  product quality, service, and brand
name  preference.  Since  wire  rod is a  commodity  steel  product,  management
believes the domestic wire rod market is more  competitive  than the  fabricated
wire  products,  nails and  industrial  wire  markets,  and price is the primary
competitive factor. Among Keystone's principal domestic wire rod competitors are
Gerdau  Ameristeel and Rocky Mountain Steel. The Company also faces  significant
foreign competition.

     The Company's  principal  competitors  in its wire mesh markets are Insteel
Wire Products, Inc, of Mount Airy, NC, and MMI Products, Inc., of Houston Texas.
The Company also faces  competition  from  smaller  regional  manufacturers  and
wholesalers  of wire mesh  products.  The Company  believes that EWP's  superior
products,   renowned  customer   service,   and  industry  leading  sales  force
distinguish EWP from its competitors. In addition, the Company believes that its
relationship  with EWP enhances EWP's ability to compete more effectively in the
market as EWP can rely on a more stable supply of wire rod.  Competitors  of EWP
have at times faced raw material  shortages that have negatively  impacted their
daily production capability and delivery reliability.

     The Company also competes with many small  independent  wire  companies who
purchase  wire rod from  domestic  and  foreign  sources.  Due to the breadth of
Keystone's  fabricated  wire  products,  wire mesh,  nails and  industrial  wire
offerings,  its ability to service diverse  geographic and product markets,  and
the low relative cost of its internal  supply of wire rod, the Company  believes
it is well  positioned  to compete  effectively  with  non-diversified  wire rod
producers and wire  companies.  Foreign steel and industrial wire producers also
compete with the Company and other domestic producers.

     The domestic steel wire rod industry continues to experience consolidation.
During  the  last  five  years,   the  majority  of  Keystone's  major  domestic
competitors have either filed for protection  under federal  bankruptcy laws and
discontinued operations or reduced or completely shut-down their operations. The
Company  believes  these  shut-downs  or  production  curtailments  represent  a
significant  decrease in estimated  domestic annual wire rod capacity.  However,
worldwide  overcapacity in the steel industry  continues to exist and imports of
wire rod and certain  fabricated  wire  products in recent years have  increased
significantly.

     Keystone  believes  its  facilities  are  well  located  to  serve  markets
throughout the continental United States,  with principal markets located in the
Midwestern,  Southwestern  and  Southeastern  regions.  Close  proximity  to its
customer  base  provides the Company with  certain  advantages  over foreign and
certain domestic competition including reduced shipping costs, improved customer
service and shortened  delivery times.  Keystone believes higher  transportation
costs  and  the  lack of  local  distribution  centers  tend  to  limit  foreign
producers'  penetration of the Company's principal  fabricated wire products and
industrial wire markets,  but there can be no assurance this will continue to be
the case.

Raw Materials and Energy

     The primary raw material  used in Keystone's  operations is ferrous  scrap.
The Company's  steel mill is located  close to numerous  sources of high density
automobile,  industrial and railroad  ferrous scrap,  all of which are currently
available.  The purchase of ferrous  scrap is highly  competitive  and its price
volatility is influenced by periodic shortages,  export activity, freight costs,
weather,  and other  conditions  beyond the control of the Company.  The cost of
ferrous  scrap can fluctuate  significantly  and product  selling  prices cannot
always be  adjusted,  especially  in the  short-term,  to  recover  the costs of
increases  in  ferrous  scrap  prices.  The  Company  has not  entered  into any
long-term contracts for the purchase or supply of ferrous scrap and Keystone is,
therefore,  subject to the price fluctuation of ferrous scrap. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

     Keystone's  manufacturing  processes consume large amounts of energy in the
form of electricity and natural gas. The Company purchases electrical energy for
its Peoria,  Illinois  facility  from a utility under an  interruptible  service
contract which  provides for more  economical  electricity  rates but allows the
utility  to  refuse  or  interrupt   power  to   Keystone's   Peoria,   Illinois
manufacturing  facilities.  This utility has in the past, and may in the future,
refuse or interrupt service to the Company resulting in decreased production and
increased costs associated with the related downtime.  In addition,  in the past
the utility has had the right to pass through  certain of its costs to consumers
through fuel adjustment  surcharges.  However,  the Company's  current agreement
with the utility does not provide for such fuel adjustment charges.

Trademarks

     The  Company has  registered  the  trademark  RED BRAND for field fence and
related products.  Adopted by Keystone in 1924, the RED BRAND trademark has been
widely advertised and enjoys high levels of market recognition. The Company also
maintains other trademarks for various products that have been promoted in their
respective markets.

Employment

     As of December 31, 2005,  Keystone employed  approximately 1,200 people, of
whom  approximately  800  are  represented  by the  Independent  Steel  Workers'
Alliance ("ISWA") at KSW,  approximately 70 are represented by the International
Association  of  Machinists  and  Aerospace  Workers  (Local 1570)  ("IAMAW") at
Sherman (who are then leased to KWP) and  approximately  60 are  represented  by
Local Union #40, An Affiliate to the  International  Brotherhood  of  Teamsters'
Chauffeurs Warehousemen and Helpers of America,  AFL-CIO ("IBTCWHA") at EWP. The
current collective bargaining agreements with the ISWA, IAMAW and IBTCWHA expire
in May 2006, October 2008, and November 2006, respectively. The Company believes
its  relationship  with its employees are good.  Keystone has begun  discussions
with the ISWA concerning the renewal of its collective bargaining agreement that
expires in May 2006.  See  "Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations."

Customers

     The  Company   sells  its  products  to  customers  in  the   agricultural,
industrial, construction, commercial, original equipment manufacturer and retail
markets  primarily in the Midwestern,  Southwestern and Southeastern  regions of
the  United  States.  Customers  vary  considerably  by product  and  management
believes  Keystone's  ability to offer a broad  range of products  represents  a
competitive advantage in servicing the diverse needs of its customers.

     A listing of end-user markets by products follows:

<TABLE>
<CAPTION>
Product                                    Principal Markets Served
-------                                    ------------------------

<S>                                        <C>
Fencing products                           Agricultural, construction, do-it-yourself retailers
Wire mesh products                         Construction
Nails                                      Construction, do-it-yourself retailers
Industrial wire                            Producers of fabricated wire products
Wire rod                                   Producers of industrial wire and
                                            fabricated wire products
Billets                                    Producers of products manufactured from low carbon
                                            Steel
Lawn and garden products                   Do-it-yourself retailers
</TABLE>

     Keystone's industrial wire customers include manufacturers and producers of
nails,  coat hangers,  barbecue grills,  air  conditioners,  tools,  containers,
refrigerators  and other  appliances.  With few exceptions,  these customers are
generally not in  competition  with the Company.  Keystone's  wire rod customers
include other  downstream  industrial  wire,  nail and fabricated  wire products
companies  including  manufacturers of products similar to those manufactured by
the Company.

     The Company's ten largest customers represented  approximately 35%, 48% and
43% of  Keystone's  net sales in 2003,  2004 and 2005,  respectively.  No single
customer  accounted  for more than 9% of the  Company's  net sales  during 2003.
During 2004, a single customer accounted for approximately 12% of Keystone's net
sales. No other single customer accounted for more than 10% of the Company's net
sales during 2004.  During 2005, a single customer  accounted for  approximately
11% of Keystone's net sales. No other single customer accunted for more than 10%
of the Company's net sales during 2005.  Keystone's  fabricated  wire  products,
wire mesh,  nails,  industrial  wire and rod  business is not  dependent  upon a
single  customer  or a few  customers,  the loss of any one,  or a few, of which
would have a material adverse effect on its business.

Backlog

     The Company's backlog of unfilled cancelable fabricated wire products, wire
mesh,  nails,  industrial wire and rod purchase orders,  for delivery  generally
within three  months,  approximated  $26.4 million and $53.6 million at December
31, 2004 and 2005, respectively.  Keystone believes backlog is not a significant
factor in its business, and expects all of the backlog at December 31, 2005 will
be shipped during 2006.

Environmental Matters

     Keystone's production facilities are affected by a variety of environmental
laws and regulations, including laws governing the discharge of water pollutants
and air contaminants,  the generation,  transportation,  storage,  treatment and
disposal of solid  wastes and  hazardous  substances  and the  handling of toxic
substances, including certain substances used in, or generated by, the Company's
manufacturing operations.  Many of these laws and regulations require permits to
operate the facilities to which they pertain. Denial, revocation,  suspension or
expiration of such permits could impair the ability of the affected  facility to
continue operations.

     The Company records  liabilities  related to  environmental  issues at such
time as information  becomes available and is sufficient to support a reasonable
estimate of a range of probable  loss. If Keystone is unable to determine that a
single amount in an estimated  range is more likely,  the minimum  amount of the
range is recorded.  Costs of future  expenditures for environmental  remediation
obligations   are  not  discounted  to  their  present   value.   Recoveries  of
environmental  remediation  costs from other parties are recorded as assets when
their receipt is deemed probable.

     Keystone  believes  its  current  operating   facilities  are  in  material
compliance  with  all  presently  applicable  federal,   state  and  local  laws
regulating  the  discharge  of  materials  into the  environment,  or  otherwise
relating to the protection of the  environment.  Environmental  legislation  and
regulations  have changed rapidly in recent years and the Company may be subject
to increasingly stringent environmental standards in the future.

     Information  in  Note  15  to  the  Consolidated  Financial  Statements  is
incorporated herein by reference.

Acquisition and Restructuring Activities

     The Company  routinely  compares  its  liquidity  requirements  against its
estimated future cash flows. As a result of this process, the Company has in the
past  and may in the  future  seek to raise  additional  capital,  refinance  or
restructure  indebtedness,  consider  the  sale of  interests  in  subsidiaries,
business  units or other assets,  or take a  combination  of such steps or other
steps, to increase  liquidity,  reduce  indebtedness and fund future activities.
Such  activities  have  in  the  past  and  may in the  future  involve  related
companies. From time to time, the Company and related entities also evaluate the
restructuring  of  ownership   interests  among  its  subsidiaries  and  related
companies  and  expects  to  continue  this  activity  in the  future and may in
connection with such activities,  consider issuing  additional equity securities
and increasing the indebtedness of the Company or its subsidiaries.

Availability of Company Reports Filed with the SEC

     The Company will provide  without  charge  copies of this Annual  Report on
Form 10-K for the year ended  December  31,  2005,  any copies of the  Company's
Quarterly  Reports on Form 10-Q for 2005 and any Current Reports on Form 8-K for
2004 and 2005,  and any amendments  thereto,  as soon as they are filed with the
SEC upon written request to the Company. Such requests should be directed to the
attention of the Corporate  Secretary at the Company's address on the cover page
of this Form 10-K.

     The general  public may read and copy any  materials the Company files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street,  NW, Washington,
DC 20549,  and may obtain  information on the operation of the Public  Reference
Room by calling the SEC at  1-800-SEC-0330.  The Company is an electronic filer,
and the SEC maintains an Internet website at www.sec.gov that contains  reports,
proxy and information  statements,  and other information regarding issuers that
file electronically with the SEC, including the Company.

ITEM 1A.   RISK FACTORS

     Listed  below are certain  risk factors  associated  with  Keystone and its
businesses.  In addition to the potential effect of these risk factors discussed
below,  any risk factor  which  could  result in reduced  earnings or  operating
losses,  or reduced  liquidity,  could in turn  adversely  affect the  Company's
ability to service its liabilities or adversely  affect the quoted market prices
for Keystone's publicly-traded securities.

     Our  leverage  may impair our  financial  condition or limit our ability to
operate our  businesses.  We currently have a significant  amount of debt. As of
December 31, 2005, our total consolidated debt was approximately  $99.9 million.
Our level of debt could have  important  consequences  to our  stockholders  and
creditors, including:

     o    making  it more  difficult  for us to  satisfy  our  obligations  with
          respect to our liabilities;

     o    increasing our  vulnerability to adverse general economic and industry
          conditions;

     o    requiring that a portion of our cash flow from  operations be used for
          the payment of interest on our debt, therefore reducing our ability to
          use our  cash  flow to fund  working  capital,  capital  expenditures,
          acquisitions and general corporate requirements;

     o    limiting  our ability to obtain  additional  financing  to fund future
          working  capital,  capital  expenditures,   acquisitions  and  general
          corporate requirements;

     o    limiting our  flexibility  in planning for, or reacting to, changes in
          our business and the industry in which we operate and

     o    placing  us  at  a   competitive   disadvantage   relative   to  other
          less-leveraged competitors.

     We recently emerged from Chapter 11 bankruptcy  protection.  As part of our
emergence from the Chapter 11 bankruptcy proceedings,  we negotiated a favorable
amendment to the  collective  bargaining  agreement with our largest labor union
and received  permanent  reductions in our obligation to provide certain retiree
medical benefit payments to retirees.  However, we continue to incur significant
ongoing  costs for plant and  equipment  and pay  substantial  benefits for both
current  and  retired  employees.  As such,  we remain  vulnerable  to  business
downturns and increases in costs.

     Demand for, and prices of,  certain of our products are cyclical and we may
experience  prolonged  depressed market  conditions for our products,  which may
result in reduced  earnings or operating  losses.  A significant  portion of our
revenues  are  attributable  to sales of  products  into  the  agricultural  and
construction  industries.  These two  industries  themselves  are  cyclical  and
changes in those industries'  economic  conditions can significantly  impact our
earnings  and  operating  cash  flows.  This may result in reduced  earnings  or
operating  losses.  Events  that could  adversely  affect the  agricultural  and
construction industries include, among other things, short and long-term weather
patterns,  interest  rates and  embargos  placed by  foreign  countries  on U.S.
agricultural  products.  Such events could significantly  decrease our operating
results, and our business and financial condition could significantly decline.

     We sell the  majority  of our  products  in mature and  highly  competitive
industries  and face price  pressures in the markets in which we operate,  which
may result in reduced  earnings  or  operating  losses.  The markets in which we
operate our businesses are highly competitive.  Competition is based on a number
of factors,  such as price, product quality and service. Some of our competitors
may be able to drive down prices for our products because the competitors' costs
are lower than our  costs.  In  addition,  some of our  competitors'  financial,
technological  and other  resources may be greater than our resources,  and such
competitors may be better able to withstand  changes in market  conditions.  Our
competitors  may be able to respond  more quickly than we can to new or emerging
technologies and changes in customer requirements. Further, consolidation of our
competitors or customers in any of the industries in which we compete may result
in reduced demand for our products.  In addition,  in some of our businesses new
competitors  could emerge by modifying their existing  production  facilities so
they could manufacture  products that compete with our products.  The occurrence
of any of these events could result in reduced earnings or operating losses.

     Many of our EWP division's  products are ultimately used in  infrastructure
projects by local, State or Federal  governments.  Such projects are impacted by
the  availability  of governmental  funding for such projects.  A decline in the
availability of governmental  funds for such projects could ultimately result in
a decline in demand or selling  prices of EWP's  products.  Such a decline could
result in reduced earnings or operating losses.

     Wire rod imported into the U.S. continues at high levels.  Global producers
of wire rod are able to import their products into the U.S. with minimal tariffs
and duties. Many of these global wire rod producers are able to produce wire rod
at costs  lower than us. As such,  these wire rod  imports  are often able to be
priced at lower levels than similar products manufactured by us. In addition, we
believe certain foreign  governments  subsidize local wire rod producers.  These
events can adversely  impact our shipment  levels and pricing  decisions and, as
such, could result in reduced earnings or operating losses.

     Higher  costs or limited  availability  of ferrous  scrap may  decrease our
liquidity.  The number of sources for, and  availability  of, ferrous scrap, our
primary raw material, is generally limited to the particular geographical region
in which a facility is located.  Should our  suppliers not be able to meet their
contractual  obligations  or should we be otherwise  unable to obtain  necessary
ferrous scrap quantities,  we may incur higher costs for ferrous scrap or may be
required to reduce production levels, either of which may decrease our liquidity
as we may be unable to offset such higher costs with  increased  selling  prices
for our products.

     We are subject to many environmental and safety regulations with respect to
our operating  facilities that may result in unanticipated costs or liabilities.
Most of our facilities  are subject to extensive  laws,  regulations,  rules and
ordinances  relating  to the  protection  of the  environment,  including  those
governing the  discharge of pollutants in the air and water and the  generation,
management and disposal of hazardous  substances and wastes or other  materials.
We may incur substantial costs,  including fines, damages and criminal penalties
or civil sanctions, or experience  interruptions in our operations for actual or
alleged violations or compliance  requirements arising under environmental laws.
Our operations could result in violations under  environmental  laws,  including
spills or other releases of hazardous substances to the environment. Some of our
operating facilities are in densely populated urban areas or in industrial areas
adjacent to other operating facilities. In the event of an accidental release or
catastrophic  incident,  we could incur material costs as a result of addressing
such an event and in implementing measures to prevent such incidents.  Given the
nature  of  our  business,  violations  of  environmental  laws  may  result  in
restrictions   imposed  on  our  operating   activities  or  substantial  fines,
penalties,  damages or other costs, including as a result of private litigation.
In addition, certain of our production facilities have been used for a number of
years  to  manufacture  products.  We may  incur  additional  costs  related  to
compliance with  environmental  laws  applicable to our historic  operations and
these facilities.  In addition, we may incur significant  expenditures to comply
with existing or future  environmental  laws.  Costs  relating to  environmental
matters will be subject to evolving  regulatory  requirements and will depend on
the timing of  promulgation  and  enforcement of specific  standards that impose
requirements on our operations.  Costs beyond those currently anticipated may be
required under existing and future environmental laws.

     Loss of key  personnel  or our ability to attract and retain new  qualified
personnel  could hurt our businesses and inhibit our ability to operate and grow
successfully.  Our success in the highly competitive markets in which we operate
will continue to depend to a significant  extent on the leadership  teams of our
businesses and other key management personnel.  We generally do not have binding
employment agreements with any of these managers.  This increases the risks that
we may not be able to retain our current management  personnel and we may not be
able to recruit  qualified  individuals to join our management  team,  including
recruiting  qualified  individuals to replace any of our current  personnel that
may leave in the future.

     Our relationships with our union employees could  deteriorate.  At December
31, 2005, we employed  approximately  1,200 persons in our various businesses of
which  approximately  79%  are  subject  to  collective  bargaining  or  similar
arrangements.  A significant portion of these collective  bargaining  agreements
are set to expire  within  the next two years.  We may not be able to  negotiate
labor  agreements with respect to these  employees on  satisfactory  terms or at
all.  If our  employees  were to  engage  in a strike,  work  stoppage  or other
slowdown,  we could  experience a significant  disruption  of our  operations or
higher ongoing labor costs.

     As a result of the material  weaknesses  described below, we have concluded
that our disclosure  controls and  procedures  were not effective as of December
31, 2005. As of December 31, 2005, we did not maintain  effective  controls over
the  completeness  and  accuracy  of net sales and  related  cost of goods sold.
Specifically,  we did not have  controls  designed  and in place to detect sales
made under the terms F.O.B. at our customer's location. Additionally, we did not
maintain  effective  controls over the review and monitoring of the accuracy and
completeness  of net sales  and costs of goods  sold.  This  control  deficiency
resulted in adjustments to net sales and cost of goods sold in the third quarter
of 2005.

     In  addition,  as of  December  31,  2005,  we did not  maintain  effective
controls  over  the   presentation  and   classification   of  cash  overdrafts.
Specifically,  effective  controls were not designed and in place to ensure that
cash overdrafts were properly classified as indebtedness in the our consolidated
balance sheet, and that changes in our cash overdrafts were properly included in
the  determination  of  cash  flows  from  financing  activities.  This  control
deficiency  resulted  in the  restatement  of our  2002,  2003 and  2004  annual
consolidated financial statements and audit adjustments to both our 2004 interim
consolidated  financial  statements and our annual and interim 2005 consolidated
financial statements.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

     Not applicable.

ITEM 2. PROPERTIES.

     The  Company's  principal  executive  offices are located in  approximately
1,200 square feet of leased space at 5430 LBJ Freeway, Suite 1740, Dallas, Texas
75240-2697.

     Keystone's  fabricated wire products,  wire mesh,  industrial wire and wire
rod  production  facilities  utilize  approximately  2.4 million square feet for
manufacturing  and office  space,  approximately  84% of which is located at the
Company's Peoria, Illinois facility.

     The following table sets forth the location, size and general product types
produced  for each of the  Company's  operating  facilities,  as of December 31,
2005, all of which are owned by the Company.

<TABLE>
<CAPTION>
                                                             Approximate
                                                                Size
     Facility Name                   Location                (Square Feet)             Products Produced
     -------------                   --------                -------------             -----------------

<S>                               <C>                          <C>          <C>
Keystone Steel & Wire             Peoria, IL                   2,012,000    Fabricated wire products, nails,
                                                                              industrial wire, wire rod
Keystone Wire Products            Sherman, TX                    299,000    Fabricated wire products and
                                                                             industrial wire
Engineered Wire Products          Upper Sandusky, OH              79,000    Wire mesh
                                                               ---------

                                                               2,390,000
                                                               =========
</TABLE>

     The  Company  believes  all of  its  facilities  are  well  maintained  and
satisfactory for their intended purposes.

ITEM 3. LEGAL PROCEEDINGS.

     On  February  26,  2004,  Keystone  and  five of its  direct  and  indirect
subsidiaries  filed for  voluntary  protection  under  Chapter 11 of the Federal
Bankruptcy Code.  Keystone and its filing  subsidiaries filed their petitions in
the U.S.  Bankruptcy  Court for the Eastern  District of Wisconsin in Milwaukee.
The Chapter 11 cases were  consolidated  for  procedural  purposes only and were
jointly  administered  under  the name FV  Steel  and  Wire  Company  - Case No.
04-22421-SVK. Each of the filing companies continued to operate its business and
manage its  property  as a  debtor-in-possession.  As a result of the Chapter 11
filings,  litigation relating to prepetition claims against the filing companies
was stayed during the Chapter 11 proceedings.  Keystone  emerged from Chapter 11
on August 31, 2005.

     Keystone  is  also  involved  in  various  legal  proceedings.  Information
required by this Item is  included in Notes 2 and 15 and 17 to the  Consolidated
Financial Statements, which information is incorporated herein by reference.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     No matters were submitted to a vote of security  holders during the quarter
ended December 31, 2005.



                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     Until its emergence from Chapter 11 on August 31, 2005,  Keystone's  common
stock was traded on the OTC Bulletin  Board  (Symbol:  KESNQ.PK).  The Company's
common  stock has not  publicly  traded  since  August 31,  2005.  The number of
holders of record of the Company's  common stock as of March 31, 2006 was 2. The
following  table  sets  forth  the  high and low  closing  sales  prices  of the
Company's common stock for the calendar years indicated,  according to published
sources.

<TABLE>
<CAPTION>
                                                                                      High               Low
                                                                                      ----               ---

Year ended December 31, 2005

<S>                                                                                 <C>                 <C>
  First quarter                                                                     $ .23               $ .09
  Second quarter                                                                    $ .17               $ .08
  Third quarter (through August 31)                                                 $ .08               $ .01
  Third quarter (September 1 to September 30)                                         N/A                  N/A
  Fourth quarter                                                                      N/A                  N/A

Year ended December 31, 2004

  First quarter                                                                     $ .33               $ .05
  Second quarter                                                                    $ .18               $ .05
  Third quarter                                                                     $ .42               $ .09
  Fourth quarter                                                                    $ .31               $ .03
</TABLE>



     The Company  has not paid cash  dividends  on its common  stock since 1977.
Keystone is subject to certain  covenants under its commercial  revolving credit
facilities  that restrict its ability to pay dividends,  including a prohibition
against  the  payment of cash  dividends  on its  common  stock  without  lender
consent.

     All of the  Company's  outstanding  common  stock at  August  31,  2005 was
cancelled in connection  with the  Keystone's  emergence from Chapter 11, and at
that time, Keystone issued 10 million shares of a new issue of common stock. See
Note 2 to the Consolidated Financial Statements.

ITEM 6. SELECTED FINANCIAL DATA.

     The  following  selected  consolidated  financial  data  should  be read in
conjunction  with  Keystone's  Consolidated  Financial  Statements and Item 7 --
"Management's  Discussion  And  Analysis Of Financial  Condition  And Results Of
Operations."

<TABLE>
<CAPTION>
                                                                         Years ended December 31,
                                                    ------------------------------------------------------------------
                                                      2001          2002          2003           2004           2005
                                                    --------      -------       -------        -------        --------
                                                           (In thousands, except per share and per ton amounts)

Statement of Operations Data:
<S>                                                 <C>            <C>          <C>            <C>            <C>
  Net sales                                         $325,187       $334,835     $306,671       $364,335       $367,545
  Cost of goods sold                                 313,931        315,579      310,881        322,232        337,541
                                                    --------       --------     --------       --------       --------
  Gross profit (loss)                               $ 11,256       $ 19,256     $ (4,210)      $ 42,103       $ 30,004
                                                    ========       ========     ========       ========       ========

  Selling expenses                                  $  6,400       $  7,754     $  6,934       $  5,634       $  6,251
  General and administrative
    expenses                                          14,723         16,385       10,689         10,766         11,804
  Operating income (loss)                             (4,388)        (3,279)     (28,731)        32,455         23,659
  Gain on early extinguishment of
   debt                                                    -         54,739         -              -            32,510
  Gain on legal settlement                                 -              -            -          5,284           -
  Interest expense                                    14,575          5,569        3,941          3,705          3,992
  Reorganization costs                                     -              -            -         11,158         10,308

  Income (loss) before income taxes                 $(20,395)      $ 40,045     $(37,218)      $ 17,439       $ 39,662
  Minority interest in after-tax
   earnings                                                1              1          299              -              -
  Provision for income taxes (benefit)                 5,998         21,622         -             1,379            430
                                                    --------       --------     --------       --------       --------
  Income (loss) before cumulative
   effect of change in accounting
   principle (4)                                     (26,394)        18,422      (37,517)        16,060         39,232
  Cumulative effect of change in
   accounting principle                                 -            19,998         -              -              -
                                                    --------       --------     --------       --------       --------

  Net income (loss)                                 $(26,394)      $ 38,420     $(37,517)      $ 16,060       $ 39,232
                                                    ========       ========     ========       ========       ========
  Net income (loss) available for
   common shares (1)                                $(26,394)      $ 33,737     $(43,457)      $ 14,837       $ 39,232
                                                    ========       ========     ========       ========       ========

 Basic net income (loss) available
  for common shares per share                       $  (2.62)      $   3.35     $  (4.32)      $   1.47       $   4.12
                                                    ========       ========     ========       ========       ========
 Diluted net income (loss) available
  for common shares per share                       $  (2.62)      $   1.76     $  (4.32)      $    .57       $   1.88
                                                    ========       ========     ========       ========       ========
  Weighted average common and common
   equivalent shares outstanding (3):
    Basic                                             10,062         10,067       10,068         10,068         10,046
                                                    ========       ========     ========       ========       ========
    Diluted                                           10,062         21,823       10,068         28,043         22,029
                                                    ========       ========     ========       ========       ========

Other Financial Data:
  Capital expenditures                              $  3,889       $  7,973     $  2,683       $  5,080       $  9,772
  Depreciation and amortization                       16,992         17,396       16,461         15,812         15,745

Other Steel and Wire Products
 operating data:
  Shipments (000 tons):
    Fabricated wire products                             143            146          135            116            101
    Wire mesh                                             64             63           66             71             71
    Nails                                                 74             74           53             28             17
    Industrial wire                                       94             96           91             82             72
    Wire rod                                             291            287          252            200            236
    Billets                                             -                 5           17             17             29
                                                    --------       --------     --------       --------       --------
      Total                                              666            671          614            514            526
                                                    ========       ========     ========       ========       ========

  Average selling prices (per ton):
    Fabricated wire products                        $    789       $    791     $    783       $    984       $  1,090
    Wire mesh                                            534            526          539            829            881
    Nails                                                589            592          558            759            742
    Industrial wire                                      454            448          452            709            731
    Wire rod                                             283            304          314            539            503
    Billets                                                -            156          192            176            321

    Steel and wire products in total                     474            482          479            707            696
  Average ferrous scrap purchase cost
   per ton                                          $     85       $     94      $   115       $    205       $    220
</TABLE>

<TABLE>
<CAPTION>
                                                                    As of December 31,
                                                 ---------------------------------------------------------------------
                                                   2001           2002           2003           2004            2005
                                                  ------        -------         ------         ------          -------
                                                (Restated)     (Restated)     (Restated)     (Restated)
                                                                             (In thousands)

Balance Sheet Data:
<S>                                               <C>            <C>            <C>            <C>            <C>
  Working capital (deficit) (2)                   $(30,982)      $(41,790)      $(90,210)      $ 11,910       $ 36,373
  Property, plant and equipment, net               129,600        119,984        105,316         94,033         86,773
  Total assets                                     366,900        215,495        282,194        323,282        358,364
  Total debt (5)                                   147,835         98,684         88,897         65,985         99,895
  Redeemable preferred stock (3)                         -          2,112          2,112          2,112              -
  Stockholders' equity (deficit)                      (336)      (136,900)       (10,050)         4,787         67,531
</TABLE>

(1)  Includes  the  effect  of  dividends  on  preferred  stock  of  $4,683,000,
     $5,940,000 and $1,223,000 in 2002, 2003 and 2004, respectively. The Company
     discontinued  accruing  dividends  on its  preferred  stock upon filing for
     Chapter 11 on February 26, 2004. See Note 2 to the  Consolidated  Financial
     Statements.

(2)  Working  capital   (deficit)   represents   current  assets  minus  current
     liabilities.

(3)  All of the Company's  outstanding  common and preferred stock at August 31,
     2005 was cancelled in connection with Keystone's emergence from Chapter 11,
     and at that  time,  Keystone  issued  10  million  shares of a new issue of
     common stock.

(4)  Upon  adoption of  Statement  of Financial  Accounting  Standards  No. 142,
     effective January 1, 2002, negative goodwill with a net book value of $20.0
     million  was  eliminated  as a  cumulative  effect of change in  accounting
     principle.

(5)  During 2005, the Company  restated  total debt at December 31, 2001,  2002,
     2003 and 2004 to properly  classify certain cash overdrafts as increases in
     Keystone's  revolving  credit  facility.  As a result,  total  debt at both
     December  31, 2001 and 2002,  increased  by $1.4  million and total debt at
     December  31, 2003  increased  by $1.2  million,  from  amounts  previously
     reported. See Note 1 to the Consolidated Financial Statements.


<PAGE>

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.


Bankruptcy

     On  February  26,  2004,  Keystone  and  five of its  direct  and  indirect
subsidiaries  filed for  voluntary  protection  under  Chapter 11 of the Federal
Bankruptcy Code. Keystone and its subsidiaries filed their petitions in the U.S.
Bankruptcy Court for the Eastern District of Wisconsin in Milwaukee. The Company
is managing  its business as a debtor-in  possession  subject to approval by the
Court.  Keystone  attributed  the need to  reorganize  to  weaknesses in product
selling prices over the last several years,  unprecedented  increases in ferrous
scrap costs, Keystone's primary raw material, and significant liquidity needs to
service employee and retiree medical costs. These problems substantially limited
Keystone's  liquidity and  undermined its ability to obtain  sufficient  debt or
equity capital to operate as a going concern.

     Under Chapter 11 proceedings,  actions by creditors to collect Pre-petition
Claims are  stayed,  absent  specific  authorization  from the Court to pay such
claims  while  the  Company  manages  the  business  as a  debtor-in-possession.
Keystone  received  approval  from the Court to pay certain of its  pre-petition
liabilities, including employee wages and certain employee benefits.

     Keystone filed a plan of reorganization on October 4, 2004 and amended that
plan on May 26, 2005, June 21, 2005 and June 27, 2005.  Keystone's  amended plan
of reorganization  was accepted by the impacted  constituencies and confirmed by
the Court on August 10, 2005. The Company emerged from bankruptcy  protection on
August  31,  2005.   Significant   provisions  of  Keystone's  amended  plan  of
reorganization included, among other things:

o    Assumption  of  the  previously  negotiated  amendment  to  the  collective
     bargaining  agreement  with the ISWA,  Keystone's  largest labor union that
     related primarily to greater employee participation in healthcare costs;
o    Assumption of the  previously  negotiated  agreements  reached with certain
     retiree groups that will provide relief by permanently  reducing healthcare
     related payments to these retiree groups from pre-petition levels;
o    The Company's  obligations due to  pre-petition  secured lenders other than
     its   Debtor-In-Possession   lenders  were   reinstated   in  full  against
     reorganized Keystone;
o    All shares of Keystone's  common and  preferred  stock  outstanding  at the
     petition date (February 26, 2004) were cancelled;
o    Pre-petition  unsecured creditors with allowed claims against Keystone will
     receive,  on a pro rata basis,  in the  aggregate,  $5.2 million in cash, a
     $4.8  million  secured  promissory  note and 49% of the new common stock of
     reorganized Keystone;
o    Certain  operating  assets  and  existing  operations  of  Sherman,  one of
     Keystone's  pre-petition  wholly-owned  subsidiaries,  will be sold at fair
     market value to Keystone (fair market value and book value both approximate
     $2.0 million),  which will then be used to form and operate a newly created
     wholly-owned   subsidiary  of  reorganized  Keystone  named  Keystone  Wire
     Products Inc.;
o    Sherman Wire was also  reorganized  and the proceeds of the operating asset
     sale to Keystone and  liquidation of Sherman  Wire's  remaining real estate
     assets  (book value  approximately  $1.6  million)  and other funds will be
     distributed,  on a pro rata basis, to Sherman Wire's pre-petition unsecured
     creditors as their claims are finally adjudicated;
o    Sherman Wire's pre-petition wholly-owned non-operating  subsidiaries,  J.L.
     Prescott  Company,  and DeSoto  Environmental  Management,  Inc. as well as
     Sherman Wire of Caldwell, Inc., a wholly-owned subsidiary of Keystone, will
     ultimately be liquidated  and the  pre-petition  unsecured  creditors  with
     allowed  claims against these entities will receive their pro-rata share of
     the respective entity's net liquidation proceeds;
o    Pre-petition  unsecured  creditors  with allowed  claims against FV Steel &
     Wire Company,  another one of Keystone's  wholly-owned  subsidiaries,  will
     receive cash in an amount equal to their allowed claims;
o    One of Keystone's  Debtor-In-Possession  lenders,  EWP  Financial,  LLC (an
     affiliate  of  Contran,   Keystone's  largest   pre-petition   shareholder)
     converted  $5  million  of  its  DIP  credit   facility,   certain  of  its
     pre-petition  unsecured claims and all of its administrative claims against
     Keystone into 51% of the new common stock of reorganized Keystone; and
o    The Board of  Directors  of  reorganized  Keystone  now  consists  of seven
     individuals,  two each of which were  designated  by Contran  and the OCUC,
     respectively.   The  remaining  three  directors   qualify  as  independent
     directors (two of the independent  directors were appointed by Contran with
     the  OCUC's  consent  and one was  appointed  by the  OCUC  with  Contran's
     consent).

In addition,  Keystone has obtained an $80 million  secured credit facility from
Wachovia Capital Finance (Central). Proceeds from this credit facility were used
to extinguish Keystone's existing  Debtor-In-Possession credit facilities and to
provide working capital for reorganized Keystone. See Note 2 to the Consolidated
Financial Statements.

Summary

     As discussed in Note 1 to the Consolidated  Financial Statements,  Keystone
restated 2003 and 2004 consolidated  balance sheets and statements of cash flows
to properly classify certain cash overdrafts.

     The Company reported a net loss of $37.5 million during 2003 and net income
of $16.1  million  and $39.2  million  during 2004 and 2005,  respectively.  The
primarily  reasons  for the  increase  in  earnings  from  2003 to 2004 were (i)
significantly  higher per-ton product selling prices  partially offset by higher
costs for ferrous scrap,  (ii) favorable  changes to the Company's medical plans
for both  active and  retired  employees  during  2004,  (iii) a higher  defined
benefit pension credit in 2004, (iv) an $865,000  distribution of collected wire
rod  tariffs  and  duties  from the  Federal  government  in 2004 and (v) a $5.3
million  gain  from a  legal  settlement  with a  former  supplier  relative  to
consigned  inventory on Keystone's premises at February 26, 2004, offset in part
by $11.2 million of expenses  associated with the bankruptcy filing. The primary
reasons for the increase in earnings from 2004 to 2005 were (i) higher  shipment
volumes,  (ii)  lower  retiree  medical  costs in 2005,  (iii) a higher  defined
benefit pension credit during 2005 and (iv) a $32.5 million gain on cancellation
of debt as a result of the Company's  emergence  from Chapter 11 during 2005 all
partially offset by (i) lower per-ton product selling prices,  (ii) higher costs
for ferrous scrap and natural gas and (iii) the absence of the $5.2 million gain
on legal settlement that was recorded by Keystone during 2004.

General

     The  Company  believes  it is a  leading  domestic  manufacturer  of  steel
fabricated wire products, wire mesh, nails, industrial wire and wire rod for the
agricultural,  industrial,  construction,  original  equipment  manufacturer and
retail consumer  markets and believes it is one of the largest  manufacturers of
fabricated  wire  products in the United  States based on tons shipped  (101,000
tons in 2005).  Keystone's  operations benefit from vertical  integration as the
Company's  mini-mill  supplies  wire  rod  produced  from  ferrous  scrap to its
downstream  fabricated  wire  products,  wire mesh,  nails and  industrial  wire
operations.  Sales of fabricated wire products,  wire mesh, nails and industrial
wire by these downstream  fabrication  operations  accounted for 65% of 2005 net
sales.  Keystone's fabricated wire products and wire mesh typically yield higher
and less  volatile  gross  margins  compared  to wire rod.  Management  believes
Keystone's  fabricated  wire products and wire mesh businesses help mitigate the
adverse  effect of wire rod imports on market prices  compared to producers that
rely  primarily  on wire  rod  sales.  Moreover,  historically  over  time,  the
Company's wire rod  production  costs have generally been below the market price
for wire rod  providing a significant  cost  advantage  over wire  producers who
purchase wire rod as a raw material.

     The Company's annual billet production  capacity is 820,000 tons.  However,
Keystone's wire rod production is constrained by the 800,000 ton capacity of its
rod mill.  The Company  anticipates  any excess billet  production  will be sold
externally.

     The Company's  steel making  operations  provided  585,000 tons and 590,000
tons of  billets  in 2005 and 2004,  respectively.  As a result of the  slightly
lower billet  production in 2005,  wire rod production  declined 2% from 544,000
tons (68% of  estimated  capacity)  in 2004 to  534,000  tons (67% of  estimated
capacity).  Keystone's  estimated  current  fabricated  wire products,  nail and
industrial  wire production  capacity is 542,000 tons. The Company's  fabricated
wire  products,  wire  mesh,  nail and  industrial  wire  production  facilities
operated at about 55% of their annual  capacity during each of 2003 and 2004 and
50% in 2005.

     The  Company's  profitability  is dependent in large part on its ability to
utilize  effectively  its  production   capacity,   which  is  affected  by  the
availability of raw materials, plant efficiency and other production factors and
to  control  its  manufacturing  costs,  which are  comprised  primarily  of raw
materials,  energy and labor costs.  Keystone's  primary raw material is ferrous
scrap, and during 2005 ferrous scrap costs represented approximately 42% of cost
of goods sold.  The price of ferrous scrap is highly  volatile and ferrous scrap
prices are  affected by periodic  shortages,  export  activity,  freight  costs,
weather and other conditions largely beyond the control of the Company.  Ferrous
scrap prices can vary widely from period to period.  The average  per-ton  price
paid for ferrous scrap by the Company was $115 in 2003, $205 in 2004 and $220 in
2005. Keystone's product selling prices cannot always be adjusted, especially in
the short-term, to recover any increases in ferrous scrap.

     The domestic  wire rod  industry  continues  to  experience  consolidation.
During  the  last  five  years,   the  majority  of  Keystone's  major  domestic
competitors have either filed for protection  under Federal  bankruptcy laws and
discontinued operations or reduced or completely shut-down their operations. The
Company  believes  these  shut-downs  or  production  curtailments  represent  a
significant  decrease in  domestic  annual  capacity.  However,  worldwide  over
capacity  in the steel  industry  continues  to exist and  imports  of wire rod,
certain  fabricated  wire  products  and nails in recent  years  have  increased
significantly.

     Keystone  consumes  a  significant  amount of  energy in its  manufacturing
operations and, accordingly, its profitability can also be adversely affected by
the  volatility in the price of coal, oil and natural gas resulting in increased
energy,  transportation,  freight,  ferrous scrap and supply costs. During 2005,
energy costs  represented  approximately  10% of cost of goods sold. The Company
purchases  electrical  energy for its Peoria,  Illinois  facility from a utility
under an  interruptible  service  contract  which  provides for more  economical
electricity  rates but allows the  utility to refuse or  interrupt  power to its
manufacturing  facilities.  The utility has in the past,  and may in the future,
refuse or interrupt  service to Keystone  resulting in decreased  production and
increased costs associated with the related downtime.  In addition,  in the past
the utility has had the right to pass through  certain of its costs to consumers
through fuel adjustment  surcharges.  The Company's  current  agreement with the
utility does not provide for such fuel adjustment surcharges.

     In July 2003,  Keystone sold its 51% interest in Garden Zone back to Garden
Zone. The Company recorded a gain of  approximately  $800,000 as a result of the
sale. Garden Zone distributes wire, plastic and wood lawn and garden products to
retailers.  Garden  Zone's  revenues  and  operating  profit  during  2003  were
approximately $11.2 million and $700,000, respectively.

     In August 2003, the Company sold its Keystone Fasteners division to a third
party.  Keystone  recorded a gain of  approximately  $300,000 as a result of the
sale. Keystone Fasteners  manufactured and distributed collated nails.  Keystone
Fasteners' revenues and operating loss during 2003 approximated $7.3 million and
$900,000, respectively.

     Keystone is also  engaged in the  operation  of a ferrous  scrap  recycling
facility.  The  operations  of Garden Zone,  Keystone  Fasteners and the ferrous
scrap recycling  facility were  insignificant  when compared to the consolidated
operations  of the Company.  As such,  the results of their  operations  are not
separately addressed in the discussion that follows.

Results of Operations

     The  following  table  sets  forth  Keystone's  steel and wire  production,
ferrous scrap costs, sales volume and pricing data, for the periods indicated.

<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                                                           ---------------------------------------
                                                                           2003            2004               2005
                                                                           ----            ----               ----
                                                                                   (Tons in thousands)

Production volume (tons):
<S>                                                                          <C>             <C>               <C>
  Billets                                                                    577             590               585
  Wire rod                                                                   559             544               534

Average per-ton ferrous scrap purchase cost                                 $115            $205            $  220

Sales volume (tons):
  Fabricated wire products                                                   135             116               101
  Wire mesh                                                                   66              71                71
  Nails                                                                       53              28                17
  Industrial wire                                                             91              82                72
  Wire rod                                                                   252             200               236
  Billets                                                                     17              17                29
                                                                            ----            ----            ------
                                                                             614             514               526
                                                                            ====            ====            ======

Per-ton selling prices:
  Fabricated wire products                                                  $783            $984            $1,090
  Wire mesh                                                                  539             829               881
  Nails                                                                      558             759               742
  Industrial wire                                                            452             709               731
  Wire rod                                                                   314             539               503
  Billets                                                                    192             176               321
  All steel and wire products                                                479             707               696
</TABLE>


     The  following  table sets forth the  components of the Company's net sales
for the periods indicated.

<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                                              ---------------------------------------
                                                                              2003             2004              2005
                                                                              ----             ----             -----
                                                                                          (In millions)

Steel and wire products:
<S>                                                                           <C>              <C>             <C>
  Fabricated wire products                                                    $106.0           $114.2          $110.1
  Wire mesh                                                                     35.2             59.0            62.8
  Nails                                                                         29.5             21.0            12.4
  Industrial wire                                                               41.3             58.4            52.5
  Wire rod                                                                      78.9            107.6           118.6
  Billets                                                                        3.4              3.0             9.3
  Other                                                                          1.2              1.1             1.8
                                                                              ------          -------         -------
                                                                               295.5            364.3           367.5
Lawn and garden products                                                        11.2               -               -
                                                                              ------          -------         -------
                                                                              $306.7           $364.3          $367.5
                                                                              ======           ======          ======
</TABLE>

     The following  table sets forth  selected  operating  data of Keystone as a
percentage of net sales for the periods indicated.

<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                                             --------------------------------------
                                                                                2003           2004           2005
                                                                             --------        -------         ------

<S>                                                                          <C>             <C>            <C>
Net sales                                                                    100.0 %         100.0 %        100.0%
Cost of goods sold                                                           101.4            88.4           91.8
                                                                             -----           -----          -----
Gross margin (loss)                                                           (1.4)%          11.6 %          8.2%
                                                                             =====           =====          =====

Selling expense                                                                2.3 %           1.5%           1.7%
General and administrative expense                                             3.5             3.0            3.2
Defined benefit pension expense (credit)                                       2.2            (1.9)          (3.2)
Corporate expense                                                              1.9             1.7             .9
Gain on legal settlement                                                        -             (1.5)            -
Reorganization costs                                                            -              3.1            2.8
Gain on cancellation of debt                                                    -              -             (8.8)
Income (loss) before income taxes                                            (12.2)%           4.8 %         10.8%
Income tax provision                                                           -                .4             .1
                                                                             -----           -----          -----
Net income (loss)                                                            (12.2)%           4.4%          10.7%
                                                                             =====           =====          =====
</TABLE>


Year ended December 31, 2005 compared to year ended December 31, 2004

     Discussion of operating results

     During  2005,  Keystone's  shipment  of steel and wire  products  increased
12,000 tons over 2004 shipment levels. This 2% increase in shipments resulted in
total 2005  shipments  of 526,000  tons as compared to 514,000 tons during 2004.
Per-ton  selling prices during 2005 declined $11 per-ton,  or 2%, as compared to
2004 as per-ton selling prices fell from $707 per-ton in 2004 to $696 per-ton in
2005. This decline in per-ton  product selling prices had an unfavorable  impact
on net sales of  approximately  $5.7  million.  In  addition  to the  decline in
per-ton  selling prices during 2005,  the overall  product mix during 2005 was a
less  favorable  mix than in 2004.  Lower  margin wire rod and billet  shipments
accounted for 51% of the overall shipment volume in 2005 as compared to only 42%
in 2004. The 12,000 ton increase in shipment volume  partially offset by the $11
per-ton  decline in selling prices and less favorable  product mix resulted in a
$3.2 million increase in net sales to $367.5 million during 2005.

     Keystone realized  increased per-ton selling prices during 2005 as compared
to 2004 in its fabricated wire products,  wire mesh,  industrial wire and billet
product lines while per-ton  selling  prices  declined in its nails and wire rod
product lines.  During 2005,  per-ton selling prices of fabricated wire products
increased by 11%, wire mesh increased by 6%, industrial wire increased by 3% and
billets  increased  by 82% while  per-ton  selling  prices of nails and wire rod
declined by 2% and 7%,  respectively.  Shipment  volume of the  Company's  value
added  products  during 2005  declined or remained  constant as compared to 2004
shipment  levels.  Shipments of fabricated wire products  declined by 13% during
2005 as compared to 2004,  while  shipments of nails and industrial wire fell by
39% and 12%  respectively.  The 71,000  tons of wire mesh  shipped  during  2005
remained  unchanged  from 2004 shipment  levels.  Keystone was able to partially
offset the lower 2005  shipment  volume of its value added  products with an 18%
increase in wire rod  shipments as well as a 71%  increase in billet  shipments.
The Company  believes  the lower  shipment  levels of its value  added  products
during 2005 were a result of lower market demand due to high inventory levels at
Keystone's customers.

     Billet  production  during 2005  declined by 5,000 tons to 585,000  tons as
compared  to 590,000  tons  during  2004 while wire rod  production  declined by
10,000 tons to 534,000 tons as compared to 544,000  tons during 2004.  The lower
billet  and wire rod  production  during  2005 was  primarily  a result of lower
market demand for our value-added finished products.

     Cost of goods  sold  increased  by 4.8%  during  2005 to $337.5  million as
compared  to $322.2  million  during  2004 as the cost of goods sold  percentage
increased from 88.4% in 2004 to 91.8% during 2005.  This increase in the cost of
goods sold  percentage  was due primarily to increased  costs for ferrous scrap,
the Company's primary raw material,  and natural gas costs at Keystone's Peoria,
Illinois facility, partially offset by lower retiree medical costs. During 2005,
the Company's  per-ton ferrous scrap costs increased by 7.3% as compared to 2004
levels.  Keystone purchased 651,000 tons of ferrous scrap at an average price of
$220 per-ton during 2005 as compared to 667,000 tons at an average price of $205
per-ton  during 2004.  This increase in per-ton  ferrous scrap costs during 2005
adversely impacted cost of goods sold by approximately $9.8 million. The cost of
natural gas at the Company's Peoria facility during 2005 was approximately  $4.4
million  higher  than in 2004.  Keystone  currently  anticipates  its  costs for
ferrous  scrap cost and  natural  gas for its Peoria  facility  during 2006 will
approximate the Company's 2005 experience.

     During 2004, the Company  entered into an agreement (the "1114  Agreement")
with  certain  retiree  groups that  substantially  reduced the post  retirement
benefits ("OPEB") that will be paid to these retiree groups in the future. Prior
to confirmation of Keystone's definitive plan of reorganization, the Court could
have  rescinded the 1114  Agreement  and  therefore  the 1114  Agreement was not
definitive  until it was  confirmed by the Court in connection  with  Keystone's
emergence  from Chapter 11 on August 31, 2005. As such,  and in accordance  with
GAAP,  the Company  continued to record OPEB expense  through August 31, 2005 at
the  estimated  level  ($11.6  million for the first eight months of 2005) as if
Keystone had not entered into the 1114  Agreement.  However,  at the time of the
Company's  emergence  from  Chapter  11  on  August  31,  2005,  and  concurrent
confirmation  of the 1114  Agreement,  GAAP  then  required  the  effect  of the
substantially  reduced OPEB benefits  agreed to as part of the 1114 Agreement be
accounted for as a plan amendment, the benefit of which is amortized into income
over  future  periods.   Accordingly,   Keystone  recorded  an  OPEB  credit  of
approximately  $2.7  million for the last four months of 2005,  resulting  in an
$8.9 million expense for the year 2005 as compared to $20.9 million during 2004.
A significant portion of the Company's OPEB expense is recorded in cost of goods
sold.

     As a result of the above items,  Keystone  recorded a gross profit of $30.0
million, or 8.2%, in 2005 as compared to $42.1 million, or 11.6% during 2004.

     Selling expense during 2005 increased by $617,000 to $6.3 million from $5.6
million during 2004 primarily as a result of increased advertising and marketing
expenses during 2005.

     General and administrative  expenses during 2005 increased by approximately
$1.0  million to $11.8  million  from $10.8  million  during  2004.  The primary
reasons for this  increase  were  higher  non-Chapter  11 legal costs  partially
offset by lower retiree medical costs resulting from the 1114 Agreement.

     During 2005,  Keystone  recorded a defined  benefit pension credit of $11.7
million as  compared  to a credit in 2004 of $6.8  million.  The higher  pension
credit  during 2005 was  primarily  a result of a $52  million  increase in plan
assets  during  2004,  resulting  in a higher  expected  return  on plan  assets
component of defined benefit pension plan expense. In addition, Keystone was not
required  to make  any cash  contributions  for  defined  benefit  pension  plan
fundings  during either 2004 or 2005. As a result of a $277 million  increase in
plan assets during 2005, the Company currently  anticipates  during 2006 it will
record a defined benefit pension credit in excess of the pension credit recorded
during 2005 and that no plan  fundings  will be required  during 2006.  However,
future variances from assumed  actuarial rates,  including the rate of return on
pension plan assets,  may result in increases or decreases in pension expense or
credit  and  future  funding  requirements.  See  Note  10 to  the  Consolidated
Financial  Statements  and the following  discussion of  Assumptions  on Defined
Benefit pension Plans - Defined benefit pension plan.

     General corporate expense declined $2.8 million to $3.5 million during 2005
from $6.3 million during 2004.  The primary  reasons for this decline were lower
retiree  medical  costs  resulting  from the 1114  Agreement  and lower  general
insurance expense all partially offset by increased state franchise taxes.

     Interest expense during 2005 was slightly higher than 2004 due primarily to
higher interest rates partially offset by lower debt levels. The overall average
interest  rates were  impacted  by the fact the  Company  discontinued  accruing
interest on  pre-petition  unsecured debt upon filing for Chapter 11 on February
26, 2004.  Average  borrowings by the Company  approximated $91.2 million during
2005 as compared to $99.6 million during 2004. During 2005, the average interest
rate on outstanding  indebtedness  was 4.2% per annum as compared 2.2% per annum
during 2004.  Keystone  currently  anticipates  average  interest rates and debt
levels in 2006 will be higher than their respective levels during 2005.

     In  connection  with its  Chapter 11  proceedings,  during  2004,  Keystone
entered into a  settlement  agreement  with its former  ferrous  scrap  supplier
relative to certain  disputed  ferrous scrap  inventories  located at Keystone's
Peoria,  Illinois  facility  on February  26,  2004,  the date of the  Company's
Chapter 11 filing. As Keystone consumed these disputed  inventories during 2004,
the Company deposited funds equal to the cost of these disputed inventories into
an escrow  account and charged cost of goods sold.  However,  under the terms of
the settlement  agreement,  during December 2004,  approximately $5.3 million of
the escrowed funds were refunded back to Keystone. Keystone recorded the receipt
of  this  refund  as a gain  on  legal  settlement  on  its  2004  statement  of
operations. There was no such settlement during 2005.

     During 2005, Keystone incurred $10.3 million in legal and professional fees
relative to its Chapter 11 proceedings and related reorganization  activities as
compared to $11.2 million during 2004. The Company does not currently anticipate
significant  levels of such legal and professional  fees will be incurred during
2006.

     In connection with Keystone's emergence from Chapter 11 on August 31, 2005,
pre-petition  unsecured  creditors,  a  debtor-in-possession  secured lender and
certain  post-petition  creditors with allowed claims against the Company in the
amount of  approximately  $63.9 million  received,  on a pro rata basis,  in the
aggregate, $5.2 million in cash, a $4.8 million secured promissory note and 100%
of the new common stock of reorganized Keystone (valued at $21.4 million).  As a
result,  the Company  recorded a $32.5  million gain from  cancellation  of debt
during 2005.

     The principal reasons for the difference between the U.S. federal statutory
income tax rate and the  Company's  effective  income tax rates are explained in
Note 8 to the  Consolidated  Financial  Statements.  At December 31,  2005,  the
Company had net operating loss  carryforwards of approximately  $8.0 million and
other tax attributes and net deductible temporary differences aggregating into a
gross deferred  income tax asset of $10.7 million.  Because the Company does not
currently  believe the benefit of such net operating loss carryforward and other
net   deductible   temporary   differences   meets  the   "more-likely-than-not"
recognition  criteria of GAAP,  the Company  had  recorded a deferred  tax asset
valuation  allowance  of $10.7  million  at  December  31,  2005,  resulting  in
recognition  of no net deferred  tax asset.  Keystone  periodically  reviews the
recoverability  of its deferred tax assets to determine whether such assets meet
the  "more-likely-than-not"  recognition criteria.  The Company will continue to
review the  recoverability  of its  deferred tax assets based on the criteria of
GAAP, and based on such periodic  reviews,  Keystone could recognize a change in
the  recorded  valuation  allowance  related to its  deferred  tax assets in the
future.  While the Company  currently  expects to report  pre-tax  income during
2006, and as a result of the deferred tax asset valuation  allowance  recognized
at  December  31,  2005,  the  Company  does not  anticipate  recognizing  a tax
provision  associated  with its  expected  pre-tax  income  during  2006 will be
appropriate until such time as the Company  determines (which might or might not
occur during 2006) that  recognition of the benefit of its gross deferred income
tax assets is appropriate under GAAP.

     As a result of the items  discussed  above,  Keystone  recorded  net income
during 2005 of $39.2 million as compared to net income of $16.1 million in 2004.

     At December 31, 2005, the Company's  financial  statements  reflected total
accrued  liabilities  of $15.4  million  ($8.5  million of which is reflected in
liabilities  subject to compromise  on the  Company's  December 31, 2005 balance
sheet) to cover estimated  remediation costs arising from environmental  issues.
Although  Keystone has established an accrual for future required  environmental
remediation  costs  that are  probable  and  reasonably  estimable,  there is no
assurance regarding the ultimate cost of remedial measures that might eventually
be  required  by  environmental  authorities  or that  additional  environmental
hazards, requiring further remedial expenditures,  might not be asserted by such
authorities or private parties.  Accordingly, the costs of remedial measures may
exceed  the  amounts  accrued.  See  Note  15  to  the  Consolidated   Financial
Statements.

Year ended December 31, 2004 compared to year ended December 31, 2003

Discussion of operating results

     Despite a 100,000 ton decline in shipment volume of steel and wire products
during 2004,  net sales  increased  by $57.7  million,  or 18.8%,  from 2003 due
primarily to a 47.6% increase in overall  per-ton steel and wire product selling
prices.  This increase was partially  offset by an $18.5 million  decline in net
sales from Garden Zone and  Keystone  Fasteners  due to  Keystone's  sale of its
interest in Garden Zone and its Keystone  Fasteners  division during 2003. There
was no significant change in Keystone's steel and wire products mix between 2003
and 2004. The 47.6% increase in overall  per-ton steel and wire product  selling
prices  ($228 per ton)  favorably  impacted  net sales by  approximately  $117.2
million during 2004.

     During 2004,  Keystone realized increased per-ton selling prices over those
of 2003 in all product lines except billets.  Fabricated  wire products  per-ton
selling prices increased by 25.7%,  wire mesh increased  53.8%,  nails increased
36.0%, industrial wire increased 56.9% and wire rod increased 71.7%. The per-ton
selling prices of billets during 2004 declined 8.3% as compared to 2003.  During
2004,  shipment volumes declined as compared to 2003 levels in all product lines
except wire mesh and billets.  Fabricated wire products shipment volume declined
7.5%, nails declined 47.2%, industrial wire declined 9.9% and wire rod shipments
declined  20.6%.  Wire mesh shipment volume  increased 7.6% during 2004.  Billet
shipment  volume in 2004  remained  unchanged  from the 2003 level.  The Company
believes the lower  shipment  volumes  across the majority of its product  lines
during 2004 was due to Keystone's limited production schedules during the period
preceding and immediately following Keystone's Chapter 11 filing combined with a
Company initiative to discontinue sales to its less profitable customers. During
the last portion of 2003 and throughout  2004, the Company  implemented  several
price  increases  primarily as a reaction to rapidly  increasing  ferrous  scrap
costs,  Keystone's  primary raw material.  As a result of these efforts,  during
2004,  the  Company  was able to realize  significant  increases  in the per-ton
product selling prices of the majority of its product lines.

     Billet production during 2004 increased by 23,000 tons to 590,000 tons from
577,000 tons in 2003. Wire rod production during 2004 declined by 15,000 tons to
544,000 tons from 559,000 tons in 2003.  The lower wire rod  production  in 2004
was due primarily to Keystone's limited  production  schedules during the period
preceding and immediately  following  Keystone's Chapter 11 filing combined with
lower customer  demand  resulting  from the Company's  initiative to discontinue
sales to its less profitable customers.

     Despite a 100,000  ton  decline  (16.3%)  in  shipment  volume in 2004,  as
compared to 2003, cost of goods sold increased by 3.7% in 2004 to $322.2 million
from $310.9 million in 2003. However, the cost of goods sold percentage declined
from 101.4% in 2003 to 88.4% of net sales in 2004.  This  decline in the cost of
goods sold  percentage  was due primarily to the  significantly  higher  product
per-ton selling prices in 2004,  partially offset by increased costs for ferrous
scrap, natural gas costs and electrical power at the Company's Peoria,  Illinois
facility.  In addition,  during 2003,  inventory  quantities were reduced.  This
reduction  resulted in a liquidation  of LIFO  inventory  quantities  carried at
lower  costs  prevailing  in  prior  years  as  compared  with  the cost of 2003
purchases,  the  effect of which  decreased  cost of goods sold  during  2003 by
approximately  $11.5 million.  Keystone's  per-ton ferrous scrap costs increased
77.7%  during 2004 as  compared  to 2003.  During  2004,  the Company  purchased
667,000 tons of ferrous scrap at an average price of $205 per-ton as compared to
2003  purchases  of  634,000  tons at an  average  price of $115  per ton.  This
increase in per-ton ferrous scrap costs  adversely  impacted gross profit during
2004 by  approximately  $59.7  million.  The cost of natural gas and  electrical
power at the Company's  Peoria facility in 2004 was  approximately  $226,000 and
$425,000,  respectively,  higher  than  they  were  in  2003.  In  addition,  in
connection with its restructuring  activities during 2004, Keystone modified its
health and welfare  benefit  plans for active  employees.  These  changes to the
health  and  welfare   benefit  plans   resulted  in  a   significantly   higher
participation by the employees and a correspondingly lower required contribution
by the Company during 2004.

     As a result of the above  items,  the gross  margin loss of $4.2 million in
2003 improved to a positive  margin of $42.1  million in 2004. As a result,  the
gross margin  percentage in 2003 of a 1.4% loss increased to a positive 11.6% in
2004.

     Selling  expense  during  2004  declined  18.7% to $5.6  million  from $6.9
million  during  2003.  The  primary  reason  for this  decline  was the sale of
Keystone's  interest in Garden Zone and its Keystone  Fasteners  division during
2003 partially  offset by increased  personnel costs at EWP. Through the date of
their respective 2003 sales, Garden Zone and Keystone Fasteners recorded a total
of $2.0 million of selling expenses.

     General and  administrative  expense of $10.8 million in 2004  approximated
the general and  administrative  expense in 2003 of $10.7 million primarily as a
result of the 2003 sales of Keystone's  interest in Garden Zone and its Keystone
Fasteners  division  as well as the changes to the  employee  health and welfare
benefit plans for active employees being offset by increased  personnel costs at
EWP.

     During 2004,  Keystone  recorded a defined  benefit  pension credit of $6.8
million as compared to recording  pension  expense in 2003 of $6.9 million.  The
pension  expense  in 2003 was due  primarily  to a $46  million  decline in plan
assets  during  2002 and the  resulting  lower  expected  return on plan  assets
component of defined  benefit pension plan expense.  However,  as a result of an
$85 million  increase in plan assets during 2003, the Company's  defined benefit
pension credit was approximately $6.8 million in 2004. In addition, Keystone was
not required to make any cash  contributions  for defined  benefit  pension plan
fundings  during  2004  or  2003.  See  Note  10 to the  Consolidated  Financial
Statements  and the  following  discussion  of  Assumptions  on Defined  Benefit
pension Plans - Defined benefit pension plan.

     General corporate expenses during 2004 were  approximately  $280,000 higher
than general corporate expenses during 2003 due primarily to higher OPEB expense
in 2004 being offset by lower personnel and non-restructuring  related legal and
professional costs.

     Interest  expense during 2004 was slightly lower than 2003 due primarily to
lower  overall  average  borrowings  and  interest  rates.  The overall  average
interest  rates were  impacted  by the fact the  Company  discontinued  accruing
interest on  pre-petition  unsecured debt upon filing for Chapter 11 on February
2, 2004.  Average  borrowings by the Company  approximated  $99.6 million during
2004 as  compared  to $101.5  million  during  2003.  During  2004,  the average
interest rate on  outstanding  indebtedness  was 2.2% per annum as compared 2.7%
per annum during 2003. Keystone currently anticipates average interest rates and
debt levels in 2005 will be higher than their respective levels during 2004.

     In  connection  with its  Chapter 11  proceedings,  during  2004,  Keystone
entered into a  settlement  agreement  with its former  ferrous  scrap  supplier
resulting in a $5.3 million refund which the Company recorded as a gain on legal
settlement on its 2004 statement of operations.  There was no such settlement in
2005.

     During 2004, Keystone incurred $11.2 million in legal and professional fees
relative to its Chapter 11 proceedings and related reorganization activities.

     As a result of the items  discussed  above,  Keystone  recorded  net income
during  2004 of $16.1  million  as  compared  to  recording  a net loss of $37.5
million in 2003.


SEGMENT RESULTS OF OPERATIONS:

     Keystone's  operating  segments are defined as components  of  consolidated
operations  about which  separate  financial  information  is available  that is
regularly  evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing  performance.  The Company's chief operating
decision maker is Mr. David L. Cheek,  President and Chief Executive  Officer of
Keystone.  Each  operating  segment is separately  managed,  and each  operating
segment represents a strategic business unit offering  different  products.  See
Note 3 to the Consolidated Financial Statements.

     The  Company's  operating  segments are organized  along its  manufacturing
facilities and include three  reportable  segments:  (i) Keystone Steel and Wire
("KSW")  which  manufacturers  and sells wire rod,  wire and wire  products  for
agricultural,   industrial,   construction,   commercial,   original   equipment
manufacturers  and retail consumer markets (ii) Engineered Wire Products ("EWP")
which  manufactures  and sells welded wire  reinforcement in both roll and sheet
form that is utilized in concrete construction products including pipe, pre-cast
boxes and  applications  for use in roadways,  buildings and bridges,  and (iii)
Keystone  Wire  Products  ("KWP")  which  manufacturers  and sells wire and wire
products  for  agricultural,   industrial,  construction,  commercial,  original
equipment  manufacturers  and retail  consumer  markets.  In connection with the
Company's emergence from Chapter 11 on August 31, 2005, certain operating assets
and  existing  operations  of  Sherman  Wire were sold at fair  market  value to
Keystone,  which then used these assets to form and operate KWP, a newly created
wholly-owned  subsidiary of reorganized  Keystone. As such, operating results of
this  segment  prior to  Keystone's  emergence  from  Chapter 11 were  operating
results of Sherman  Wire.  Operating  results of this segment  after  Keystone's
emergence  from Chapter 11, were  operating  results of KWP. In accordance  with
Keystone's  plan of  reorganization,  the remaining  assets of Sherman Wire will
eventually be  liquidated.  EWP was not included in the Company's  February 2004
bankruptcy proceedings. See Note 2.

     In addition,  prior to July 2003,  Keystone also operated three businesses,
including Sherman Wire, that did not constitute  reportable  business  segments.
These  businesses  sold  wire,   nails  and  wire  products  for   agricultural,
industrial, construction, commercial, original manufacturers and retail consumer
markets.  The results of  operations  of these  businesses  are  aggregated  and
included under the "Sherman/KWP"  heading in the following  tables.  During July
2003,  Keystone  transferred its operations at one of these three  businesses to
other Keystone  facilities,  and during August 2003 Keystone sold another of the
businesses.  As a result,  from  August  2003,  through  August  31,  2005,  the
"Sherman/KWP" heading in the following tables only includes Sherman Wire.

     Prior to July 2003,  the Company  owned a 51%  interest in Garden  Zone,  a
distributor of wire, plastic and wood lawn and garden products to retailers.  In
July 2003, Keystone sold its 51% ownership in Garden Zone.

     The net  proceeds  from the sale of  Garden  Zone  and  Keystone  Fasteners
aggregated $3.3 million.  The gain on the sale of these  businesses,  as well as
the results of operations of each of Garden Zone and Keystone  Fasteners are not
significant,  individually  and in the aggregate.  Accordingly,  the Company has
elected not to present their results of  operations as  discontinued  operations
for all periods presented due to their immateriality.

     The accounting  policies of the segments are the same as those described in
the summary of significant  accounting  policies except that (i) defined benefit
pension  expense for each  segment is  recognized  and  measured on the basis of
estimated  current  service  cost of each  segment,  with the  remainder  of the
Company's net defined  benefit  pension  expense or credit not allocated to each
segment but still is reported as part of operating  profit or loss, (ii) segment
OPEB  expense is  recognized  and measured  based on the basis of the  estimated
expense of each segment, with the remainder of the Company's actual OPEB expense
not allocated to each segment but still is reported as part of operating  profit
or loss,  (iii)  elimination of intercompany  profit or loss on ending inventory
balances  is not  allocated  to each  segment  but still is  reported as part of
operating  profit  or loss,  (iv) LIFO  inventory  reserve  adjustments  are not
allocated to each  segment but still are reported as a part of operating  profit
or loss, and (v) amortization of goodwill included in general corporate expenses
and is not  allocated  to any  segment  and is not  included  in total  reported
operating  profit or loss.  General  corporate  expense also  includes  OPEB and
environmental  expense  relative to  facilities  no longer owned by the Company.
Intercompany sales between reportable  segments are generally recorded at prices
that approximate market prices to third-party customers.

<TABLE>
<CAPTION>
                                               Principal
         Business Segment                      entities                Location                   Products
         ----------------                   --------------            ---------                -----------------

<S>                                 <C>                              <C>                   <C>
Keystone Steel & Wire               Keystone Steel & Wire            Peoria, IL            Billets, wire rod, industrial
                                                                                           wire, nails and fabricated wire
                                                                                           products

Engineered Wire Products            Engineered Wire                  Upper Sandusky,       Fabricated wire products
                                     Products                         OH

Garden Zone                         Garden Zone (1)                  Charleston, SC        Wire, wood and plastic lawn and
                                                                                           garden products

Sherman Wire/KWP                    Sherman Wire/                    Sherman, TX           Industrial wire and fabricated
                                    Keystone Wire                                          wire products
                                     Products
                                    Sherman Wire of                  Caldwell, TX          Industrial wire and fabricated
                                     Caldwell(2)                                           wire products
                                    Keystone Fasteners(3)            Springdale, AR        Nails
</TABLE>

(1)      51.0% subsidiary - interest sold in July 2003.
(2)      Transferred operations in July 2003 to Sherman and KSW.
(3)      Business sold in August 2003.

<TABLE>
<CAPTION>
                                                                2003             2004          2005
                                                                ----             ----          ----
                                                                           (In thousands)

Revenues:
<S>                                                             <C>            <C>             <C>
  Keystone Steel and Wire                                       $274,284       $346,703        $342,139
  Engineered Wire Products                                        35,260         58,982          62,777
  Garden Zone                                                     12,082              -               -
  Sherman Wire/KWP                                                28,127         16,193          21,655
  Elimination of intersegment
    revenues                                                     (43,082)       (57,543)        (59,026)
                                                               ---------       --------        --------

                                                                $306,671       $364,335        $367,545
                                                                ========       ========        ========

Operating profit (loss):
  Keystone Steel and Wire                                       $(21,388)      $ 10,126        $ (6,091)
  Engineered Wire Products                                         2,721         10,598           9,481
  Garden Zone                                                        700              -               -
  Sherman Wire/KWP                                                (4,579)          (422)         (1,674)
  GAAP adjustments and eliminations                               (6,185)        12,153          21,943
                                                               ---------       --------        --------

                                                                $(28,731)      $ 32,455        $ 23,659
                                                                ========       ========        ========
</TABLE>

Keystone Steel & Wire

     KSW's net sales  during  2005  declined  by $4.6  million or 1.3% to $342.1
million from $346.7 million  during 2004 due primarily to lower per-ton  product
selling prices partially offset by increased  shipment volume.  During 2005, KSW
shipped  8,282 more tons of  product  than  during  2004  although  at the lower
per-ton  selling  prices.  KSW's average per-ton selling prices during 2005 were
approximately  $18 per-ton  lower than in 2004.  KSW believes the lower  per-ton
selling prices during 2005 were a result of reduced  demand for its  value-added
finished  products due to high inventory levels at KSW's customers.  During 2005
and 2004, approximately 13% and 14%, respectively,  of KSW's net sales were made
to other  Keystone  entities.  Significantly  all of the sales to other Keystone
entities were sales of wire rod.

     During 2005, KSW reported an operating loss of $6.1 million, as compared to
recording operating income during 2004 of $10.1 million. The primary reasons for
this decline in operating  profit were the lower per-ton  product selling prices
and higher costs for ferrous scrap and natural gas during 2005 partially  offset
by lower retiree medical costs as a result of the 1114 Agreement.

     KSW's  net  sales in 2004  increased  by $72.4  million  or 26.4% to $346.7
million from $274.3  million in 2003,  due primarily to higher  overall  per-ton
product  selling prices  partially  offset by lower shipment  volumes.  KSW sold
approximately  79,000 less tons of  products  in 2004 as  compared  to 2003,  at
selling prices $197 per-ton higher than per-ton  product selling prices in 2003.
KSW  believes  the lower  shipment  volume  during  2004 was due to its  limited
production  schedules  during the period  preceding  and  immediately  following
Keystone's Chapter 11 filing combined with an initiative to discontinue sales to
KSW's less profitable customers.  During the last portion of 2003 and throughout
2004, KSW implemented several price increases primarily as a reaction to rapidly
increasing ferrous scrap costs, KSW's primary raw material. As a result of these
efforts,  during  2004,  KSW was able to realize  significant  increases  in its
per-ton product selling prices. During 2004 and 2003, approximately 14% and 11%,
respectively of KSW's net sales were made to other Keystone entities.

     During 2004, KSW recorded  operating income of $10.1 million as compared to
recording a $21.4 million  operating  loss in 2003.  The primary  reason for the
increased operating profit in 2004 was the significantly  higher per-ton product
selling prices in 2004,  partially  offset by increased costs for ferrous scrap,
natural gas costs and electrical power. In addition, changes to KSW's health and
welfare benefit plans resulted in a significantly  higher  participation  by the
employees and a correspondingly lower required contribution by KSW during 2004.

Engineered Wire Products

     During  2005,  EWP  recorded  net sales of $62.8  million  which was a $3.8
million  increase over the $59.0 million of net sales recorded  during 2004. The
primary reason for this increase was a 2005 increase in per-ton  product selling
prices as shipment volume remained  constant between 2004 and 2005. During 2005,
EWP's per-ton  product  selling prices averaged $881 per-ton as compared to $829
per-ton  during  2004.  EWP shipped  approximately  71,000 tons of its  products
during each of 2004 and 2005.

     Despite a $3.8  million  increase in sales  during  2005,  EWP's  operating
income  declined to $9.5 million during 2005 as compared to $10.6 million during
2004. The primary  reason for this decline was that the higher  per-ton  product
selling prices during 2005 were more than offset by higher costs, primarily wire
rod,  EWP's  primary raw  material.  EWP  sources  the  majority of its wire rod
requirements from KSW.

     EWP's net sales of $59.0  million  during  2004  were  approximately  $23.7
million  or 67.3%  higher  than  during  2003 due  primarily  to both  increased
shipment volume and higher overall per-ton product selling prices.  During 2004,
EWP sold 5,700 more tons of products than during 2003 at per-ton product selling
prices  approximately  $291 per-ton higher than per-ton  selling prices in 2003.
During 2004, EWP implemented  several price increases primarily as a reaction to
rapidly  increasing wire rod costs.  As a result of these efforts,  during 2004,
EWP was able to realize  significant  increases in its per-ton  product  selling
prices.

     As a result of  significantly  higher per-ton product selling prices during
2004,  partially offset by increased wire rod and personnel costs as compared to
2003, EWP recorded a $7.9 million increase in operating income to $10.6 million.

Sherman Wire/KWP

     This segment's sales during 2005 amounted to $21.7 million,  a $5.5 million
increase  over sales during 2004 by this segment of $16.2  million.  The primary
reason for this increase was an increase in shipment volume  partially offset by
a decline in per-ton product  selling prices.  During 2005, this segment shipped
7,428 more tons of product  than during 2004.  This  segment's  average  per-ton
selling price in 2005 was approximately $29 per-ton lower than in 2004. Like the
Company's  KSW segment,  management  believes the lower per-ton  selling  prices
during 2005 were a result of reduced demand of its value-added finished products
due to high inventory levels at the Company's  customers.  During 2005 and 2004,
approximately 69% and 62%,  respectively,  of this segment's net sales were made
to KSW. The majority of these sales were fabricated wire products.

     Despite increased sales by this segment during 2005, the recorded operating
loss  increased by $1.3 million to $1.7 million from $422,000  during 2004.  The
primary  reason for this  increase in  operating  loss during 2005 was the lower
per-ton product selling prices as well as higher costs for utilities and repairs
and maintenance  partially  offset by lower retiree medical costs as a result of
the 1114 Agreement.

     Sherman  Wire was the only  business  in this  segment  during  2004.  Tons
shipped by Sherman Wire during 2003 declined by 26,000 tons from shipment levels
by the three  businesses  in this segment  during 2004.  On a stand alone basis,
Sherman Wire's shipment volume declined by 7,000 tons from 2003 to 2004. Sherman
Wire  believes  its lower  shipment  volume  during  2004 was due to its limited
production  schedules  during the period  preceding  and  immediately  following
Keystone's Chapter 11 filing combined with an initiative to discontinue sales to
Sherman  Wire's less  profitable  customers.  Sherman Wire recorded net sales of
$16.2 million in 2004, as compared to net sales of $28.1 million recorded by the
three businesses in this segment during 2003. This $11.9 million decline was due
primarily  to the sale and  transfer of two of the  businesses  in this  segment
during 2003 partially offset by a significant increase in Sherman Wire's per-ton
product  selling prices during 2004. On a stand alone basis,  Sherman Wire's net
sales  during  2004  approximated  its net  sales in 2003 as  increased  per-ton
product  selling  prices offset the decline in shipment  volume.  Sherman Wire's
overall per-ton product  selling price increased by  approximately  $224 per-ton
during 2004 as compared to the per-ton  product  selling prices  achieved by the
businesses in this segment  during 2003. On a stand alone basis,  Sherman Wire's
per-ton product selling prices increased $216 per-ton from 2003 to 2004.  During
2004, Sherman Wire implemented  several price increases  primarily as a reaction
to rapidly increasing wire rod costs, Sherman Wire's primary raw material.  As a
result  of  these  efforts,  during  2004,  Sherman  Wire  was  able to  realize
significant  increases  in its per-ton  product  selling  prices.  Sherman  Wire
sources the  majority  of its wire rod  requirements  from KSW.  During 2004 and
2003, approximately 62% and 36%, respectively,  of this segment's net sales were
made to other Keystone  entities.  These sales to other  Keystone  entities were
sales of industrial wire and fabricated  wire products.  On a stand alone basis,
during 2004 and 2003, approximately 62% and 55%, respectively, of Sherman Wire's
net sales were made to other Keystone  entities,  primarily KSW. The majority of
these sales were fabricated wire products.

     During 2004, Sherman Wire recorded a $422,000 operating loss as compared to
a $4.6 million  operating  loss  recorded by the  businesses  in this segment in
2003.  On a stand alone  basis,  during 2004,  Sherman Wire  recorded a $422,000
operating  loss as compared to an operating  loss of $2.5  million in 2003.  The
primary  reason for this improved  operating  performance in 2004 was the higher
overall per-ton product selling prices  partially  offset by the increased costs
for wire rod. In addition,  changes to Sherman Wire's health and welfare benefit
plans resulted in a significantly  higher  participation  by the employees and a
correspondingly lower required contribution by Sherman Wire during 2004.

     GAAP adjustments and eliminations in the above table consisted primarily of
adjustments  to reflect  the  difference  between the  defined  benefit  pension
expense or credit and OPEB  expense  allocated  to the  segments  and the actual
expense or credit  included in the  determination  of operating  profit or loss.
GAAP adjustments and  eliminations  included a defined benefit pension credit of
$10.3 million and $15.3 million during 2004 and 2005,  respectively  and defined
benefit  pension  expense  of  $3.8  million  during  2003.  During  2003,  GAAP
adjustments and eliminations included OPEB expense of $3.3 million. During 2004,
GAAP adjustments and eliminations included OPEB income of $6.1 million.

Related Party Transactions

     As further discussed in Note 13 to the Consolidated  Financial  Statements,
the Company is party to certain transactions with related parties.

     It is the policy of the  Company  to engage in  transactions  with  related
parties  on terms,  in the  opinion of the  Company,  no less  favorable  to the
Company than could be obtained from unrelated parties.

Outlook for 2006

     As a result of the  Company's  strengthened  financial  position due to its
emergence from Chapter 11, management  currently  believes Keystone will be able
to  recapture  in 2006 a portion of the market  that it lost during the last two
years.  This  market  was lost due to  customer  concerns  about  the  Company's
financial  stability.  As a  result,  management  expects  shipment  volumes  to
increase  over 2005 levels  during  2006.  However,  due to  anticipated  market
pressures,  management  currently  believes  overall per-ton selling prices will
decline in 2006 as compared to 2005.  Despite  these lower selling  prices,  the
Company expects ferrous scrap and energy costs to remain relatively flat in 2006
as compared to 2005.  However,  these lower  selling  prices will be tempered by
substantially lower retiree medical and restructure costs. As a result, Keystone
expects it will report net income for financial reporting purposes,  and expects
to report positive cash flows from operating activities in 2006. In addition, as
a result of significant  accumulated net operating losses,  the benefit of which
has not been  previously  recognized  for  financial  reporting  purposes as the
Company does not currently believe meets the "more-likely-than-not"  recognition
criteria,  the  Company  does not expect to record  significant  net tax expense
associated  with its pre-tax  income  during 2006 until such time as the Company
determines  (which might or might not occur during 2006) that recognition of the
benefit of its gross deferred income tax assets is appropriate under GAAP.

     As discussed above, certain pre-petition liabilities of Sherman Wire remain
subject to  compromise  at December  31, 2005 as their  claims have not yet been
finally adjudicated.  See Note 12 to the Consolidated Financial Statements. When
such  liabilities  are finally  adjudicated,  it is possible  the Company  would
record an additional  gain on  cancellation  of debt to the extent the amount of
the  allowed  claim  was  less  than  the  amount  of the  associated  liability
recognized in the Company's consolidated financial statements.

Critical Accounting Policies and Estimates

     The  accompanying   "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations"  are based upon the Company's  consolidated
financial  statements,  which have been prepared in accordance  with  accounting
principles  generally  accepted in the United  States of America  ("GAAP").  The
preparation of these financial statements requires the Company to make estimates
and judgments  that affect the reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period.  On an on-going basis,  the Company  evaluates its estimates,  including
those related to bad debts,  inventory  reserves,  the  recoverability  of other
long-lived assets (including goodwill and other intangible assets),  pension and
other   post-retirement   benefit  obligations  and  the  underlying   actuarial
assumptions  related thereto,  the realization of deferred income tax assets and
accruals  for  environmental  remediation,  litigation,  income  tax  and  other
contingencies.  The Company bases its estimates on historical  experience and on
various  other   assumptions  that  it  believes  to  be  reasonable  under  the
circumstances,  the results of which form the basis for making  judgments  about
the  reported  amounts of assets,  liabilities,  revenues and  expenses.  Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.

     Keystone  believes the following  critical  accounting  policies affect its
more  significant  judgments  and  estimates  used  in  the  preparation  of its
consolidated financial statements:

o    The Company maintains allowances for doubtful accounts for estimated losses
     resulting from the inability of its customers to make required payments and
     other factors.  The Company takes into  consideration the current financial
     condition  of the  customers,  the age of the  outstanding  balance and the
     current economic  environment when assessing the adequacy of the allowance.
     If the financial  condition of the Company's customers were to deteriorate,
     resulting in an impairment of their  ability to make  payments,  additional
     allowances  may be  required.  During 2003,  2004 and 2005,  the net amount
     written off against the allowance for doubtful  accounts as a percentage of
     the balance of the allowance  for doubtful  accounts as of the beginning of
     the year ranged from approximately 3% to 57%.

o    Keystone  provides  reserves for  estimated  obsolescence  or  unmarketable
     inventories equal to the difference between the cost of inventories and the
     estimated net realizable  value using  assumptions  about future demand for
     its products and market  conditions.  If actual market  conditions are less
     favorable than those projected by management, additional inventory reserves
     may  be  required.  Keystone  provides  reserves  for  tools  and  supplies
     inventory  based  generally on both  historical  and expected  future usage
     requirements.

o    The Company uses the last-in,  first-out  ("LIFO")  method to determine the
     cost of  certain  of its  inventories.  The LIFO  method  assumes  the last
     inventory  purchases  during a period  were sold first,  leaving  remaining
     inventory on the balance sheet at earlier prices.  As such, the LIFO method
     generally  reflects  the effects of inflation or deflation on cost of goods
     sold sooner than other  inventory cost methods do. The LIFO method was used
     to cost  approximately 84% and 81% of inventories held at December 31, 2004
     and 2005,  respectively.  The  first-in,  first-out or average cost methods
     were used to determine the cost of all other inventories.

o    The Company  recognizes an impairment charge associated with its long-lived
     assets,  primarily  property and equipment,  goodwill and other  intangible
     assets whenever it determines that recovery of such long-lived asset is not
     probable. Such determination is made in accordance with the applicable GAAP
     requirements associated with the long-lived asset, and is based upon, among
     other  things,  estimates  of the  amount  of future  net cash  flows to be
     generated by the  long-lived  asset and estimates of the current fair value
     of the asset. Adverse changes in such estimates of future net cash flows or
     estimates  of fair  value  could  result in an  inability  to  recover  the
     carrying  value of the  long-lived  asset,  thereby  possibly  requiring an
     impairment charge to be recognized in the future.

     Under  applicable  GAAP (SFAS No. 144,  Accounting  for the  Impairment  or
     Disposal of Long-Lived Assets),  property and equipment is not assessed for
     impairment unless certain impairment  indicators,  as defined, are present.
     During 2005, no such impairment indicators were present.

     Under applicable GAAP (SFAS No. 142, Goodwill and Other Intangible Assets,)
     goodwill is required to be reviewed  for  impairment  at least on an annual
     basis.  Goodwill will also be reviewed for impairment at other times during
     each year when impairment indicators, as defined, are present. As discussed
     in Notes 1 and 19 to the Consolidated Financial Statements, the Company has
     assigned its goodwill to the EWP reporting unit (as that term is defined in
     SFAS No. 142).  No goodwill  impairment  was deemed to exist as a result of
     the Company's annual  impairment  review completed during the third quarter
     of 2005.  The estimated fair value of the EWP reporting unit was determined
     based on discounted cash flow projections. Significant judgment is required
     in estimating the discounted  cash flows for the EWP reporting  unit.  Such
     estimated  cash  flows  are  inherently  uncertain,  and  there  can  be no
     assurance  that EWP will  achieve  the future cash flows  reflected  in its
     projections.

o    Keystone  records a valuation  allowance to reduce its deferred  income tax
     assets  to  the  amount  that  is   believed  to  be  realized   under  the
     "more-likely-than-not"   recognition   criteria.   While  the  Company  has
     considered  future  taxable  income and ongoing  prudent and  feasible  tax
     planning strategies in assessing the need for a valuation allowance,  it is
     possible  that in the future the  Company  may change its  estimate  of the
     amount of the deferred income tax assets that would  "more-likely-than-not"
     be realized in the  future,  resulting  in an  adjustment  to the  deferred
     income  tax  asset  valuation  allowance  that  would  either  increase  or
     decrease,  as  applicable,  reported  net income or loss in the period such
     change in estimate was made. At December 31, 2005, the Company believes its
     gross deferred tax assets do not currently meet the  "more-likely-than-not"
     realizability  test and accordingly has provided a valuation  allowance for
     the total gross deferred tax assets.

o    The Company records accruals for environmental, legal, income tax and other
     contingencies  when  estimated  future  expenditures  associated  with such
     contingencies become probable, and the amounts can be reasonably estimated.
     However,  new information may become available,  or circumstances  (such as
     applicable  laws and  regulations)  may  change,  thereby  resulting  in an
     increase or decrease in the amount  required to be accrued for such matters
     (and  therefore a decrease or increase in reported net income in the period
     of such change).

o    Keystone sponsors a defined benefit pension plan covering substantially all
     employees who meet certain  eligibility  requirements.  The Company was not
     required to make cash  contributions to the pension plan during 2005 and is
     not expected to be required to make cash  contributions to its pension plan
     during 2006. The determination of additional minimum liability,  intangible
     asset,  charge to stockholders'  equity and pension expense is dependent on
     the selection of certain  actuarial  assumptions that attempt to anticipate
     future events. These pension actuarial assumptions,  which are described in
     Note 10 to the Consolidated  Financial  Statements,  include discount rate,
     expected return on plan assets, rate of future compensation increases,  and
     mortality  rates.  Actual  results that differ from the  Company's  pension
     actuarial  assumptions are generally  accumulated and amortized over future
     periods and therefore,  generally affect the pension asset or liability and
     pension expense or credit in future periods. While the Company believes its
     pension actuarial assumptions are appropriate,  future material differences
     between the Company's pension  actuarial  assumptions and actual results or
     significant changes in the Company's pension actuarial  assumptions,  could
     result in a material  increase or  decrease  in the amount of the  reported
     pension  asset or liability  and expense or credit,  and  therefore  have a
     material impact on the Company's reported future results of operations.  In
     addition,  the plan  could  become  underfunded  under  applicable  federal
     regulations,  which would require the Company to make cash contributions to
     the plan.  See also the  following  discussion  of  Assumptions  on Defined
     Benefit Pension Plans and OPEB Plans - Defined Benefit Pension Plan.

o    The determination of the Company's obligation and expense for OPEB benefits
     is  dependent  on the  selection  of certain  actuarial  assumptions  which
     attempt to anticipate  future  events.  These OPEB  actuarial  assumptions,
     which  are  also  described  in  Note  10  to  the  Consolidated  Financial
     Statements,  include discount rate and mortality rates. Actual results that
     differ from the Company's  OPEB  actuarial  assumptions  are, in accordance
     with GAAP,  generally  accumulated  and amortized  over future  periods and
     therefore, generally affect OPEB obligations and expense in future periods.
     While the Company believes its OPEB actuarial  assumptions are appropriate,
     future  differences  between the Company's OPEB actuarial  assumptions  and
     actual  results or  significant  changes in the  Company's  OPEB  actuarial
     assumptions  could  materially  affect the reported amount of the Company's
     future OPEB obligation and expense, and therefore have a material impact on
     the Company's  reported  future  results of  operations.  In addition,  the
     amount the Company  ultimately  pays for future cash OPEB benefits could be
     materially   different   from  the  amounts   inherent  in  the   actuarial
     assumptions.  See also the following  discussion of  Assumptions on Defined
     Benefit Pension Plans and OPEB Plans - OPEB plans.

Accounting Principles Newly Adopted in 2005

     See Note 19 to the Consolidated Financial Statements.

Accounting Principles Not Yet Adopted

     See Note 20 to the Consolidated Financial Statements.

Assumptions on Defined Benefit Pension Plans and OPEB Plans

     Defined benefit pension plan. The Company  accounts for its defined benefit
pension plan using SFAS No. 87, Employer's  Accounting for Pensions.  Under SFAS
No. 87,  defined  benefit  pension plan expense or credit and prepaid or accrued
pension  costs  are each  recognized  based on  certain  actuarial  assumptions,
principally the assumed  discount rate, the assumed  long-term rate of return on
plan assets and the assumed increase in future compensation  levels. The Company
recognized a consolidated defined benefit pension plan credit of $6.8 million in
2004 and  $11.7  million  in 2005 and a  consolidated  defined  benefit  pension
expense of $6.9  million in 2003.  The  amount of funding  requirements  for the
defined  benefit  pension plan is based upon  applicable  regulations,  and will
generally differ from pension expense or credit recognized under SFAS No. 87 for
financial reporting  purposes.  No contributions were required to be made to the
Company's defined benefit pension plan during the past three years.

     The discount rates the Company  utilizes for  determining  defined  benefit
pension  expense  or credit and the  related  pension  obligations  are based on
current  interest  rates earned on  long-term  bonds that receive one of the two
highest ratings given by recognized  rating agencies.  In addition,  the Company
receives advice about appropriate discount rates from the Company's  third-party
actuaries,  who may in some cases utilize their own market indices. The discount
rates  are  adjusted  as of each  valuation  date  (December  31st)  to  reflect
then-current  interest  rates on such long-term  bonds.  Such discount rates are
used to determine the actuarial  present value of the pension  obligations as of
December 31st of that year,  and such discount  rates are also used to determine
the interest  component  of defined  benefit  pension  expense or credit for the
following year.

     The Company  used the  following  discount  rates for its  defined  benefit
pension plan during the last three years:

<TABLE>
<CAPTION>
                                                         Discount rates used for:
                       ------------------------------------------------------------------------------------------------
                               Obligations at                   Obligations at                   Obligations at
                       December 31, 2003 and expense     December 31, 2004 and expense       December 31, 2005 and
                                 in 2004                           in 2005                     expense in 2006
                       -------------------------------  --------------------------------  -----------------------------

                                      <S>                               <C>                             <C>
                                      6.0%                              5.65%                           5.5%
</TABLE>

     The  assumed  long-term  rate of  return  on  plan  assets  represents  the
estimated  average rate of earnings  expected to be earned on the funds invested
or to be invested  in the plans'  assets  provided to fund the benefit  payments
inherent in the projected benefit  obligations.  Unlike the discount rate, which
is adjusted each year based on changes in current long-term  interest rates, the
assumed  long-term  rate of return on plan  assets will not  necessarily  change
based upon the actual,  short-term  performance  of the plan assets in any given
year.  Defined  benefit  pension  expense or credit  each year is based upon the
assumed long-term rate of return on plan assets for the plan and the actual fair
value of the plan assets as of the  beginning of the year.  Differences  between
the  expected  return on plan assets for a given year and the actual  return are
deferred and  amortized  over future  periods  based upon the  expected  average
remaining service life of the active plan participants.

     In  determining  the  expected  long-term  rate of  return  on  plan  asset
assumptions,  the Company  considers  the long-term  asset mix (e.g.  equity vs.
fixed  income) for the assets of its plan and the  expected  long-term  rates of
return for such asset components. In addition, the Company receives advice about
appropriate long-term rates of return from the Company's third-party  actuaries.
Substantially  all of Keystone's plan assets are invested in the Combined Master
Retirement Trust ("CMRT"),  a collective  investment trust sponsored by Contran,
to permit the  collective  investment by certain master trusts that fund certain
employee  benefits  plans  sponsored  by Contran and certain of its  affiliates.
Harold C. Simmons is the sole trustee of the CMRT.  Mr.  Simmons and two members
of Keystone's board of directors and Master Trust Investment  Committee comprise
the Trust  Investment  Committee for the CMRT. The CMRT's  long-term  investment
objective  is to provide a rate of return  exceeding a composite of broad market
equity and fixed  income  indices  (including  the S&P 500 and  certain  Russell
indicies) utilizing both third-party  investment managers as well as investments
directed by Mr. Simmons. During the 18-year history of the CMRT through December
31, 2005, the average annual rate of return has been 14.0%.  For 2003,  2004 and
2005, the assumed  long-term rate of return utilized for plan assets invested in
the CMRT was 10%. In determining the  appropriateness  of such long-term rate of
return assumption,  the Company  considered,  among other things, the historical
rate of return for the CMRT, the current and projected asset mix of the CMRT and
the  investment  objectives  of the CMRT's  managers.  In addition,  the Company
receives advice about  appropriate  long-term rates of return from the Company's
third-party  actuaries.  At December 31, 2005, the asset mix of the CMRT was 86%
in  U.S.  equity  securities,   3%  in  U.S.  fixed  income  securities,  7%  in
international  equity  securities,  3%  in  cash  and  1% in  other  investments
(primarily real estate).

     The Company  regularly  reviews its actual asset allocation for its defined
benefit  pension plan, and will  periodically  rebalance the  investments in the
plan  to  more  accurately  reflect  the  targeted  allocation  when  considered
appropriate.

     As noted above,  the  Company's  assumed  long-term  rate of return on plan
assets was 10% for each of 2003, 2004 and 2005. The Company currently expects to
utilize the same long-term  rate of return on plan assets  assumption in 2006 as
it used in 2005 for purposes of  determining  the 2006 defined  benefit  pension
plan expense or credit.

     To the extent the defined benefit pension plan's particular pension benefit
formula  calculates  the  pension  benefit in whole or in part based upon future
compensation  levels, the projected benefit  obligations and the pension expense
will be based in part upon expected increases in future compensation levels. For
pension benefits that are so calculated, the Company generally bases the assumed
expected increase in future compensation levels upon average long-term inflation
rates.

     As  discussed  above,  assumed  discount  rates  and rate of return on plan
assets are  re-evaluated  annually.  A reduction  in the assumed  discount  rate
generally  results in an actuarial loss, as the  actuarially-determined  present
value of  estimated  future  benefit  payments  will  increase.  Conversely,  an
increase in the assumed discount rate generally results in an actuarial gain. In
addition,  an actual return on plan assets for a given year that is greater than
the assumed return on plan assets results in an actuarial gain,  while an actual
return  on plan  assets  that is less  than the  assumed  return  results  in an
actuarial  loss.  Other actual  outcomes that differ from previous  assumptions,
such as  individuals  living longer or shorter than assumed in mortality  tables
that are also used to  determine  the  actuarially-determined  present  value of
estimated future benefit payments, changes in such mortality table themselves or
plan amendments,  will also result in actuarial losses or gains. Under GAAP, all
of such actuarial gains and losses are not recognized in earnings currently, but
instead  are  deferred  and  amortized  into income in the future as part of net
periodic defined benefit pension cost. However, any actuarial gains generated in
future periods would reduce the negative  amortization  effect of any cumulative
unrecognized  actuarial  losses,  while any actuarial losses generated in future
periods  would  reduce  the  favorable  amortization  effect  of any  cumulative
unrecognized actuarial gains.

     During 2005, the Company's  defined  benefit  pension plans generated a net
actuarial  gain of  approximately  $254 million.  This  actuarial  gain resulted
primarily  from the effect of the actual  return on plan assets  ($304  million)
exceeded the expected return on plan assets ($41 million),  offset in part by an
actuarial  loss resulting  primarily from the reduction in the assumed  discount
rate. As discussed above,  actuarial gains and losses are deferred and amortized
into income in future periods.  As a result,  the amount of prepaid pension cost
recognized  by the Company at December 31, 2005 ($145  million) is less than the
excess of the fair value of plan assets over the actuarially  determined present
value of estimated benefit payments ($309 million).

     Based on the actuarial  assumptions  described above,  Keystone expects its
2006 defined  benefit  pension credit will exceed 2005's defined benefit pension
credit of $11.7 million.  Keystone was not required to make contributions to the
defined benefit pension plan during 2003, 2004 or 2005 and does not expect to be
required to make any contributions during 2006.

     As noted above,  defined  benefit pension expense or credit and the amounts
recognized  as  prepaid or accrued  pension  costs are based upon the  actuarial
assumptions   discussed  above.  The  Company  believes  all  of  the  actuarial
assumptions  used are  reasonable and  appropriate.  If Keystone had lowered the
assumed  discount rate by 25 basis points as of December 31, 2005, the Company's
projected  and  accumulated   benefit   obligations   would  have  increased  by
approximately $10.0 million and $9.6 million, respectively at that date, and the
defined  benefit  pension credit would be expected to decrease by  approximately
$487,000 during 2006. Similarly,  if Keystone lowered the assumed long-term rate
of return on plan  assets by 25 basis  points for its  defined  benefit  pension
plan,  the  defined  benefit  pension  credit  would be  expected to decrease by
approximately $1.0 million during 2006.

     OPEB plans. The Company currently provides certain post retirement benefits
for  eligible  retired  employees.  See  Note 10 to the  Consolidated  Financial
Statements.  The  Company  accounts  for such OPEB  costs  under  SFAS No.  106,
Employers Accounting for Postretirement Benefits other than Pensions. Under SFAS
No. 106,  OPEB  expense and  accrued  OPEB costs are based on certain  actuarial
assumptions,  including  the  assumed  discount  rate.  The  Company  recognized
consolidated  OPEB expense of $17.5  million in 2003,  $20.9 million in 2004 and
$8.9 million in 2005. Similar to defined benefit pension benefits, the amount of
funding  will  differ  from  the  expense  recognized  for  financial  reporting
purposes,  and  contributions to the plans to cover benefit payments  aggregated
$10.3 million in 2003, $5.3 million in 2004 and $8.3 million in 2005. The amount
of OPEB contributions made by the Company in 2004 and 2005, which was lower than
the Company's  contributions in 2003 of $10.3 million,  reflects in part certain
interim relief related to the Company's retiree medical plans that were approved
by the Bankruptcy  Court in connection  with the Company's  Chapter 11 filing as
well as the subsequent 1114 Agreement.

     The  assumed  discount  rates the Company  utilizes  for  determining  OPEB
expense and the related accrued OPEB obligations are generally based on the same
discount  rates the Company  utilizes  for its  defined  benefit  pension  plan.
Because future OPEB payments are not based on health care costs,  changes in the
healthcare cost trend rate do not impact future OPEB expense or obligations.

     As discussed above,  assumed discount rates are  re-evaluated  annually.  A
reduction in the assumed  discount rate generally  results in an actuarial loss,
as the actuarially-determined present value of estimated future benefit payments
will increase.  Conversely,  an increase in the assumed  discount rate generally
results in an actuarial  gain.  Other actual  outcomes that differ from previous
assumptions,  such as  individuals  living  longer or  shorter  than  assumed in
mortality  tables  which are also used to determine  the  actuarially-determined
present value of estimated  future benefit  payments,  changes in such mortality
table  themselves or plan  amendments,  will also result in actuarial  losses or
gains.  Under GAAP, all of such actuarial gains and losses are not recognized in
earnings  currently,  but instead are deferred and amortized  into income in the
future as part of net periodic OPEB cost. However, any actuarial gains generated
in  future  periods  would  reduce  the  negative  amortization  effect  of  any
cumulative  unrecognized  actuarial losses, while any actuarial losses generated
in  future  periods  would  reduce  the  favorable  amortization  effect  of any
cumulative unrecognized actuarial gains.

     As discussed above,  during 2004 the Company entered into an agreement (the
"1114  Agreement")  with certain retiree groups that  substantially  reduced the
OPEB benefits that will be paid to these retiree groups in the future.  Prior to
confirmation  of Keystone's  definitive plan of  reorganization,  the bankruptcy
court could have  rescinded the 1114  Agreement and therefore the 1114 Agreement
was not  definitive  until it was  confirmed  by the  court in  connection  with
Keystone's emergence from Chapter 11 on August 31, 2005. Concurrent confirmation
of the 1114  Agreement  in August  2005,  GAAP then  required  the effect of the
substantially  reduced OPEB benefits  agreed to as part of the 1114 Agreement be
accounted for as a plan amendment, the benefit of which is amortized into income
over  future  periods.  As a result,  the  Company's  OPEB  plans  generated  an
aggregate  $192  million  actuarial  gain  during  2005,  and the  amount of the
Company's  aggregate  accrued  OPEB costs at December  31,  2005 ($137  million)
exceeds the actuarially-determined present value of the estimated future benefit
payments at such date ($39 million).

     Based on the  actuarial  assumptions  described  above and  changes  to the
Company's  post  retirement  benefit  plans during 2004 and in  connection  with
Keystone's Chapter 11 filings, the Company expects it will record a consolidated
$6.6 million OPEB credit in 2006.  In  comparison,  the Company  expects to make
$4.3 million of contributions to such plans during 2006.

     As noted  above,  OPEB  expense and the amount  recognized  as accrued OPEB
costs are based upon the  actuarial  assumptions  discussed  above.  The Company
believes all of the actuarial  assumptions  used are reasonable and appropriate.
If the Company had lowered the assumed  discount rate by 25 basis points for all
of its OPEB plans as of December 31, 2005, the Company's  aggregate  accumulated
OPEB obligations  would have increased by  approximately  $906,000 at that date,
and the Company's OPEB expense would be expected to increase by $319,000  during
2006.

Liquidity and Capital Resources

     At  December  31,  2005,  Keystone  had working  capital of $36.4  million,
including $5.5 million of notes payable and current maturities of long-term debt
as well as outstanding  borrowings under the Company's revolving credit facility
of $32.1 million.  The amount of available borrowings under Keystone's revolving
credit facility is based on formula-determined  amounts of trade receivables and
inventories,  less the amount of outstanding  letters of credit. At December 31,
2005,  $4.6  million of letters of credit  were  outstanding  and unused  credit
available for borrowing  under  Keystone's  revolving  credit facility was $21.6
million.  The revolving credit facility  requires daily cash receipts be used to
reduce  outstanding  borrowings,  which results in the Company  maintaining zero
cash balances when there are balances  outstanding  under this credit  facility.
Accordingly,  any outstanding balances under this facility are always classified
as a current liability regardless of the maturity date of the facility.

     Despite a $23.2  million  increase in earnings  between 2004 and 2005,  the
Company's  operations  used $30.7 million in cash during 2005 as compared to the
$11.9 million of cash provided by operations in 2004.  The  significant  reasons
for this difference were the $32.5 million non-cash gain on cancellation of debt
during 2005, a $15.1 million decline in the Company's  non-cash  pension expense
during 2005, a $5.0 million  increase in the Company's  non-cash  pension credit
during 2005 and a $1.9 million increase in reorganization costs paid during 2005
all  partially  offset by a $5.3  million  non-cash  gain on a legal  settlement
during 2004.

     During 2005,  Keystone  made capital  expenditures  of  approximately  $9.8
million,  primarily related to upgrades of production  equipment at its facility
in Peoria,  Illinois,  as compared to $5.1 million in 2004. Capital expenditures
for  2006  are  expected  to be  approximately  $23.0  million  and are  related
primarily to a plant  expansion at EWP and upgrades to  production  equipment at
KSW. Such capital  expenditures  are expected to be funded using cash flows from
operations   together  with  borrowing   availability  under  Keystone's  credit
facility.

     At December 31, 2005, the Company's financial  statements reflected accrued
liabilities  of $15.4 million ($8.5 million of which is included in  liabilities
subject to compromise on the Company's balance sheet) for estimated  remediation
costs for those  environmental  matters that Keystone  believes are probable and
reasonably  estimable.  Although  the  Company  has  established  an accrual for
estimated future required environmental remediation costs, there is no assurance
regarding  the  ultimate  cost of remedial  measures  that might  eventually  be
required by environmental  authorities or that additional environmental hazards,
requiring  further  remedial  expenditures,   might  not  be  asserted  by  such
authorities or private parties.  Accordingly, the costs of remedial measures may
exceed the amounts accrued. Keystone believes it is not possible to estimate the
range of costs for certain sites. The upper end of range of reasonably  possible
costs to  Keystone  for sites for which the  Company  believes it is possible to
estimate costs is approximately $16 million.

     Keystone  is not  expected  to be  required  to make  contributions  to its
pension  plan during  2006.  Future  variances  from  assumed  actuarial  rates,
including the rate of return on pension plan assets,  may result in increases or
decreases  to  pension  expense  or credit and  funding  requirements  in future
periods. See Note 10 to the Consolidated Financial Statements.

     The Company  periodically  reviews the  recoverability  of its deferred tax
assets  to  determine  whether  such  assets  meet  the   "more-likely-than-not"
recognition criteria. At December 31, 2005,  considering all factors believed to
be relevant,  including the Company's  recent  operating  results,  its expected
future near-term productivity rates; cost of raw materials,  electricity,  labor
and employee benefits,  environmental remediation, and retiree medical coverage;
interest rates;  product mix; sales volumes and selling prices and the fact that
accrued OPEB expenses will become deductible over an extended period of time and
require the Company to generate  significant  amounts of future taxable  income,
the Company  believes its gross  deferred tax assets do not  currently  meet the
"more-likely-than-not"  realizability  test. As such, the Company has provided a
deferred  tax asset  valuation  allowance  of  approximately  $10.7  million  at
December 31, 2005,  or all of the  Company's  deferred tax asset.  Keystone will
continue to review the  recoverability of its deferred tax assets,  and based on
such periodic reviews,  the Company could change the valuation allowance related
to its deferred tax assets in the future.  The Company does not currently expect
it will be appropriate to recognize a tax provision associated with its expected
pre-tax income during 2006.

     Keystone incurs significant  ongoing costs for plant and equipment and pays
substantial  benefits for both current and retired employees.  As such, Keystone
is vulnerable to business  downturns  and increases in costs,  and  accordingly,
routinely  compares its  liquidity  requirements  and capital  needs against its
estimated future operating cash flows. During Keystone's Chapter 11 proceedings,
the  Company  negotiated  a favorable  amendment  to the  collective  bargaining
agreement  with its  largest  labor  union and  received  permanent  relief with
respect to certain OPEB payments to retirees. Keystone is also taking additional
action  towards  improving its  liquidity.  These actions  include,  but are not
limited  to,  reducing  inventory  levels  through  more  efficient   production
schedules and modifying coverages and participant contribution levels of medical
plans for both employees and retirees.  Keystone has also considered, and may in
the future consider,  the sale of certain divisions or subsidiaries that are not
necessary  to achieve the  Company's  long-term  business  objectives.  Keystone
currently  believes these efforts  combined with its existing credit  facilities
will provide sufficient  liquidity for the Company's  operations during the next
year.

  Summary of Debt and Other Contractual Commitments

     As  more  fully  described  in  the  notes  to the  Consolidated  Financial
Statements,  the Company is a party to various debt,  lease and other agreements
which  contractually  and  unconditionally  commit the  Company  to pay  certain
amounts in the future.  See Notes 2, 6, 16 and 17 to the Consolidated  Financial
Statements.  The following table summarizes such contractual  commitments of the
Company and its consolidated  subsidiaries that are unconditional  both in terms
of timing and amount by the type and date of payment:

<TABLE>
<CAPTION>
                                                    Payment due date
                                                ---------------------------------------
                                                                                               2011 and
Contractual commitment                             2006        2007/2008       2009/2010          after        Total
                                                  ------       ---------       ---------       ----------      -----
                                                                          (In thousands)

Indebtedness:
<S>                                               <C>            <C>             <C>               <C>        <C>
   Principal                                      $ 5,466        $40,203         $54,696           $ -        $100,365
   Interest                                         4,277          8,047           5,327             -          17,651

Operating leases                                      495            274             128             -             897

Product supply agreements                           1,613          2,400           2,400          1,500          7,913
                                                  -------        -------         -------        -------       --------

                                                  $11,851        $50,924         $62,551         $1,500       $126,826
                                                  =======        =======         =======         ======       ========
</TABLE>

     The  timing  and  amounts  shown  in the  above  table  for  the  Company's
commitments  related to indebtedness  (both  principal and interest),  operating
leases and product  supply  agreements  are based upon the  contractual  payment
amount and the  contractual  payment  date for such  commitments.  In  addition,
balances  due under  the  Company's  revolving  credit  facilities  are shown as
current  maturities  in  the  Company's  Consolidated  Financial  Statements  at
December  31,  2005.  However,  the above  table  reflects  maturities  of these
facilities only upon the contracted expiration of the respective facility.

     In addition,  the Company is party to an agreement that requires  quarterly
contributions  of $75,000 to an  environmental  trust fund.  Monies in the trust
fund are made  available  to the  Company as the related  environmental  site is
remediated.

     The above table does not reflect any amounts that the Company  might pay to
fund its defined  benefit pension plans and OPEB plans, as the timing and amount
of any such future  fundings are unknown and  dependent  on, among other things,
the future  performance of defined  benefit  pension plan assets,  interest rate
assumptions  and actual future census data.  Such defined  benefit pension plans
and OPEB plans are discussed above in greater detail.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Keystone's  exposure  to changes in interest  rates  relates  primarily  to
long-term  debt  obligations.  At December  31, 2005,  approximately  66% of the
Company's long-term debt was comprised of fixed rate instruments, which minimize
earnings  volatility  related to interest  expense.  Keystone does not currently
participate in interest rate-related derivative financial instruments.

     The  table  below  presents   principal  amounts   (including  a  total  of
approximately  $470,000 of interest  that will be converted to principal  during
2006)  and  related  weighted-average   interest  rates  by  maturity  date  for
Keystone's long-term debt obligations.

<TABLE>
<CAPTION>
                                                    Contracted Maturity Date                                 Estimated
                             ---------------------------------------------------------------------          Fair Value
                             2006      2007      2008      2009      2010      Thereafter    Total       December 31, 2005
                             ----      ----      ----      ----      ----      ----------    -----       -----------------
                                                                  ($ In thousands)

Fixed-rate debt -
<S>                         <C>       <C>        <C>      <C>         <C>         <C>        <C>             <C>
  Principal amount          $  867    $21,364    $9,657   $10,312     $ -         $ -        $42,200         $31,439

  Weighted-average
    interest rate              .1%      1.5%       1.9%      1.4%       -%         - %          1.6%

Variable-rate debt-
  Principal amount          $4,599    $ 4,592    $4,590   $ 4,590  $39,794        $ -        $58,165         $58,165

  Weighted-average
    interest rate             7.3%      7.3%       7.3%      7.3%     7.3%         - %          7.3%
</TABLE>

     At  December  31,  2004,   long-term   debt   included   $27.6  of  million
variable-rate  debt  which  approximated  fair  value,  with a  weighted-average
interest rate of 5.7%.  Due to the  significant  uncertainties  surrounding  the
Company's  Chapter  11  proceedings,  management  was  unable  to  estimate  the
aggregate  fair value of Keystone's  fixed rate notes,  with a  weighted-average
interest rate of 2.0%, at December 31, 2004.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The information  called for by this Item is contained in a separate section
of this  report.  See Index of  Financial  Statements  and  Financial  Statement
Schedule on page F-1.

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE.

     None.

ITEM 9A. CONTROLS AND PROCEDURES

     Evaluation of Disclosure  Controls and  Procedures.  The Company  maintains
disclosure   controls  and  procedures.   The  term  "disclosure   controls  and
procedures,"  as defined by Rule 13a-15(e) of the Securities and Exchange Act of
1934,  as amended (the "Act"),  means  controls  and other  procedures  that are
designed to ensure that information required to be disclosed in the reports that
the Company  files or submits to the  Securities  and Exchange  Commission  (the
"SEC"), is recorded, processed, summarized and reported, within the time periods
specified  in the SEC's  rules and forms.  Disclosure  controls  and  procedures
include,  without  limitation,  controls and procedures  designed to ensure that
information required to be disclosed by the Company in the reports that it files
or  submits  to the SEC under the Act is  accumulated  and  communicated  to the
Company's  management,   including  its  principal  executive  officer  and  its
principal  financial  officer,  or  persons  performing  similar  functions,  as
appropriate to allow timely decisions to be made regarding required  disclosure.
Each of David L. Cheek, the Company's President and Chief Executive Officer, and
Bert E. Downing,  Jr., the Company's Vice President,  Chief  Financial  Officer,
Corporate  Controller  and Treasurer,  have  evaluated the Company's  disclosure
controls and  procedures as of December 31, 2005.  Based upon their  evaluation,
and  solely  as a result  of the  material  weaknesses  discussed  below,  these
executive  officers  have  concluded  the  Company's   disclosure  controls  and
procedures were not effective as of December 31, 2005.

     Internal Control Over Financial Reporting. A material weakness is a control
deficiency, or a combination of control deficiencies,  that results in more than
a remote  likelihood  that a  material  misstatement  of the  annual or  interim
financial  statements  will not be  prevented  or  detected.  Management  of the
Company  has  concluded  that  the  following  control  deficiencies  constitute
material weaknesses in the Company's internal control over financial reporting:

(1)  As of December 31, 2005,  the Company did not maintain  effective  controls
     over the  completeness  and accuracy of net sales and related cost of goods
     sold. Specifically, the Company did not have controls designed and in place
     to detect sales made under the terms  F.O.B.  at the  customer's  location.
     Additionally,  the Company did not  maintain  effective  controls  over the
     review and  monitoring  of the accuracy and  completeness  of net sales and
     costs of goods sold. This control deficiency resulted in adjustments to net
     sales and cost of goods sold in the third quarter of 2005.
(2)  As of December 31, 2005,  the Company did not maintain  effective  controls
     over the presentation and classification of cash overdrafts.  Specifically,
     effective  controls  were not  designed  and in place to  ensure  that cash
     overdrafts  were  properly  classified  as  indebtedness  in the  Company's
     consolidated  balance sheet,  and that changes in its cash  overdrafts were
     properly  included  in the  determination  of  cash  flows  from  financing
     activities.  This control  deficiency  resulted in the  restatement  of the
     Company's 2003 and 2004 annual consolidated  financial statements and audit
     adjustments to both its 2004 interim consolidated  financial statements and
     its annual and interim 2005  consolidated  financial  statements  affecting
     ccounts payable and the current portion of long-term debt.

     Each of these two control  deficiencies  could result in a misstatement  of
the aforementioned  accounts that would result in a material misstatement to the
Company's annual or interim consolidated  financial statements that would not be
prevented or detected.

     Accordingly,  management  of the  Company  determined  that  each of  these
control deficiencies constitutes a material weakness.

     The Company currently expects that Section 404 of the Sarbanes-Oxley Act of
2002 will  require  the  Company  to  annually  include a  management  report on
internal  control over financial  reporting  starting with the Company's  Annual
Report on Form 10-K for the year ended  December 31, 2007. The Company will have
to document,  test and evaluate its internal  control over financial  reporting,
using  a  combination  of  internal  and  external  resources.  The  process  of
documenting,   testing  and  evaluating  the  Company's  internal  control  over
financial  reporting  under the applicable  guidelines is expected to be complex
and time consuming,  and available internal and external resources  necessary to
assist the  Company in the  documentation  and  testing  required to comply with
Section 404 could be limited.  While the Company  currently  believes it will be
able to dedicate the  appropriate  resources,  and that it will be able to fully
comply  with  Section  404 in its Annual  Report on Form 10-K for the year ended
December 31, 2007 and be in a position to conclude that the  Company's  internal
control over financial  reporting is effective as of December 31, 2007,  because
the  applicable  requirements  are  complex  and  time  consuming,  and  because
currently  unforeseen events or circumstances beyond the Company's control could
arise,  there can be no assurance  that the Company will  ultimately  be able to
fully  comply with  Section  404 in its Annual  Report on Form 10-K for the year
ended  December  31,  2007 or  whether  it will be  able to  conclude  that  the
Company's internal control over financial  reporting is effective as of December
31, 2007.

     Remediation of Material Weakness.  In order to remediate the first material
weakness  discussed  above, in March 2006, the Company  modified its information
system  to  appropriately  identify  products  shipped  to its  customers  under
delivery  terms of F.O.B.  at the customer  location.  In addition,  the Company
intends to institute a quarterly  close  procedure,  to be  implemented  for the
first time for the quarter  ending March 31, 2006,  to review all sales within a
specified number of weeks prior to the end of the quarter to ensure the delivery
terms are consistent with revenue recognition in the quarter of shipment.

     In order to remediate the second  material  weakness  discussed  above,  in
March 2006 the Company revised the recurring reclassification journal entry used
in the preparation of its  consolidated  balance sheet to properly  classify the
amount of any cash  overdrafts as part of the current portion of long-term debt.
In addition, the Company intends to institute quarterly close procedures,  to be
implemented  for the first time for the quarter ending March 31, 2006, to ensure
(i) that an adequate review of the Company's balance sheet and statement of cash
flow consolidation occurs each quarter and (ii) the continued appropriateness of
the  reclassification  journal entry to classify bank  overdrafts as part of the
current portion of long-term debt.

     Changes in Internal  Control Over Financial  Reporting.  There have been no
changes in the Company's  internal  control over financial  reporting during the
quarter ended December 31, 2005 that has materially  affected,  or is reasonably
likely to materially  affect,  the  Company's  internal  control over  financial
reporting.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The  information  required by this Item is  incorporated  by  reference  to
Keystone's  Proxy  Statement  to be  filed  with  the  Securities  and  Exchange
Commission  pursuant  to  Regulation  14A  within  120 days after the end of the
fiscal year covered by this report (the "Keystone Proxy Statement").

ITEM 11.  EXECUTIVE COMPENSATION.

     The  information  required by this Item is incorporated by reference to the
Keystone Proxy Statement.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The  information  required by this Item is incorporated by reference to the
Keystone Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The  information  required by this Item is incorporated by reference to the
Keystone  Proxy  Statement.  See  also  Note  13 to the  Consolidated  Financial
Statements.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

     Independent Auditors. The firm of PricewaterhouseCoopers LLP ("PwC") served
as Keystone's  independent  registered public accounting firm for the year ended
December 31, 2005.  Keystone  expects PwC will be considered for  appointment to
audit Keystone's annual  consolidated  financial  statements for the year ending
December 31, 2006.

     Pre-approval  Policies  and  Procedures.  Keystone's  audit  committee  has
implemented   pre-approval  policies  and  procedures  that  require  the  audit
committee to pre-approve any services Keystone's  independent  registered public
accounting firm provides to Keystone or its subsidiaries.

     Fees Paid to PwC.  The  following  table shows the  aggregate  fees PwC has
billed or is expected  to bill to Keystone  and its  subsidiaries  for  services
rendered for 2004 and 2005.

<TABLE>
<CAPTION>
                        Type of Fees                                         2004                 2005
                        ------------                                         ----                 ----

<S>                                                                        <C>                   <C>
Audit Fees (1)                                                             $443,000              $498,000
Audit-Related Fees (2)                                                      132,500                  -
Tax Fees                                                                       -                     -
All Other Fees                                                                 -                     -
                                                                           --------              --------

Total                                                                      $575,500              $498,000
                                                                           ========              ========
</TABLE>

_______________________

(1)  Fees for the following services:

     (a)  audits of Keystone's  consolidated  year-end financial  statements for
          each year ($423,000 and $393,000 in 2004 and 2005, respectively);
     (b)  reviews of the unaudited quarterly financial  statements  appearing in
          Keystone's Form 10-Q for each of the first three quarters of 2005;
     (c)  normally provided  statutory or regulatory  filings or engagements for
          each year; and
     (d)  the  estimated  out-of-pocket  costs PwC incurred in providing  all of
          such services for which Keystone reimburses PwC.
     (e)  accounting  consultations concerning comment letters received from the
          United States Securities and Exchange Commission ($20,000 in 2004)

(2)  2004 - Fees for employee benefit plan audits.



                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     (a)(1),  (2) The Index of Consolidated  Financial  Statements and Financial
Statement Schedule is included on page F-1 of this report.

     (a)(3)  Exhibits

          Included as exhibits  are the items listed in the Exhibit  Index.  The
          Company will  furnish a copy of any of the exhibits  listed below upon
          payment  of $4.00 per  exhibit  to cover the costs to the  Company  in
          furnishing the exhibits.

Exhibit No.                          Exhibit


  3.1     Restated  Certificate of  Incorporation  dated  September 15, 1995, as
          filed  with  the  Secretary  of State of  Delaware.  (Incorporated  by
          reference  to Exhibit 3.1 to the  Registrant's  Annual  Report on Form
          10-K for the year ended December 31, 2003).

  3.2     Certificate of Amendment of the Restated  Certificate of Incorporation
          dated  October  9,  2003,  as  filed  with the  Secretary  of State of
          Delaware.   (Incorporated   by   reference   to  Exhibit  3.2  to  the
          Registrant's  Annual  Report on Form 10-K for the year ended  December
          31, 2003).

  3.3     Amended and Restated  Certificate of  Incorporation  of the Registrant
          dated  August  31,  2005,  as  filed  with the  Secretary  of State of
          Delaware.   (Incorporated   by   reference   to  Exhibit  3.3  to  the
          Registrant's  Annual  Report on Form 10-K for the year ended  December
          31, 2003).

  3.4     Amended  and  Restated   Certificate  of   Designations,   Rights  and
          Preferences  of the Series A 10%  Cumulative  Convertible  Pay-In-Kind
          Preferred Stock of Registrant  dated March 12, 2003.  (Incorporated by
          reference  to Exhibit 3.2 to the  Registrant's  Annual  Report on Form
          10-K for the year ended December 31, 2002).

  3.5     Bylaws of the  Company,  as amended  and  restated  December  30, 1994
          (Incorporated by reference to Exhibit 3.2 to the  Registrant's  Annual
          Report on Form 10-K for the year ended December 31, 1994).

  3.6     Amended and Restated  Bylaws of the Registrant  dated August 31, 2005.
          (Incorporated by reference to Exhibit 3.6 to the  Registrant's  Annual
          Report on Form 10-K for the year ended December 31, 2003).

  4.1     Indenture  dated as of August 7, 1997 relating to the  Registrant's  9
          5/8% Senior  Secured  Notes due 2007.  (Incorporated  by  reference to
          Exhibit 4.1 to the Registrant's Form 8-K filed September 4, 1997).

  4.2     First  Supplemental  Indenture Dated as of March 15, 2002 to Indenture
          Dated as of August 7, 1997 Between  Registrant  as Issuer and the Bank
          of New York, as Trustee.  (Incorporated by reference to Exhibit 4.2 to
          the  Registrant's  Annual  Report  on Form  10-K  for the  year  ended
          December 31, 2001).


Exhibit No.                          Exhibit


  4.3     Dated as of August 7, 1997 Between  Registrant  as Issuer and the Bank
          of New York, as Trustee.  (Incorporated by reference to Exhibit 4.3 to
          the  Registrant's  Annual  Report  on Form  10-K  for the  year  ended
          December 31, 2001).

  4.4     Amended and Restated Revolving Loan And Security Agreement dated as of
          December  29,  1995   between  the  Company  and  Congress   Financial
          Corporation  (Central).  (Incorporated  by reference to Exhibit 4.1 to
          Registrant's Form 10-K for the year ended December 31, 1995).

  4.5     First  Amendment to Amended and Restated  Revolving  Loan And Security
          Agreement  dated as of  September  27,  1996  between  Registrant  and
          Congress Financial Corporation  (Central).  (Incorporated by reference
          to Exhibit 4.1 to Registrant's  Quarterly  Report on Form 10-Q for the
          quarter ended September 30, 1996).

  4.6     Second  Amendment to Amended and Restated  Revolving Loan And Security
          Agreement  dated as of August 4, 1997 between  Registrant and Congress
          Financial Corporation (Central). (Incorporated by reference to Exhibit
          4.6 to the Registrant's  Annual Report on Form 10-K for the year ended
          December 31, 2001).

  4.7     Third  Amendment to Amended and Restated  Revolving  Loan And Security
          Agreement  dated as of May 14, 1999  between  Registrant  and Congress
          Financial Corporation (Central). (Incorporated by reference to Exhibit
          4.7 to the Registrant's  Annual Report on Form 10-K for the year ended
          December 31, 2001).

  4.8     Fourth  Amendment to Amended and Restated  Revolving Loan and Security
          Agreement  dated  as of  December  31,  1999  between  Registrant  and
          Congress Financial Corporation (Central) (Incorporated by reference to
          Exhibit 4.4 to the Registrant's  Form 10-K for the year ended December
          31, 1999).

  4.9     Fifth  Amendment to Amended and Restated  Revolving  Loan and Security
          Agreement dated as of February 3, 2000 between Registrant and Congress
          Financial Corporation (Central). (Incorporated by reference to Exhibit
          4.6 to the  Registrant's  Form 10-K for the year  ended  December  31,
          1999).

 4.10     Sixth  Amendment to Amended and Restated  Revolving  Loan and Security
          Agreement dated as of January 17, 2001 between Registrant and Congress
          Financial Corporation (Central). (Incorporated by reference to Exhibit
          4.10 to the Registrant's Annual Report on Form 10-K for the year ended
          December 31, 2001).

 4.11     Seventh Amendment to Amended and Restated  Revolving Loan and Security
          Agreement dated as of November 1, 2001 between Registrant and Congress
          Financial Corporation (Central). (Incorporated by reference to Exhibit
          4.11 to the Registrant's Annual Report on Form 10-K for the year ended
          December 31, 2001).

 4.12     Eighth  Amendment to Amended and Restated  Revolving Loan and Security
          Agreement  dated  as of  December  31,  2001  between  Registrant  and
          Congress Financial Corporation  (Central).  (Incorporated by reference
          to Exhibit 4.12 to the Registrant's Annual Report on Form 10-K for the
          year ended December 31, 2001).


Exhibit No.                          Exhibit

 4.13     Ninth  Amendment to Amended and Restated  Revolving  Loan and Security
          Agreement dated as of January 31, 2002 between Registrant and Congress
          Financial Corporation (Central). (Incorporated by reference to Exhibit
          4.13 to the Registrant's Annual Report on Form 10-K for the year ended
          December 31, 2001).

 4.14     Tenth  Amendment to Amended and Restated  Revolving  Loan and Security
          Agreement  dated  as of  February  28,  2002  between  Registrant  and
          Congress Financial Corporation  (Central).  (Incorporated by reference
          to Exhibit 4.14 to the Registrant's Annual Report on Form 10-K for the
          year ended December 31, 2001).

 4.15     Eleventh Amendment to Amended and Restated Revolving Loan and Security
          Agreement  dated as of March 15, 2002 between  Registrant and Congress
          Financial Corporation (Central). (Incorporated by reference to Exhibit
          4.15 to the Registrant's Annual Report on Form 10-K for the year ended
          December 31, 2001).

 4.16     Twelfth Amendment to Amended and Restated  Revolving Loan and Security
          Agreement  dated as of March 15, 2002 between  Registrant and Congress
          Financial Corporation (Central). (Incorporated by reference to Exhibit
          4.16 to the Registrant's Annual Report on Form 10-K for the year ended
          December 31, 2001).

 4.17     Thirteenth  Amendment  to  Amended  and  Restated  Revolving  Loan and
          Security Agreement dated as of November 17,2003 between Registrant and
          Congress Financial Corporation  (Central).  (Incorporated by reference
          to Exhibit 4.17 of the Registrant's Annual Report on Form 10-K for the
          year ended December 31, 2003).

 4.18     Loan Agreement  dated as of March 13, 2002 between  Registrant and the
          County of Peoria, Illinois. (Incorporated by reference to Exhibit 4.17
          to the  Registrant's  Annual  Report on Form  10-K for the year  ended
          December 31, 2001).

 4.19     Subordinate  Security  Agreement  dated as of March  13,  2002 made by
          Registrant in favor of the County of Peoria,  Illinois.  (Incorporated
          by reference to Exhibit 4.18 to the Registrant's Annual Report on Form
          10-K for the year ended December 31, 2001).

 4.20     Amended and  Restated EWP Bridge Loan  Agreement  dated as of November
          21,  2001,  by  and  between   Registrant   and  EWP  Financial   LLC.
          (Incorporated by reference to Exhibit 4.19 to the Registrant's  Annual
          Report on Form 10-K for the year ended December 31, 2001).

 4.21     First  Amendment  to Amended and  Restated  EWP Bridge Loan  Agreement
          dated  as of  March  18,  2002,  by and  between  Registrant  and  EWP
          Financial  LLC.  (Incorporated  by  reference  to Exhibit  4.20 to the
          Registrant's  Annual  Report on Form 10-K for the year ended  December
          31, 2001).

 4.22     Second  Amendment to Amended and  Restated  EWP Bridge Loan  Agreement
          dated as of  December  31,  2002,  by and between  Registrant  and EWP
          Financial  LLC.  (Incorporated  by  reference  to Exhibit  4.21 to the
          Registrant's  Annual  Report on Form 10-K for the year ended  December
          31, 2002).


Exhibit No.                          Exhibit

 4.23     Third  Amendment  to Amended and  Restated  EWP Bridge Loan  Agreement
          dated as of June 30, 2003, by and between Registrant and EWP Financial
          LLC.  (Incorporated  by  reference  to  Exhibit  4.1  to  Registrant's
          Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).

 4.24     Fourth  Amendment to Amended and  Restated  EWP Bridge Loan  Agreement
          dated as of July 31, 2003, by and between Registrant and EWP Financial
          LLC.  (Incorporated  by  reference  to  Exhibit  4.2  to  Registrant's
          Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).

 4.25     Fifth  Amendment  to Amended and  Restated  EWP Bridge Loan  Agreement
          dated  as of  August  31,  2003,  by and  between  Registrant  and EWP
          Financial   LLC.   (Incorporated   by  reference  to  Exhibit  4.1  to
          Registrant's  Quarterly  Report  on Form  10-Q for the  quarter  ended
          September 30, 2003).

 4.26     Sixth  Amendment  to Amended and  Restated  EWP Bridge Loan  Agreement
          dated as of September  30,  2003,  by and between  Registrant  and EWP
          Financial   LLC.   (Incorporated   by  reference  to  Exhibit  4.2  to
          Registrant's  Quarterly  Report  on Form  10-Q for the  quarter  ended
          September 30, 2003).

 4.27     Seventh  Amendment to Amended and  Restated EWP Bridge Loan  Agreement
          dated as of  October  31,  2003,  by and  between  Registrant  and EWP
          Financial   LLC.   (Incorporated   by  reference  to  Exhibit  4.3  to
          Registrant's  Quarterly  Report  on Form  10-Q for the  quarter  ended
          September 30, 2003).

 4.28     Eighth  Amendment to Amended and  Restated  EWP Bridge Loan  Agreement
          dated  as of  November  25,  2003 by and  between  Registrant  and EWP
          Financial  LLC.  (Incorporated  by  reference  to Exhibit  4.28 to the
          Registrant's  Annual  Report on Form 10-K for the year ended  December
          31, 2003).

 4.29     Ninth  Amendment  to Amended and  Restated  EWP Bridge Loan  Agreement
          dated as of  December  15,  2003,  by and between  Registrant  and EWP
          Financial  LLC.  (Incorporated  by  reference  to Exhibit  4.29 to the
          Registrant's  Annual  Report on Form 10-K for the year ended  December
          31, 2003).

 4.30     Tenth  Amendment  to Amended and  Restated  EWP Bridge Loan  Agreement
          dated as of  January  15,  2004,  by and  between  Registrant  and EWP
          Financial  LLC.  (Incorporated  by  reference  to Exhibit  4.30 to the
          Registrant's  Annual  Report on Form 10-K for the year ended  December
          31, 2003).

 4.31     Assumption  Agreement  and  Amendment  to Financing  Agreements  dated
          February 27, 2004 by and between  Registrant  and  Congress  Financial
          Corporation  (Central).  (Incorporated by reference to Exhibit 4.31 to
          the  Registrant's  Annual  Report  on Form  10-K  for the  year  ended
          December 31, 2003).

 4.32     First Amendment to  Post-Petition  Credit Agreement dated December 10,
          2004 by and between  Registrant  and  Congress  Financial  Corporation
          (Central).   (Incorporated   by  reference  to  Exhibit  4.32  to  the
          Registrant's  Annual  Report on Form 10-K for the year ended  December
          31, 2003).

Exhibit No.                          Exhibit

 4.33     Second  Amendment to  Post-Petition  Credit  Agreement dated March 31,
          2005 by and between  Registrant  and  Congress  Financial  Corporation
          (Central).   (Incorporated   by  reference  to  Exhibit  4.33  to  the
          Registrant's  Annual  Report on Form 10-K for the year ended  December
          31, 2003).

 4.34     Debtor-in-Possession  Credit  Agreement dated February 27, 2004 by and
          between  Registrant and EWP Financial LLC.  (Incorporated by reference
          to Exhibit 4.34 to the Registrant's Annual Report on Form 10-K for the
          year ended December 31, 2003).

 4.35     First Amendment to Debtor-In-Possession  Credit Agreement dated August
          25,  2004  by  and  between   Registrant   and  EWP   Financial   LLC.
          (Incorporated by reference to Exhibit 4.35 to the Registrant's  Annual
          Report on Form 10-K for the year ended December 31, 2003).

 4.36     Second  Amendment  to  Debtor-In-Possession   Credit  Agreement  dated
          December 31, 2004 by and between  Registrant  and EWP  Financial  LLC.
          (Incorporated by reference to Exhibit 4.36 to the Registrant's  Annual
          Report on Form 10-K for the year ended December 31, 2003).

 4.37     Letter  agreement dated July 31, 2005,  amending  Debtor-In-Possession
          Credit Agreement by and between Registrant and EWP Financial LLC.

 4.38     Stock Pledge  Agreement  dated as of November 21, 2001, by and between
          Registrant  and EWP  Financial  LLC.  (Incorporated  by  reference  to
          Exhibit 4.21 to the  Registrant's  Annual  Report on Form 10-K for the
          year ended December 31, 2001).

 4.39     Form of Registrant's 6% Subordinated  Unsecured Note dated as of March
          15,  2002.   (Incorporated   by  reference  to  Exhibit  4.22  to  the
          Registrant's  Annual  Report on Form 10-K for the year ended  December
          31, 2001).

 4.40     Form of Registrant's  8%  Subordinated  Secured Note dated as of March
          15,  2002.   (Incorporated   by  reference  to  Exhibit  4.23  to  the
          Registrant's  Annual  Report on Form 10-K for the year ended  December
          31, 2001).

 4.41     Indenture  Dated as of March 15,  2002,  related  to  Registrant's  8%
          Subordinated Secured Notes Between Registrant as Issuer, and U.S. Bank
          National  Association,  as  Trustee.  (Incorporated  by  reference  to
          Exhibit 4.24 to the  Registrant's  Annual  Report on Form 10-K for the
          year ended December 31, 2001).

 4.42     Supplemental  Indenture No. 1 dated as of August 31, 2005,  related to
          Registrant's  8%  Subordinated  Secured  Notes  between  Registrant as
          issuer, and U.S. Bank National Association as Trustee.

 4.43     Revolving credit Facility Promissory Note dated as of January 5, 2004,
          by and between  Engineered  Wire  Products,  Inc.  and Bank One,  N.A.
          (Incorporated by reference to Exhibit 4.41 to the Registrant's  Annual
          Report on Form 10-K for the year ended December 31, 2003).

 4.44     Business Loan Agreement  (Asset Based) dated as of January 5, 2004, by
          and  between  Engineered  Wire  Products,  Inc.  and  Bank  One,  N.A.
          (Incorporated by reference to Exhibit 4.42 to the Registrant's  Annual
          Report on Form 10-K for the year ended December 31, 2003).


Exhibit No.                          Exhibit

 4.45     Term  Promissory  Note dated as of January  5,  2004,  by and  between
          Engineered  Wire Products,  Inc. and Bank One, N.A.  (Incorporated  by
          reference to Exhibit 4.43 to the  Registrant's  Annual  Report on Form
          10-K for the year ended December 31, 2003).

 4.46     Commercial  Security  Agreement  dated as of January  5, 2004,  by and
          between   Engineered   Wire   Products,   Inc.  and  Bank  One,   N.A.
          (Incorporated by reference to Exhibit 4.44 to the Registrant's  Annual
          Report on Form 10-K for the year ended December 31, 2003).

 4.47     Amendment  to  Loan  Agreement  dated  May  17,  2004  by and  between
          Engineered  Wire Products,  Inc. and Bank One, N.A.  (Incorporated  by
          reference to Exhibit 4.45 to the  Registrant's  Annual  Report on Form
          10-K for the year ended December 31, 2003).

 4.48     Business Loan Extension  Agreement  dated June 18, 2004 by and between
          Engineered  Wire Products,  Inc. and Bank One, N.A.  (Incorporated  by
          reference to Exhibit 4.46 to the  Registrant's  Annual  Report on Form
          10-K for the year ended December 31, 2003).

 4.49     Business  Loan  Extension  Agreement  dated  September 30, 2004 by and
          between   Engineered   Wire   Products,   Inc.  and  Bank  One,   N.A.
          (Incorporated by reference to Exhibit 4.47 to the Registrant's  Annual
          Report on Form 10-K for the year ended December 31, 2003).

 4.50     Business  Loan  Extension  Agreement  dated  December  22, 2004 by and
          between   Engineered   Wire   Products,   Inc.  and  Bank  One,   N.A.
          (Incorporated by reference to Exhibit 4.48 to the Registrant's  Annual
          Report on Form 10-K for the year ended December 31, 2003).

 4.51     Business Loan Extension  Agreement dated March 30, 2005 by and between
          Engineered  Wire Products,  Inc. and Bank One, N.A.  (Incorporated  by
          reference to Exhibit 4.49 to the  Registrant's  Annual  Report on Form
          10-K for the year ended December 31, 2003).

 4.52     Business Loan Extension  Agreement dated June 27, 2005, by and between
          Engineered  Wire Products,  Inc. and Bank One, N.A.  (Incorporated  by
          reference to Exhibit 4.50 to the  Registrant's  Annual  Report on Form
          10-K for the year ended December 31, 2003).

 4.53     Loan and Security  Agreement  dated August 31, 2005 by and between the
          Registrant  and  Wachovia  Capital  Finance   Corporation   (Central).
          (Incorporated by reference to Exhibit 4.51 to the Registrant's  Annual
          Report on Form 10-K for the year ended December 31, 2003).

 4.54     Promissory  Note dated August 31,  2005,  from  Registrant  to Jack B.
          Fishman Esq. as trustee for holders of Class A6 claims.

 4.55     Securities  Pledge  Agreement  dated August 31,  2005,  by and between
          Registrant and Jack B. Fishman Esq. as trustee for holders of Class A6
          claims.

 10.1     Agreement  Regarding  Shared  Insurance  between   Registrant,   CompX
          International,  Inc., Contran Corporation,  Kronos Worldwide, Inc., NL
          Industries,  Inc.,  Titanium Metals Corp. and Valhi,  Inc. dated as of
          October 30,  2003.  (Incorporated  by reference to Exhibit 10.1 to the
          Registrant's  Annual  Report on Form 10-K for the year ended  December
          31, 2003).

 10.2     The Combined Master Retirement Trust between Valhi, Inc. and Harold C.
          Simmons as restated  effective July 1, 1995 (Incorporated by reference
          to Exhibit 10.2 to the Registrant's Registration Statement on Form S-4
          (Registration No. 333-35955)).


Exhibit No.                          Exhibit


 10.3*    Keystone  Consolidated  Industries,  Inc. 1992 Incentive  Compensation
          Plan.  (Incorporated  by  reference  to Exhibit  99.1 to  Registrant's
          Registration Statement on Form S-8 (Registration No. 33-63086)).

 10.4*    Keystone  Consolidated  Industries,  Inc. 1992  Non-Employee  Director
          Stock  Option  Plan.  (Incorporated  by  reference  to Exhibit 99.2 to
          Registrant's  Registration  Statement  on Form S-8  (Registration  No.
          33-63086)).

 10.5*    Keystone Consolidated Industries,  Inc. 1997 Long-Term Incentive Plan.
          (Incorporated by reference to Appendix A to Registrant's  Schedule 14A
          filed April 25, 1997).

 10.6*    Amendment to the Keystone Consolidated Industries, Inc. 1997 Long-Term
          Incentive Plan.  (Incorporated  by reference to Registrant's  Schedule
          14A filed April 24, 1998.)

 10.7*    Form of Deferred  Compensation  Agreement  between the  Registrant and
          certain executive officers. (Incorporated by reference to Exhibit 10.1
          to the  Registrant's  Quarterly  Report on Form 10-Q (File No. 1-3919)
          for the quarter ended March 31, 1999).

 10.8     Account  Reconciliation  Agreement  dated as of March 12, 2002 between
          Registrant  and  Central  Illinois  Light  Company.  (Incorporated  by
          reference to Exhibit 10.8 to the  Registrant's  Annual  Report on Form
          10-K for the year ended December 31, 2001).

 10.9     Account  Reconciliation  Agreement  dated as of March 11, 2002 between
          Registrant and PSC Metals, Inc.  (Incorporated by reference to Exhibit
          10.9 to the Registrant's Annual Report on Form 10-K for the year ended
          December 31, 2001).

 10.10    Intercorporate Services Agreement dated as of September 1, 2005 by and
          between Registrant and Contran Corporation.

 21       Subsidiaries of the Company.

 31.1     Certification

 31.2     Certification

 32.1     Certification


  *Management contract, compensatory plan or agreement.

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its  behalf  by the  undersigned  and  dated  March  31,  2006,  thereunto  duly
authorized.

                                       KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                                   (Registrant)



                                       /s/ GLENN R. SIMMONS
                                       Glenn R. Simmons
                                       Chairman of the Board

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been  signed  below and dated as of March 31,  2006 by the  following
persons on behalf of the registrant and in the capacities indicated:


/s/ GLENN R. SIMMONS               /s/ STEVEN L. WATSON
------------------------           --------------------------
Glenn R. Simmons                   Steven L. Watson
Chairman of the Board              Director

/s/ PAUL M. BASS, JR.              /s/ DONALD P. ZIMA
------------------------           --------------------------
Paul M. Bass, Jr.                  Donald P. Zima
Director                           Director

/s/ RICHARD R. BURKHART            /s/ DAVID L. CHEEK
------------------------           --------------------------
Richard R. Burkhart                David L. Cheek
Director                           President and
                                   Chief Executive Officer

/s/ JOHN R. PARKER                 /s/ BERT E. DOWNING, JR.
------------------------           --------------------------
John R. Parker                     Bert E. Downing, Jr.
Director                           Vice President, Chief
                                   Financial Officer, Corporate
                                   Controller and Treasurer
/s/ TROY T. TAYLOR                 (Principal Accounting and
------------------------           Financial Officer)
Troy T. Taylor
Director

<PAGE>


             KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES

                           ANNUAL REPORT ON FORM 10-K

                            Items 8, 14(a) and 14(d)

   Index of Consolidated Financial Statements and Financial Statement Schedule

                                                                         Page
Financial Statements

  Report of Independent Registered Public Accounting Firm                 F-2

  Consolidated Balance Sheets -
   December 31, 2004 and 2005                                             F-3

  Consolidated Statements of Operations -
   Years ended December 31, 2003, 2004 and 2005                           F-5

  Consolidated Statements of Comprehensive Income (Loss) -
   Years ended December 31, 2003, 2004 and 2005                           F-7

  Consolidated Statements of Stockholders' Equity (Deficit) -
   Years ended December 31, 2003, 2004 and 2005                           F-8

  Consolidated Statements of Cash Flows -
   Years ended December 31, 2003, 2004 and 2005                           F-9

  Notes to Consolidated Financial Statements                              F-11

Financial Statement Schedule

  Report of Independent Registered Public Accounting Firm                 S-1


  Schedule II - Valuation and Qualifying Accounts                         S-2

     Schedules I, III and IV are omitted because they are not applicable.

                                       2
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Stockholders and Board of Directors of Keystone Consolidated  Industries,
Inc.:

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated   statements   of   operations,    comprehensive   income   (loss),
stockholders'  equity  (deficit) and cash flows present fairly,  in all material
respects, the financial position of Keystone Consolidated  Industries,  Inc. and
its  subsidiaries  at  December  31,  2004 and 2005,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2005 in conformity with accounting principles generally accepted in
the United States of America.  These financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance  with the  standards of the Public  Company  Accounting
Oversight  Board  (United  States).  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the  consolidated  financial  statements,  the Company
restated its 2004 and 2003 consolidated financial statements.




PricewaterhouseCoopers LLP

Dallas, Texas
March 31, 2006


                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 2004 and 2005
                        (In thousands, except share data)




<TABLE>
<CAPTION>
               ASSETS                                                                    2004            2005
                                                                                      ---------        --------
                                                                                    (Restated)

 Current assets:
   Accounts receivable, net of allowances
<S>                                                                                    <C>             <C>
     of $448 and $451                                                                  $ 26,729        $ 46,199
   Inventories                                                                           53,017          69,691
   Prepaid expenses and other                                                             2,017           2,760
   Restricted investments                                                                 5,373           1,040
                                                                                       --------        --------

       Total current assets                                                              87,136         119,690
                                                                                       --------        --------

 Property, plant and equipment:
   Land, buildings and improvements                                                      56,252          55,382
   Machinery and equipment                                                              311,226         310,446
   Construction in progress                                                               1,558           3,949
                                                                                       --------        --------
                                                                                        369,036         369,777
   Less accumulated depreciation                                                        275,003         283,004
                                                                                       --------        --------

       Net property, plant and equipment                                                 94,033          86,773
                                                                                       --------        --------

 Other assets:
   Restricted investments                                                                 5,965           4,758
   Prepaid pension cost                                                                 133,443         145,152
   Deferred financing costs                                                               1,226             902
   Goodwill                                                                                 752             752
   Other                                                                                    727             337
                                                                                       --------        --------

       Total other assets                                                               142,113         151,901
                                                                                       --------        --------

                                                                                       $323,282        $358,364
                                                                                       ========        ========
</TABLE>

<PAGE>



                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                           December 31, 2004 and 2005
                        (In thousands, except share data)



<TABLE>
<CAPTION>
                       LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                                       2004            2005
                                                                                      ------          ------
                                                                                    (Restated)

 Current liabilities:
   Notes payable and current maturities of
<S>                                                                                   <C>             <C>
    long-term debt                                                                    $  51,640       $  41,640
   Accounts payable                                                                       3,801           9,797
   Accounts payable to affiliates                                                           821               -
   Accrued OPEB cost                                                                          -           4,256
   Other accrued liabilities                                                             18,964          27,624
                                                                                       --------       ---------

         Total current liabilities                                                       75,226          83,317
                                                                                       --------       ---------

 Noncurrent liabilities:
   Long-term debt                                                                        14,345          58,255
   Accrued OPEB cost                                                                     13,478         133,208
   Other                                                                                    988           5,577
                                                                                       --------       ---------

       Total noncurrent liabilities                                                      28,811         197,040
                                                                                       --------       ---------

 Liabilities subject to compromise                                                      212,346          10,476
                                                                                       --------       ---------

 Series A preferred stock, $1,000 stated
  value; 250,000 shares authorized and 71,899
  shares issued in 2004                                                                   2,112            -
                                                                                       --------       ---------

 Stockholders' equity:
   Common stock, $1.00 stated value, 27,000,000
    shares authorized and 10,069,584 shares issued
    in 2004; $.01 par value, 11,000,000 shares
    authorized and 10,000,000 shares issued and
    outstanding in 2005                                                                  10,798             100
   Additional paid-in capital                                                            41,225          75,423
   Accumulated deficit                                                                  (47,224)         (7,992)
   Treasury stock - 1,134 shares, at cost in 2004                                           (12)           -
                                                                                       --------       ---------

       Total stockholders' equity                                                         4,787          67,531
                                                                                       --------       ---------

                                                                                      $ 323,282       $ 358,364
                                                                                      =========       =========
</TABLE>



Commitments and contingencies (Notes 15, 16 and 17).

          See accompanying notes to consolidated finanical statements.


<PAGE>

                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  Years ended December 31, 2003, 2004 and 2005
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                           2003            2004            2005
                                                                           ----            ----            ----

<S>                                                                     <C>              <C>             <C>
 Net sales                                                              $306,671         $364,335        $367,545
 Cost of goods sold                                                      310,881          322,232         337,541
                                                                        --------         --------        --------
   Gross margin (loss)                                                    (4,210)          42,103          30,004
                                                                        --------         --------        --------

 Selling expense                                                           6,934            5,634           6,251
 General and administrative expense                                       10,689           10,766          11,804
 Defined benefit pension expense (credit)                                  6,898           (6,752)        (11,710)
                                                                        --------         --------        --------

                                                                          24,521            9,648           6,345
                                                                        --------         --------        --------

 Operating income (loss)                                                 (28,731)          32,455          23,659
                                                                        --------         --------        --------

 General corporate income (expense):
   Corporate expense                                                      (5,973)          (6,253)         (3,466)
   Interest expense                                                       (3,941)          (3,705)         (3,992)
   Interest income                                                            41              132             266
   Gain on legal settlement                                                 -               5,284               -
   Gain on sale of business units                                          1,073                -               -
   Other income, net                                                         313              684             993
                                                                        --------         --------        --------

                                                                          (8,487)          (3,858)         (6,199)
                                                                        --------         --------        --------

       Income (loss) before income taxes
        and reorganization items                                         (37,218)          28,597          17,460
                                                                        --------         --------        --------

 Reorganization items:
   Reorganization costs                                                     -             (11,158)        (10,308)
   Gain on cancellation of debt                                             -                -             32,510
                                                                        --------         --------        --------

                                                                            -             (11,158)         22,202
                                                                        --------         --------        --------

   Income (loss) before income taxes                                     (37,218)          17,439          39,662

 Provision for income taxes                                                    -            1,379             430

 Minority interest in after-tax earnings                                     299             -               -
                                                                        --------         --------        --------

       Net income (loss)                                                 (37,517)          16,060          39,232

   Dividends on preferred stock                                            5,940            1,223            -
                                                                        --------         --------        --------

   Net income (loss) available for
    common shares                                                       $(43,457)        $ 14,837        $ 39,232
                                                                        ========         ========        ========
</TABLE>

                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
                  Years ended December 31, 2003, 2004 and 2005
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                     2003            2004            2005
                                                                     ----            ----            ----

 Basic earnings (loss) per share
<S>                                                               <C>             <C>             <C>
  available for common shares                                     $ (4.32)        $  1.47         $  4.12
                                                                  =======         =======         =======

 Basic shares outstanding                                          10,068          10,068          10,046
                                                                  =======         =======         =======

 Diluted earnings (loss) per share
  available for common shares                                     $ (4.32)        $   .57         $  1.88
                                                                  =======         =======         =======

 Diluted shares outstanding                                        10,068          28,043          22,029
                                                                  =======         =======         =======
</TABLE>





          See accompanying notes to consolidated finanical statements.


<PAGE>



                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                  Years ended December 31, 2003, 2004 and 2005
                                 (In thousands)



<TABLE>
<CAPTION>
                                                                     2003            2004            2005
                                                                     ----            ----            ----

<S>                                                              <C>              <C>             <C>
 Net income (loss)                                               $(37,517)        $ 16,060        $ 39,232

 Other comprehensive income (loss), net
  of tax -
   Pension liabilities adjustment                                 170,307             -               -
                                                                 --------         --------        --------

     Comprehensive income (loss)                                 $132,790         $ 16,060        $ 39,232
                                                                 ========         ========        ========
</TABLE>




        See accompanying notes to consolidated financial statements.


<PAGE>

                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                  Years ended December 31, 2003, 2004 and 2005
                                 (In thousands)



<TABLE>
<CAPTION>
                                                                         Accumulated
                                                                           other
                                                                       comprehensive
                                     Common stock         Additional       loss -
                                  -------------------      paid-in         Pension        Accumulated      Treasury
                                  Shares       Amount      capital       Liabilities        (deficit)       stock         Total
                                  ------       ------     ---------      -----------      -----------      --------      -------


<S>                               <C>         <C>          <C>           <C>                <C>             <C>        <C>
 Balance - December 31, 2002      10,068      $10,798      $48,388       $(170,307)         $(25,767)       $(12)      $(136,900)

 Net loss                           -            -            -               -              (37,517)         -          (37,517)

 Preferred stock dividends          -            -          (5,940)           -                 -             -           (5,940)

 Other comprehensive income         -            -            -            170,307              -             -          170,307
                                 -------     --------    ---------       ---------          --------        ----        --------

 Balance - December 31, 2003      10,068       10,798       42,448            -              (63,284)        (12)        (10,050)

 Net income                            -            -            -               -            16,060           -          16,060

 Preferred stock dividends          -            -          (1,223)           -                 -             -           (1,223)
                                 -------     --------    ---------       ---------          --------        ----        --------

 Balance - December 31, 2004      10,068       10,798       41,225            -              (47,224)        (12)          4,787

 Net income                            -         -               -            -               39,232          -           39,232

 Cancellation of common stock    (10,068)     (10,798)      10,786            -                 -             12            -

 Cancellation of Series A
  Preferred Stock                   -            -           2,112               -                 -           -           2,112

 Issuance of common stock         10,000          100       21,300            -                 -             -           21,400
                                 -------     --------    ---------       ---------          --------        ----        --------

 Balance - December 31, 2005      10,000      $   100      $75,423        $   -             $ (7,992)      $  -         $ 67,531
                                 =======      =======      =======        ========          ========       =====        ========
</TABLE>


        See accompanying notes to consolidated financial statements.



<PAGE>


                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  Years ended December 31, 2003, 2004 and 2005
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                           2003           2004            2005
                                                                         --------      ---------        --------
                                                                        (Restated)     (Restated)

 Cash flows from operating activities:
<S>                                                                       <C>            <C>            <C>
   Net income (loss)                                                      $(37,517)      $ 16,060       $ 39,232
   Depreciation and amortization                                            16,461         15,812         15,745
   Amortization of deferred financing costs                                    742          1,108            694
   Non-cash OPEB expense                                                     7,158         15,655            560
   Non-cash defined benefit pension
    expense (credit)                                                         6,898         (6,752)       (11,710)
   Gain on cancellation of debt                                                  -              -        (32,510)
   Gain on legal settlement                                                      -         (5,284)             -
   Reorganization costs accrued                                                  -         11,158         10,307
   Reorganization costs paid                                                     -         (8,275)       (10,133)
   Other, net                                                               (1,440)           576             29
   Change in assets and liabilities:
     Accounts receivable                                                     5,887        (11,049)       (19,473)
     Inventories                                                            20,097        (29,012)       (16,674)
     Accounts payable                                                       (6,191)         8,155          4,252
     Other, net                                                             (5,875)         3,702        (11,004)
                                                                          --------      ---------      ---------

       Net cash provided (used) by operating
         activities                                                          6,220         11,854        (30,685)
                                                                          --------      ---------      ---------

 Cash flows from investing activities:
   Capital expenditures                                                     (2,683)        (5,080)        (9,772)
   Proceeds from sale of business units                                      3,344           -              -
   Collection of notes receivable                                               75             75             75
   Restricted investments                                                     (141)        (5,467)         5,540
   Other, net                                                                 (619)            76          1,261
                                                                          --------      ---------      ---------

       Net cash used by investing
        activities                                                             (24)       (10,396)        (2,896)
                                                                          --------      ---------      ---------

 Cash flows from financing activities:
   Revolving credit facilities, net                                         (7,308)       (14,222)        28,314
   Other notes payable and long-term debt:
     Additions                                                               3,588         16,028         23,372
     Principal payments                                                     (2,446)        (2,537)       (17,575)
   Deferred financing costs paid                                               (30)          (727)          (530)
                                                                          --------      ---------      ---------

     Net cash provided (used) by financing
        activities                                                          (6,196)        (1,458)        33,581
                                                                          --------      ---------      ---------
</TABLE>



<PAGE>



                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                  Years ended December 31, 2003, 2004 and 2005
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                         2003           2004            2005
                                                                        ------         ------          ------
                                                                      (Restated)     (Restated)

 Cash and cash equivalents:
   Net change from operations, investing
<S>                                                                       <C>            <C>            <C>
    and financing activities                                                  -              -              -

   Balance at beginning of year                                               -              -              -
                                                                          --------       -------        --------

   Balance at end of year                                                 $   -          $   -          $   -
                                                                          ========       =======        ========


 Supplemental disclosures:
   Cash paid (received) for:
     Interest, net of amounts capitalized                                 $  2,789       $  2,306       $  3,195
     Income taxes, net                                                          18            (27)           985
   Common stock issued in exchange for
    extinguishment of certain pre-petition
    unsecured and DIP claims                                                     -              -         21,400
   Note issued in exchange for extinguishment
    of certain pre-petition unsecured claims                                     -              -          4,800
</TABLE>


<PAGE>

                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Restatement and summary of significant accounting policies

Restatement.

     In connection with finalizing the preparation of the Company's consolidated
financial  statements  for  the  year  ended  December  31,  2005,  the  Company
determined  that cash  overdrafts,  which  currently  are financed by borrowings
under the Company's revolving credit facility,  and cash receipts which would be
applied against the revolving  credit  facility,  were improperly  classified as
part of accounts payable.  Under accounting principles generally accepted in the
United  States of  America  ("GAAP"),  such  cash  overdrafts  should  have been
classified as part of the current  portion of long-term  debt. In addition,  the
relative  changes  in such  cash  overdrafts  were  improperly  included  in the
determination of cash flows from operating activities,  while under GAAP changes
in such cash overdrafts  should have been included in the  determination of cash
flows from financing activities.

     Accordingly, the Company has restated its consolidated financial statements
at December 31, 2004 and its consolidated statements of cash flows for the years
ended  December 31, 2003 and 2004,  as  contained in this Form 10-K,  to reflect
this  correction.  The $2.7 million  adjustment  to the 2004 balance  sheet is a
result of $3.8 million of cash receipts net of $1.1 million of cash overdrafts.

     The following tables show (i) selected  consolidated  balance sheet data as
of December 31, 2004, and selected consolidated statements of cash flow data for
the years ended December 31, 2003 and 2004, in each case as previously reported,
(ii) adjustments to such  consolidated  financial  statement data to reflect the
effect of this restatement and (iii) such consolidated financial statement data,
as restated.

                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                    SELECTED CONSOLIDATED BALANCE SHEET DATA
                                December 31, 2004
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                               December 31, 2004
                                                             ----------------------------------------------------
                                                              Previously
                                                               Reported           Adjustments         As restated
                                                             ------------         -----------         -----------

Selected balance sheet items:

Notes payable and current maturities
<S>                                                              <C>                 <C>                  <C>
 of long-term debt                                               $ 54,336            $ (2,696)            $ 51,640
                                                                 ========            ========             ========

Accounts payable                                                 $  1,105            $  2,696             $  3,801
                                                                 ========            ========             ========

Total current liabilities                                        $ 75,226            $   -                $ 75,226
                                                                 ========            ========             ========
</TABLE>


                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                SELECTED CONSOLIDATED STATEMENT OF CASH FLOW DATA
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                        Year ended December 31, 2004
                                                             ----------------------------------------------------
                                                              Previously
                                                               Reported           Adjustments         As restated
                                                             ------------         -----------         -----------

Items comprising cash flow provided
 by operating activities:

<S>                                                              <C>                 <C>                  <C>
  Change in accounts payable                                     $  4,237            $  3,918             $  8,155
                                                                 ========            ========             ========

  Total cash flow provided by
   operating activities                                          $  7,936            $  3,918             $ 11,854
                                                                 ========            ========             ========

Items comprising cash flow
 provided (used) by financing
 activities:

  Revolving credit facilities, net                               $(10,304)           $ (3,918)           $ (14,222)
                                                                 ========            ========             ========

  Total cash flow provided (used)
   by financing activities                                       $  2,460            $ (3,918)            $ (1,458)
                                                                 ========            ========             ========

Cash and cash equivalents -
  Net change from operations,
   investing and financing
   activities                                                    $   -               $   -                $   -
                                                                 ========            ========             ========
</TABLE>


<TABLE>
<CAPTION>
                                                                          Year ended December 31, 2003
                                                             ----------------------------------------------------
                                                              Previously
                                                               Reported           Adjustments         As restated
                                                             ------------         -----------         -----------

Items comprising cash flow provided
 (used) by operating activities:

<S>                                                              <C>                 <C>                  <C>
  Change in accounts payable                                     $ (6,412)           $    221             $ (6,191)
                                                                 ========            ========             ========

  Total cash flow provided by
   operating activities                                          $  5,999            $    221             $  6,220
                                                                 ========            ========             ========

Items comprising cash flow
 provided (used) by financing
 activities:

  Revolving credit facilities, net                               $ (7,087)           $   (221)            $ (7,308)
                                                                 ========            ========             ========

  Total cash flow provided (used)
   by financing activities                                       $ (5,975)           $   (221)            $ (6,196)
                                                                 ========            ========             ========

Cash and cash equivalents -
  Net change from operations,
   investing and financing
   activities                                                    $   -               $   -                $   -
                                                                 ========            ========             ========
</TABLE>



Summary of significant accounting policies.

     At December 31, 2005, Keystone Consolidated Industries, Inc. ("Keystone" or
"the Company") is 51% owned by Contran  Corporation  ("Contran").  Substantially
all of Contran's  outstanding voting stock is held by trusts established for the
benefit of certain children and grandchildren of Mr. Harold C. Simmons, of which
Mr. Simmons is sole trustee.  Consequently, Mr. Simmons may be deemed to control
the Company.

     On  February  26,  2004,  Keystone  and  five of its  direct  and  indirect
subsidiaries  filed for  voluntary  protection  under  Chapter 11 of the Federal
Bankruptcy Code. Keystone and its subsidiaries filed their petitions in the U.S.
Bankruptcy  Court for the  Eastern  District  of  Wisconsin  in  Milwaukee  (the
"Court"). Keystone's amended plan of reorganization was accepted by the impacted
constitutencies  and  confirmed  by the Court on August 10,  2005.  The  Company
emerged from bankruptcy protection on August 31, 2005. See Note 2.

     Under  Chapter 11  proceedings,  actions by creditors to collect  claims in
existence at the filing date ("Pre-petition Claims") are stayed, absent specific
authorization  by the Court to pay such claims,  while the Company  continues to
manage the business as a  debtor-in-possession.  Keystone received approval from
the Court to pay certain of its Pre-petition Claims including employee wages and
certain employee benefits. All of the Company's liabilities at February 26, 2004
(other than  liabilities  of one of the  Company's  subsidiaries  that was not a
party to the bankruptcy filing), are considered Pre-petition Claims.

     Management's   Estimates.   The  preparation  of  financial  statements  in
conformity with GAAP requires  management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent assets and liabilities at the date of the financial  statements,  and
the reported amount of revenues and expenses during the reporting period. Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.

     Principles of consolidation.  The consolidated financial statements include
the  accounts of Keystone  and its  majority-owned  subsidiaries.  All  material
intercompany  accounts and balances  have been  eliminated.  Certain  prior year
amounts have been reclassified to conform with the 2005 presentation.

     Fiscal year.  The  Company's  fiscal year is 52 or 53 weeks and ends on the
last Sunday in December. Each of fiscal 2003, 2004 and 2005 were 52-week years.

     Inventories and cost of sales.  Inventories are stated at the lower of cost
or market. The last-in,  first-out ("LIFO") method is used to determine the cost
of  approximately  84% and 81% of the inventories  held at December 31, 2004 and
2005, respectively.  The first-in, first-out or average cost methods are used to
determine  the cost of all other  inventories.  Cost of sales  include costs for
materials, packing and finishing, utilities, salaries and benefits, maintenance,
shipping and handling costs and depreciation.


     Property, plant and equipment and depreciation expense. Property, plant and
equipment are stated at cost.  Depreciation for financial  reporting purposes is
computed using  principally the  straight-line  method over the estimated useful
lives of 10 to 30 years for buildings and improvements and three to 12 years for
machinery and equipment.  Accelerated  depreciation  methods are used for income
tax  purposes,  as  permitted.  Depreciation  expense  for  financial  reporting
purposes amounted to $16,459,000,  $15,812,000 and $15,745,000  during the years
ended December 31, 2003, 2004 and 2005, respectively. Upon sale or retirement of
an asset,  the related cost and  accumulated  depreciation  are removed from the
accounts and any gain or loss is recognized in income currently.

     Expenditures  for  maintenance,  repairs and minor  renewals are  expensed;
expenditures for major  improvements are capitalized.  Keystone performs certain
planned  major  maintenance  activities  during the year  (generally  during the
fourth  quarter).  The costs  estimated to be incurred in connection  with these
maintenance  activities are accrued in advance on a straight-line  basis and are
included in cost of goods sold.

     Interest costs related to major long-term capital projects and renewals are
capitalized as a component of construction costs.  Interest costs capitalized in
each of 2003 and 2004  amounted to $3,000.  Interest  cost  capitalized  in 2005
amounted to $1,000.

     When events or changes in circumstances indicate assets may be impaired, an
evaluation  is performed to determine if an  impairment  exists.  Such events or
changes in circumstances  include,  among other things, (i) significant  current
and prior periods or current and projected periods with operating losses, (ii) a
significant  decrease  in the  market  value of an asset or (iii) a  significant
change in the extent or manner in which an asset is used.  All relevant  factors
are considered.  The test for impairment is performed by comparing the estimated
future  undiscounted cash flows (exclusive of interest expense)  associated with
the asset to the asset's net carrying  value to  determine  if a  write-down  to
market value or  discounted  cash flow value is required.  The Company  assesses
impairment  of other  long-lived  assets  (such as property  and  equipment)  in
accordance  with SFAS No.  144,  Accounting  for the  Impairment  of Disposal of
Long-Lived  Assets.  Keystone did not record a charge under SFAS No. 144, during
2003, 2004 and 2005.

     Investment   in  joint   ventures.   Investments   in  20%  but  less  than
majority-owned  companies are accounted  for by the equity  method.  Differences
between  the  cost  of  the   investments  and  Keystone's  pro  rata  share  of
separately-reported net assets, if any, are not significant.

     Deferred financing costs.  Deferred financing costs relate primarily to the
issuance  of  substantially  all of  Keystone's  long-term  debt  as well as its
primary  revolving credit facility and are amortized by the interest method over
the respective  terms of these debt  facilities.  Deferred  financing  costs are
stated net of accumulated  amortization of $6,808,000 and $7,502,000 at December
31, 2004 and 2005, respectively.

     Goodwill.  Goodwill  represents  the  excess  of cost  over  fair  value of
individual  net assets  acquired in business  combinations  accounted for by the
purchase  method.  Under  SFAS No.  142  goodwill  is not  subject  to  periodic
amortization.

     The Company  assesses  impairment of goodwill in  accordance  with SFAS No.
142. The Company's  recorded goodwill relates to a business segment that was not
included in the Chapter 11 petitions filed in February 2004. See Note 2.

     Retirement  plans  and   post-retirement   benefits  other  than  pensions.
Accounting  and  funding  policies  for  retirement  plans  and post  retirement
benefits other than pensions ("OPEB") are described in Note 10.

     Environmental   liabilities.   Keystone  records   liabilities  related  to
environmental  remediation when estimated  future  expenditures are probable and
reasonably estimable. If the Company is unable to determine that a single amount
in an  estimated  range is more  likely,  the  minimum  amount  of the  range is
recorded. Such accruals are adjusted as further information becomes available or
circumstances change.  Estimated future expenditures are not discounted to their
present value. Recoveries of environmental  remediation costs from other parties
are recorded as assets when their  receipt is deemed  probable.  At December 31,
2004, Keystone had such assets recorded of approximately  $323,000.  The Company
did not have any such assets recorded at December 31, 2005. See Note 15.

     Income taxes. Deferred income tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences between the income
tax and financial reporting carrying amounts of assets and liabilities. Keystone
periodically evaluates its deferred tax assets and adjusts any related valuation
allowance  based on the estimate of the amount of such deferred tax assets which
the  Company  believes  does  not meet  the  "more-likely-than-not"  recognition
criteria.

     Net sales.  Sales are recorded when products are shipped  because title and
other risks and rewards of ownership have passed to the customer. Shipping terms
of products shipped are generally FOB shipping point, although in some instances
shipping  terms are FOB  destination  point (for which sales are not  recognized
until the product is received by the customer). Amounts charged to customers for
shipping and handling are included in net sales.  Sales are stated net of price,
early payment and distributor discounts and volume rebates.

     Selling,  general  and  administrative   expenses.   Selling,  general  and
administrative expenses include costs related to marketing, sales, distribution,
and  administrative  functions  such as  accounting,  treasury and finance,  and
includes costs for salaries and benefits, travel and entertainment,  promotional
materials and professional fees.  Advertising costs, expensed as incurred,  were
$1.0 million in each of 2003 and 2005 and $.6 million in 2004.

     Corporate  expenses.  Corporate  expenses  include  expenses related to the
maintenance of the Company's  corporate  office,  amortization of goodwill,  and
OPEB and  environmental  expenses  related  to  facilities  no  longer  owned by
Keystone. Corporate expenses are not included in total operating profit or loss.

     Income (loss) per share. Basic and diluted income (loss) per share is based
upon the weighted  average number of common shares actually  outstanding  during
each year.  Diluted  earnings per share includes the diluted impact,  if any, of
the Company's  convertible  preferred  stock.  The impact of  outstanding  stock
options was antidilutive for all periods presented.  The weighted average number
of outstanding stock options which were excluded from the calculation of diluted
earnings  per  share   because   their  impact  would  have  been   antidilutive
approximated 462,000, 374,000 and 244,000 in 2003, 2004 and 2005, respectively.

     Employee  stock  options.   Keystone  accounted  for  stock-based  employee
compensation in accordance with Accounting Principles Board Opinion ("APBO") No.
25, Accounting for Stock Issued to Employees,  and its various  interpretations.
See  Notes 9 and 19.  Under  APBO No.  25,  no  compensation  cost is  generally
recognized  for fixed stock  options in which the exercise  price is equal to or
greater  than the market price on the grant date.  Compensation  cost related to
stock options  recognized by the Company in accordance  with APBO No. 25 has not
been  significant  in  each  of the  past  three  years.  All  of the  Company's
outstanding  common stock and stock options were  cancelled in  connection  with
Keystone's emergence from Chapter 11 on August 31, 2005. See Note 2.

     The following  table  presents what the Company's  consolidated  net income
(loss), and related per share amounts, would have been in 2003, 2004 and 2005 if
Keystone would have elected to account for its stock-based employee compensation
related to stock options in  accordance  with the fair  value-based  recognition
provisions of SFAS No. 123,  Accounting for  Stock-Based  Compensation,  for all
awards granted subsequent to January 1, 1995.

<TABLE>
<CAPTION>
                                                                                  Years ended December 31,
                                                                        ----------------------------------------
                                                                           2003           2004            2005
                                                                        ----------      --------        --------
                                                                                  (In thousands, except per
                                                                                        share amounts)

Net income (loss) available for common
<S>                                                                      <C>             <C>            <C>
 Shares as reported                                                      $(37,517)       $16,060        $39,232
Adjustments, net of applicable income
 tax effects:
  Stock-based employee compensation
   expense under APBO No. 25                                                -               -              -
  Stock-based employee compensation
   expense under SFAS No. 123                                                 (25)          -              -
                                                                         --------        -------        -------

Pro forma net income (loss) available for
 common shares                                                           $(37,542)       $16,060        $39,232
                                                                         ========        =======        =======

Basic net income (loss) available for common
 shares per share:
 As reported                                                             $  (4.32)       $  1.47        $  4.12
 Pro forma                                                               $  (4.32)       $  1.47        $  4.12

Diluted net income (loss) available for
 common shares per share:
 As reported                                                             $  (4.32)       $   .57        $  1.88
 Pro forma                                                               $  (4.32)       $   .57        $  1.88
</TABLE>

     Derivative activities. The Company has adopted SFAS No. 133, Accounting for
Derivative  Instruments and Hedging Activities,  as amended. Under SFAS No. 133,
all  derivatives  are recognized as either assets or liabilities and measured at
fair value.  The accounting for changes in fair value of derivatives will depend
upon the intended use of the derivative,  and such changes are recognized either
in net income or other comprehensive income.

     Chapter 11. Legal and  professional  fees incurred in  connection  with the
Company's  Chapter 11 filing have been  expensed as incurred.  These fees relate
primarily to fees paid to lawyers and financial advisors  representing  Keystone
as well as the  other  impacted  constituencies.  During  2004  and  2005,  such
reorganization  costs amounted to approximately $11.2 million and $10.3 million,
respectively.

     The  Company  determined  there was  insufficient  collateral  to cover the
interest portion of scheduled  payments on its  pre-petition  unsecured debt. As
such, the Company  discontinued  accruing interest on its unsecured 6% Notes and
unsecured 9 5/8% Notes as of February  26, 2004,  the filing  date.  Contractual
interest on those  obligations  subsequent  to February 26, 2004 and through the
date  of the  Company's  emergence  from  Chapter  11  (August  31,  2005),  was
approximately  $1.0  million  in  2004  and  $841,000  in  2005,  and  as  such,
contractual  interest  expense during 2004 and 2005 exceeded  recorded  interest
expense by those respective amounts. In addition,  the Company also discontinued
accruing dividends on its preferred stock at the filing date.

Note 2 - Bankruptcy

     On  February  26,  2004,  Keystone  and  five of its  direct  and  indirect
subsidiaries  filed for  voluntary  protection  under  Chapter 11 of the Federal
Bankruptcy Code. Keystone and its subsidiaries filed their petitions in the U.S.
Bankruptcy Court for the Eastern District of Wisconsin in Milwaukee.  Keystone's
amended plan of reorganization  was accepted by the impacted  constituencies and
confirmed by the Court on August 10, 2005. The Company  emerged from  bankruptcy
protection on August 31, 2005.

     Keystone attributed the need to reorganize to weaknesses in product selling
prices over the last several  years,  unprecedented  increases in ferrous  scrap
costs,  Keystone's  primary raw material,  and  significant  liquidity  needs to
service retiree medical costs. These problems  substantially  limited Keystone's
liquidity and undermined its ability to obtain sufficient debt or equity capital
to operate as a going concern.

     Significant   provisions  of  Keystone's  amended  plan  of  reorganization
included, among other things:

o    Assumption  of  the  previously  negotiated  amendment  to  the  collective
     bargaining  agreement  with the  Independent  Steel  Workers  Alliance (the
     "ISWA"),  Keystone's  largest labor union that related primarily to greater
     employee participation in healthcare loss;
o    Assumption of the  previously  negotiated  agreements  reached with certain
     retiree groups that will provide relief by permanently  reducing healthcare
     related payments to these retiree groups from pre-petition levels;
o    The Company's  obligations due to  pre-petition  secured lenders other than
     its   Debtor-In-Possession   lenders  were   reinstated   in  full  against
     reorganized Keystone;
o    All shares of Keystone's  common and  preferred  stock  outstanding  at the
     petition date (February 26, 2004) were cancelled;
o    Pre-petition  unsecured creditors with allowed claims against Keystone will
     receive,  on a pro rata basis,  in the  aggregate,  $5.2 million in cash, a
     $4.8  million  secured  promissory  note and 49% of the new common stock of
     reorganized Keystone;
o    Certain  operating  assets and existing  operations of Sherman Wire Company
     ("Sherman Wire"), one of Keystone's pre-petition wholly-owned subsidiaries,
     will be sold at fair market  value (fair  market  value and book value both
     approximate  $2.0  million) to Keystone,  and will then be used to form and
     operate a newly created  wholly-owned  subsidiary of  reorganized  Keystone
     named Keystone Wire Products Inc.;
o    Sherman Wire was also  reorganized  and the proceeds of the operating asset
     sale to Keystone and  liquidation of Sherman  Wire's  remaining real estate
     assets  (book value  approximately  $1.6  million)  and other funds will be
     distributed,  on a pro rata basis, to Sherman Wire's pre-petition unsecured
     creditors as their claims are finally adjudicated;
o    Sherman Wire's pre-petition wholly-owned non-operating  subsidiaries,  J.L.
     Prescott  Company,  and DeSoto  Environmental  Management,  Inc. as well as
     Sherman Wire of Caldwell, Inc., a wholly-owned subsidiary of Keystone, will
     ultimately be liquidated  and the  pre-petition  unsecured  creditors  with
     allowed  claims against these entities will receive their pro-rata share of
     the respective entity's net liquidation proceeds;
o    Pre-petition  unsecured  creditors  with allowed  claims against FV Steel &
     Wire Company,  another one of Keystone's  wholly-owned  subsidiaries,  will
     receive cash in an amount equal to their allowed claims;
o    One of Keystone's  Debtor-In-Possession  lenders,  EWP  Financial,  LLC (an
     affiliate  of  Contran)  converted  $5 million of its DIP credit  facility,
     certain of its pre-petition  unsecured claims and all of its administrative
     claims  against  Keystone  into 51% of the new common stock of  reorganized
     Keystone; and
o    The Board of  Directors  of  reorganized  Keystone  now  consists  of seven
     individuals,  two each of which were designated by Contran and the Official
     Committee of Unsecured Creditors (the "OCUC"),  respectively. The remaining
     three  directors  qualify as independent  directors (two of the independent
     directors  were  appointed by Contran  with the OCUC's  consent and one was
     appointed by the OCUC with Contran's consent).

     In addition,  Keystone has obtained a five-year $80 million  secured credit
facility from Wachovia Capital Finance (Central). See Note 6.

     See Note 12 for the  details  of the effect on the  Company's  consolidated
financial  statements  resulting  from  confirmation  of the  Company's  plan of
reorganization. In addition, as noted above, certain pre-petition liabilities of
Sherman Wire remain  subject to  compromise at December 31, 2005 as their claims
have not yet been finally adjudicated.

     Prior to Keystone's  emergence from Chapter 11 on August 31, 2005,  Contran
and  other  entities  related  to Mr.  Harold  C.  Simmons,  beneficially  owned
approximately 50% of the outstanding common stock of the Company.  In connection
with    Keystone's    emergence    from   Chapter   11,   one   of    Keystone's
Debtor-In-Possession  ("DIP")  lenders,  EWP  Financial,  LLC (an  affiliate  of
Contran)  converted  $5  million  of its DIP  credit  facility,  certain  of its
pre-petition  unsecured  claims  and all of its  administrative  claims  against
Keystone  into 51% of the new common  stock of  reorganized  Keystone.  As such,
Contran, or one of its affiliates, may be deemed to control Keystone both prior,
and subsequent  to,  Keystone's  emergence  from Chapter 11. Because  Keystone's
emergence  from Chapter 11 did not result in a change of control of the Company,
Keystone did not qualify to use Fresh Start  Accounting  upon its emergence from
Chapter 11.

Note 3 - Business Segment Information:

     Keystone's  operating  segments are defined as components  of  consolidated
operations  about which  separate  financial  information  is available  that is
regularly  evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing  performance.  The Company's chief operating
decision maker is Mr. David L. Cheek,  President and Chief Executive  Officer of
Keystone.  Each  operating  segment is separately  managed,  and each  operating
segment represents a strategic business unit offering different products.

     The  Company's  operating  segments are organized  along its  manufacturing
facilities and include three  reportable  segments:  (i) Keystone Steel and Wire
("KSW")  which  manufacturers  and sells wire rod,  wire and wire  products  for
agricultural,   industrial,   construction,   commercial,   original   equipment
manufacturers and retail consumer markets, (ii) Engineered Wire Products ("EWP")
which  manufactures  and sells welded wire  reinforcement in both roll and sheet
form that is utilized in concrete construction products including pipe, pre-cast
boxes and  applications  for use in roadways,  buildings and bridges,  and (iii)
Keystone  Wire  Products  ("KWP")  which  manufacturers  and sells wire and wire
products  for  agricultural,   industrial,  construction,  commercial,  original
equipment  manufacturers  and retail  consumer  markets.  In connection with the
Company's emergence from Chapter 11 on August 31, 2005, certain operating assets
and  existing  operations  of  Sherman  Wire were sold at fair  market  value to
Keystone,  which then used these assets to form and operate KWP, a newly created
wholly-owned  subsidiary of reorganized  Keystone. As such, operating results of
this  segment  prior to  Keystone's  emergence  from  Chapter 11 were  operating
results of Sherman  Wire.  Operating  results of this segment  after  Keystone's
emergence  from Chapter 11, were  operating  results of KWP. In accordance  with
Keystone's  plan of  reorganization,  the remaining  assets of Sherman Wire will
eventually be  liquidated.  EWP was not included in the Company's  February 2004
bankruptcy proceedings. See Note 2.

     In addition,  prior to July 2003,  Keystone also operated three businesses,
including Sherman Wire, that did not constitute  reportable  business  segments.
These  businesses  sold  wire,   nails  and  wire  products  for   agricultural,
industrial, construction, commercial, original manufacturers and retail consumer
markets.  The results of  operations  of these  businesses  are  aggregated  and
included under the "Sherman/KWP"  heading in the following  tables.  During July
2003,  Keystone  transferred its operations at one of these three  businesses to
other Keystone  facilities,  and during August 2003 Keystone sold another of the
businesses.  As a result,  from  August  2003,  through  August  31,  2005,  the
"Sherman/KWP" heading in the following tables only includes Sherman Wire.

     Prior to July 2003,  the  Company  owned a 51%  interest in Garden Zone LLC
("Garden  Zone"),  a  distributor  of wire,  plastic  and wood  lawn and  garden
products to  retailers.  In July 2003,  Garden  Zone  purchased  Keystone's  51%
ownership in Garden Zone.

     Keystone is also engaged in a scrap recycling joint venture through its 50%
interest in Alter Recycling Company,  L.L.C.  ("ARC"), an unconsolidated  equity
affiliate.

     KSW's,  EWP's and Sherman/KWP's  products are distributed  primarily in the
Midwestern,  Southwestern and Southeastern United States. Garden Zone's products
were distributed primarily in the Southeastern United States.

<TABLE>
<CAPTION>
Business Segment                              Principal entities                           Location
----------------                              ------------------                           --------
<S>                                           <C>                                          <C>
Keystone Steel & Wire                         Keystone Steel & Wire                        Peoria, Illinois

Engineered Wire Products                      Engineered Wire Products                     Upper Sandusky, Ohio

Garden Zone                                   Garden Zone (1)                              Charleston, South
                                                                                             Carolina

Sherman Wire/Keystone                         Sherman Wire/Keystone Wire                   Sherman, Texas
 Wire Products                                 Products
                                              Sherman Wire
                                               of Caldwell, Inc. (2)                       Caldwell, Texas
                                              Keystone Fasteners (3)                       Springdale, Arkansas
</TABLE>

(1)  51.0% subsidiary - interest sold in July 2003.
(2)  Transferred  operations  in July 2003 to Sherman Wire and Keystone  Steel &
     Wire.
(3)  Business sold in August 2003.

     The net  proceeds  from the sale of  Garden  Zone  and  Keystone  Fasteners
aggregated $3.3 million.  The gain on the sale of these  businesses,  as well as
the results of operations of each of Garden Zone and Keystone  Fasteners are not
significant,  individually  and in the aggregate.  Accordingly,  the Company has
elected not to present their results of  operations as  discontinued  operations
for all periods presented due to their immateriality.

     Keystone  evaluates segment  performance based on segment operating income,
which is defined as income before income taxes and interest  expense,  exclusive
of certain items (such as gains or losses on  disposition  of business  units or
sale of fixed  assets) and certain  general  corporate  income and expense items
(including  interest income) which are not attributable to the operations of the
reportable operating segments.

     The accounting  policies of the segments are the same as those described in
the summary of significant  accounting  policies except that (i) defined benefit
pension  expense for each  segment is  recognized  and  measured on the basis of
estimated  current  service  cost of each  segment,  with the  remainder  of the
Company's net defined  benefit  pension  expense or credit not allocated to each
segment but still is reported as part of operating  profit or loss, (ii) segment
OPEB  expense is  recognized  and measured  based on the basis of the  estimated
expense of each segment with the remainder of the Company's  actual OPEB expense
not allocated to each segment but still is reported as part of operating  profit
or loss,  (iii)  elimination of intercompany  profit or loss on ending inventory
balances  is not  allocated  to each  segment  but still is  reported as part of
operating  profit  or loss,  (iv) LIFO  inventory  reserve  adjustments  are not
allocated to each segment but still are reported as part of operating  profit or
loss, and (v) amortization of goodwill is included in corporate  expenses and is
not  allocated to any segment and is not included in total  reporting  operating
profit or loss. Corporate expenses also includes OPEB and environmental expenses
relative  to  facilities  no longer  owned by the  Company.  Intercompany  sales
between  reportable  segments are generally  recorded at prices that approximate
market prices to third-party customers.

     Segment assets are comprised of all assets  attributable to each reportable
operating  segment.  Corporate  assets consist  principally  of pension  related
assets,  restricted  investments,  deferred tax assets and  corporate  property,
plant and equipment.

<TABLE>
<CAPTION>
                                                                                                            GAAP
                                                                                                        Adjustments,
                                                                                                          Corporate
                                                                                                            Items
                                                                Sherman/      Garden       Segment           and
                                        KSW           EWP         KWP          Zone         Total       Eliminations    Total
                                        ---           ---       --------      ------       -------      ------------    -----
                                                                               (In thousands)
Year ended December 31, 2005:

<S>                                      <C>           <C>        <C>           <C>          <C>             <C>         <C>
  Third party net sales               $298,091      $62,777    $  6,677      $  -         $367,545        $   -       $367,545
  Intercompany sales                    44,048         -         14,978         -           59,026         (59,026)       -
                                      --------      -------    --------      ----         --------        --------    --------
                                      $342,139      $62,777    $ 21,655      $  -         $426,571        $(59,026)   $367,545
                                      ========      =======    ========      ====         ========        ========    ========
  Depreciation and
   amortization                       $ 13,486      $ 1,034    $  1,133      $  -         $ 15,653        $     92    $ 15,745
  Operating profit (loss)               (6,091)       9,481      (1,674)        -            1,716          21,943      23,659
  Identifiable segment assets          178,697       22,750       5,260         -          206,707         151,657     358,364
  Capital expenditures                   9,450          201         121         -            9,772               -       9,772

Year ended December 31, 2004:

  Third party net sales               $299,117      $58,982    $  6,187      $  -         $364,286        $     49    $364,335
  Intercompany sales                    47,586         -         10,006         -           57,592         (57,592)       -
                                      --------      -------    --------      ----         --------        --------    --------
                                      $346,703      $58,982    $ 16,193      $  -         $421,878        $(57,543)   $364,335
                                      ========      =======    ========      ====         ========        ========    ========
  Depreciation and                                                            $ -
   amortization                       $ 13,418      $ 1,037    $  1,171                   $ 15,626        $    186    $ 15,812
  Operating profit (loss)               10,126       10,598        (422)           -        20,302          12,153      32,455
  Identifiable segment assets          146,869       26,708       7,891            -       181,468         141,814     323,282
  Capital expenditures                   4,727          274          77            -         5,078               2       5,080

Year ended December 31, 2003:

  Third party net sales               $244,069      $35,260    $ 16,139      $11,203      $306,671        $   -       $306,671
  Intercompany sales                    30,215         -         11,988          879        43,082         (43,082)       -
                                      --------      -------    --------      -------      --------        --------    --------
                                      $274,284      $35,260    $ 28,127      $12,082      $349,753        $(43,082)   $306,671
                                      ========      =======    ========      =======      ========        ========    ========
  Depreciation and
   amortization                       $ 13,905      $ 1,014    $  1,491      $  -         $ 16,410        $     51    $ 16,461
  Operating profit (loss)              (21,388)       2,721      (4,579)         700       (22,546)         (6,185)    (28,731)
  Identifiable segment assets          121,826       20,635       7,765            -       150,226         131,968     282,194
  Capital expenditures                   2,197          380          74           32         2,683               -       2,683
</TABLE>


     In the above tables,  GAAP  adjustments  relate to operating profit (loss),
Corporate  items relate to  depreciation  and  amortization,  segment assets and
capital  expenditures and eliminations relate to net sales. GAAP adjustments are
principally  (i) the difference  between the defined  benefit pension expense or
credit and OPEB expense  allocated  to the  segments  and the actual  expense or
credit  included in the  determination  of  operating  profit or loss,  (ii) the
elimination  of  intercompany  profit or loss on ending  inventory  balances and
(iii) LIFO inventory reserve adjustments.



<TABLE>
<CAPTION>
                                                                                 Years ended December 31,
                                                                           -----------------------------------------
                                                                           2003            2004             2005
                                                                           -----           ----             --------
                                                                                      (In thousands)

<S>                                                                        <C>             <C>              <C>
Operating income (loss)                                                    $(28,731)       $ 32,455         $ 23,659
General corporate items:
  Interest income                                                                41             132              266
  Other income                                                                1,386             684              993
  Corporate expense                                                          (5,973)         (6,253)          (3,466)
  Gain on legal settlement                                                        -           5,284                -
  Interest expense                                                           (3,941)         (3,705)          (3,992)
                                                                           --------        --------         --------

  Income (loss) before income taxes and
   reorganization items                                                    $(37,218)       $ 28,597         $ 17,460
                                                                           ========        ========         ========

</TABLE>

     Substantially all of the Company's assets are located in the United States.
Information  concerning geographic  concentration of net sales based on location
of customer is as follows:

<TABLE>
<CAPTION>
                                                                                Year ended December 31,
                                                                       ---------------------------------------------
                                                                        2003              2004             2005
                                                                       ------           --------          ----------
                                                                                    (In thousands)

<S>                                                                     <C>               <C>               <C>
United States                                                           $303,668          $359,575          $360,282
Canada                                                                     2,876             4,437             6,329
Great Britain                                                                125               180               657
Australia                                                                   -                   63               277
Ireland                                                                     -                   80                 -
Japan                                                                          2              -                    -
                                                                        --------          --------          --------

                                                                        $306,671          $364,335          $367,545
                                                                        ========          ========          ========
</TABLE>

Note 4 - Joint ventures

     In January 1999,  Keystone and two unrelated  parties formed Garden Zone to
supply wire,  wood and plastic  products to the consumer lawn and garden market.
Prior to July 2003,  Keystone owned 51% of Garden Zone and, as such,  Keystone's
consolidated  financial statements included the accounts of Garden Zone. Neither
Keystone nor the other owners  contributed  capital or assets to the Garden Zone
joint  venture,  but  Keystone  did  guarantee  51% of Garden  Zone's $4 million
revolving  credit  agreement.  See Note 6. Garden Zone  commenced  operations in
February  1999 and its net  income  since  that  date,  of which 51%  accrued to
Keystone for financial reporting purposes, has been insignificant. In July 2003,
Garden Zone purchased Keystone's 51% ownership in Garden Zone.

     In July 1999, Keystone formed ARC, a joint venture with Alter Peoria, Inc.,
to operate a ferrous scrap recycling operation at Keystone's facility in Peoria,
Illinois.  ARC sells  ferrous  scrap to  Keystone  and others.  Upon  formation,
Keystone  contributed  the property and  equipment of its Peoria  ferrous  scrap
facility  (net book value of  approximately  $335,000)  to the joint  venture in
return for its 50% ownership interest.  Keystone is not required to, nor does it
currently  anticipate it will, make any other  contributions  to fund or operate
this joint venture.  Keystone has not guaranteed any debt or other  liability of
the joint venture. Keystone recognized no gain or loss upon formation of ARC and
the  investment  in ARC is  accounted  for by the equity  method.  In  addition,
Keystone  sold its  ferrous  scrap  facility's  existing  inventory  to ARC upon
commencement  of ARC's  operations.  Prior to 2003,  Keystone  had  reduced  its
investment  in ARC to zero  due to  operating  losses  incurred  by ARC,  and in
accordance with GAAP, the Company did not recognize  additional equity in losses
of ARC as the Company had no obligation to fund such losses or otherwise provide
funds to ARC.  During 2005,  ARC returned to cumulative  profitability.  As such
during 2005, the Company  recorded  $37,000 of equity in net income of ARC. Such
amount  is  included  in  other  income  in  the  Company's  2005  statement  of
operations.  At December 31, 2005, the Company's  investment in ARC ($37,000) is
incuded  in other  noncurrent  assets.  During  2003,  2004 and  2005,  Keystone
purchased approximately $5.5 million, $4.3 million and $834,000, respectively of
ferrous scrap from ARC.

Note 5 - Inventories

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                        -----------------------
                                                                                         2004           2005
                                                                                        ------         --------
                                                                                           (In thousands)
 Steel and wire products:
<S>                                                                                      <C>            <C>
   Raw materials                                                                         $15,142        $10,914
   Work in process                                                                        21,305         29,550
   Finished products                                                                      28,941         28,018
   Supplies                                                                               14,844         16,421
                                                                                         -------        -------
                                                                                          80,232         84,903
   Less LIFO reserve                                                                      27,215         15,212
                                                                                         -------        -------
                                                                                         $53,017        $69,691
                                                                                         =======        =======
</TABLE>


     During 2003, inventory quantities were reduced.  This reduction resulted in
a liquidation of LIFO inventory  quantities carried at lower costs prevailing in
prior years as  compared  with the cost of 2003  purchases,  the effect of which
decreased cost of goods sold by approximately  $11.5 million or $1.14 per share.
During each of 2004 and 2005 the Company added LIFO inventory quantities.

Note 6 - Notes payable and long-term debt


<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                        ------------------------
                                                                                          2004           2005
                                                                                        --------        --------
                                                                                      (Restated)
                                                                                           (In thousands)

 Revolving credit facilities:
<S>                                                                                       <C>            <C>
   Wachovia                                                                               $  -           $36,174
   EWP                                                                                      1,989              -
 DIP facilities:
   Congress                                                                                15,108           -
   EWPFLLC                                                                                  5,000           -
 8% Notes                                                                                  28,116         26,532
 UC Note                                                                                        -          4,997
 Term loans:
   Wachovia                                                                                     -         21,980
   County                                                                                  10,000         10,000
   EWP                                                                                      5,513              -
 Other                                                                                        259            212
                                                                                         --------       --------
                                                                                           65,985         99,895
   Less current maturities                                                                 51,640         41,640
                                                                                         --------       --------

                                                                                          $14,345        $58,255
                                                                                          =======        =======
</TABLE>

     Keystone has obtained an $80 million  secured credit facility from Wachovia
Capital  Finance  (Central) in  connection  with the  Company's  emergence  from
Chapter 11 (the "Wachovia  Facility").  Proceeds from the Wachovia Facility were
used to  extinguish  Keystone's  existing  Debtor-in-Possession  ("DIP")  credit
facilities,  the EWP Term Loan  (defined  below) and the EWP  Revolver  (defined
below) and to provide  working capital for  reorganized  Keystone.  The Wachovia
Facility includes a term loan in the amount of up to $25.0 million, subject to a
borrowing  base  calculation  based on the market  value of the  Company's  real
property and equipment.  To the extent there is sufficient  borrowing  base, the
term loan  portion of the  Wachovia  Facility  can be  reloaded in the amount of
$10.0  million.  The  portion of the credit  facility in excess of the term loan
balance is available to the Company as a revolving  credit facility subject to a
borrowing base calculation based on eligible receivables and inventory balances.
At December 31, 2005,  $4.6  million of letters of credit were  outstanding  and
unused  credit  available for  borrowing  under the Wachovia  facility was $21.6
million.  Interest rates on the credit facility range from the prime rate to the
prime rate plus .5% depending on Keystone's excess  availability,  as defined in
the credit  agreement  (7.25% at December 31, 2005).  The Wacovia  Facility also
provides  for a LIBOR  interest  rate  option.  Under the terms of the  Wachovia
Facility,  the Company is required to annually pay down the term loan portion of
the  facility  in the  amount of 25% of excess  cash  flow,  as  defined  in the
agreement,  subject to a $2.0 million annual and a $5.0 million aggregate limit.
Otherwise,  the principal portion of the term notes are amortized over either 60
or 84 months  depending  on the  underlying  collateral.  All  unpaid  term note
principal  and  interest is due upon  maturity  of the  Wachovia  Facility.  The
Wachovia Facility also includes performance  covenants related to minimum levels
of cash flow and fixed charge  coverage ratio as well as a covenant  prohibiting
the payment of cash dividends on the Company's  common stock.  The facility also
provides  the lender  with the  ability  to  declare a default  under the credit
facility in the event of, among other things,  a material  adverse change in the
Company's  business.   Keystone  paid  the  lender  approximately   $400,000  of
diligence,  commitment  and closing fees in connection  with this  facility.  At
December 31, 2005,  unused credit  available  for  borrowing  under the Wachovia
facility was $21.6 million.  The Wachovia  Facility requires the Company's daily
net cash receipts to be used to reduce the outstanding borrowings, which results
in the Company maintaining zero cash balances so long as there is an outstanding
balance under this facility.  Accordingly,  any  outstanding  balances under the
revolving  credit  portion of the Wachovia  Facility are always  classified as a
current liability, regardless of the maturity date of the facility. The Wachovia
Facility matures in August 2010.

     Keystone's 8% Notes were issued in connection with an exchange offer during
2002  whereby  the Company  retired  approximately  $93.9  million of its $100.0
million then outstanding 9 5/8% notes along with accrued interest at the date of
the exchange (the "Exchange  Offer").  Keystone  accounted for the  transactions
related to the Exchange  Offer in  accordance  with SFAS No. 15,  Accounting  by
Debtors and Creditors for troubled Debt Restructurings.  In accordance with SFAS
No. 15, the 8% Notes were recorded at their aggregate  undiscounted  future cash
flows  (both  principal  and  interest)  of $29.3  million and  thereafter  both
principal and interest payments are accounted for as a reduction of the carrying
amount of the debt,  and no interest  expense is  recognized.  The 8% Notes bear
simple  interest  at 8% per annum,  one-half  of which will be paid in cash on a
semi-annual  basis and one-half  will be deferred and be paid  together with the
principal in three installments, one-third in each of March 2007, 2008 and 2009.
The 8% Notes are  collateralized by a second-priority  lien on substantially all
of the existing fixed and intangible  assets of the Company and its subsidiaries
(excluding EWP), other than the real property and other fixed assets  comprising
Keystone's  steel mill in Peoria,  Illinois,  on which there is a third-priority
lien.  Keystone may redeem the 8% Notes,  at its option,  in whole or in part at
any time  with no  prepayment  penalty.  The 8% Notes  are  subordinated  to all
existing senior indebtedness of Keystone,  including,  without  limitation,  the
Wachovia  Facility  and,  to the extent of the  Company's  steel mill in Peoria,
Illinois,  the County Term Loan (as defined below).  The 8% Notes rank senior to
any expressly  subordinated  indebtedness of Keystone.  In October 2002, Contran
purchased $18.3 million of the total $19.8 million  principal amount at maturity
of the 8% Notes.  As such,  approximately  $26.0  million of the recorded  $28.1
million  liability for the 8% Notes at December 31, 2004 was payable to Contran.
Approximately  $24.5 million of the recorded $26.5 million  liability for the 8%
Notes at  December  31, 2005 was payable to  Contran.  The  indenture  governing
Keystone's  8% Notes  provides  the  holders  of such  Notes  with the  right to
accelerate  the  maturity  of the Notes in the event of a  default  by  Keystone
resulting  in an  acceleration  of the  maturity of any of the  Company's  other
secured debt. As such,  the 8% Notes were  classified as a current  liability at
December 31, 2004. Upon emergence from Chapter 11, the Company paid all the then
delinquent payments on the 8% Notes. In addition, the Company paid the scheduled
September 2005, payment on the 8% Notes. As such, at December 31, 2005, only the
scheduled  principal payments during the next 12 months were shown as current on
Keystone's  balance sheet. In connection with Keystone's  emergence from Chapter
11 on August  31,  2005,  the  Company's  obligations  under  the 8% Notes  were
reinstated in full against reorganized Keystone.

     In  connection  with  Keystone's  emergence  from  Chapter  11, the Company
provided a $4.8 million note to its  pre-petition  unsecured  creditors (the "UC
Note").  The UC Note will accrue  interest  until October 2006 at 12% per annum,
compounded  on the first  business day of each calendar  quarter.  Such interest
will be deferred and converted to principal  and beginning in October 2006,  the
UC Note will bear interest at 8% per annum and interest  payments will be due on
the first day of each  calendar  quarter  beginning in January  2007.  The first
principal  payment  on the UC Note is due on  January  1, 2007 in the  amount of
$1,542,235. Thereafter, quarterly principal payments of $391,603 each are due on
the first day of each calendar quarter until such time as the UC Note is paid in
full. The UC Note is  collateralized by a lien on the Company's equity interests
in EWP and  any  proceeds  thereof.  The UC Note  contains  identical  financial
covenants to the Wachovia Facility.

     In April 2002 Keystone received a new $10 million term loan from the County
of Peoria, Illinois (the "County Term Loan"). The County Term Loan does not bear
interest,  requires  no  amortization  of  principal,  is  due  in  2007  and is
collateralized  by a second  priority  lien on the real property and other fixed
assets comprising KSW's steel mill in Peoria, Illinois. Proceeds from the County
Term Loan were used by Keystone to reduce the outstanding  balance of Keystone's
revolving credit facility.  In connection with Keystone's emergence from Chapter
11 on August 31, 2005, the Company's obligations under the County Term Note were
reinstated in full against reorganized Keystone.

     Prior to Keystone's  Chapter 11 filing,  its then primary  revolving credit
facility ("the Keystone  Revolver"),  as amended in November 2003,  provided for
revolving borrowings of up to $45 million based upon formula-determined  amounts
of trade receivables and inventories. Borrowings bore interest at the prime rate
plus 1.0%, and were collateralized by certain of the Company's trade receivables
and inventories.  In addition,  the Keystone  Revolver was  cross-collateralized
with junior liens on certain of the Company's property, plant and equipment. The
Keystone  Revolver  required the Company's daily net cash receipts to be used to
reduce the  outstanding  borrowings,  which resulted in the Company  maintaining
zero  cash  balances  so long as there  was an  outstanding  balance  under  the
Keystone  Revolver.  Accordingly,  any  outstanding  balances under the Keystone
Revolver  were  always  classified  as a current  liability,  regardless  of the
maturity  date of the  facility.  The Keystone  Revolver  contained  restrictive
covenants, including certain minimum working capital and net worth requirements,
maintenance of financial  ratios  requirements  and other  customary  provisions
relative to payment of dividends on Keystone's common stock and on the Company's
Redeemable Series A Preferred Stock. The Keystone  Revolver  comprised a portion
of the Congress DIP Facility discussed below.

     In April 2002,  Keystone received a new $5 million term loan (the "Keystone
Term  Loan")  from the same  lender  providing  the  Keystone  revolving  credit
facility.  The Keystone Term Loan bore interest at prime plus 1.0%. The Keystone
Term Loan was collateralized by a first-priority lien on all of the fixed assets
of the Company and its subsidiaries,  other than EWP. Proceeds from the Keystone
Term Loan were used by Keystone to reduce the outstanding  balance of Keystone's
revolving credit facility.  In November 2003,  Keystone  increased the then $3.0
million outstanding balance on the Keystone Term Loan by $3.5 million. Principal
payments on the amended  Keystone  Term Loan was due in 48 monthly  installments
through December 2007. Proceeds from the amended Keystone Term Loan were used by
Keystone  to reduce  the  outstanding  balance  of the  Keystone  Revolver.  The
Keystone  Term Loan  comprised a portion of the Congress DIP Facility  discussed
below.

     Borrowings  under  EWP's $7 million  revolving  credit  facility  (the "EWP
Revolver") as amended in March 2005, bore interest at LIBOR plus 2.45%. Prior to
January  2004,  borrowings  under the EWP Revolver  bore  interest at either the
prime  rate or LIBOR plus  2.25%.  EWP's  accounts  receivable  and  inventories
collateralized the EWP Revolver.  The EWP Revolver Agreement contained covenants
with respect to working capital, additional borrowings, payment of dividends and
certain  other  matters.  The EWP  Revolver was retired with the proceeds of the
Wachovia Facility on August 31, 2005.

     In January 2004,  EWP received a new $6.75 million term loan ("the EWP Term
Loan") from the same lender  providing the EWP Revolver.  The EWP Term Loan bore
interest at LIBOR plus 2.5%,  was due in monthly  installments  of $112,500 plus
accrued  interest and a balloon  payment upon the maturity date, as amended,  on
March 31, 2005. In addition,  the EWP Term Loan, was collateralized by a lien on
all of the fixed assets of EWP and  cross-collateralized  with the EWP Revolver.
Proceeds from the EWP Term Loan were used to repay intercompany  indebtedness to
Keystone.  Keystone used the proceeds to reduce the  outstanding  balance of the
Keystone  Revolver.  The EWP Term  Note was  retired  with the  proceeds  of the
Wachovia Facility on August 31, 2005.

     In addition,  EWP Financial LLC ("EWPFLLC"),  a wholly-owned  subsidiary of
Contran,  had agreed to loan the Company up to an aggregate of $6 million  under
the terms of a revolving credit facility that matured on February 29, 2004. This
facility was  collateralized  by the common stock of EWP owned by Keystone.  The
Company did not borrow any amounts under such facility.  However, EWPFLLC issued
a $250,000  letter of credit for the benefit of the Company under this revolving
credit facility which is no longer outstanding at December 31, 2005.

     On  March  15,  2004,  the  Court  approved  two  new  debtor-in-possession
financing facilities (the "DIP Order). The first debtor-in-possession  financing
facility consists of an Assumption  Agreement whereby the pre-petition lender on
the  Keystone  Revolver and  Keystone  Term Note agreed to convert  those credit
facilities to a debtor-in-possession  facility (collectively,  the "Congress DIP
Facility").  The terms of the respective  facilities comprising the Congress DIP
Facility were relatively unchanged from the respective  pre-petition  facilities
with the exception of the  elimination of the existing  financial  covenants and
the  granting  of a second  lien on the  stock  of EWP  owned  by  Keystone.  In
connection  with the approval of the Congress DIP  Facility,  the Keystone  Term
Note was increased by $4.0 million. Approximately $2.0 million of these proceeds
were applied to the Keystone  Revolver  portion of the Congress DIP Facility and
the remainder was used to fund Keystone's  working capital needs.  However,  the
Congress DIP Facility  lender applied an availability  reserve of  approximately
$2.0 million to the borrowing base of the Keystone  Revolver in connection  with
the increase in Keystone Term Note resulting in no net increase in  availability
under the  Keystone  Revolver  at that time.  The  Keystone  Term Note  required
monthly  principal  payments of $100,000.  The Congress DIP Facility matured the
earliest to occur of  September  30,  2005,  payment in full of the Congress DIP
Facility,  confirmation  of a plan of  reorganization  of Keystone,  an event of
default or upon certain  other  events.  The  Congress  DIP Facility  required a
facility fee of $375,000,  half of which was paid at inception and half of which
was paid in August 2004. In addition,  EWPFLLC has a $2.0 million  participation
in the Congress DIP Facility. Upon emergence from bankruptcy in August 2005, the
Wachovia Facility was used to extinguish the Congress DIP facility. See Note 2.

     The second debtor-in-possession financing facility comprising the DIP Order
is a $5 million  revolving  credit  facility  with  EWPFLLC,  (the  "EWPFLLC DIP
Facility").  Advances  under the EWPFLLC DIP Facility bore interest at the prime
rate  plus 3.0% per annum and were  collateralized  by the  common  stock of EWP
owned by  Keystone.  Proceeds  from the EWPFLLC DIP  Facility  were used to fund
Keystone's  working capital needs. The EWPFLLC DIP Facility required Keystone to
abide by specified cash budgets. In addition,  the EWPFLLC DIP Facility required
EWPFLLC to fund up to an additional $2 million  through a  participation  in the
Congress DIP Facility upon the Company's realization of certain milestones.  The
Company met such milestones and in April 2004, this additional funding was made.
The  EWPFLLC  DIP  Facility,  as amended,  matured on August 31,  2005,  or upon
confirmation of a plan of reorganization of Keystone,  closing of a sale of EWP,
an event of  default  under the EWP Term  Note,  an event of  default  under the
Congress  DIP Facility or upon certain  other  events.  The EWPFLLC DIP Facility
required a facility  fee of $100,000,  half of which was paid at  inception  and
half of which  was paid in  August  2004.  In  addition,  during  2004 and 2005,
Keystone  paid EWPFLLC  approximately  $305,000 and $362,000,  respectively,  of
interest  under this  facility.  Upon  Keystone's  emergence  from Chapter 11 on
August 31, 2005,  EWPFLLC assigned its $5 million DIP credit facility to Contran
and Contran  converted the DIP facility,  certain of its pre-petition  unsecured
claims and all of its administrative claims against Keystone into 51% of the new
common stock of reorganized Keystone. See Notes 2 and 12.

     The unsecured 6% Notes and the unsecured 9 5/8% Notes  described below were
classified  as  liabilities  subject to  compromise  at December  31,  2004.  In
addition,  Keystone ceased to accrue interest on such  indebtedness  upon filing
for Chapter 11 on February 26, 2004. The 6% Notes and the 9 5/8% Notes were both
compromised as part of the Company's confirmed plan of reorganization.  See Note
12.

     The  Company's  6% Notes bore  simple  interest  at 6% per annum,  of which
one-fourth was to be paid in cash on a semi-annual  basis and  three-fourths was
to  accrue  and be paid  together  with  the  principal  in  four  installments,
one-fourth  in each of March 2009,  2010 and 2011 and May 2011.  Keystone  could
have redeemed the 6% Notes, at its option,  in whole or in part at any time with
no prepayment penalty. The 6% Notes were subordinated to all existing and future
senior or secured  indebtedness of the Company,  including,  without limitation,
the revolving credit  facilities of Keystone,  EWP and Garden Zone, the Keystone
Term Loan, the County Term Loan, the 8% Notes and any other future  indebtedness
of the Company  which was not  expressly  subordinated  to the 6% Notes.  The 6%
Notes were also  originally  issued in connection with the Exchange Offer and in
accordance  with SFAS No. 15, the 6% Notes were  recorded  at the $16.0  million
carrying  amount of the  associated 9 5/8% Notes (both  principal and interest),
and  interest  expense on such debt was  recognized  on the  effective  interest
method at a rate of 3.8%. The 6% Notes were classified as liabilities subject to
compromise at December 31, 2004. See Note 12.

     Keystone's remaining 9 5/8% Notes at the petition date were also classified
as liabilities subject to compromise at December 31, 2004. See Note 12.

     The Wachovia  Facility  reprices with changes in interest rates. Due to the
significant   uncertainties   surrounding  the  Company's  Chapter  11  filings,
management was unable to estimate the aggregate  fair value of Keystone's  fixed
rate notes ($60.5  million  book value) at December 31, 2004.  The book value of
all other  indebtedness  at December 31, 2004 was deemed to  approximate  market
value.  At December 31, 2005, the aggregate fair value of Keystone's  fixed rate
notes, based on management's estimate of fair value,  approximated $31.4 million
($42.2 million book value). The book value of all other indebtedness at December
31, 2005 is deemed to approximate market value.

     At December 31, 2005, the aggregate future  maturities of notes payable and
long-term  debt  (including a total of  approximately  $470,000 of interest that
will be  converted  to  principal  during  2005 and 2006) are shown in the table
below:

<TABLE>
<CAPTION>
Year ending December 31,                                             Amount
------------------------                                         --------------
                                                                 (In thousands)

      <S>                                                          <C>
      2006                                                         $ 5,466
      2007                                                          25,956
      2008                                                          14,247
      2009                                                          14,902
      2010                                                          35,758
                                                                   -------
                                                                   $96,329
                                                                   =======
</TABLE>


Note 7 - Series A Preferred Stock:

     In connection  with the Exchange  Offer,  Keystone  issued 59,399 shares of
Series A 10% Cumulative  Convertible  Pay-In-Kind Preferred Stock (the "Series A
Preferred Stock"). The Series A Preferred Stock had a stated value of $1,000 per
share and had a  liquidation  preference  of $1,000 per share plus  accrued  and
unpaid dividends. The Series A Preferred Stock had an annual dividend commencing
in December 2002 of $100 per share,  and such dividends  could have been paid in
cash or, at the Company's  option, in whole or in part in new Series A Preferred
Stock based on their stated value. The Company  discontinued  accruing dividends
on its Series A Preferred Stock upon filing for Chapter 11 on February 26, 2004.
The $11.8  million of  dividends  accrued at February 26, 2004 (all of which are
included in Liabilities Subject to Compromise at December 31, 2004, see Note 12)
were  determined  based on the assumption  such dividends  would be paid in cash
rather than in the form of additional shares of Series A Preferred Stock.

     In connection with the Company's restructuring activities in December 2003,
the Company issued 12,500  additional  Shares of Series A Preferred Stock to the
employees  of  KSW's  primary  labor  union.  Based on the  Company's  financial
position  at the  issuance  date and  subsequent  Chapter 11 filing,  management
believes the fair value of the 12,500  additional shares issued in December 2003
was deminimis and as such, did not assign a value to the newly issued shares.

     All of the Company's  Series A Preferred  Stock was cancelled in connection
with Keystone's emergence from Chapter 11 on August 31, 2005. See Note 2 and 12.


Note 8 - Income taxes

     Summarized  below are (i) the differences  between the provision  (benefit)
for income taxes and the amounts that would be expected  using the U. S. federal
statutory  income tax rate of 35%, and (ii) the components of the  comprehensive
provision (benefit) for income taxes.

<TABLE>
<CAPTION>
                                                                                    Years ended December 31,
                                                                               ------------------------------------
                                                                                 2003          2004          2005
                                                                               -------        -------       -------
                                                                                         (In thousands)

 Expected tax provision (benefit), at
<S>                                                                            <C>           <C>            <C>
  statutory rate                                                               $(13,026)     $  6,104       $13,882
 U.S. state income taxes (benefit), net                                          (1,093)          559         2,265
 Deferred tax asset valuation allowance                                          19,088        (8,808)      (19,651)
 Capitalize reorganization costs                                                      -         3,840         3,608
 Release of contingency reserve                                                  (5,292)            -             -
 Other, net                                                                         323          (316)          326
                                                                               --------      --------       -------

 Provision for income taxes                                                    $   -         $  1,379       $   430
                                                                               ========      ========       =======

 Provision (benefit) for income taxes:
   Currently payable (refundable):
     U.S. federal                                                              $    (27)     $    914       $    75
     U.S. state                                                                      27           465           355
                                                                               --------      --------       -------

       Net currently payable                                                       -            1,379           430
   Deferred income taxes, net                                                      -             -             -
                                                                               --------      --------       -------

                                                                               $   -         $  1,379       $   430
                                                                               ========      ========       =======
</TABLE>


     The components of the net deferred tax asset are summarized below.

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                              ---------------------------------------
                                                                                2004                        2005
                                                                      --------------------------------------------------------
                                                                        Assets     Liabilities      Assets      Liabilities
                                                                      ----------  -------------   ----------  ----------------
                                                                                          (In thousands)

 Tax effect of temporary differences relating to:
<S>                                                                      <C>            <C>          <C>            <C>
   Inventories                                                           $  6,008       $   -        $  4,697       $   -
   Property and equipment                                                       -         (4,445)           -        (14,960)
   Pensions                                                                     -        (52,043)           -        (56,610)
   Accrued OPEB cost                                                       53,401              -       53,611              -
   Accrued liabilities                                                     14,084              -       11,334              -
   Other deductible differences                                             5,460              -        3,954              -
   Other taxable differences                                                    -         (2,833)        -            (3,026)
   Net operating loss carryforwards                                         3,493              -        4,372              -
   Alternative minimum tax credit carryforwards                             7,201              -        7,303              -
   Deferred tax asset valuation allowance                                 (30,326)             -      (10,675)             -
                                                                         --------       --------    ---------       --------

     Gross deferred tax assets                                             59,321        (59,321)      74,596        (74,596)
 Reclassification, principally netting by tax
  jurisdiction                                                            (59,321)        59,321      (74,596)        74,596
                                                                         --------       --------    ---------       --------

     Net deferred tax asset                                                     -              -            -              -
 Less current deferred tax asset, net of pro rata
  allocation of deferred tax asset valuation
  allowance                                                                  -              -            -                 -
                                                                         --------       --------    ---------       --------

     Noncurrent net deferred tax asset                                   $   -          $   -        $   -          $      -
                                                                         ========       ========    =========       ========
</TABLE>


<TABLE>
<CAPTION>
                                                                                    Years ended December 31,
                                                                                --------------------------------
                                                                                2003          2004          2005
                                                                                ----          ----          ----
                                                                                         (In thousands)

 Increase (decrease) in valuation allowance:
   Increase in certain deductible temporary
    differences which the Company believes do
    not meet the "more-likely-than-not"
    recognition criteria:
<S>                                                                            <C>           <C>           <C>
       Recognized in net income (loss)                                         $ 21,995      $(8,808)      $(19,651)
         Offset to the change in gross deferred
          income tax assets due principally to
          redetermination of certain tax attributes                              (2,907)           -              -
       Recognized in other comprehensive loss -
        pension liabilities                                                     (66,420)           -              -
                                                                               --------      -------       --------

                                                                               $(47,332)     $(8,808)      $(19,651)
                                                                               ========      =======       ========
</TABLE>

     At December  31,  2005,  Keystone  had (i)  approximately  $7.2  million of
alternative  minimum tax credit  carryforwards  that have no expiration date and
(ii) net  operating  loss  carryforwards  of  approximately  $10.0 million which
expire in 2023  through  2025,  and which may be used to reduce  future  taxable
income of the entire Company. See Note 2.

     The Company's  emergence  from Chapter 11 on August 31, 2005 did not result
in an ownership change within the meaning of Section 382 of the Internal Revenue
Code.

     At December  31,  2005,  considering  all factors  believed to be relevant,
including the Company's recent operating results,  its expected future near-term
productivity rates; cost of raw materials,  electricity,  natural gas, labor and
employee  benefits,  environmental  remediation,  and retiree medical  coverage;
interest  rates;  product  mix;  sales  volumes  and selling  prices;  financial
restructuring  efforts  and the fact that  accrued  OPEB  expenses  will  become
deductible  over an extended  period of time and require the Company to generate
significant  amounts of future taxable  income,  the Company  believes its gross
deferred   tax  assets  do  not   currently   meet  the   "more-likely-than-not"
realizability  test.  As such,  the  Company has  provided a deferred  tax asset
valuation allowance to offset its gross deferred income tax asset. Keystone will
continue to review the  recoverability of its deferred tax assets,  and based on
such  periodic  reviews,  Keystone  could  recognize  a change in the  valuation
allowance related to its deferred tax assets in the future.

Note 9 - Stock options, warrants and stock appreciation rights plan

     In 1997,  Keystone  adopted its 1997  Long-Term  Incentive  Plan (the "1997
Plan").  Stock  options  granted  under the 1997 Plan could be exercised  over a
period of ten, or in certain instances, five years. The vesting period, exercise
price, length of period during which awards could be exercised,  and restriction
periods of all awards were determined by the Incentive Compensation Committee of
the Board of Directors.  During 1997, the Company granted all remaining  options
available under Keystone's 1992 Option Plan.

     All of the  Company's  outstanding  common  stock  and stock  options  were
cancelled in connection with Keystone's  emergence from Chapter 11 on August 31,
2005. See Note 2.

     Changes in outstanding  options,  including  options  outstanding under the
former 1992 Option Plan, are summarized in the table below.


<TABLE>
<CAPTION>
                                                                              Price per           Amount payable
                                                             Options           share              upon exercise
                                                             -------        -----------           ---------------

<S>                                                            <C>         <C>    <C>                <C>
 Outstanding at December 31, 2002                              487,300     $4.25 -$13.94             $ 3,987,668

   Cancelled                                                   (61,300)     5.13 - 10.25                (522,824)
                                                              --------     -------------             -----------

 Outstanding at December 31, 2003                              426,000      4.25 - 13.94               3,464,844

   Cancelled                                                   (57,000)     8.13 - 10.25                (488,625)
                                                              --------     -------------             -----------

 Outstanding at December 31, 2004                              369,000      4.25 - 13.94               2,976,219

   Cancelled                                                  (369,000)     4.25- 13.94               (2,976,219)
                                                              --------     -------------             -----------

 Outstanding at December 31, 2005                                   -0-    $0.00- $0.00                  $    -0-
                                                              ========     ============               ===========
</TABLE>


     The pro forma information  included in Note 1, required by SFAS No. 123, as
amended,  is  based  on an  estimation  of the  fair  value  of  options  issued
subsequent  to January 1, 1995.  There  were no options  granted  subsequent  to
December 31, 2000. The fair values of the options granted  subsequent to January
1, 1995 and prior to January  1, 2001 were  calculated  using the  Black-Scholes
stock option valuation model. The Black-Scholes  model was not developed for use
in valuing  employee stock options,  but was developed for use in estimating the
fair value of traded  options  that have no vesting  restrictions  and are fully
transferable.  In  addition,  it  requires  the  use of  subjective  assumptions
including  expectations  of future  dividends and stock price  volatility.  Such
assumptions are only used for making the required fair value estimate and should
not be  considered  as  indicators  of future  dividend  policy  or stock  price
appreciation.  Because  changes in the  subjective  assumptions  can  materially
affect  the fair  value  estimate,  and  because  employee  stock  options  have
characteristics significantly different from those of traded options, the use of
the  Black-Scholes  option-pricing  model may not provide a reliable estimate of
the fair value of employee  stock  options.  The pro forma  impact on net income
(loss) per share  disclosed in Note 1 is not  necessarily  indicative  of future
effects on net income (loss) or earnings (loss) per share.


Note 10 - Pensions and other post retirement benefits plans

     Keystone  sponsors several pension plans and other post retirement  benefit
plans for its employees and certain  retirees.  Under plans currently in effect,
certain active employees would be entitled to receive OPEB upon retirement.  The
Company uses a December 31st  measurement  date for its defined  benefit pension
and OPEB plans. The following tables provide a reconciliation  of the changes in
the plans' projected benefit  obligations and fair value of assets for the years
ended December 31, 2004 and 2005:

<TABLE>
<CAPTION>
                                                             Pension Benefits                   Other Benefits
                                                        --------------------------       --------------------------
                                                          2004             2005             2004             2005
                                                        --------          --------       ----------         -------
                                                                               (In thousands)

Change in projected benefit
 obligations ("PBO"):
<S>                                                      <C>              <C>             <C>              <C>
  Benefit obligations at beginning of year               $362,064         $384,701        $ 233,042        $ 206,309
  Service cost                                              3,335            3,798            2,866            2,056
  Interest cost                                            20,902           21,499           11,033            8,785
  Participant contributions                                     -                -              929                -
  Plan amendment                                                -              876          (39,014)        (191,657)
  Settlement                                                    -                -           (9,115)               -
  Actuarial loss                                           25,659            8,655           12,751           21,536
  Benefits paid                                           (27,259)         (27,313)          (6,183)          (8,324)
                                                         --------        ---------        ---------        ---------

    Benefit obligations at end of year                   $384,701         $392,216        $ 206,309        $  38,705
                                                         ========         ========        =========        =========

Change in plan assets:
  Fair value of plan assets at beginning
    of year                                              $372,218         $424,380        $    -           $    -
  Actual return (loss) on plan assets                      79,421          304,154                -             -
  Employer contributions                                        -                -            5,254            8,324
  Participant contributions                                     -                -              929                -
  Benefits paid                                           (27,259)         (27,313)          (6,183)          (8,324)
                                                         --------        ---------        ---------        ---------

    Fair value of plan assets at end
     of year                                             $424,380         $701,221        $    -           $    -
                                                         ========         ========        =========        =========

Funded status at end of the year:
  Plan assets greater (less) than PBO                    $ 39,679         $309,005        $(206,309)       $ (38,705)
    Unrecognized actuarial losses (gains)                  83,674         (173,892)         107,546          122,978
    Unrecognized prior service credit
     due to plan amendments                                  -                   -          (36,333)        (220,273)
    Unrecognized prior service cost
     (credit)                                              10,090           10,039           (1,807)          (1,464)
                                                         --------        ---------        ---------        ---------

                                                         $133,443         $145,152        $(136,903)       $(137,464)
                                                         ========         ========        =========        =========

Amounts recognized in the balance sheet:
  Prepaid pension cost                                   $133,443         $145,152        $    -            $   -
  Accrued benefit costs:
    Current                                                  -                   -                -           (4,256)
    Noncurrent                                               -                   -          (13,478)        (133,208)
    Liabilities subject to compromise                        -                -            (123,425)            -
                                                         --------        ---------        ---------        ---------

                                                         $133,443         $145,152        $(136,903)       $(137,464)
                                                         ========         ========        =========        =========
</TABLE>

     The rate  assumptions  used in determining  the actuarial  present value of
benefit  obligations as of December 31, 2004 and 2005 are shown in the following
table:

<TABLE>
<CAPTION>
                                                                        Pension Benefits             Other Benefits
                                                                       ------------------         --------------------
                                                                       2004         2005            2004         2005
                                                                       ----         -----         -------        -----

<S>                                                                    <C>          <C>              <C>         <C>
Discount rate                                                          5.65%        5.50%            5.65%       5.50%
Rate of compensation increase                                          3.00%        3.00%            -             -
</TABLE>


     The rate assumptions used in determining the net periodic pension and other
retiree  benefit  expense during 2003,  2004 and 2005 are shown in the following
table:

<TABLE>
<CAPTION>
                                                   Pension Benefits                        Other Benefits
                                             ------------------------------      --------------------------------
                                             2003        2004         2005         2003        2004        2005
                                             ----        ----         -----      ------        ----        ------

<S>                                            <C>         <C>        <C>            <C>         <C>         <C>
Discount rate                                  6.5%        6.0%       5.65%          6.5%        6.0%        5.52%
Expected return on plan assets                10.0%       10.0%       10.0%          -           -           -
Rate of compensation increase                  3.0%        3.0%        3.0%          -           -           -
</TABLE>


     The following  table provides the  components of net periodic  benefit cost
for the plans for the years ended December 31, 2003, 2004 and 2005:

<TABLE>
<CAPTION>
                                                       Pension Benefits                    Other Benefits
                                                -------------------------------  ----------------------------------
                                                 2003        2004        2005       2003        2004         2005
                                                ------      ------      -------  ---------     ------       -------
                                                                          (In thousands)

<S>                                            <C>         <C>         <C>          <C>         <C>         <C>
Service cost                                   $  3,456    $  3,335    $  3,798     $ 2,826     $ 2,866     $  2,056
Interest cost                                    21,586      20,902      21,499      11,849      11,033        8,785
Expected return on plan assets                  (27,376)    (35,860)    (41,037)          -           -            -
Amortization of unrecognized:
  Prior service cost                                882         882         926        (343)       (343)        (343)
  Prior service cost due to
   plan amendment                                  -           -           -           -         (2,681)      (7,660)
  Actuarial losses                                8,350       3,989       3,104       3,171       4,879        6,047
                                               --------    --------    --------   ---------     -------      -------

Net periodic benefit cost (credit)                6,898      (6,752)    (11,710)     17,503      15,754        8,885
Settlement loss                                    -           -           -           -          5,155         -
                                               --------    --------    --------   ---------     -------      -------

Total benefit cost (credit)                    $  6,898    $ (6,752)   $(11,710)    $17,503     $20,909      $ 8,885
                                               ========    ========    ========     =======     =======      =======
</TABLE>


     At December 31, 2005, the accumulated  benefit obligation for the Company's
pension  and OPEB plans was  approximately  $385.8  million  and $38.7  million,
respectively (2004 - $379.2 million and $206.3 million, respectively).

     At December 31, 2002,  the  accumulated  benefit  obligation for Keystone's
defined benefit pension plan (the "Plan")  approximated $335.6 million. Due to a
decline in the value of the Plan's  assets  during  2002,  and a decrease in the
discount rate from  December 31, 2001 to 2002,  the Plan's  accumulated  benefit
obligation  at December 31, 2002  exceeded the Plan's  assets at that date. As a
result,  SFAS No. 87,  Employers'  Accounting  for  Pensions,  provides that the
Company is required to record an additional  minimum  liability that is at least
equal to the amount by which the Plan's  accumulated  benefit obligation exceeds
the Plan's  assets (or $182.2  million at  December  31,  2002),  eliminate  any
recorded prepaid pension cost, record an intangible asset equal to the amount of
any  unrecognized  prior  service  cost  and  charge  a  separate  component  of
stockholders'  equity for the difference.  As such, during the fourth quarter of
2002,  Keystone  recorded an  additional  minimum  pension  liability  of $182.2
million,  an  intangible  pension  asset of $11.9 million and charged a separate
component of  stockholders'  equity for $170.3 million.  During 2003, the Plan's
assets  exceeded the  accumulated  benefit  obligation.  As such, the previously
recorded additional minimum liability,  intangible pension asset were eliminated
through the separate component of stockholders' equity.

     During 2003, 2004 and 2005, substantially all of the plan's net assets were
invested  in  the  Combined  Master  Retirement  Trust  ("CMRT"),  a  collective
investment  trust sponsored by Contran,  to permit the collective  investment by
certain master trusts which fund certain  employee  benefit plans  maintained by
Contran, Valhi and related companies,  including the Company.  Harold C. Simmons
is the sole trustee of the CMRT. Mr. Simmons and two members of Keystone's board
of directors and Master Trust Investment Committee comprise the Trust Investment
Committee for the CMRT.

     The CMRT's  long-term  investment  objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indicies) utilizing both third-party  investment
managers as well as investments directed by Mr. Simmons. The trustee of the CMRT
and the CMRT's Trust Investment Committee actively manage the investments of the
CMRT. Such parties have in the past, and may in the future, change the asset mix
of  the  CMRT  based  upon,  among  other  factors,  advice  they  receive  from
third-party  advisors and their  expectations as to what asset mix will generate
the greatest  overall  long-term  rate of return.  For 2003,  2004 and 2005, the
assumed  long-term rate of return for plan assets  invested in the CMRT was 10%.
In determining the  appropriateness of such long-term rate of return assumption,
the Company  considered,  among other things,  the historical rate of return for
the CMRT,  the current and  projected  asset mix of the CMRT and the  investment
objectives of the CMRT's  managers.  In addition,  the Company  receives  advice
about  appropriate  long-term  rates of return  from the  Company's  third-party
actuaries. During the 18-year history of the CMRT through December 31, 2005, the
average  annual rate of return has been 14.0%.  At December 31, 2004,  the asset
mix of the CMRT was 77% in U.S.  equity  securities,  14% in U.S.  fixed  income
securities,  7% in  international  equity  securities  and 2% in cash and  other
investments.  At December  31,  2005,  the asset mix of the CMRT was 86% in U.S.
equity  securities,  3% in U.S.  fixed income  securities,  7% in  international
equity  securities,  3% in cash  and 1% in  other  investments  (primarily  real
estate).

     With certain exceptions, the trustee of the CMRT has exclusive authority to
manage  and  control  the  assets of the CMRT.  Administrators  of the  employee
benefit plans participating in the CMRT,  however,  have the authority to direct
distributions and transfers of plan benefits under such participating plans. The
Trust  Investment  Committee of the CMRT has the authority to direct the trustee
to establish  investment  funds,  transfer assets between  investment  funds and
appoint investment managers and custodians. Except as otherwise provided by law,
the trustee is not responsible for the investment of any assets of the CMRT that
are subject to the management of an investment manager.

     The Company may withdraw all or part of the Plan's  investment  in the CMRT
at the end of any calendar month without penalty.

     In general,  prior to February 1, 2004,  Keystone's post retirement benefit
plans provided  certain life insurance,  Medicare Part B and medical benefits to
eligible  retirees.  Effective  February 1, 2004,  the Company's OPEB plans were
amended to permanently and unilaterally terminate all future medical benefits to
retirees  that were not covered  under a union  contract or an  otherwise  court
ordered  plan.  However,  these  current and future  retirees  will retain their
existing  post-retirement  life  insurance  and  Medicare  Part B  reimbursement
benefits (as only the medical and prescription  drug benefits were  terminated).
For the groups  that did not have  Medicare  Part B  reimbursement,  this change
resulted in a  settlement  of  liabilities  from the plan.  The net loss of $5.2
million due to this  settlement  is reflected in the 2004 OPEB  expense.  During
2004,  Keystone  entered into an agreement (the "1114  Agreement") with retirees
who were  covered a union  contract  or an  otherwise  court  ordered  plan (the
"Protected  Groups") that  substantially  reduced the OPEB benefits that will be
paid to the  Protected  Groups  in the  future.  Under  the  terms  of the  1114
Agreement, the existing medical and prescription drug coverage for the Protected
Groups was terminated (life insurance and Medicare Part B reimbursement benefits
were  unchanged)  and  replaced  with a $3.0  million  lump sum  payment  to the
Protected Groups upon the Company's emergence from Chapter 11 and future minimum
monthly fixed  payments to all  participants  (retirees and  dependents)  in the
Protected  Groups.  The 1114  Agreement  also provided  that the future  minimum
monthly fixed payments could increase in certain years based on the prior year's
free cash flow, as defined in the 1114 Agreement.  Because these future payments
are not based on health care  costs,  changes in the health care cost trend rate
do not impact future OPEB expense or obligations. See Note 2.

     The  Company  does  not   anticipate  it  will  be  required  to  make  any
contributions  to  its  defined  benefit  pension  plan  during  2006.  Keystone
anticipates it will contribute approximately $4.3 million to its post retirement
benefit plans during 2006.

     The following benefit payments,  which reflect expected future service,  as
appropriate, are expected to be paid during the years ending December 31,:

<TABLE>
<CAPTION>
                                                                             Pension                   Other
                                                                             Benefits                Benefits
                                                                             --------                --------
                                                                                      (In thousands)

<C>                                                                           <C>                      <C>
2006                                                                          $ 27,408                 $ 4,256
2007                                                                          $ 27,308                 $ 4,191
2008                                                                          $ 27,343                 $ 4,419
2009                                                                          $ 27,221                 $ 2,612
2010                                                                          $ 27,116                 $ 2,567
2011 - 2015                                                                   $137,482                 $12,270
</TABLE>

     The Company also  maintains  several  defined  contribution  pension plans.
Expense  related to these plans was $1.5  million in 2003,  $1.3 million in 2004
and $2.3 million in 2005.

Note 11 - Other accrued liabilities

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                       -------------------------
                                                                                       2004                 2005
                                                                                       ----                 ----
                                                                                           (In thousands)
 Current:
<S>                                                                                     <C>              <C>
   Employee benefits                                                                    $12,019          $12,085
   Self insurance                                                                         1,064            4,455
   Reorganization costs                                                                   2,883            3,057
   Environmental                                                                              -            3,000
   Pre-petition unsecured creditor settlement                                                 -            1,061
   Income taxes                                                                           1,405              939
   Legal and professional                                                                   358              247
   Other                                                                                  1,235            2,780
                                                                                        -------         --------

                                                                                        $18,964          $27,624
                                                                                        =======         ========
 Noncurrent:
   Environmental                                                                           $  -         $  3,921
   Workers compensation payments                                                            988            1,595
   Other                                                                                   -                  61
                                                                                        -------         --------

                                                                                        $   988          $ 5,577
                                                                                        =======         ========
</TABLE>

     In connection with Keystone's emergence from Chapter 11 on August 31, 2005,
the Company's pre-petition unsecured creditors with allowed claims will receive,
among other  things,  a $5.2  million  cash  payment.  As of December  31, 2005,
approximately  80% of this  amount  had  been  distributed  to the  pre-petition
unsecured creditors.  As such, Keystone has recorded a $1.1 million liability to
the pre-petition unsecured creditors at December 31, 2005.

     Keystone generally  undertakes  planned major maintenance  activities on an
annual  basis,  usually  in  the  fourth  quarter  of  each  year.  These  major
maintenance  activities are conducted  during a shut-down of the Company's steel
and wire rod mills.  Repair and  maintenance  costs incurred in connection  with
these major  maintenance  activities  are accrued in advance on a  straight-line
basis throughout the year and are included in cost of goods sold.

     See Note 15.

Note 12 - Liabilities subject to compromise

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                          --------------------------
                                                                           2004              2005
                                                                          -------           --------

<S>                                                                       <C>                <C>
Accrued OPEB cost                                                         $123,425           $  -
Environmental                                                               19,432             8,491
6% Notes                                                                    16,031              -
Accrued preferred stock dividends                                           11,846              -
Accounts payable                                                            10,776               850
Deferred vendor payments                                                    10,518              -
9 5/8% Notes                                                                 6,150              -
Self insurance                                                               4,549              -
Accounts payable to affiliates                                               3,027              -
Workers compensation                                                         1,847              -
Accrued and deferred interest                                                1,237              -
Legal and professional                                                         726               244
Disposition of former facilities                                               665               684
Other                                                                        2,117               207
                                                                          --------           -------

                                                                          $212,346           $10,476
                                                                          ========           =======
</TABLE>

     In connection with Keystone's emergence from Chapter 11 on August 31, 2005,
pre-petition  unsecured  creditors  (other than  Contran)  with  allowed  claims
against Keystone received,  in the aggregate,  on a pro rata basis, $5.2 million
in cash, a $4.8 million secured  promissory note and 49% of the new common stock
of  reorganized  Keystone  (valued at $10.5  million).  Also in connection  with
Keystone's  emergence from Chapter 11,  Contran  received an aggregate of 51% of
the new  common  stock of  reorganized  Keystone  (valued at $10.9  million)  in
exchange  for  its  $5.0  million  of  DIP  financing  and  Contran's  pre-  and
post-petition  claims  against  Keystone.  The new common  stock of  reorganized
Keystone represents an aggregate of 10.0 million shares. Such shares were valued
at  $2.14  per  share by the  Company  with the  assistance  of its  independent
financial advisors.  In addition,  pre-petition  unsecured creditors of Keystone
with balances due to them of less than $1,900, were paid in full.

     During the fourth quarter of 2004,  Keystone  received a $5.2 million Court
ordered  settlement  from a former vendor  relative to the Company's  Chapter 11
filing and consigned inventory and related balances due to that vendor. The $5.2
million is shown as gain from legal  settlement on the Company's  2004 statement
of operations.  In connection with negotiations with its pre-petition  unsecured
creditors  relative to Keystone's  emergence from Chapter 11, the Company agreed
to deposit the $5.2 million into a restricted  cash account in order to fund the
$5.2 milion cash payment to be paid to the pre-petition unsecured creditors.  As
of December  31, 2005,  approximately  80% of the funds in this account had been
released to the unsecured creditors. The remaining 20% will be released when the
final cash payment is made to the  pre-petition  unsecured  creditors.  As such,
Keystone  has recorded a $1.0 million  liability to the  pre-petition  unsecured
creditors  which  is  included  in  other  current  accrued  liabilities  on the
Company's December 31, 2005 balance sheet. See Note 8. In addition,  the Company
has escrowed these funds in a separate  demand account and, as such,  Keystone's
balance sheet includes a restricted investment in current assets of $5.4 million
and $1.0 million at December 31, 2004 and 2005, respectively,  that will be used
to fund the payment to the pre-petition unsecured creditors.

     During  the first  quarter  of 2002,  two of the  Company's  major  vendors
representing  approximately  $16.1 million of trade payables,  agreed to be paid
over a five-year period ending in March 2007 with no interest.  The repayment of
a portion of such deferred  vendor  payments could be accelerated if the Company
achieves  specified  levels of  future  earnings.  As a result of the  Company's
Chapter 11  filings,  payments  under  these  agreements  were  discontinued  on
February 26, 2004. The balances due under these agreements at December 31, 2004,
are shown in liabilities subject to compromise at December 31, 2004. See Note 2.

     Accrued OPEB liabilities, certain accrued environmental liabilities related
to properties  owned by Keystone and other  liabilities  were reinstated in full
against  reorganized  Keystone in connection  with the Company's  emergence from
Chapter  11.  The  Company  continues  to  negotiate  claims  related to certain
pre-petition  environmental  liabilities  related to  non-owned  sites and other
liabilities at December 31, 2005. See Notes 10 and 11.

     The  remaining  liabilities  subject to  compromise  at December  31, 2005,
relate to Sherman Wire Company.

     As a result of the  foregoing,  the Company  recorded a $32.5  million gain
from  cancellation of debt during the third quarter of 2005. The following table
summarizes the significant components of compromised liabilities and the related
recorded gain from cancellation of debt.

<TABLE>
<CAPTION>
                                                                   Unsecured
                                                                     claims
                                                                   other than        Contran
                                                                    Contran          claims          Total
                                                                   ----------      ----------       ---------
                                                                                (In thousands)

Liabilities compromised:
<S>                                                                   <C>              <C>            <C>
        6% Notes                                                      $16,031          $  -           $16,031
        Accrued Series A Preferred Stock
         dividends                                                      1,098           10,748         11,846
        Accounts payable - pre-petition                                 7,576            3,279         10,855
        Accounts payable - post-petition                                    -            1,179          1,179
        Deferred vendor payments                                       10,518             -            10,518
        9 5/8% Notes                                                    6,150             -             6,150
        DIP loan                                                            -            5,000          5,000
        Accrued interest                                                1,236             -             1,236
        Accrued environmental                                             868               -             868
        Other, net                                                        227               -             227
                                                                      -------         --------        -------
           Total liabilities compromised                               43,704           20,206         63,910
                                                                      -------         --------        -------

Consideration provided:
        Cash                                                            5,200               -           5,200
        Secured Note                                                    4,800               -           4,800
        Common stock                                                   10,486           10,914         21,400
                                                                      -------         --------        -------
           Total consideration provided                                20,486           10,914         31,400
                                                                      -------         --------        -------

Gain on cancellation of debt                                          $23,218          $ 9,292        $32,510
                                                                      =======          =======        =======
</TABLE>

Note 13 - Related party transactions

     The Company may be deemed to be controlled  by Harold C. Simmons.  See Note
1.  Corporations  that may be deemed to be controlled by or affiliated  with Mr.
Simmons sometimes engage in (a) intercorporate  transactions such as guarantees,
management and expense  sharing  arrangements,  shared fee  arrangements,  joint
ventures,  partnerships,  loans, options, advances of funds on open account, and
sales,  leases and  exchanges  of assets,  including  securities  issued by both
related  and  unrelated  parties,  and (b)  common  investment  and  acquisition
strategies,   business   combinations,    reorganizations,    recapitalizations,
securities  repurchases,  and  purchases and sales (and other  acquisitions  and
dispositions)  of  subsidiaries,   divisions  or  other  business  units,  which
transactions  have involved both related and unrelated parties and have included
transactions  which  resulted  in the  acquisition  by one  related  party  of a
publicly-held  minority equity  interest in another  related party.  The Company
continuously considers,  reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business,  tax and other  objectives then relevant,  it is possible that the
Company might be a party to one or more such transactions in the future.

     Under the terms of an  intercorporate  services  agreement  ("ISA") entered
into between the Company and Contran,  employees of Contran will provide certain
management,  tax planning,  financial and administrative services to the Company
on a fee basis. Such charges are based upon estimates of the time devoted by the
employees of Contran to the affairs of the Company, and the compensation of such
persons.  Because of the large number of companies  affiliated with Contran, the
Company  believes it benefits from cost savings and economies of scale gained by
not having certain management, financial and administrative staffs duplicated at
each entity,  thus allowing certain  individuals to provide services to multiple
companies but only be compensated by one entity. The ISA fees charged by Contran
to the Company  aggregated  approximately  $1,005,000  in each of 2003 and 2004.
During  2005,  the  ISA  fees  charged  by  Contran  to the  Company  aggregated
approximately  $1.0  million.  At December  31,  2004,  the Company owed Contran
approximately $3.8 million,  primarily for ISA fees. Such amount was included in
payables to affiliates  ($821,000) and liabilities  subject to compromise  ($3.0
million) on the  Company's  December 31, 2004,  balance  sheet.  See Note 12. In
addition,  Keystone purchased certain aircraft services from Valhi in the amount
of $52,000 in 2003 and $17,000 in 2004.

     Tall Pines Insurance Company ("Tall Pines") and EWI RE, Inc. provide for or
broker certain  insurance  policies for Contran and certain of its  subsidiaries
and affiliates,  including the Company. Tall Pines is a wholly-owned  subsidiary
of  Valhi,  Inc.,  a  majority-owned   subsidiary  of  Contran,  and  EWI  is  a
wholly-owned subsidiary of NL Industries,  Inc., a majority-owned  subsidiary of
Valhi. Consistent with insurance industry practices,  Tall Pines and EWI receive
commissions from the insurance and reinsurance  underwriters  and/or assess fees
for the policies  they provide or broker.  The  aggregate  premiums paid to Tall
Pines (including amounts paid to Valmont Insurance  Company,  another subsidiary
of Valhi that was merged into Tall Pines in 2004),  and EWI were $2.2 million in
2003, $2.1 million in 2004 and $2.9 million in 2005.  These amounts  principally
included payments for insurance and reinsurance  premiums paid to third parties,
but also included  commissions  paid to Tall Pines and EWI. Tall Pines purchases
reinsurance for substantially all of the risks it underwrites.  In the Company's
opinion,  the amounts that the Company paid for these insurance policies and the
allocation among the Company and its affiliates of relative  insurance  premiums
are reasonable and similar to those they could have obtained  through  unrelated
insurance companies and/or brokers. The Company expects these relationships with
Tall Pines and EWI will continue in 2006.

     Contran and  certain of its  subsidiaries  and  affiliates,  including  the
Company, purchase certain of their insurance policies as a group, with the costs
of  the  jointly-owned   policies  being  apportioned  among  the  participating
companies.  With  respect to  certain  of such  policies,  it is  possible  that
unusually  large losses  incurred by one or more insureds  during a given policy
period could leave the other  participating  companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and affiliates,  including the Company, have entered
into a loss sharing  agreement under which any uninsured loss is shared by those
entities  who have  submitted  claims  under the  relevant  policy.  The Company
believes  the  benefits in the form of reduced  premiums  and  broader  coverage
associated  with  the  group  coverage  for  such  policies  justifies  the risk
associated with the potential for any uninsured loss.

     Dallas Compressor  Company, a subsidiary of Contran,  sells compressors and
related  services to Keystone.  During 2003,  2004 and 2005  Keystone  purchased
products and services  from Dallas  Compressor  Company in the amount of $1,000,
$20,000 and $33,000, respectively.

     EWPFLLC  had agreed to loan the  Company up to an  aggregate  of $6 million
through  February 29, 2004.  Borrowings would have accrued interest at the prime
rate  plus 3%,  and  would  have been  collateralized  by the  stock of EWP.  In
addition,  the Company paid a commitment fee of .375% on the unutilized  portion
of the  facility.  The  terms of this  loan  were  approved  by the  independent
directors  of the  Company.  The loan  matured in February  2004.  During  2003,
Keystone paid EWPFLLC unused line fees of $23,000,  related to this facility. In
addition,  during  2004,  Keystone  paid  EWPFLLC  a  $100,000  facility  fee in
connection  with the EWP DIP Facility and during 2004 and 2005, the Company also
paid EWPFLLC  $305,000 and  $362,000,  respectively,  in interest on the EWP DIP
facility. See Note 2.

     During 2004,  Keystone  entered into a scrap  supply  agreement  with Alter
Trading  Corporation  ("ATC").  The Company  sources the majority of its ferrous
scrap  supply from ATC under this  agreement.  ATC owns the 50%  interest in ARC
that is not  owned  by  Keystone.  During  2004  and  2005,  Keystone  purchased
approximately $99.9 million and $132.4 million of ferrous scrap from ATC.

Note 14 - Quarterly financial data (unaudited)

<TABLE>
<CAPTION>
                                                        March 31,        June 30,      September 30,    December 31,
                                                        ---------       ----------     -------------    ------------
                                                                   (In thousands, except per share data)

 Year ended December 31, 2005:
<S>                                                      <C>               <C>            <C>             <C>
   Net sales                                             $89,537           $88,992        $ 84,770        $104,246
   Gross profit                                            5,055             1,958           8,916          14,075
   Reorganization costs                                    3,294             2,687           4,342             (15)
   Gain on cancellation of debt                                -                 -          32,349             161

   Net income (loss)                                     $(1,276)          $(3,659)       $ 34,104        $ 10,063
                                                         =======           =======        ========        ========

   Basic net income (loss)
    per share available for common shares                $  (.13)         $   (.36)      $   3.61          $  1.01
                                                         =======           =======        ========        ========

   Diluted net income (loss) per share
    available for common shares                          $  (.13)        $    (.36)     $    1.64          $  1.01
                                                         =======           =======        ========        ========

 Year ended December 31, 2004:
   Net sales                                             $67,177          $101,827        $112,505         $82,826
   Gross profit (loss)                                    (1,433)           18,709          19,965           4,862
   Reorganization costs                                    1,927             3,092           3,257           2,882
   Net gain on legal settlement                                -                 -               -           5,284

   Net (income) loss                                     $(7,638)         $ 10,993        $ 10,887         $ 1,818
                                                         =======           =======        ========        ========

   Basic net income (loss)
    per share available for common shares                $  (.88)         $   1.09       $   1.08          $   .18
                                                         =======           =======        ========        ========

   Diluted net income (loss) per share
    available for common shares                          $  (.88)         $    .39       $    .39          $   .06
                                                         =======           =======        ========        ========
</TABLE>

     During the fourth  quarter of 2004,  based on an actuarial  valuation,  the
Company  recorded a decrease in 2004 OPEB expense and liability of approximately
$2.2 million  resulting in OPEB expense for the year 2004 of $20.9 million.  The
Company had previously  estimated OPEB expense for 2004 would  approximate $23.1
million.

     During  the  fourth  quarter  of 2004,  Keystone  received  a $5.2  million
settlement from a former vendor relative to the Company's  Chapter 11 filing and
consigned inventory and related balances due to that vendor. The $5.2 million is
shown  as  gain  from  legal  settlement  on the  Company's  2004  statement  of
operations.  In connection with  negotiations  with its  pre-petition  unsecured
creditors  relative to Keystone's  emergence from Chapter 11, the Company agreed
to deposit the $5.2 million into a restricted cash account. Approximately 80% of
the funds in this account were released to the pre-petition  unsecured creditors
upon  Keystone's  emergence  from Chapter 11. The remaining 20% will be released
when the final cash payment is made to the pre-petition unsecured creditors. The
balance in this account is shown as a restricted investment in current assets on
the Company's December 31, 2004 and 2005 balance sheets.

     See Notes 2, 4, 8 and 10.

Note 15 - Environmental matters

     As a result of the  Chapter 11 filings on  February  26,  2004,  litigation
relating to prepetition claims against the filing companies,  including Keystone
and Sherman Wire Company ("Sherman"), was stayed. Upon emergence from Chapter 11
on August 31, 2005, the pre-petition  litigation claims against Sherman continue
to be stayed  while  these  claims are  adjudicated.  Environmental  liabilities
related to non-owned  Keystone sites  ($868,000)  were  discharged in connection
with the Chapter 11 proceedings.  Recorded environmental  liabilities related to
non-owned  Sherman sites ($7.7  million) and an owned Sherman site ($.8 million)
continue to be negotiated  and  adjudicated  subsequent to Keystone's  emergence
from Chapter 11. See Note 12. In general,  as a result of the Company's  Chapter
11  reorganization  and discharge when it exited  bankruptcy in August 2005, any
future  government or third-party  private actions against Keystone arising from
its alleged  pre-petition  responsibility  for  hazardous  contamination  at any
environmental  sites  that are not  owned by  Keystone  have  been  barred.  The
Company's  Chapter 11  discharge  does not affect the  Company's  liability  for
hazardous  contamination  of  property  that  was  owned by  Keystone  as of the
petition date and any associated  clean up costs remains the  responsibility  of
the Company.

     Keystone  has been  named as a  defendant,  potentially  responsible  party
("PRP"),  or  both,  pursuant  to  the  Comprehensive   Environmental  Response,
Compensation and Liability Act ("CERCLA") or similar state laws in approximately
19 governmental  and private  actions  associated  with  environmental  matters,
including  waste disposal sites and  facilities  currently or previously  owned,
operated  or used  by  Keystone,  certain  of  which  are on the  United  States
Environmental Protection Agency's (the "U.S. EPA") Superfund National Priorities
List or similar state lists.  These proceedings seek cleanup costs,  damages for
personal  injury or  property  damage  and/or  damages  for  injury  to  natural
resources.  Certain of these proceedings involve claims for substantial amounts.
Although  Keystone may be jointly and severally  liable for such costs,  in most
cases,  it is only one of a number of PRPs who may also be jointly and severally
liable.

     Although Keystone believes its  comprehensive  general liability  insurance
policies  provide  indemnification  for certain  costs the  Company  incurs with
respect  to its  environmental  remediation  obligations,  it has only  recorded
receivables  for the  estimated  insurance  recoveries  at three of those sites.
Accrued receivables related to these matters were $323,000 at December 31, 2004.

     During  2003 and 2005,  the  Company  received  approximately  $32,000  and
$382,000,  respectively,  from certain of its insurers in exchange for releasing
such  insurers  from  coverage  for  certain  years  of  environmental   related
liabilities.  Such amounts are included in Keystone's  self insurance  accruals.
Keystone did not receive any such insurance recoveries during 2004.

     On a  quarterly  basis,  Keystone  evaluates  the  potential  range  of its
liability  at sites where it has been named as a PRP or  defendant  by analyzing
and  estimating the range of reasonably  possible costs to Keystone.  Such costs
include,   among  other  things,   expenditures  for  remedial   investigations,
monitoring,  managing,  studies,  certain  legal  fees,  clean-up,  removal  and
remediation.  Keystone believes it has provided adequate accruals ($15.4 million
at December 31, 2005, $8.5 million of which is reflected in liabilities  subject
to  compromise  on the  Company's  December  31, 2005  balance  sheet) for these
matters at 10 sites for which  Keystone  believes its  liability is probable and
reasonably  estimable,  but Keystone's  ultimate  liability may be affected by a
number of factors,  including  the  imposition  of more  stringent  standards or
requirements  under  environmental  laws or  regulations,  new  developments  or
changes in remedial  alternatives  and costs, the allocation of such costs among
PRPs, the solvency of other PRPs or a determination that Keystone is potentially
responsible for the release of hazardous substances at other sites, any of which
could  result in  expenditures  in  excess of  amounts  currently  estimated  by
Keystone to be required  for such  matters.  With  respect to other PRPs and the
fact  that the  Company  may be  jointly  and  severally  liable  for the  total
remediation  cost at certain sites,  the Company could  ultimately be liable for
amounts in excess of its accruals due to, among other  things,  reallocation  of
costs among PRPs or the insolvency of one or more PRPs. In addition,  the actual
timeframe for payments by Keystone for these matters may be substantially in the
future.

     Keystone  believes it is not  possible  to estimate  the range of costs for
five sites. For these sites, generally the investigation is in the early stages,
and it is either  unknown  as to  whether or not the  Company  actually  had any
association  with the site, or if the Company had association with the site, the
nature of its responsibility,  if any, for the contamination at the site and the
extent of  contamination.  The timing on when information would become available
to the  Company to allow the  Company to estimate a range of loss is unknown and
dependent on events  outside the control of the Company,  such as when the party
alleging liability provides information to the Company.

     The upper end of the range of reasonably possible costs to Keystone for the
14 sites for which it is  possible  to  estimate  costs is  approximately  $16.3
million.  Keystone's  estimates of such  liabilities have not been discounted to
present  value,  and other than  certain  previously-reported  settlements  with
respect to certain of Keystone's  former  insurance  carriers,  Keystone has not
recognized  any material  insurance  recoveries.  No assurance can be given that
actual costs will not exceed  accrued  amounts or the upper end of the range for
sites for which  estimates  have been made,  and no assurance  can be given that
costs  will not be  incurred  with  respect  to the  eight  sites as to which no
estimate  of  liability   can   presently   be  made   because  the   respective
investigations  are in early stages.  The extent of CERCLA  liability  cannot be
determined  until the  Remedial  Investigation/Feasibility  Study  ("RI/FS")  is
complete,  the U.S.  EPA  issues a Record  of  Decision  ("ROD")  and  costs are
allocated  among PRPs.  The extent of liability  under  analogous  state cleanup
statutes and for common law equivalents is subject to similar uncertainties.

     The exact time frame over which the Company makes  payments with respect to
its accrued  environmental  costs is unknown and is dependent upon,  among other
things,  the timing of the actual  remediation  process which in part depends on
factors  outside the control of the  Company.  At each balance  sheet date,  the
Company makes an estimate of the amount of its accrued environmental costs which
will be paid out over the subsequent 12 months,  and the Company classifies such
amount as a current liability.  The remainder of the accrued environmental costs
are classified as a noncurrent liability.

     More  detailed  descriptions  of  certain  legal  proceedings  relating  to
environmental  matters  are set  forth  below.  A  summary  of  activity  in the
Company's  environmental accruals for the three years ended December 31, 2005 is
as follows:

<TABLE>
<CAPTION>
                                                                                    Years ended December 31,
                                                                                -----------------------------------
                                                                                2003          2004            2005
                                                                                ----          ----           ------
                                                                                         (In thousands)

<S>                                                                             <C>           <C>           <C>
 Balance at beginning of period                                                 $20,209       $19,766       $19,432
 Expense                                                                           -                -             -
 Payments                                                                          (475)         (334)       (3,534)
 Cancellation of debt                                                                 -             -          (868)
 Reclassification                                                                    32          -              382
                                                                                -------       -------       -------

 Balance at end of period                                                       $19,766       $19,432       $15,412
                                                                                =======       =======       =======

 Amounts recognized in the balance sheet:
   Other accrued liabilities - current                                          $13,044       $  -          $ 3,000
   Other accrued liabilities - noncurrent                                         6,722          -            3,921
   Liabilities subject to compromise                                               -           19,432         8,491
                                                                                -------       -------       -------

                                                                                $19,766       $19,432       $15,412
                                                                                =======       =======       =======
</TABLE>

     Approximately   $8.5  million  of  the  Company's  $15.4  million  recorded
environmental accrual at December 31, 2004 is included in liabilities subject to
compromise on the Company's  balance  sheet.  All of the recorded  environmental
liability  included  in  liabilities  subject  to  compromise  on the  Company's
December 31, 2005 balance sheet relates to sites involving Sherman or one of its
predecessors.  Sherman's environmental liabilities continue to be negotiated and
adjudicated  subsequent  to Keystone's  emergence  from Chapter 11 on August 31,
2005. See Note 12.

Sites no longer subject to compromise at December 31, 2005.

     The Company is currently involved in the closure of inactive waste disposal
units at its Peoria facility pursuant to a closure plan approved by the Illinois
Environmental Protection Agency ("IEPA") in September 1992. The original closure
plan  provides  for the  in-place  treatment of seven  hazardous  waste  surface
impoundments  and two waste  piles to be  disposed  of as  special  wastes.  The
Company recorded an estimated  liability for remediation of the impoundments and
waste piles  based on a  six-phase  remediation  plan.  The Company  adjusts the
recorded  liability  for each Phase as actual  remediation  costs become  known.
During 1995,  the Company began  remediation  of Phases II and III and completed
these Phases,  as well as Phase IV during 1996. During 1998 and 1999 the Company
did not have any significant  remediation  efforts  relative to Phases V and VI.
During 2000, Keystone began preliminary efforts relative to Phase V. Pursuant to
agreements with the IEPA and Illinois Attorney General's (the "IAG") office, the
Company is depositing  $75,000 per quarter into a trust fund. Prior to 2005, the
Company was required to continue these quarterly deposits and could not withdraw
funds  from the  trust  fund  until  the fund  balance  exceeded  the sum of the
estimated  remaining  remediation  costs  plus $2  million.  During  2005,  this
agreement  was  modified  such  that  the IEPA and IAG now  permit  Keystone  to
withdraw  funds  from the trust  fund as the site is  remediated.  However,  the
requirement  for the  Company to make  quarterly  deposits  of $75,000 in to the
trust fund remains until such time as the site is completely remediated.  During
2005,  Keystone paid  approximately  $3.6 million in remediation  costs for this
site and through December 31, 2005, had received  approximately  $1.6 million in
funds from the trust fund.  At December 31, 2004 and 2005,  the trust fund had a
balance of $5.7  million and $4.5  million,  respectively,  which  amounts  were
included in other noncurrent assets.

     In  February  2000,  Keystone  received  a notice  from the  United  States
Environmental  Protection  Agency ("U.S.  EPA") giving formal notice of the U.S.
EPA's intent to issue a unilateral  administrative order to Keystone pursuant to
section  3008(h) of the Resource  Conservation  and Recovery Act  ("RCRA").  The
draft order enclosed with this notice would require Keystone to: (1) investigate
the nature and extent of hazardous  constituents  present at and  released  from
five  alleged  solid  waste  management  units  at  the  Peoria  facility;   (2)
investigate  hazardous  constituent  releases  from "any  other  past or present
locations at the Peoria facility where past waste treatment, storage or disposal
may pose an unacceptable risk to human health and the environment"; (3) complete
by  June  30,  2001  an  "environmental  indicators  report"  demonstrating  the
containment of hazardous  substances that could pose a risk to "human receptors"
and further  demonstrating  that  Keystone  "has  stabilized  the  migration  of
contaminated  groundwater  at or from the  facility;"  (4) submit by January 30,
2002 proposed "final corrective  measures  necessary to protect human health and
the environment  from all current and future  unacceptable  risks of releases of
hazardous waste or hazardous  constituents at or from the Peoria  facility;  and
(5)  complete  by June 30,  2001  the  closure  of the  sites  discussed  in the
preceding  paragraph now  undergoing  RCRA closure under the  supervision of the
IEPA. Keystone has complied with deadlines in the draft order. During the fourth
quarter  of 2000,  Keystone  entered  into a  modified  Administrative  Order on
Consent,  which may require the Company to conduct cleanup activities at certain
solid waste management units at its Peoria facility  depending on the results of
soil and  groundwater  sampling and risk  assessment to be conducted by Keystone
during future periods pursuant to the order.

     In March 2000,  the IAG filed and served a  seven-count  complaint  against
Keystone for alleged  violations of the Illinois  Environmental  Protection Act,
415 ILCS 5/31, and regulations  implementing RCRA at Keystone's Peoria facility.
The complaint  alleges Keystone violated RCRA in failing to prevent spills of an
alleged  hazardous waste on four separate  occasions during the period from June
1995 through  January  1999.  The complaint  also alleges the Company  illegally
"stored",  "disposed of" and manifested the same  allegedly  hazardous  waste on
some or all of  those  occasions.  In  addition,  the  complaint  alleges  these
hazardous  waste spills  resulted in  groundwater  pollution in violation of the
Illinois  Environmental  Protection Act. The complaint  further alleges Keystone
improperly  disposed  of  hazardous  waste on two  occasions  at a landfill  not
permitted to receive  such wastes.  The  complaint  seeks the maximum  statutory
penalties  allowed which ranges up to $50,000 for each  violation and additional
amounts up to $25,000  for each day of  violation.  Keystone  has  answered  the
complaint and  proceedings  in the case have been stayed  pending the outcome of
settlement negotiations between Keystone and the IAG's office.

     In June 2000, the IAG filed a Complaint For Injunction And Civil  Penalties
against  Keystone.  The complaint alleges the Company's Peoria facility violated
its National Pollutant Discharge  Elimination System ("NPDES") permit limits for
ammonia and zinc discharges from the facility's  wastewater  treatment  facility
into the Illinois River. The complaint alleges specific violations of the 30-day
average ammonia limit in the NPDES permit for three months in 1996, 11 months in
1997, 12 months in 1998, 11 months in 1999 and the first two months of 2000. The
complaint  further alleges two violations of the daily maximum limit for zinc in
October and December of 1999. In February 2004, the Company reached a settlement
agreement  with the IEPA which  provided for Keystone to make a $75,000  penalty
payment to the IEPA, and to implement  certain  corrective  actions to prevent a
recurrence of the NPDES violations.  The Company did not pay the $75,000 penalty
because the enforcement  action was stayed by Keystone's  Chapter 11 filing. The
Company  reached a  settlement  agreement  with the IEPA in 2005 to satisfy  the
penalty obligation through a RCRA trust fund controlled by the IEPA.

     In December 2005, the Company  received a Notice of Violation from the U.S.
EPA regarding air permit issues at its Peoria,  Illinois facility.  The U.S. EPA
alleges  Keystone  failed to perform  stack testing and conduct a review of best
available  emission control  technology in connection with the implementation of
plant construction modifications made pursuant to a 2001 air permit issued under
the Clean Air Act and the Illinois Environmental  Protection Act. During January
2006, the Company and the U.S. EPA reached a preliminary agreement on a plan for
addressing  the  U.S.  EPA's  concerns  without  referring  the  matter  for any
enforcement action or resulting fines.

Sites still subject to compromise at December 31, 2005.

     Prior to its acquisition by Keystone,  DeSoto, Inc. ("DeSoto") was notified
by U.S. EPA that it is one of approximately  50 PRPs at the Chemical  Recyclers,
Inc. site in Wylie,  Texas. In January 1999, DeSoto changed its name to Sherman.
Under a consent  order with the U.S.  EPA, the PRP group has performed a removal
action  and  an  investigation  of  soil  and  groundwater  contamination.  Such
investigation  revealed certain environmental  contamination.  A majority of the
PRPs and  Sherman  entered  into a  Participation  Agreement  dated May 26, 1989
pursuant to which the parties agreed to share in the clean up costs of the site.
The site was remediated by the participating  PRPs within the scope of the EPA's
Statement  of  Work  set  forth  in the  administrative  order  as of  Sherman's
bankruptcy  petition date.  The  participation  agreement  provides that Sherman
could  withdraw  from the  agreement  and have no  further  liability  under the
agreement  for clean-up  costs if it gave  written  notice to the other PRPs who
were a party  to the  agreement  that it was  withdrawing  from  the  agreement.
Sherman was current on its  obligations  under the  agreement as of its petition
date and gave formal notice of its  withdrawal on February 18, 2005. On February
28, 2005,  the EPA  indicated  to the other PRPs that it was  possibly  going to
require  additional  remediation  at the site.  The other PRPs did timely file a
claim against  Sherman in its bankruptcy for any future  liability it might have
under the  participation  agreement,  but on September 27, 2005 the Court denied
the  claim  pursuant  to  Section  502(e)(1)(B)  of  the  Bankruptcy  Code  as a
contingent  contribution  claim, which are not allowable claims. The EPA did not
file a claim against Sherman in connection with this site at all. The other PRPs
have  appealed the Court's  September  27, 2005 Order denying their claim to the
U.S.  District  Court of  Wisconsin.  Sherman  and the other PRPs have filed the
necessary  appellate  motion  and reply  brief and the case has not been set for
oral  argument  as of March 28,  2006.  On March 3, 2006,  the U.S.  EPA ordered
further remedial  action,  the exact extent of which is not currently known. Any
further liability of Sherman Wire related to this site will be discharged in the
Chapter 11 proceedings.

     In 1984, U.S. EPA filed suit against DeSoto by amending a complaint against
Midwest  Solvent  Recovery,  Inc. et al ("Midco").  DeSoto was a defendant based
upon alleged  shipments to an industrial  waste  recycling  storage and disposal
operation site located in Gary,  Indiana.  The amended  complaint  sought relief
under CERCLA to force the  defendants to clean up the site,  pay  non-compliance
penalties and reimburse the  government  for past clean up costs.  In June 1992,
DeSoto  settled  its  portion  of the case by  entering  into a partial  consent
decree,  and all but one of the eight remaining primary  defendants and 93 third
party  defendants  entered  into a main consent  decree.  Under the terms of the
partial consent decree,  DeSoto agreed to pay its pro rata share (13.47%) of all
costs under the main consent decree.  In addition to certain amounts included in
the trust fund  discussed  below,  Sherman also has certain  funds  available in
other trust funds due it under the partial consent decree.  These credits can be
used by Sherman (with certain  limitations) to fund its future liabilities under
the partial consent decree. Pursuant to a settlement agreement,  the other Midco
PRPs were given a $1.1 million  allowed claim in the Chapter 11 proceedings  and
DeSoto was given a site  release.  Any further  liability of Sherman  related to
this site will be discharged in the Chapter 11 proceedings.

     In 1995,  DeSoto was notified by the Texas  Natural  Resource  Conservation
Commission  ("TNRCC") that there were certain  deficiencies  in prior reports to
TNRCC relative to one of its  non-operating  facilities  located in Gainesville,
Texas.  During 1999,  Sherman entered into TNRCC's  Voluntary  Cleanup  Program.
Remediation  costs are  presently  estimated  to be between  $1.2 million and $2
million.  Investigation  activities are on-going  including  additional soil and
groundwater sampling.

     In December 1991,  DeSoto and  approximately 600 other PRPs were named in a
complaint alleging DeSoto and the PRPs generated wastes that were disposed of at
a Pennsauken,  New Jersey  municipal  landfill.  The plaintiffs in the complaint
were ordered by the court to show in what manner the  defendants  were connected
to the site. The  plaintiffs  provided an alleged nexus  indicating  garbage and
construction materials from DeSoto's former Pennsauken facility were disposed of
at the site and such  waste  allegedly  contained  hazardous  material  to which
DeSoto objected.  The claim was dismissed  without  prejudice in August 1993. In
1996,  DeSoto  received an amended  complaint  containing the same  allegations.
Pursuant to a settlement  agreement,  the Pollution Control Finance Authority of
Cambden County was given a $750,000  allowed claim in the Chapter 11 proceedings
and DeSoto was given a site  release.  The other PRP's claims were  dismissed in
the Chapter 11  proceedings.  Any further  liability of Sherman  related to this
site will be discharged in the Chapter 11 proceedings.

     Sherman has received  notification  from the TNRCC stating that DeSoto is a
PRP  at  the  Material  Recovery   Enterprises  Site  near  Ovalo,  Texas,  with
approximately  3% of the total  liability.  The matter has been  tendered to the
Valspar  Corporation  ("Valspar")  pursuant to a 1990 agreement  whereby Valspar
purchased  certain assets of DeSoto.  Valspar has been handling the matter under
reservation  of rights.  At the  request of Valspar,  Sherman  Wire has signed a
participation  agreement which would require Sherman Wire to pay no less than 3%
of the remediation costs. Valspar continues to pay for legal fees in this matter
and has  reimbursed  Sherman Wire for all  assessments.  The TNRCC was granted a
$15,000 claim in the Chapter 11  proceedings.  Any further  liability of Sherman
related to this site will be discharged in the Chapter 11 proceedings.

     In November 2003, Sherman received a General Notice of Potential  Liability
from the U.S. EPA advising them that the U.S. EPA believe  Sherman Wire is a PRP
at the Lake Calumet Cluster Site in Chicago,  Illinois. The U.S. EPA advises the
200  acre  site  consists  of areas  of both  ground  water  and  surface  water
contamination  located in a remnant  wetland area. The U.S. EPA's effort at this
site is part of a larger effort undertaken along with the State of Illinois, the
City of Chicago,  the U.S. Army Corps of Engineers,  and the U.S.  Department of
Energy to cleanup  contamination in the Lake Calumet basin. The U.S. EPA alleges
the original wetland area has been partially filed by various waste handling and
disposal  activities  which  started  as early as the  1940's.  Incineration  of
hazardous waste including paints,  thinners,  varnishes,  chlorinated  solvents,
styrene,  ink,  adhesives,  and antifreeze  occurred on the site from 1977 until
1982.  In addition,  several  landfills  operated in and near the site from 1967
into the 1990s.  Approximately  1,600 ruptured drums have been discovered buried
on the site. The U.S. EPA has undertaken or overseen various response actions at
the site to mitigate remaining above ground  contamination in the site vicinity.
The U.S. EPA advises these  activities have led to the formation of an extensive
ground water contamination plume and contamination in the remaining wetland. The
origin of the contamination cannot be associated with any single prior activity.
The ground  water is in direct  contact  with the wetland  waters,  and the same
contaminants of concern, certain of which are known to bioaccumulate,  and their
concentrations are above human health and environmental  standards.  Sherman did
not  respond to the  November  2003  Notice,  however,  Sherman  notified  their
insurance  carriers and asked them to indemnify and defend  Sherman with respect
to the Notice. At present,  no carrier has agreed to either indemnify or defend.
In addition,  in November,  2003,  Sherman requested the U.S. EPA to provide any
documentation  that allegedly  connects Sherman to the site.  Subsequently,  the
U.S. EPA produced  documents  that may show that Sherman wastes were sent to the
site.  There  were no  claims  related  to this  site  filed in the  Chapter  11
proceedings.  The Company's emergence from Chapter 11 proceedings in August 2005
precludes subsequent claims against Sherman related to this site.

     In addition to the sites discussed above, Sherman was allegedly involved at
various  other  sites  and in  related  toxic  tort  lawsuits  which it does not
currently  expect to incur  significant  liability.  Prepetition  claims against
Sherman  continue to be negotiated and  adjudicated  subsequent to the Company's
emergence from Chapter 11 on August 31, 2005.

     Under the terms of a 1990 asset sale agreement,  DeSoto established a trust
fund to fund potential clean-up liabilities relating to the assets sold. Sherman
Wire had  access to the trust fund for any  expenses  or  liabilities  it incurs
relative to  environmental  claims  relating to the site identified in the trust
agreement.  The trust fund was  primarily  invested  in United  States  Treasury
securities and was classified as restricted investments on the balance sheet. As
of December 31, 2003, the balance in the trust fund was approximately  $135,000.
During 2004, under its terms, the trust fund was liquidated.

     Sherman also has access to a trust fund  relative to another  environmental
site for any expenses or liabilities it incurs relative to environmental  claims
at that site.  The trust  fund is  included  in  restricted  investments  on the
balance sheet.  As of December 31, 2004 and 2005, the balance in this trust fund
was approximately $248,000 and $254,000, respectively.

     See Note 11.

Sites  compromised  as a  result  of  confirmation  of  the  Company's  plan  of
reorganization.

     In July 1991, the United States filed an action  against a former  division
of the Company and four other PRPs in the United States  District  Court for the
Northern  District of Illinois  (Civil  Action No.  91C4482)  seeking to recover
investigation  and  remediation  costs incurred by U.S. EPA at the Byron Salvage
Yard, located in Byron,  Illinois.  In April 1992,  Keystone filed a third-party
complaint  in  this  civil  action   against  15  additional   parties   seeking
contribution  in the event the Company is held liable for any response  costs at
the Byron site. Neither the Company nor the other designated PRPs are performing
any  investigation  of the nature and extent of the  contamination.  In December
1996,  Keystone,  U.S. EPA and the Department of Justice  entered into the Fifth
Partial  Consent  Decree to settle  Keystone's  liability for EPA response costs
incurred at the site  through  April 1994 for a payment of  $690,000.  Under the
agreement  Keystone is  precluded  from  recovering  any portion of the $690,000
settlement payment from other parties to the lawsuit.  In January 1997, Keystone
paid the $690,000  settlement.  Keystone will remain  potentially liable for EPA
response  costs  incurred  after April 30,  1994,  and natural  resource  damage
claims, if any, that may be asserted in the future. Keystone recovered a portion
of the  $690,000  payment  from its  insurer.  In March 1997,  U.S. EPA issued a
Proposed Remedial Action Plan ("PRAP") recommending that a limited excavation of
contaminated  soils be performed at an  estimated  cost of $63,000,  that a soil
cover be placed over the site, an on-site  groundwater  pump and treat system be
installed  and  operated  for an  estimated  period of 15  years,  and that both
on-site and  off-site  groundwater  monitoring  be conducted  for an  indefinite
period. U.S. EPA's cost estimate for the recommended plan is $5.1 million.  U.S.
EPA's estimate of the highest cost alternatives evaluated but not recommended in
the PRAP is approximately  $6 million.  The Company filed public comments on May
1, 1997, objecting to the PRAP. In March 1999, Keystone and other PRP's received
a  Comprehensive   Environmental   Response,   Compensation  and  Liability  Act
("CERCLA")  special  notice  letter  notifying  them  for  the  first  time of a
September  1998 Record of Decision  ("ROD") and  requesting a  commitment  on or
before  May 19,  1999 to  perform  soils  work  required  by that  ROD  that was
estimated to cost approximately $300,000. In addition, the special notice letter
also  requested  the PRPs to reimburse  U.S. EPA for costs  incurred at the site
since May 1994 in the amount of $1.1  million,  as well as for all future  costs
the U.S.  EPA will incur at the site in  overseeing  the  implementation  of the
selected soils remedy and any future  groundwater  remedy.  Keystone  refused to
agree to the U.S.  EPA's past and future cost demand.  In August 1999,  U.S. EPA
issued a  groundwater  PRAP with an estimated  present value cost of $3 million.
Keystone filed public  comments  opposing the PRAP in September 1999. In October
2002, Keystone and the other remaining PRPs entered into a second Consent Decree
with the U.S. EPA, in order to resolve their  liability for  performance  of the
U.S.  EPA's  September  1998  ROD  for a  soils  remedy  at the  site,  for  the
performance of the U.S. EPA's  December 1999 ROD for remedial  action  regarding
the  groundwater  component of Operable  Unit No. 4 at the site,  for payment of
U.S.  EPA's  site  costs  incurred  since  May 1994 as well as future  U.S.  EPA
oversight  costs,  and  for the  transfer  of  certain  funds  that  may be made
available to the PRPs as a result of a consent decree  reached  between U.S. EPA
and another site PRP. Under the terms of the second Consent Decree,  and the PRP
Agreement  was executed to implement  the PRPs'  performance  under that decree,
Keystone is  required  to pay  approximately  $700,000  (of which  approximately
$600,000 has already  been paid into a PRP Group trust  fund),  and would remain
liable for 18.57% of future U.S. EPA oversight  costs as well as a similar share
of any  unanticipated  cost increases in the soils remedial action work.  (Under
the agreements, the City of Byron, Illinois, would assume responsibility for any
cost  overruns  associated  with the  municipal  water supply  components of the
groundwater contamination remedy.) The U.S. EPA served the PRP Group in February
2003 with its first oversight cost claim under the second Consent Decree, in the
amount of  $186,000  for the period  from March 1, 2000 to  November  25,  2002.
Keystone's share of that claim is approximately  $35,000.  The U.S. EPA has also
requested  changes to the  groundwater  monitoring  program at the site that may
require future increases in the PRP Group's groundwater  monitoring reserves. In
September  2002,  the IAG served a demand  letter on Keystone  and 3 other PRP's
seeking recovery of  approximately  $1.3 million in state cleanup costs incurred
at the Byron Salvage Yard site. The PRP's are currently negotiating with the IAG
in an attempt to settle  this claim.  The four PRP's named in the demand  letter
are also attempting to include other site PRP's in the negotiations. Pursuant to
a settlement agreement,  the United States was given a $228,000 allowed claim in
Keystone's Chapter 11 proceedings.  Any further liability of Keystone related to
this site was discharged in the Chapter 11 proceedings.

     In September 1991, the Company along with 53 other PRPs, executed a consent
decree to undertake  the  immediate  removal of hazardous  wastes and initiate a
Remedial  Investigation/Feasibility  Study ("RI/FS") of the Interstate Pollution
Control site located in Rockford,  Illinois. The Company's percentage allocation
within  the group of PRPs  agreeing  to fund this  project is  currently  2.14%.
However, the Company's ultimate allocation,  and the ultimate costs of the RI/FS
and any remedial action, are subject to change depending, for example, upon: the
number and financial condition of the other participating PRPs, field conditions
and sampling  results,  results of the risk  assessment and  feasibility  study,
additional  regulatory  requirements,  and the success of a contribution  action
seeking to compel additional parties to contribute to the costs of the RI/FS and
any remedial action. The RI/FS began in 1993, was completed in 1997 and approved
by IEPA in 1998.  In the summer of 1999,  IEPA selected a capping and soil vapor
extraction  remedy  estimated  by the PRP group to have a present  value cost of
approximately  $2.5  million.  IEPA  may also  demand  reimbursement  of  future
oversight  costs.  The three largest PRPs at the site are  negotiating a consent
order with IEPA for the performance of the site remedy. Pursuant to a settlement
agreement,  the PRP group  was  given a  $125,000  allowed  claim in  Keystone's
Chapter 11  proceedings  and  Keystone  received  a site  release.  Any  further
liability  of  Keystone  related to this site was  discharged  in the Chapter 11
proceedings.

     In  August  1987,  Keystone  was  notified  by  U.S.  EPA  that it is a PRP
responsible  for  the  alleged  hazardous  substance  contamination  of  a  site
previously  owned  by the  Company  in  Cortland,  New  York.  Four  other  PRPs
participated  in the RI/FS and a contribution  action is pending  against eleven
additional  viable  companies which  contributed  wastes to the site.  Following
completion  of the RI/FS,  U.S. EPA  published in November  1997, a PRAP for the
site  that  recommends  the  excavation  and  disposal  of  contaminated   soil,
installation  of an  impervious  cap over a portion of the site,  placement of a
surface  cover  over  the  remainder  of the site  and  semi-annual  groundwater
monitoring until drinking water standards are met by natural  attenuation.  U.S.
EPA estimates the costs of this recommended plan to be $3.1 million. The highest
cost remedy  evaluated by U.S. EPA but not  recommended in the PRAP is estimated
by U.S. EPA to have a cost of $19.8  million.  In September  1998,  Keystone and
four other PRPs who had funded the prior  remedial  actions  and RI/FS  signed a
proposed  Consent  Decree with U.S.  EPA  calling for them to be  "nonperforming
parties" for the  implementation of a March 1998 Record of Decision.  Under this
Consent Decree,  Keystone could be responsible for an unspecified  share of U.S.
EPA's future  costs in the event that changes to the existing ROD are  required.
There  were no  claims  related  to this site  filed in  Keystone's  Chapter  11
proceedings.  The Company's emergence from Chapter 11 proceedings in August 2005
precludes subsequent claims against Keystone related to this site.


Note 16 - Lease commitments

     At December 31,  2005,  the Company is obligated  under  certain  operating
leases through 2010. Future commitments under these leases are summarized below.

<TABLE>
<CAPTION>
                                                                           Lease commitment
                                                                           ----------------
                                                                            (In thousands)

<C>                                                                                  <C>
2006                                                                                 $495
2007                                                                                  155
2008                                                                                  119
2009                                                                                   97
2010                                                                                   31
                                                                                     ----
                                                                                     $897
                                                                                     ====
</TABLE>


Note 17 -  Other commitments and contingencies

Current litigation

     Prepetition   claims  against   Sherman   continue  to  be  negotiated  and
adjudicated  subsequent to the Company's emergence from Chapter 11 on August 31,
2005.

     In July 2001,  Sherman received a letter from a law firm advising them that
Sears  Roebuck & Co.  ("Sears")  had been named as a  defendant  in a lead paint
personal injury case. Sears claimed  contractual  indemnity  against Sherman and
demanded that Sherman  defend and  indemnify  Sears with regard to any losses or
damages Sears may sustain in the case. Sears was named as an additional  insured
on insurance  policies,  in which DeSoto, the manufacturer of the paint, was the
named  insured.  Additional  demands  were made by Sears in 2002 with  regard to
additional lead paint cases.  DeSoto's  insurance  carriers were notified of the
action and asked to indemnify Sherman with respect to the complaint. Sherman has
not  indemnified  Sears and is unaware if the insurors  have agreed to indemnify
Sears.

     In May  2002,  the  Company  was  notified  by an  insurance  company  of a
declaratory  complaint  filed  in Cook  County  Illinois  by Sears  against  the
insurance  company and a second insurance  company  (collectively the "Insurance
Companies")  relative to a certain lead paint personal injury litigation against
Sears.  It is the Company's  understanding  that the  declaratory  complaint has
since been amended to include all lead paint cases where Sears has been named as
a defendant as a result of paint sold by Sears that was  manufactured  by DeSoto
(now Sherman).  Sears was allegedly named as an additional  insured on insurance
policies issued by the Insurance Companies, in which DeSoto, the manufacturer of
the paint, was the named insured.  Sears has demanded  indemnification  from the
Insurance Companies. One of the Insurance Companies has demanded indemnification
and defense from Sherman.  Sherman believes the request for  indemnification  is
invalid.  However,  such  Insurance  Company  has  refused  to accept  Sherman's
response and has demanded  that Sherman  participate  in mediation in accordance
with  the  terms of a prior  settlement  agreement.  Sherman  may be sued by the
Insurance  Companies and, as a result,  could be held  responsible for all costs
incurred by the Insurance Companies in defending Sears and paying for any claims
against Sears as well as for the cost of any  litigation  against  Sherman Wire.
The total amount of these lead paint  litigation  related costs and claims could
be  significant.  However,  the Company does not have a liability  recorded with
respect to these matters  because the liability that may result,  if any, cannot
be reasonably estimated at this time.

     On March 1, 2006, Sears filed a notice with the Bankruptcy Court indicating
it is consenting to the Allstate  Settlement  described  below and will withdraw
its claims  with  prejudice  respect to this  matter on the date the  Bankruptcy
Court's   order   approving   the   Allstate   Settlement   becomes   final  and
non-appeasable. The Chapter 11 proceedings bar any future claims against Sherman
with respect to this matter.

     On March 27, 2006,  the Bankruptcy  Court  approved a settlement  agreement
with one of DeSoto's former  insurers,  Allstate  Insurance  Company ("AIC") and
Northbrook Property and Casualty Insurance Company  ("NP&CIC"),  whereby Sherman
entered into a policy  buy-back  arrangement  with the insurers and the insurers
agree to withdraw their claims for retrospective  premiums under the policies in
Sherman's  bankruptcy  with  prejudice  after of the  Bankruptcy  Court's  order
approving the agreement  becomes final and  non-appealable.  As a result of this
agreement,  Sherman will receive approximately $4.0 million from the insurers in
exchange for a release of the insurers from the  policies.  The $4.0 million may
be used by  Sherman  to  satisfy  its  pre-petition  allowed  unsecured  claims,
including  environmental  related  claims  against  Sherman  in  its  bankruptcy
proceedings.  Any  portion of the $4.0  million  not used to  satisfy  Sherman's
allowed  unsecured  claims will revert back to the bankruptcy  estate of Sherman
and be distributed in accordance  with Keystone's  plan of  reorganization.  The
settlement agreement does not apply to any Worker's  Compensation  policies that
AIC or NP&CIC  underwrote for Sherman.  The  settlement  agreement also does not
apply to Sears, but Sears will be barred from bringing a claim against Sherman's
bankruptcy  estate after the Bankruptcy  Court's order  approving the settlement
becomes final and non-appealable.

     The Company is also engaged in various legal proceedings  incidental to its
normal  business  activities.  In the  opinion  of the  Company,  none  of  such
proceedings  is material in relation  to the  Company's  consolidated  financial
position, results of operations or liquidity.

Product supply agreement

     In 1996, Keystone entered into a fifteen-year product supply agreement (the
"Supply  Agreement") with a vendor. The Supply Agreement  provides,  among other
things,  that the vendor will construct a plant at the Company's Peoria facility
and,  after  completion  of the plant,  provide  Keystone  with all,  subject to
certain  limitations,  of its gaseous  oxygen and  nitrogen  needs for a 15-year
period  ending  in  2011.  In  addition  to  specifying  rates to be paid by the
Company,  including a minimum  facility  fee of  approximately  $1.2 million per
year,  the Supply  Agreement also  specifies  provisions for  adjustments to the
rates and term of the Supply  Agreement.  Purchases  made pursuant to the Supply
Agreement during 2003, 2004 and 2005 amounted to $1.4 million,  $1.9 million and
$2.7 million, respectively.

     Keystone is party to a product  supply  agreement  with another vendor that
expires in December 2006. The agreement  requires  Keystone to annually purchase
10,000 rolls of product from the vendor at an average price of approximately $83
per roll, but the agreement can be cancelled by Keystone with a 180-day  notice.
Purchases made pursuant to this contract  during 2003, 2004 and 2005 amounted to
$539,000, $819,000 and $743,000, respectively.

Concentration of credit risk

     All of the Company's  segments perform ongoing credit  evaluations of their
customers' financial condition and, generally,  require no collateral from their
customers.

     Keystone Steel & Wire. KSW sells its products to agricultural,  industrial,
construction,   commercial,   original   equipment   manufacturers   and  retail
distributors primarily in the Midwestern,  Southwestern and Southeastern regions
of the  United  States.  KSW's ten  largest  external  customers  accounted  for
approximately  41% of its net sales in 2003, 47% in 2004 and 45% in 2005.  These
customers accounted for approximately 51% of KSW's notes and accounts receivable
at  December  31, 2004 and 66% at December  31,  2005.  KSW's net sales to other
Keystone  segments  accounted for approximately 11% of its sales in 2003, 14% in
2004 and 13% in 2005.  These  intercompany  customers  accounted for 4% of KSW's
notes and accounts  receivable at December 31, 2004 and 5% at December 31, 2005.
No single  external  customer  accounted for more than 10% of KSW's sales during
each of 2003 and 2004. During 2005, a single customer accounted for 11% of KSW's
sales.  No other  single  customer  accounted  for more than 10% of KSW's  sales
during 2005.

     Engineered  Wire  Products.   EWP  sells  its  products  to  concrete  pipe
manufacturers  and retail  distributors  primarily in the Midwest and East Coast
regions  of the  United  States.  EWP's  ten  largest  customers  accounted  for
approximately  52% of its net sales in 2003, 49% in 2004 and 54% in 2005.  These
customers accounted for approximately 40% of EWP's notes and accounts receivable
at December 31, 2004 and 48% at December 31, 2005. An external  single  customer
accounted  for 10% of EWP's net sales  during 2003 and another  single  external
customer  accounted  for 11% of EWP's  net  sales  in 2003 and a third  external
customer  accounted for 13% of EWP's net sales in 2005. No other single customer
accounted  for more than 10% of EWP's net sales during 2003,  2004 or 2005.  EWP
does not sell products to other Keystone segments.

     Sherman/KWP.  The Company's  businesses in this segment sell their products
to  agricultural,   industrial,  construction,  commercial,  original  equipment
manufacturers and retail distributors primarily in the Midwestern,  Southwestern
and  Southeastern  regions of the United  States.  This  segment's  ten  largest
external customers accounted for approximately 40% of its net sales in 2003, 28%
in 2004 and 25% in 2005. These customers accounted for approximately 85% of this
segment's notes and accounts receivable at December 31, 2004 and 75% at December
31, 2005.  This  segments' net sales to other  Keystone  segments  accounted for
approximately  36% of its sales net in 2003, 62% in 2004 and 69% in 2005.  These
intercompany  customers  accounted for  approximately 6% of this segment's notes
and accounts  receivable at December 31, 2004 and 5% of this segment's notes and
accounts  receivable at December 31, 2005. No single external customer accounted
for more than 10% of this segment's net sales during 2003. During 2004, a single
customer accounted for 19% of this segment's net sales. No other single customer
accounted  for more than 10% of this  segment's  net sales during  2004.  During
2005, a single customer  accounted for 16% of this segment's net sales. No other
single  customer  accounted for more than 10% of this segment's net sales during
2005.

     Lawn and  garden  products.  Garden  Zone sold its  products  primarily  to
retailers in the Southeastern United States. Garden Zone's ten largest customers
accounted for 94% of its net sales in 2003. Garden Zone did not sell significant
levels of product to other  Keystone  segments  during 2003.  A single  external
customer  accounted  for 50% of Garden  Zone's net sales  during  2003.  Another
external customer also accounted for 10% of Garden Zone's net sales during 2003.

Note 18 - Earnings per share:

     Net income  (loss) per share is based upon the weighted  average  number of
common shares and dilutive  securities.  A reconciliation  of the numerators and
denominators  used in the  calculations of basic and diluted  earnings per share
computations of income (loss) before  cumulative  effect of change in accounting
principle is presented below. The Company discontinued accruing dividends on its
preferred stock upon filing for Chapter 11 on February 26, 2004.  Keystone stock
options were omitted from the calculation  because they were antidilutive in all
periods presented.

<TABLE>
<CAPTION>
                                                                                Years ended December 31,
                                                                        ---------------------------------------
                                                                          2003             2004            2005
                                                                        -------           ------           ----
                                                                                     (In thousands)

Numerator:
  Net income (loss) before cumulative
   effect of change in accounting
<S>                                                                  <C>               <C>              <C>
   principle                                                         $(37,517)         $16,060          $39,232
  Cancellation of Series A Preferred Stock                               -                -               2,112
  Less Series A Preferred Stock
   dividends                                                           (5,940)          (1,223)            -
                                                                     --------         --------         --------
  Basic net income (loss)                                             (43,347)          14,837           41,344
  Series A Preferred Stock dividends                                    5,940            1,223             -
                                                                     --------         --------         --------

  Diluted net income (loss)                                          $(37,517)         $16,060          $41,344
                                                                     ========         ========          =======

Denominator:
  Average common shares outstanding                                    10,068           10,068           10,046
  Dilutive effect of Series A
   Preferred Stock                                                       -              17,975           11,983
                                                                     --------         --------         --------

  Diluted shares                                                       10,068           28,043           22,029
                                                                     ========         ========          =======
</TABLE>


Note 19 - Accounting principles newly adopted in 2003, 2004 and 2005:

     Asset retirement obligations.  The Company adopted SFAS No. 143, Accounting
for Asset Retirement Obligations,  January 1, 2003. Under SFAS No. 143, the fair
value of a liability for an asset retirement  obligation covered under the scope
of SFAS No. 143 is  recognized in the period in which the liability is incurred,
with an  offsetting  increase in the carrying  amount of the related  long-lived
asset.  Over time,  the  liability  is  accreted  to its future  value,  and the
capitalized  cost is  depreciated  over the useful  life of the  related  asset.
Future revisions in the estimated fair value of the asset retirement obligation,
due to changes in the amount and/or timing of the expected  future cash flows to
settle  the  retirement  obligation,  are  accounted  for  prospectively  as  an
adjustment to the  previously-recognized  asset retirement cost. Upon settlement
of the  liability,  an entity will either settle the obligation for its recorded
amount or incur a gain or loss upon  settlement.  The Company  does not have any
asset retirement  obligations which are covered under the scope of SFAS No. 143,
and as such,  the  effect,  to the  Company  of  adopting  SFAS No.  143 was not
material.

     Costs associated with exit or disposal activities. The Company adopted SFAS
No. 146,  Accounting  for Costs  Associated  with Exit or  Disposal  Activities,
January 1, 2003 for exit or disposal activities initiated on or after that date.
Under SFAS No. 146, costs associated with exit activities,  as defined, that are
covered by the scope of SFAS No. 146 will be recognized  and measured  initially
at fair value, generally in the period in which the liability is incurred. Costs
covered by the scope of SFAS No. 146 include  termination  benefits  provided to
employees,  costs to consolidate facilities or relocate employees,  and costs to
terminate contracts (other than a capital lease).  Under prior GAAP, a liability
for such an exit cost was recognized at the date an exit plan was adopted, which
may or may not have  been the date at which  the  liability  was  incurred.  The
effect to the  Company  of  adopting  SFAS No. 146 as of January 1, 2003 was not
material  as the Company  was not  involved  in any exit or disposal  activities
covered by the scope of the new standards as of such date.

     Variable   interest   entities.   The  Company  began  complying  with  the
consolidation requirements of FASB Interpretation ("FIN") No. 46R, Consolidation
of Variable Interest Entities,  an interpretation of ARB No. 51, as amended,  at
March 31, 2004.  The Company  does not believe it has any  material  involvement
with any  variable  interest  entity (as that term is  defined  in FIN No.  46R)
covered by the scope of FIN No. 46R,  and  therefore  the impact of adopting the
consolidation  requirements of FIN No. 46R did not have a significant  effect on
the Company's consolidated financial statements.

Note 20 - Accounting principles not yet adopted:

     Inventory costs. The Company will adopt SFAS No. 151,  "Inventory Costs, an
amendment of ARB No. 43,  Chapter 4," for inventory  costs  incurred on or after
January 1, 2006.  SFAS No. 151 requires that the allocation of fixed  production
overhead costs to inventory shall be based on normal  capacity.  Normal capacity
is not defined as a fixed amount;  rather,  normal capacity refers to a range of
production  levels expected to be achieved over a number of periods under normal
circumstances,  taking into account the loss of capacity  resulting from planned
maintenance  shutdowns.  The amount of fixed overhead  allocated to each unit of
production is not increased as a consequence of idle plant or production  levels
below the low end of normal  capacity,  but instead a portion of fixed  overhead
costs  are  charged  to  expense  as  incurred.  Alternatively,  in  periods  of
production above the high end of normal  capacity,  the amount of fixed overhead
costs allocated to each unit of production is decreased so that  inventories are
not measured above cost.  SFAS No. 151 also  clarifies  existing GAAP to require
that  abnormal  freight and wasted  materials  (spoilage)  are to be expensed as
incurred.  The Company believes its production cost accounting  already complies
with the  requirements of SFAS No. 151, and the Company does not expect adoption
of SFAS No.  151 will  have a  material  effect  on its  consolidated  financial
statements.

     Stock options. Based on guidance issued by the U.S. Securities and Exchange
Commission,  the Company will adopt SFAS No. 123R,  "Share-Based Payment," as of
January 1, 2006. SFAS No. 123R,  among other things,  eliminates the alternative
in existing GAAP to use the intrinsic value method of accounting for stock-based
employee  compensation  under APBO No. 25. Upon  adoption of SFAS No. 123R,  the
Company will  generally be required to recognize  the cost of employee  services
received in exchange for an award of equity  instruments based on the grant-date
fair value of the award,  with the cost  recognized over the period during which
an  employee  is  required  to  provide  services  in  exchange  for  the  award
(generally,  if the vesting period of the award).  No compensation  cost will be
recognized in the aggregate for equity  instruments  for which the employee does
not render the requisite service (generally,  the instrument is forfeited before
it has vested). The grant-date fair value will be estimated using option-pricing
models  (e.g.   Black-Scholes   or  a  lattice  model).   Under  the  transition
alternatives  permitted  under SFAS No.  123R,  the  Company  will apply the new
standard  to all new  awards  granted on or after  January  1, 2006,  and to all
awards  existing  as of  December  31,  2005  which are  subsequently  modified,
repurchased or cancelled.  Additionally, as of January 1, 2006, the Company will
be required to  recognize  compensation  cost for the portion of any  non-vested
award  existing  as of  December  31, 2005 over the  remaining  vesting  period.
Because all of the  Company's  stock options were  cancelled  upon the Company's
emergence  from Chapter 11 on August 31, 2005,  the effect of adopting  SFAS No.
123R will not be  significant in so far as it relates to existing stock options.
Should  the  Company,  however,  grant a  significant  number of  options in the
future, the effect on the Company's  consolidated  financial statements could be
material.


<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                         ON FINANCIAL STATEMENT SCHEDULE


To the Board of Directors of Keystone Consolidated Industries, Inc.:


Our audits of the consolidated  financial  statements  referred to in our report
dated March 31, 2006,  appearing in the 2005 Annual  Report to  Shareholders  of
Keystone Consolidated Industries,  Inc. (which report and consolidated financial
statements  are  included in this Annual  Report on Form 10-K) also  included an
audit of the  financial  statement  schedule  listed in the index on page F-1 of
this Form 10-K.  In our opinion,  this  financial  statement  schedule  presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP
Dallas, Texas
March 31, 2006


<PAGE>


                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES
                             (DEBTOR-IN-POSSESSION)

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                Additions
                                                  Balance at    charged to    Deductions  Balance at
                                                   beginning    costs and      (net of      end of
 Description                                       of period     expenses    recoveries)    period
 -----------                                       ---------    ----------   -----------  ----------

 Year ended December 31, 2003:

 Allowance for doubtful accounts and
<S>                                                 <C>          <C>            <C>        <C>
    notes receivable                                $ 1,762      $   (406)      $1,009     $   347
                                                    =======      ========       ======     =======

 Allowance for inventory obsolescence               $ 3,490      $    299       $   42     $ 3,747
                                                    =======      ========       ======     =======

 LIFO reserve                                       $13,352      $   (215)      $  -       $13,137
                                                    =======      ========       ======     =======

 Deferred tax asset valuation allowance             $20,046      $ 19,088       $  -       $39,134
                                                    =======      ========       ======     =======

 Major repair and maintenance accrual               $   -        $     61       $   61     $   -
                                                    =======      ========       ======     =======

 Year ended December 31, 2004:

 Allowance for doubtful accounts and
    notes receivable                                $   347      $    111       $   10     $   448
                                                    =======      ========       ======     =======

 Allowance for inventory obsolescence               $ 3,747      $  2,174       $   86     $ 5,835
                                                    =======      ========       ======     =======

 LIFO reserve                                       $13,137      $ 14,078       $  -       $27,215
                                                    =======      ========       ======     =======

 Deferred tax asset valuation allowance             $39,134      $ (8,808)      $  -       $30,326
                                                    =======      ========       ======     =======

 Major repair and maintenance accrual               $   -        $  1,642       $1,289     $   353
                                                    =======      ========       ======     =======

 Year ended December 31, 2005:

 Allowance for doubtful accounts and
    notes receivable                                $   448      $    238       $  235     $   451
                                                    =======      ========       ======     =======

 Allowance for inventory obsolescence               $ 5,835      $ (1,372)      $  114     $ 4,349
                                                    =======      ========       ======     =======

 LIFO reserve                                       $27,215      $(12,003)      $  -       $15,212
                                                    =======      ========       ======     =======

 Deferred tax asset valuation allowance             $30,326      $(19,651)      $  -       $10,675
                                                    =======      ========       ======     =======

 Major repair and maintenance accrual               $   353      $  1,196       $1,549     $   -
                                                    =======      ========       ======     =======
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