United States
                       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, 2004

                                       OR

          |_| Transition Report Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934

                          Commission file number 1-5558

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

         Delaware                                        75-1277589
(State of Incorporation)                    (IRS Employer Identification Number)

    765 Straits Turnpike, Suite 2000, Middlebury, CT         06762
         (Address of Principal Executive Offices)         (Zip Code)

       Registrant's telephone number, including area code: (203) 598-0397

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

        (Title of each class)        (Name of each exchange on which registered)
   Common Stock, $1.00 par value                New York Stock Exchange
   Common Stock Purchase Rights

        Securities registered pursuant to Section 12(g) of the Act: None

      Indicate by check mark whether the  registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                               YES |X|   NO |_|

      Indicate by check mark 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. |X|

      Indicate by check mark whether the Registrant is an accelerated  filer (as
defined in Exchange Act Rule 12b-2)

                               YES |_|   NO |X|

      The   aggregate   market  value  of  the  voting   common  stock  held  by
non-affiliates of the registrant*  (based upon its closing  transaction price on
the New York Stock  Exchange  Composite  Tape on June 30, 2004),  as of June 30,
2004 was  $22,935,357.  As of March 15, 2005,  7,945,377 shares of common stock,
$1.00 par value,  were  outstanding,  the only class of the registrant's  common
stock.

* Calculated by excluding all shares held by executive officers and directors of
the registrant  without  conceding that all such persons are "affiliates" of the
registrant for purposes of federal securities laws.

                       DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for the 2005 annual meeting - Part III.

Exhibit index appears on page 86. Report consists of 96 pages.

<PAGE>

                                     PART I

Item 1. BUSINESS

      Katy  Industries,  Inc.  (Katy or the Company) was organized as a Delaware
corporation  in 1967 and has an even longer  history of  successful  operations,
with some of its predecessor companies having been established for as long as 75
years.  We are organized  into two operating  groups,  Maintenance  Products and
Electrical Products,  and a corporate group. Each majority-owned  company in the
two groups operates  within a broad  framework of policies and corporate  goals.
Katy's   corporate  group  is  responsible  for  overall   planning,   financial
management,  acquisitions,  dispositions,  and other related  administrative and
corporate matters.

Recapitalization

      On June 28, 2001, we completed a recapitalization of the Company following
an agreement dated June 2, 2001 with KKTY Holding  Company,  L.L.C.  (KKTY),  an
affiliate of Kohlberg  Investors  IV, L.P.  (Kohlberg)  (the  Recapitalization).
Under the terms of the Recapitalization,  KKTY purchased 700,000 shares of newly
issued preferred stock, $100 par value per share (Convertible  Preferred Stock),
which is convertible into 11,666,666  common shares,  for an aggregate  purchase
price of $70.0 million.  More  information  regarding the Convertible  Preferred
Stock can be found in Note 12 to the Consolidated  Financial  Statements of Katy
included  in  Part  II,  Item  8.  The  Recapitalization  allowed  us to  retire
obligations we had under the then-current revolving credit agreement.

      Since the  Recapitalization,  the Company's management has been focused on
the following restructuring and cost reduction initiatives:

      o     Consolidation  of facilities:  35  manufacturing,  distribution  and
            office facilities  closed or consolidated  (including 2 to be closed
            during 2005);  manufacture  and  distribution  of each business unit
            centralized; Electrical Products manufacturing outsourced to Asia.

      o     Divestitures of non-core operations:  4 non-core business units have
            been sold or  otherwise  exited and  proceeds  have been  applied to
            reduce debt.

      o     Selling  general and  administrative  (SG&A)  cost  rationalization:
            restructured  duplicative corporate and support functions;  overhead
            reduced;   implemented  shared  sales,  administrative  and  support
            services model.

      o     Organizational changes: across-the-board review of management talent
            and key hires made at both the corporate and operational levels.

      With these initiatives nearly complete, the Company's focus has shifted to
sustaining  revenue  growth and  managing raw  material  costs.  Our future cost
reductions,  if any,  will continue to come from process  improvements  (such as
Lean  Manufacturing  and  Six  Sigma),  value  engineering  products,   improved
sourcing/purchasing and lean administration.

Operations

      Selected  operating  data  for  each  operating  group  can  be  found  in
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  included  in Part II,  Item 7.  Information  regarding  foreign  and
domestic operations and export sales can be found in Note 17 to the Consolidated
Financial  Statements  of Katy  included  in Part II, Item 8. Set forth below is
information about our operating groups and investments and about our business in
general.

      We have  restructured  many of our  operations  in order to maintain a low
cost  structure,  which is essential for us to be  competitive in the markets we
serve.  These  restructuring   efforts  include   consolidation  of  facilities,
headcount  reductions,  and  evaluation of sourcing  strategies to determine the
lowest cost method for obtaining  finished product.  Costs associated with these
efforts include expenses for recording  liabilities for non-cancelable leases at
facilities that are abandoned,  severance and other employee  termination costs,
costs to move inventory and equipment,  consultant  costs for sourcing  strategy
evaluation,   and  other  exit  costs  that  may  be  incurred   not  only  with
consolidation  of facilities,  but potentially the complete shut down of certain
manufacturing and distribution operations. We have incurred significant costs in
this  respect,  approximately  $44 million  since the  beginning of 2001. As our
post-Recapitalization   restructuring  plan  winds  down,  we  expect  to  incur
additional costs of approximately  $1.5 million to $2.5 million in 2005,  mostly
related  to  the  consolidation  of  abrasives  facilities.  Additional  details
regarding  severance,  restructuring and related charges can be found in Note 19
to the Consolidated Financial Statements of Katy included in Part II, Item 8.


                                       2
<PAGE>

Maintenance Products Group

      The Maintenance  Products Group's principal  business is the manufacturing
and  distribution of commercial  cleaning  products as well as consumer home and
automotive storage products.  Commercial cleaning products are sold primarily to
janitorial/sanitary  and foodservice  distributors  who supply end users such as
restaurants,  hotels,  healthcare  facilities  and  schools.  Consumer  home and
automotive  storage  products are primarily sold through major home  improvement
and mass market  retail  outlets.  Total  revenues  and  operating  loss for the
Maintenance  Products Group during 2004 were $278.9 million and ($2.7)  million,
respectively.  The group  accounted for 61% of the  Company's  revenues in 2004.
Total  assets for the group  were  $154.6  million at  December  31,  2004.  The
business units in this group are:

      Continental  Commercial  Products,  LLC (CCP) is the  successor  entity to
Contico International, L.L.C. (Contico) and includes as divisions all the former
business units of Contico (JanSan Plastics,  Consumer Plastics,  Metal Truck Box
and  Container),   as  well  as  the  following  business  units:   Filters  and
Grillbricks, Domestic Abrasives and Textiles. CCP is headquartered in Bridgeton,
Missouri near St. Louis,  has additional  operations in California,  Georgia and
Texas,  and was  created  mainly for the  purpose of  simplifying  our  business
transactions and improving our customer  relationships by allowing  customers to
order products from any CCP division on one purchase order.

      The  JanSan  Plastics  business  unit  is a  plastics  manufacturer  and a
      distributor of products for the commercial janitorial/sanitary maintenance
      and food service  markets.  JanSan Plastics  products  include  commercial
      waste  receptacles,  buckets,  mop wringers,  janitorial  carts, and other
      products  designed  for  commercial  cleaning  and  food  service.  JanSan
      Plastics   products   are  sold   under   the   following   brand   names:
      Continental(R),  Kleen Aire(TM),  Huskee(TM),  SuperKan(TM),  KingKan(TM),
      Unibody(TM) and Tilt'N Wheel(TM).

      The  Consumer  Plastics  business  unit  is a  plastics  manufacturer  and
      distributor of home storage  products,  sold primarily  through major home
      improvement  and mass market retail  outlets.  Consumer  Plastic  products
      include  plastic home storage units such as domestic  storage  containers,
      shelving and hard plastic gun cases and are sold under the following brand
      names: Contico(R) and Tuffbin(R).

      The Metal Truck Box business unit is a  manufacturer  and  distributor  of
      aluminum and steel automotive  storage  products,  sold primarily  through
      major home  improvement  outlets.  Metal Truck Box products are sold under
      the  following  brand  names:  Husky(R),  Tradesman(R)  and  Tuff  Box(R).
      Husky(R) is a registered trademark of Stanley Works.

      The Container business unit is a plastics  manufacturer and distributor of
      industrial  storage  drums,  pails and bins for  commercial and industrial
      use. Products are sold under the Contico(R) Container brand name.

      The Filters and Grillbricks business unit (operating under the Disco name)
      is a manufacturer  and  distributor of filtration,  cleaning and specialty
      products  sold  to  the  restaurant/food  service  industry.  Filters  and
      Grillbricks  products include fryer filters, oil stabilizing powder, grill
      cleaning  implements  and other food service  items and are sold under the
      Disco name as well as  Britesorb(TM),  and the Brillo(R)  line of cleaning
      products.

      The Abrasives  business unit (operating under the Glit-Microtron and Loren
      names) is a manufacturer  and distributor of non-woven  abrasive  products
      for commercial  and industrial use and also supplies  materials to various
      original  equipment  manufacturers  (OEM).  The Abrasives  unit's products
      include  floor  maintenance  pads,  hand pads,  scouring  pads,  specialty
      abrasives  for  cleaning  and  finishing  and roof  ventilation  products.
      Products are sold primarily in the commercial sanitary  maintenance,  food
      service and construction  markets.  Glit-Microtron  and Loren products are
      sold  under  the  following   brand  names:   Glit   Kleenfast(R),   Fiber
      Naturals(R),  Big Boss II(R),  Blue  Ice(R),  Brillo(R),  BAB-O(R) and Old
      Dutch(R) brand names. Brillo(R),  Old Dutch(R) and BAB-O(R) are registered
      trademarks used under license.

      This  unit's  primary  manufacturing  facilities  are in  Wrens,  Georgia,
      Lawrence,  Massachusetts and Pineville,  North Carolina.  The Lawrence and
      Pineville   facilities  are  expected  to  close  during  2005  and  their
      operations consolidated into the Wrens facility.

      The  Textiles  business  unit  (operating  under  the  Wilen  name)  is  a
      manufacturer  and  distributor  of  professional  cleaning  products which
      includes mops, brooms, brushes, and plastic cleaning accessories. Textiles
      products are sold primarily through  commercial  sanitary  maintenance and
      food service  markets,  with some  products sold through  consumer  retail
      outlets.   Products   are  sold   under   the   following   brand   names:
      Wax-o-matic(TM), Wilen(TM) and Rototech(R).

The  Maintenance  Products  Group also has  operations  in Canada and the United
Kingdom.


                                       3
<PAGE>

      The CCP Canada business unit, headquartered in Etobicoke, Ontario, Canada,
is a distributor of primarily  plastic  products for the commercial and sanitary
maintenance markets in Canada.

      The Abrasives  Canada business unit  (operating  under the name Gemtex) is
headquartered  in  Etobicoke,   Ontario,  Canada,  and  is  a  manufacturer  and
distributor  of resin  fiber  disks and other  coated  abrasives  for the OEM's,
automotive,  industrial,  and home improvement markets. The most prominent brand
name under which the product is sold is TRIM-KUT(R).

      The  UK  JanSan  Plastics  business  unit  (operating  under  the  Contico
Manufacturing,  Ltd.  name)  is  a  distributor  of a  wide  range  of  cleaning
equipment,  storage  solutions and washroom  dispensers  for the  commercial and
sanitary  maintenance  and food service markets in the United Kingdom (U.K.) and
Ireland.

      The UK Consumer Plastics business unit (operating under the Contico Europe
Limited name), is a manufacturer and distributor of plastic consumer storage and
home products, sold primarily to major retail outlets in the U.K.

      Electrical Products Group

      The  Electrical  Products  Group's  principal  business  is the design and
distribution of consumer electric corded products. Products are sold principally
to national home  improvement and mass merchant  retailers,  who in-turn sell to
consumer  end-users.  Total  revenues and  operating  income for the  Electrical
Products Group during 2004 were $178.7 million and $16.8 million,  respectively.
The group accounted for 39% of the Company's  revenues in 2004. Total assets for
the group were $57.7 million at December 31, 2004. Woods Industries, Inc. (Woods
US) and Woods  Industries  (Canada),  Inc.  (Woods  Canada) are both  subject to
seasonal  sales trends in  connection  with the holiday  shopping  season,  with
stronger sales and profits realized in the third and early fourth quarters.  The
business units in this group are:

      The Woods US  business  unit is  headquartered  in  Carmel,  Indiana,  and
distributes  consumer  electric  corded  products  and  electrical  accessories.
Examples of Woods US  products  are outdoor  and indoor  extension  cords,  work
lights, surge protectors, and power strips. Woods US products are sold under the
following brand names: Woods(R),  Yellow Jacket(R),  Tradesman(R),  SurgeHawk(R)
and  AC/Delco(R).  AC/Delco(R)  is a registered  trademark of The General Motors
Corporation. These products are sold primarily through national home improvement
and mass merchant  retail outlets in the United  States.  Woods US' products are
sourced primarily from Asia.

      The Woods  Canada  business  unit is  headquartered  in Toronto,  Ontario,
Canada,  and  distributes  consumer  electric  corded  products  and  electrical
accessories.  In  addition  to the  products  listed  above for Woods US,  Woods
Canada's  primary product  offerings  include garden lighting and timers.  Woods
Canada  products  are  sold  under  the  following  brand  names:   MoonRays(R),
Intercept(TM),  and Pro Power(TM).  These  products are sold  primarily  through
major home  improvement  and mass  merchant  retail  outlets  in  Canada.  Woods
Canada's products are sourced primarily from Asia.

      See  Licenses,   Patents  and  Trademarks  below  for  further  discussion
regarding the trademarks used by Katy companies.

Other Operations

      Katy's  other  operations  include  a 43%  equity  investment  in a shrimp
harvesting and farming operation, Sahlman Holding Company, Inc. (Sahlman), and a
100% interest in Savannah Energy Systems Company (SESCO), the limited partner in
a waste-to-energy facility operator.

      Sahlman  harvests  shrimp off the coast of South and  Central  America and
owns  shrimp  farming   operations  in  Nicaragua.   Sahlman  has  a  number  of
competitors,  some of which are larger  and have  greater  financial  resources.
Katy's interest in Sahlman is an equity investment.  During the third quarter of
2003,  after a review of  Sahlman's  results  for 2002 (and in the first half of
2003),  and after study of the status of the shrimp  industry and markets in the
United  States,  Katy  determined  there  had  been a loss in the  value  of the
investment that was other than temporary.  As a result, Katy concluded that $1.6
million was a reasonable estimate of the value of its investment in Sahlman, and
a charge of $5.5  million  was  recorded  to reduce  the  carrying  value of the
investment. See Note 5 to the Consolidated Financial Statements of Katy included
in Part II, Item 8.

      SESCO is the limited partner of the operator of a waste-to-energy facility
in Savannah,  Georgia. The general partner of the partnership is an affiliate of
Montenay Power Corporation.  See Note 7 to the Consolidated Financial Statements
of Katy included in Part II, Item 8.


                                       4
<PAGE>

Discontinued Operations

      In 2002 and 2003, we identified  and sold certain  business  units that we
considered non-core to the future operations of the Company.  Hamilton Precision
Metals L.P.  (Hamilton),  a reroller of precision metal foils and strips located
in  Lancaster,  Pennsylvania,  was sold on October 31, 2002 for net  proceeds of
$13.9 million.  A gain of $3.3 million (net of tax) was recognized in the fourth
quarter of 2002 as a result of the Hamilton sale.  Hamilton was formerly part of
the Electrical  Products  Group.  GC/Waldom  Electronics,  Inc.  (GC/Waldom),  a
leading  value-added  distributor  of high quality,  brand name  electrical  and
electronic  parts,  components  and  accessories   headquartered  in  Rockville,
Illinois,  was sold on April 2, 2003 for net  proceeds of $7.4  million.  A loss
(net of tax) of $0.2 million was  recognized in the second  quarter of 2003 as a
result of the GC/Waldom  sale.  GC/Waldom  was formerly  part of the  Electrical
Products  Group.  Duckback  Products,  Inc.  (Duckback),  a manufacturer of high
quality exterior  transparent  coatings and water  repellents  located in Chico,
California,  was sold on September 16, 2003 for net proceeds of $16.2 million. A
gain (net of tax) of $7.6 million was recognized in the third quarter of 2003 as
a result of the Duckback  sale.  Duckback was formerly  part of the  Maintenance
Products Group.

Customers

      We  have  several  large  customers  in  the  mass  merchant/discount/home
improvement retail markets.  Two customers,  Wal*Mart and Lowe's,  accounted for
17% and 12%, respectively, of consolidated net sales. Sales to Wal*Mart are made
by the Woods US, Consumer Plastics,  Domestic Abrasives,  Woods Canada, Textiles
and JanSan Plastics business units. Sales to Lowe's are made by the Woods US and
Consumer  Plastics business units. A significant loss of business from either of
these customers could have a material adverse impact on our results.

Backlog

Maintenance Products:

      Our aggregate backlog position for the Maintenance Products Group was $7.3
million and $7.8  million as of December  31, 2004 and 2003,  respectively.  The
orders  placed  in  2004  are  believed  to be  firm  and  based  on  historical
experience, substantially all orders are expected to be shipped during 2005.

Electrical Products:

      Our aggregate backlog position for the Electrical Products Group was $13.9
million and $6.0  million as of December  31, 2004 and 2003,  respectively.  The
orders  placed  in  2004  are  believed  to be  firm  and  based  on  historical
experience, substantially all orders are expected to be shipped during 2005.

Markets and Competition

Maintenance Products:

      We market a variety of  commercial  cleaning  products and supplies to the
commercial  janitorial/sanitary  maintenance and foodservice markets.  Sales and
marketing of these  products is handled  through a  combination  of direct sales
personnel, manufacturers' sales representatives, and wholesale distributors.

      The commercial  distribution channels for our commercial cleaning products
are highly  fragmented,  resulting in a large number of small customers,  mainly
distributors of janitorial  cleaning products.  The markets for these commercial
products are highly competitive. Competition is based primarily on price and the
ability to provide superior customer service in the form of complete and on-time
product  delivery.  Other  competitive  factors  include brand  recognition  and
product  design,  quality and  performance.  We compete for market  share with a
number of different  competitors,  depending upon the specific product. In large
part, our  competition is unique in each area of 1) plastics,  2) abrasives,  3)
textiles and 4) foodservice.  We believe that we have  established long standing
relationships  with our major customers  based on quality  products and service,
and a complete  line of products.  While each  product line is marketed  under a
different brand name, they are sold as  complementary  products,  with customers
able to access all products through a single purchase order. We also continue to
strive to be a low cost  provider  in this  industry;  however,  our  ability to
remain a low cost  provider in the industry is highly  dependent on the price of
our raw materials,  primarily  resin (see  discussion  below).  Being a low cost
producer is also dependent upon our ability to reduce and  subsequently  control
our cost structure,  which has benefited from our nearly completed restructuring
efforts.

      We market  branded  plastic home storage  units and plastic,  aluminum and
steel automotive storage, and to a lesser extent, abrasive products and mops and
brooms,  to mass  merchant and  discount  club  retailers in the U.S.  Sales and
marketing


                                       5
<PAGE>

of these  products is generally  handled by direct sales  personnel and external
representative  groups. The consumer  distribution  channels for these products,
especially the in-home and automotive storage products, are highly concentrated,
with several  large mass  merchant  retailers  representing  a very  significant
portion  of the  customer  base.  We  compete  with a  limited  number  of large
companies  that offer a broad array of products  and many small  companies  with
niche offerings.  With few consumer storage products enjoying patent protection,
the primary basis for competition is price.  Therefore,  efficient manufacturing
and distribution capability is critical to success.  Ultimately,  our ability to
remain competitive in these consumer markets is dependent upon our position as a
low cost producer, and also upon our development of new and innovative products.
We continue to pursue new markets for our products.  Our ability to remain a low
cost  provider  in the  industry  is  highly  dependent  on the price of our raw
materials,  primarily resin (see discussion above). Being a low cost producer is
also  dependent  upon our  ability to reduce and  subsequently  control our cost
structure,  which has benefited from our nearly completed restructuring efforts.
Our restructuring  efforts have and will include consolidation of facilities and
headcount reductions.

      We also market  certain of our  products to the  construction  trade,  and
resin fiber disks and other abrasive disks to the OEM trade.

Electrical Products:

      We market branded electrical products primarily in North America through a
combination of direct sales personnel and manufacturers' sales  representatives.
Our primary  customer base consists of major national retail chains that service
the home improvement,  mass merchant,  hardware and electronic and office supply
markets, and smaller regional concerns serving a similar customer base.

      Electrical  products sold by the Company are  generally  used by consumers
and include such items as outdoor and indoor extension cords, work lights, surge
protectors,  power  strips,  garden  lighting  and timers.  We have entered into
license  agreements  pursuant to which we market  certain of our products  using
certain  other  companies'  proprietary  brand  names.  Overall  demand  for our
products is highly correlated with the number of suburban homes and the consumer
demand  for  appliances,  computers,  home  entertainment  equipment,  and other
electronic equipment.

      The  markets  for  our   electrical   products  are  highly   competitive.
Competition is based  primarily on price and the ability to provide a high level
of customer  service in the form of  inventory  management,  high fill rates and
short lead times. Other competitive  factors include brand recognition,  a broad
product offering, product design, quality and performance.  Foreign competitors,
especially from Asia, provide an increasing level of competition. Our ability to
remain  competitive  in these  markets is dependent  upon  continued  efforts to
remain a low-cost  provider of these  products.  In December  2002 and  December
2003,  Woods US and Woods  Canada,  respectively,  closed  their North  American
manufacturing  facilities  and are now sourcing  products  almost  entirely from
international suppliers.

Raw Materials

      Our operations have not experienced significant  difficulties in obtaining
raw materials,  fuels,  parts or supplies for their  activities  during the most
recent fiscal year, but no prediction  can be made as to possible  future supply
problems or  production  disruptions  resulting  from  possible  shortages.  Our
Electrical  Products  businesses are highly dependent upon products sourced from
Asia, and therefore  remain  vulnerable to potential  disruptions in that supply
chain. We are also subject to uncertainties  involving labor relations issues at
entities   involved  in  our  supply  chain,   both  at  suppliers  and  in  the
transportation  and shipping  area.  Our JanSan  Plastics and Consumer  Plastics
business  units  (and  some  others  to  a  lesser  extent)  use   polyethylene,
polypropylene and other  thermoplastic  resins as raw materials in a substantial
portion of its plastic products.  Prices of plastic resins, such as polyethylene
and polypropylene  have increased  steadily from the latter half of 2002 through
the early months of 2005 with a notable acceleration in the second half of 2004.
Management  has  observed  that the  prices of  plastic  resins are driven to an
extent by prices for crude oil and natural  gas,  in  addition to other  factors
specific  to the  supply and demand of the  resins  themselves.  We are  equally
exposed to price  changes for copper at our Woods US and Woods  Canada  business
units. Prices for copper increased in late 2003 and early 2004,  stabilized in a
historically  high range in mid-2004 and increased  again in late 2004 and early
2005.  Prices for aluminum and steel (raw  materials used in our Metal Truck Box
business),  corrugated  packaging  material  and other raw  materials  have also
accelerated  over the past year. We have not employed an active hedging  program
related to our commodity  price risk,  but are employing  other  strategies  for
managing  this risk,  including  contracting  for a certain  percentage of resin
needs through supply  agreements and opportunistic  spot purchases.  In 2004, we
experienced  $33 million of cost  increases in the primary raw materials used in
our products and inflation on other costs such as packaging materials, utilities
and  freight.  We  were  able  to  reduce  the  impact  of  these  increases  to
approximately $24 million through supply contracts, opportunistic buying, vendor
negotiations  and other  measures.  These cost  increases  have continued in the
first  quarter of 2005,  and if sustained  throughout  2005,  would amount to an
increase of over $50 million  compared to 2003.  In 2004, we passed on about $15
million of these increases through price increases and are announcing additional
price  increases  in the first and second  quarters  this year.  In a climate of
rising raw material costs (and especially in 2004), we experience  difficulty in
raising prices to shift these higher costs to our customers for our plastic


                                       6
<PAGE>

products.  Our future earnings may be negatively  impacted to the extent further
increases  in costs for raw  materials  cannot be  recovered  or offset  through
higher selling  prices.  We cannot predict the direction our raw material prices
will take during 2005 and beyond.

Employees

      As of December  31,  2004,  we employed  1,793  people,  of which 428 were
members of various unions.  Our labor relations are generally  satisfactory  and
there have been no strikes in recent years.  Our  operations  can be impacted by
labor relations issues involving other entities in our supply chain. We recently
entered into a new union contract with employees at our St. Louis based business
units.

Regulatory and Environmental Matters

      We do not anticipate that federal,  state or local  environmental  laws or
regulations will have a material  adverse effect on our consolidated  operations
or  financial  position.  We  anticipate  making  additional   expenditures  for
environmental matters during 2005, in accordance with terms agreed upon with the
United States  Environmental  Protection Agency and various state  environmental
agencies.  See Note 18 to the Consolidated Financial Statements in Part II, Item
8.

Licenses, Patents and Trademarks

      The  success of our  products  historically  has not  depended  largely on
patent,  trademark  and  license  protection,  but rather on the  quality of our
products, proprietary technology, contract performance, customer service and the
technical  competence  and  innovative  ability of our  personnel to develop and
introduce  salable products.  However,  we do rely to a certain extent on patent
protection,  trademarks and licensing  arrangements  in the marketing of certain
products.  Examples of key  licensed and  protected  trademarks  include  Yellow
Jacket(R), Woods(R), Tradesman(R),  AC/Delco(R) (Woods US); Contico(R) (Consumer
Plastics);  Continental(R) (JanSan Plastics); Glit(R), Microtron(R),  Brillo(R),
and Kleenfast(R)  (Abrasives) Wilen(TM) (Textiles);  and Trim-Kut(R)  (Abrasives
Canada).  Companies most reliant upon patented  products and technology are CCP,
Woods US, Woods Canada and Gemtex.  Further, we are renewing our emphasis on new
product  development,  which will  increase our reliance on patent and trademark
protection across all business units.

      Since 1998,  Woods  Canada used the NOMA(R)  trademark in Canada under the
terms of a license with Gentek Inc.  (Gentek).  In October 2002,  Gentek filed a
petition for  reorganization  under Chapter 11 of the U.S.  Bankruptcy  Code. In
July  2003,  as part of the  bankruptcy  proceedings,  Gentek  filed a motion to
reject the trademark license agreement. On November 5, 2003, Gentek's motion was
granted  by the U.S.  Bankruptcy  Court.  As a result,  this  trademark  license
agreement  is no longer in  effect.  Woods  Canada  used the  NOMA(R)  trademark
through  mid-2004  and,  subsequently  lost the  right to brand  certain  of its
product with the NOMA(R)  trademark.  Approximately  50% of Woods Canada's sales
were of NOMA(R) - branded  products.  Woods Canada is replacing those sales with
sales of other  products and continues to act as a supplier for the new licensee
of the NOMA(R) trademark.

Available Information

      We file annual,  quarterly,  and current reports,  proxy  statements,  and
other  documents with the Securities and Exchange  Commission  (the "SEC") under
the Securities Exchange Act. The public may read and copy any materials that the
Company  files  with the SEC at the  SEC's  Public  Reference  Room at 450 Fifth
Street,  NW,  Washington,  D.C. 20549. The public may obtain  information on the
operation  of the Public  Reference  Room by calling the SEC at (800)  SEC-0330.
Also,  the SEC maintains an Internet  Website that contains  reports,  proxy and
information statements, and other information regarding issuers, including Katy,
that file  electronically  with the SEC. The public can obtain documents that we
file with the SEC at http://www.sec.gov.

      We maintain a website at http://www.katyindustries.com. We make available,
free of charge through our website,  our annual reports on Form 10-K,  quarterly
reports on Form 10-Q,  current  reports on Form 8-K,  and,  if  applicable,  all
amendments  to these  reports as well as Section 16 reports on Forms 3, 4 and 5,
as soon as reasonably  practicable  after such reports are filed or furnished to
the SEC. The information on our website is not, and shall not be deemed to be, a
part of this report or incorporated into any other filings we make with the SEC.


                                       7
<PAGE>

      Item 2. PROPERTIES

      As of December 31, 2004, our total building floor area owned or leased was
3,274,000  square feet,  of which  504,000  square feet were owned and 2,770,000
square feet were leased.  The following table shows a summary by location of our
principal  facilities  including  the  nature of the  facility  and the  related
business unit.

<TABLE>
<CAPTION>
           Location                    Facility                                    Business Unit
           --------                    --------                                    -------------
<S>                           <C>                                         <C>
UNITED STATES
California
      Norwalk*                Manufacturing, Distribution                 JanSan Plastics, Consumer Plastics,
                                                                          Container

      Santa Fe Springs* **    Distribution                                JanSan Plastics, Consumer Plastics,
                                                                          Abrasives, Textiles
                                                                          Filters & Grillbricks,

Connecticut
      Middlebury*             Corporate Headquarters                      Corporate

Georgia
      Atlanta*                Manufacturing, Distribution                 Textiles
      McDonough*              Manufacturing, Distribution                 Filters & Grillbricks
      Wrens                   Manufacturing, Distribution                 Abrasives

Indiana
      Carmel*                 Office                                      Woods US
      Indianapolis*           Distribution                                Woods US

Massachusetts
      Lawrence*  **           Manufacturing, Distribution                 Abrasives

Missouri
      Bridgeton*              Office, Manufacturing,                      JanSan Plastics, Consumer Plastics
                              Distribution

      Hazelwood*              Manufacturing                               JanSan Plastics, Consumer Plastics

North Carolina
      Pineville*  **          Manufacturing                               Abrasives

Texas
      Winters                 Manufacturing, Distribution                 Metal Truck Box

CANADA
Ontario
      Toronto*                Manufacturing, Distribution                 Abrasives Canada
      Toronto*                Distribution                                Woods Canada, CCP Canada

CHINA
      Shenzhen*               Office                                      Woods US

UNITED KINGDOM
Cornwall
      Redruth                 Manufacturing, Distribution                 UK Consumer Plastics,
                                                                          UK JanSan Plastics

Berkshire
      Slough*                                                             UK JanSan Plastics
</TABLE>

*     Facility is leased.

**    During 2005 we expect to  consolidate  all of our abrasives  operations in
      Lawrence,  Massachusetts  and Pineville,  North Carolina into our recently
      expanded Wrens,  Georgia (Wrens) Abrasives facility.  Also during 2005, we
      expect to close our distribution facility in Santa Fe Springs,  California
      and relocate to a nearby facility in southern California.


                                       8
<PAGE>

We believe that our current  facilities  meet our needs in our existing  markets
for the foreseeable future.

Item 3. LEGAL PROCEEDINGS

      General Environmental Claims

      The Company and  certain of its  current  and former  direct and  indirect
corporate  predecessors,  subsidiaries  and  divisions  are involved in remedial
activities at certain  present and former  locations and have been identified by
the United States Environmental  Protection Agency, state environmental agencies
and private  parties as  potentially  responsible  parties (PRPs) at a number of
hazardous waste disposal sites under the Comprehensive  Environmental  Response,
Compensation  and Liability  Act  (Superfund)  or equivalent  state laws and, as
such,  may be liable for the cost of cleanup and other  remedial  activities  at
these  sites.  Responsibility  for cleanup and other  remedial  activities  at a
Superfund  site is typically  shared among PRPs based on an allocation  formula.
Under the federal Superfund statute, parties could be held jointly and severally
liable,  thus subjecting them to potential  individual  liability for the entire
cost of cleanup at the site.  Based on its estimate of  allocation  of liability
among PRPs, the probability  that other PRPs,  many of whom are large,  solvent,
public  companies,  will  fully pay the  costs  apportioned  to them,  currently
available   information   concerning  the  scope  of  contamination,   estimated
remediation  costs,  estimated  legal fees and other  factors,  the  Company has
recorded  and accrued for  environmental  liabilities  in amounts  that it deems
reasonable. The ultimate costs will depend on a number of factors and the amount
currently  accrued  represents  management's  best current estimate of the total
costs to be incurred.  The Company expects this amount to be substantially  paid
over the next one to four years.

      W.J. Smith Wood Preserving Company ("W.J. Smith")

      The  most  significant  environmental  matter  in  which  the  Company  is
currently  involved  relates  to the W.J.  Smith  site.  The W.J.  Smith  matter
originated in the 1980s when the United  States and the State of Texas,  through
the Texas Water Commission,  initiated environmental enforcement actions against
W.J.  Smith  alleging  that certain  conditions  on the W.J.  Smith  property in
Denison, Texas (the "Property") violated environmental laws. In order to resolve
the enforcement actions, W.J. Smith engaged in a series of cleanup activities on
the Property and implemented a groundwater monitoring program.

      In 1993, the United States Environmental Protection Agency (EPA) initiated
a proceeding  under Section 7003 of the Resource  Conservation  and Recovery Act
(RCRA) against W.J. Smith and Katy. The proceeding sought certain actions at the
site and at certain off-site areas, as well as development and implementation of
additional cleanup  activities to mitigate off-site releases.  In December 1995,
W.J.  Smith,  Katy and the EPA  agreed to  resolve  the  proceeding  through  an
Administrative Order on Consent under Section 7003 of RCRA. W. J. Smith and Katy
have completed the cleanup activities required by the Order.

      In addition to the administrative  claim specifically  identified above, a
purported class action lawsuit was filed by twenty  individuals in federal court
in the  Marshall  Division  of the  Eastern  District  of  Texas,  on  behalf of
"landowners  and persons who reside and/or work in" an  identified  geographical
area  surrounding  the  Property.  The lawsuit  purported to allege claims under
state law for negligence,  trespass, nuisance and assault and battery. It sought
damages for personal injury and property  damage,  as well as punitive  damages.
The named  defendants  were Union Pacific  Corporation,  Union Pacific  Railroad
Company,  Katy  Industries and W.J. Smith. On June 10, 2002, Katy and W.J. Smith
filed a motion to dismiss the case for lack of federal  jurisdiction,  or in the
alternative,  to  transfer  the  case  to the  Sherman  Division.  In  response,
plaintiffs  filed a motion  for  leave to amend the  complaint  to add a federal
claim under the Resource  Conservation  and Recovery Act. On July 30, 2002,  the
court dismissed plaintiffs' lawsuit in its entirety.

      On  July  31,  2002,  plaintiffs  filed a new  lawsuit  against  the  same
defendants,  again in the  Marshall  Division of the Eastern  District of Texas,
alleging  property  damage class action  claims under the federal  Comprehensive
Environmental  Response  Compensation & Liability Act (CERCLA), as well as state
common  law   theories.   The  Company   deposed  all  of  the  proposed   class
representatives  and on October 31, 2003, filed a motion for summary judgment on
the grounds that the court lacks  jurisdiction and that  Plaintiffs'  claims are
barred by the applicable  statute of limitations.  Plaintiffs filed a motion for
class  certification  on the  property  damage  claims on that date as well.  By
Memorandum Opinion and Order dated June 8, 2004, the Court granted the Company's
Motion for Summary  Judgment on the federal  jurisdictional  claim and dismissed
the case.  The  Company  has not been  notified  of an  appeal  and the time for
appealing the decision has passed.


                                       9
<PAGE>

      Since 1990,  the Company has spent in excess of $7.0  million  undertaking
cleanup and compliance  activities in connection with the WJ Smith matter. While
ultimate  liability  with respect to this matter is not easy to  determine,  the
Company  has  recorded  and  accrued  amounts  that  it  deems   reasonable  for
prospective liabilities with respect to this matter.

      Asbestos Claims

A. The Company has recently been named as a defendant in four lawsuits  filed in
state court in Alabama by a total of  approximately  24  individual  plaintiffs.
There  are over  100  defendants  named in each  case.  In all four  cases,  the
plaintiffs  claim  that they were  exposed  to  asbestos  in the course of their
employment at a former U.S. Steel plant in Alabama and, as a result,  contracted
mesothelioma,  asbestosis,  lung cancer or other  illness.  They claim that they
were  exposed to asbestos in  products in the plant which were  manufactured  by
each  defendant.  In three of the cases,  plaintiffs  also assert wrongful death
claims.  The  Company  will  vigorously  defend the  claims  against it in these
matters.

B.  Sterling  Fluid  Systems  (USA) has  tendered  over 1,500  cases  pending in
Michigan,  New  Jersey,  Illinois,  Nevada,  Mississippi,   Wyoming,  Louisiana,
Massachusetts  and  California  to the Company for defense and  indemnification.
Sterling  bases its tender of the  complaints on the  provisions  contained in a
1993  Purchase  Agreement  between the parties  whereby  Sterling  purchased the
LaBour Pump business and other assets from the Company. Sterling has not filed a
lawsuit against Katy in connection with these matters.

      The tendered  complaints all purport to state claims against  Sterling and
its  subsidiaries.  The Company and its  current  subsidiaries  are not named as
defendants.  The  plaintiffs  in the cases also allege that they were exposed to
asbestos and  products  containing  asbestos in the course of their  employment.
Each complaint names as defendants  many  manufacturers  of products  containing
asbestos,  apparently  because  plaintiffs  came into  contact with a variety of
different  products in the course of their  employment.  Plaintiffs'  claim that
LaBour Pump and/or Sterling may have manufactured some of those products.

      With respect to many of the tendered complaints, the Company has taken the
position  that  Sterling  has waived its right to indemnity by failing to timely
request it as required  under the 1993 Purchase  Agreement.  With respect to the
balance of the  tendered  complaints,  the Company has elected not to assume the
defense of Sterling in these matters.

C. LaBour Pump Company, a former subsidiary of the Company,  has been named as a
defendant  in over 280 similar  cases in New Jersey.  These cases have also been
tendered by Sterling.  The Company has elected to defend  these  cases,  many of
which have been dismissed or settled for nominal sums.

      While the  ultimate  liability  of the  Company  related  to the  asbestos
matters above cannot be  determined  at this time,  the Company has recorded and
accrued  amounts  that it deems  reasonable  for  prospective  liabilities  with
respect to this matter.

      Non-Environmental Litigation - Banco del Atlantico, S.A.

      In December  1996,  Banco del Atlantico  ("plaintiff"),  a bank located in
Mexico,  filed a lawsuit in Texas against  Woods US, a subsidiary  of Katy,  and
against certain past and/or then present  officers,  directors and former owners
of  Woods  US  (collectively,  "defendants").  The  plaintiff  alleges  that the
defendants  participated  in violations of the Racketeer  Influenced and Corrupt
Organizations Act ("RICO") involving, among other things, allegedly fraudulently
obtained  loans  from  Mexican  banks   (including  the  plaintiff)  and  "money
laundering"  of the proceeds of the illegal  enterprise.  The plaintiff  alleges
that it made loans to a Mexican corporation  controlled by certain past officers
and directors of Woods US based upon fraudulent  representations and guarantees.
The plaintiff also alleges violations of the Indiana RICO and Crime Victims Act,
common law fraud and conspiracy,  fraudulent transfer claims, and seeks recovery
upon certain  alleged  guarantees  purportedly  executed by Woods Wire Products,
Inc., a predecessor company from which Woods US purchased certain assets in 1993
(prior to Woods US's  ownership  by Katy,  which  began in December  1996).  The
primary legal theories under which the plaintiff  seeks to hold Woods liable for
its alleged damages are respondeat superior, conspiracy, successor liability, or
a combination of the three.

      After several years of procedural  disputes,  this lawsuit has become more
active recently.  In 2003, by order of the Southern District of Texas court, the
case was  transferred  to the  Southern  District  of Indiana on the ground that
Indiana has a closer relationship to this case than Texas. The case is currently
pending in the Southern  District of Indiana.  In December  2003,  the plaintiff
filed an Amended Complaint.  There have been various motions to dismiss filed by
the  defendants.  These  motions  have been  denied by the court or have  become
mooted by subsequent filings by the plaintiff.

      In September  2004,  the  plaintiff and HSBC Mexico,  S.A.  (collectively,
"plaintiffs"), an additional owner of the Amended Complaint's claims against the
defendants, filed a Second Amended Complaint, which includes new allegations and


                                       10
<PAGE>

seeks additional  relief from the defendants.  The Second Amended Complaint also
adds new defendants  (none of which is affiliated  with the Company) and claims,
although the fundamental  nature of the lawsuit,  described  above,  remains the
same.

      The Defendants  filed motions to dismiss the Second  Amended  Complaint on
November 8, 2004. These motions sought  dismissal of plaintiffs'  Second Amended
Complaint on grounds of, among other things, forum non conveniens and failure to
state a claim.  The plaintiffs  have  responded to  defendants'  motions and the
defendants have replied. A new Case Management Plan has also been entered in the
case,  which  ties  further  case  deadlines,  including  the date for  close of
discovery and trial of this action,  to the Court's "last ruling" on the pending
motions to dismiss. Discovery is continuing.

      The plaintiffs'  Second Amended  Complaint claims damages in excess of $24
million and requests  that damages be trebled  under  Indiana and federal  RICO,
and/or the Indiana Crime Victims Act. The Second Amended Complaint also requests
that  the  Court  void  certain   transactions  and  asset  sales  as  purported
"fraudulent  transfers," including the 1993 Woods Wire Products, Inc. - Woods US
asset  sale,  and  seeks  other  relief.   Because  various  jurisdictional  and
substantive  issues have not yet been fully  adjudicated,  it is not possible at
this time for the  Company to  reasonably  determine  an  outcome or  accurately
estimate the range of potential  exposure.  Katy may also have recourse  against
the former owners of Woods US and others for, among other things,  violations of
covenants,  representations  and warranties under the purchase agreement through
which Katy acquired Woods US, and under state,  federal and common law. Woods US
may also have  indemnity  claims against the former  officers and directors.  In
addition,  there is a dispute with the former  owners of Woods US regarding  the
final  disposition  of amounts  withheld from the purchase  price,  which may be
subject to further  adjustment as a result of the claims by the  plaintiff.  The
extent or limit of any such adjustment  cannot be predicted at this time.  While
the  ultimate  liability  of the  Company  related  to  this  matter  cannot  be
determined  at this time,  the Company has recorded and accrued  amounts that it
deems reasonable for prospective liabilities with respect to this matter.

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

      There were no matters  submitted to a vote of the security  holders during
the fourth quarter of 2004.


                                       11
<PAGE>

                                     PART II

Item 5. MARKET FOR REGISTRANT'S  COMMON EQUITY AND RELATED  STOCKHOLDER  MATTERS
AND ISSUER MARKET PURCHASES OF EQUITY SECURITIES

      Our common  stock is traded on the New York  Stock  Exchange  (NYSE).  The
following  table sets forth  high and low sales  prices for the common  stock in
composite  transactions as reported on the NYSE composite tape for the prior two
years.

            Period                              High          Low
            ------                              ----          ---

            2004
                     First Quarter             $6.50         $5.70
                     Second Quarter             6.47          4.71
                     Third Quarter              5.40          4.94
                     Fourth Quarter             5.45          4.36

            2003
                     First Quarter             $3.61         $2.54
                     Second Quarter             4.89          2.40
                     Third Quarter              5.20          4.80
                     Fourth Quarter             6.75          5.20

      As of March 15,  2005,  there  were 636  holders  of record of our  common
stock, in addition to approximately 1,800 holders in street name, and there were
7,945,377 shares of common stock outstanding.

Dividend Policy

      Dividends are paid at the discretion of the Board of Directors.  Since the
Board of Directors  suspended  quarterly dividends on March 30, 2001 in order to
preserve  cash for  operations,  the Company  has not  declared or paid any cash
dividends on its common stock. In addition,  the Company's  Amended and Restated
Loan Agreement (the "Bank of America  Credit  Agreement")  prohibits the Company
from paying  dividends on its  securities,  other than  dividends paid solely in
securities. The Company currently intends to retain its future earnings, if any,
to fund the  development  and growth of its business  and,  therefore,  does not
anticipate  paying  any  dividends,   either  in  cash  or  securities,  in  the
foreseeable  future. Any future decision  concerning the payment of dividends on
the Company's common stock will be subject to its obligations  under the Bank of
America  Credit  Agreement  and will  depend  upon the  results  of  operations,
financial  condition and capital  expenditure  plans of the Company,  as well as
such  other  factors  as the Board of  Directors,  in its sole  discretion,  may
consider relevant. For a discussion of our Bank of America Credit Agreement, see
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations".

Equity Compensation Plan Information

      Information   regarding  securities  authorized  for  issuance  under  the
Company's equity compensation plans as of December 31, 2004 is set forth in Item
12, "Security Ownership of Certain Beneficial Owners and Management."

Share Repurchase Plan

      On April 20, 2003,  the Company  announced a plan to repurchase up to $5.0
million shares of its common stock. In 2004,  12,000 shares of common stock were
repurchased on the open market for  approximately  $0.1 million,  while in 2003,
482,800  shares  of  common  stock  were  repurchased  on the  open  market  for
approximately  $2.5 million.  We suspended  further  repurchases  under the plan
again on May 10,  2004 and  there  currently  are no plans to  resume  the share
repurchase program.


                                       12
<PAGE>

      Item 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                          Years Ended December 31,
                                                                   ----------------------------------------------------------------
                                                                        2004        2003          2002         2001         2000
                                                                        ----        ----          ----         ----         ----
                                                                      (Amounts in Thousands, except per share data and percentages)
<S>                                                                <C>           <C>           <C>          <C>          <C>
Net sales                                                          $   457,642   $  436,410    $  445,755   $  447,108   $  508,850
                                                                   ===========   ==========    ==========   ==========   ==========

Loss from continuing operations [a]                                $   (36,121)  $  (18,887)   $  (53,083)  $  (65,464)  $   (9,111)
  Discontinued operations [b]                                               --        9,523        (1,152)       2,202        3,653
  Cumulative effect of a change in accounting principle [b] [c]             --           --        (2,514)          --           --
                                                                   -----------   ----------    ----------   ----------   ----------
          Net loss                                                 $   (36,121)  $   (9,364)   $  (56,749)  $  (63,262)  $   (5,458)
                                                                   ===========   ==========    ==========   ==========   ==========

(Loss) earnings per share - Basic and diluted:
  Loss from continuing operations                                  $     (6.45)  $    (3.06)   $    (7.67)  $    (7.54)  $    (1.08)
  Discontinued operations                                                   --         1.16         (0.14)        0.26         0.43
  Cumulative effect of a change in accounting principle                     --           --         (0.30)          --           --
                                                                   -----------   ----------    ----------   ----------   ----------
          Loss per common share                                    $     (6.45)  $    (1.90)   $    (8.11)  $    (7.28)  $    (0.65)
                                                                   ===========   ==========    ==========   ==========   ==========

Total assets                                                       $   224,464   $  241,708    $  275,977   $  347,955   $  446,723
Total liabilities                                                      155,879      139,416       157,405      173,691      263,490
Preferred interest in subsidiary                                            --           --        16,400       16,400       32,900
Stockholders' equity                                                    68,585      102,292       102,172      157,864      150,333
Long-term debt, including current maturities                            58,737       39,663        45,451       84,093      133,838
Impairments of long-lived assets                                        30,831       11,880        21,204       47,469           --
Severance, restructuring and related charges                             3,505        8,132        19,155       13,380        2,651
Depreciation and amortization [d]                                       14,266       21,954        19,259       20,216       21,096
Capital expenditures                                                    13,876       13,435        10,119       12,566       14,196
Working capital [e]                                                     59,855       43,439        35,206       65,733       97,258
Ratio of debt to capitalization                                           46.1%        27.9%         27.7%        32.5%        42.2%

Weighted average common shares outstanding - Basic and diluted       7,883,265    8,214,712     8,370,815    8,393,210    8,403,701
Number of employees                                                      1,793        1,808         2,261        2,922        3,509
Cash dividends declared per common share                           $      0.00   $     0.00    $     0.00   $     0.00   $     0.30
</TABLE>

[a]   Includes  distributions  on preferred  securities in 2003,  2002, 2001 and
      2000.

[b]   Presented net of tax.

[c]   This amount is a  transitional  impairment  of goodwill  recorded with the
      adoption of SFAS No. 142, Goodwill and Other Intangible Assets.

[d]   From continuing operations only.

[e]   Defined as current assets minus current liabilities, exclusive of deferred
      tax assets and liabilities and debt classified as current.


                                       13
<PAGE>

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

COMPANY OVERVIEW

      For purposes of this discussion and analysis section, reference is made to
the table below and the Company's  Consolidated Financial Statements included in
Part II, Item 8. We have two principal  operating groups:  Maintenance  Products
and  Electrical  Products.  The group  labeled as Other  consists of Sahlman and
SESCO.  Two business units formerly  included in the Electrical  Products Group,
GC/Waldom and Hamilton,  and one business  formerly  included in the Maintenance
Products Group,  Duckback,  have been classified as Discontinued  Operations for
the periods  prior to their  sale.  Duckback  was sold on  September  16,  2003,
GC/Waldom was sold on April 2, 2003, and Hamilton was sold on October 31, 2002.

      Since the  Recapitalization,  the Company's management has been focused on
the following restructuring and cost reduction initiatives:

o     Consolidation  of facilities:  35  manufacturing,  distribution and office
      facilities  closed or  consolidated  (including  2  expected  to be closed
      during  2005);   manufacture  and   distribution  of  each  business  unit
      centralized; Electrical Products manufacturing outsourced to Asia.

o     Divestitures of non-core  operations:  4 non-core business units have been
      sold or otherwise exited and proceeds have been applied to reduce debt.

o     Selling   general  and   administrative   (SG&A)   cost   rationalization:
      restructured   duplicative  corporate  and  support  functions;   overhead
      reduced;  implemented  shared sales,  administrative  and support services
      model.

o     Organizational  changes:  across-the-board review of management talent and
      key hires made at both the corporate and operational levels.

      With these initiatives nearly complete, the Company's focus has shifted to
sustaining  revenue growth and containing  raw material  costs.  Our future cost
reductions are expected to continue to come from process  improvements  (such as
Lean  Manufacturing  and  Six  Sigma),  value  engineering  products,   improved
sourcing/purchasing and lean administration.

      End-user demand for our Maintenance and Electrical  products is relatively
stable  and  recurring,   particularly   in  comparison  to  other   traditional
manufacturing  segments.  Demand  for  products  in our  markets  is strong  and
supported  by the  necessity  of the  products  to users,  creating a steady and
predictable market. In the core  janitorial/sanitary  and foodservice  segments,
sanitary  and  health  standards  create a steady  flow of ongoing  demand.  The
consumable  or  short-life  nature  of most of the  products  used for  cleaning
applications  (primarily  floor pads,  hand pads, and mops,  brooms and brushes)
means that they are replaced  frequently,  creating  further  demand  stability.
During the past few years,  we did  experience  limited  recession-driven  sales
declines,  which we believe was  primarily  attributable  to both  reductions in
inventory held by distributors as well as reduced end-user consumption caused by
declines in airport  occupancy  (particularly  after September 11th) and general
hospital  occupancy.  In  addition,  many  of  our  Electrical  products  can be
characterized  as "value"  items that are  frequently  lost or  discarded,  with
subsequent   replacement   ensuring   continuing  and  stable  demand.  This  is
particularly  the case with  electrical  cords,  which  consistently  experience
strong sales ahead of the holiday season.

      The markets in which we compete are expected to  experience  steady growth
over the next several years.  Our core commercial  cleaning  product markets are
expected to grow at rates  approximating gross domestic product (GDP), driven by
increasing  sanitary  standards as a result of heightened  health  concerns.  In
addition,  the improvement in general  economic  conditions will increase demand
for Katy's  cleaning  products,  due to higher  commercial  occupancy  rates and
increased demand for travel and hospitality  industries.  The consumer  plastics
market as a whole is relatively mature, with its growth  characteristics  linked
to household  expenditures.  Demand is driven by the  increasing  competition of
material possessions by North American households and the desire of consumers to
store those possessions in an attractive and orderly manner. Demand for consumer
plastic storage products is also typically stable, due to consumer perception of
these products as "value" items.  The market for  automotive  storage units,  is
driven by sales of trucks,  sports utility  vehicles  (SUV's) and  cross/utility
vehicles (CUV's) which grew at a combined average rate of 3.9% per annum between
2000 and 2002. End-users are relatively insensitive to both price and brand-name
offering, instead focusing on product quality and size.

      We estimate that the North American  market for cords and work lights will
grow at above-GDP  growth rates,  driven by the growing number of suburban homes
(particularly  those with  outdoor  spaces) and the growth in the use of outdoor
appliances. The market for surge protectors and multiple outlet products is also
expected  to grow at  above-GDP  growth  rates  driven by the  continued  use in
consumer purchasers of appliances,  computers, home entertainment equipment, and
other electronic equipment,  as well as the growing public awareness of the need
to protect these products from power surges.

      Key elements in achieving  profitability in the Maintenance Products Group
include 1) maintaining a low cost structure, from a production, distribution and
administrative  standpoint,  2) providing  outstanding  customer  service and 3)


                                       14
<PAGE>

containing raw material costs  (especially  plastic resins) or raising prices to
shift these higher costs to our customers for our plastic products.  In addition
to continually  striving to reduce our cost structure,  we are seeking to offset
pricing  challenges by developing new products for the consumer markets,  as new
products or beneficial  modifications of existing  products increase demand from
our customers,  provide  novelty to the consumer,  and offer an opportunity  for
favorable  pricing from  customers in the national  mass  merchant  retail area.
Retention  of  customers,  or  more  specifically,   product  lines  with  those
customers,  is also very important in the mass merchant  retail area,  given the
vast size of these  national  accounts.  Since the fourth  quarter  of 2003,  we
centralized our customer service and administrative  functions for CCP divisions
JanSan Plastics,  Abrasives  (Glit-Microtron portion only), Textiles and Filters
and Grillbricks in one location,  allowing  customers to order products from any
CCP commercial unit on one purchase order. We expect to add the customer service
and administrative functions for the remaining Abrasives operations during 2005.
We believe that  operating  these business units as a cohesive unit will improve
customer service in that our customers' purchasing processes will be simplified,
as will  follow  up on order  status,  billing,  collection  and  other  related
functions.  We  believe  that  this  may  increase  customer  loyalty,  help  in
attracting new customers and lead to increased top line sales in future years.

      Key elements in achieving  profitability in the Electrical  Products Group
are in many ways similar to those mentioned for our Maintenance  Products Group.
The  achievement  and  maintenance of a low cost structure is critical given the
significant level of foreign competition, primarily from Asia and Latin America.
For this reason,  in December 2002 and December 2003, Woods US and Woods Canada,
respectively, ceased all manufacturing and initiated a fully outsourced strategy
for their consumer  electrical  products.  Customer  service,  specifically  the
ability to fill orders at a rate designated by our customers,  is very important
to customer retention, given seasonal sales pressures in the consumer electrical
area.  Woods US and Woods  Canada are both  subject to seasonal  sales trends in
connection  with the holiday  shopping  season,  with stronger sales and profits
realized in the third and early  fourth  quarters.  Retention  of  customers  is
critical in the Electrical Products Group, given the size of national accounts.

      See  "OUTLOOK  FOR  2005"  in  this  section  for   discussion  of  recent
developments  related  to the  Maintenance  Products  Group  and the  Electrical
Products Group.


                                       15
<PAGE>

<TABLE>
<CAPTION>
                                                                                         Years Ended December 31,
                                                                    ---------------------------------------------------------------
                                                                            2004                  2003                 2002
                                                                    -------------------   -------------------  --------------------
                                                                     (Amounts in Millions, except per share data and percentages)
                                                                    -------  ----------   -------  ----------  --------------------
                                                                        $    % to Sales       $    % to Sales     $      % to Sales
                                                                    -------  ----------   -------  ----------  -------   ----------
<S>                                                                 <C>         <C>       <C>         <C>      <C>         <C>
Net sales                                                           $ 457.6     100.0     $ 436.4     100.0    $ 445.8     100.0
Cost of goods sold                                                    396.6      86.7       365.5      83.8      373.6      83.8
                                                                    -------  ----------   -------  ----------  -------   ----------
   Gross profit                                                        61.0      13.3        70.9      16.2       72.2      16.2
Selling, general and administrative expenses                           57.3     (12.5)       59.8     (13.7)      63.7     (14.3)
Impairments of long-lived assets                                       30.8      (6.7)       11.9      (2.7)      21.2      (4.8)
Severance, restructuring and related charges                            3.5      (0.8)        8.1      (1.8)      19.1      (4.3)
Loss on SESCO joint venture transaction                                  --        --          --        --        6.0      (1.3)
                                                                    -------     -----     -------     -----    -------     -----
   Operating loss                                                     (30.6)     (6.7)       (8.9)     (2.0)     (37.8)     (8.5)
                                                                                =====                 =====                =====
Equity in (loss) income of equity method investment                      --                  (5.7)                 0.3
Gain (loss) on sale of assets                                           0.3                   0.6                 (0.2)
Interest expense                                                       (4.0)                 (6.2)                (6.2)
Other, net                                                             (0.9)                 (1.8)                (0.1)
                                                                    -------               -------              -------
Loss from continuing operations before (provision) benefit for
   income taxes                                                       (35.2)                (22.0)               (44.0)
(Provision) benefit  for income taxes from continuing operations       (0.9)                  3.2                 (7.5)
                                                                    -------               -------              -------
Loss from continuing operations before distributions on preferred
   interest of subsidiary                                             (36.1)                (18.8)               (51.5)
Distributions on preferred interest of subsidiary (net of tax)           --                  (0.1)                (1.6)
                                                                    -------               -------              -------
Loss from continuing operations                                       (36.1)                (18.9)               (53.1)
Income (loss) from operations of discontinued businesses
    (net of tax)                                                         --                   2.1                 (4.5)
Gain on sale of discontinued businesses (net of tax)                     --                   7.4                  3.3
                                                                    -------               -------              -------
Loss before cumulative effect of a change in accounting principle     (36.1)                 (9.4)               (54.3)

Cumulative effect of a change in accounting principle (net of tax)       --                    --                 (2.5)
                                                                    -------               -------              -------
Net loss                                                              (36.1)                 (9.4)               (56.8)
Gain on early redemption of preferred interest of subsidiary             --                   6.6                   --
Payment in kind of dividends on convertible preferred stock           (14.8)                (12.8)               (11.1)
                                                                    -------               -------              -------
Net loss attributable to common stockholders                        $ (50.9)              $ (15.6)             $ (67.9)
                                                                    =======               =======              =======

Loss per share of common stock - basic and diluted:

Loss from continuing operations                                     $ (4.58)              $ (2.30)             $ (6.34)
Gain on early redemption of preferred interest of subsidiary             --                  0.80                   --
Payment-in-kind (PIK) dividends on convertible preferred stock        (1.87)                (1.56)               (1.33)
                                                                    -------               -------              -------
   Loss from continuing operations attributable to common
    stockholders                                                      (6.45)                (3.06)               (7.67)
Discontinued operations (net of tax)                                     --                  1.16                (0.14)
Cumulative effect of a change in accounting principle (net of tax)       --                    --                (0.30)
                                                                    -------               -------              -------
   Net loss attributable to common stockholders                     $ (6.45)              $ (1.90)             $ (8.11)
                                                                    =======               =======              =======
</TABLE>

RESULTS OF OPERATIONS


                                       16
<PAGE>

2004 COMPARED TO 2003

Overview

      Our  consolidated  net sales in 2004 increased $21.2 million,  or 5%, from
2003.  Higher  net sales  resulted  from a higher  pricing  of 4% and  favorable
currency  translation  of 2%,  offset by lower volumes of 1%. Gross margins were
13.3% in the year ended  December 31, 2004 a decrease of 2.9  percentage  points
from the year ended  December 31,  2003.  Accelerating  raw  material  costs and
incremental  operating  costs incurred due to the delayed  consolidation  of the
abrasives   facilities  were  partially   offset  by  the  favorable  impact  of
restructuring,  cost containment, lower depreciation and pricing increases. SG&A
as a  percentage  of sales  declined  from 13.7% in 2003 to 12.5% in 2004.  This
decrease can be primarily  attributed  to  maintaining  these costs  despite the
increase in net sales.  The operating loss increased by $21.7 million to $(30.6)
million,  principally due to higher  impairments of long-lived  assets and lower
gross margins,  partially offset by lower severance,  restructuring  and related
charges.

      Overall,  we reported a net loss  attributable  to common  shareholders of
($50.9) million [($6.45) per share] for the year ended December 31, 2004, versus
a net loss  attributable to common  shareholders of ($15.6) million [($1.90) per
share] in the same period of 2003.  During the year ended  December 31, 2004, we
recorded  the  impact  of  paid-in-kind  dividends  earned  on  our  convertible
preferred  stock of ($14.8) million  [($1.87) per share].  During the year ended
December 31,  2003,  we reported  income from  discontinued  operations  of $9.5
million,  net of tax  [$1.16 per  share],  a gain on the early  redemption  of a
preferred  interest in a subsidiary  of $6.6  million  [$0.80 per share] and the
impact of payment-in-kind dividends earned on its convertible preferred stock of
($12.8) million [($1.56) per share].

Net Sales

Maintenance Products Group

      Net sales  from the  Maintenance  Products  Group  decreased  from  $285.3
million  during the year ended  December 31, 2003 to $278.8  million  during the
year ended  December  31,  2004,  a decrease of 2%.  Overall,  this  decline was
primarily  due to lower  volumes  of sales of 5%,  partially  offset  by  higher
pricing of 1% and the favorable impact of exchange rates of 2%. Sales volume for
the Consumer  Plastics  business  unit,  which sells  primarily to mass merchant
customers,  was  significantly  lower due to the  elimination of certain product
lines with major outlet  customers  and to a lesser  extent due to promotions in
2003 which did not recur in 2004.  We also  experienced  volume  declines in our
Abrasives   business   unit  in  the  U.S.  due  to  shipping   and   production
inefficiencies  caused by the delayed  consolidation of two abrasives facilities
into the Wrens,  Georgia  facility  and a fire at our  facility  in Wrens in the
fourth  quarter of 2004 that  disrupted  production  for  several  weeks.  These
decreases in Abrasives sales were partially  offset by stronger sales of roofing
products to the construction industry. We experienced volume gains in certain of
our businesses that sell to commercial customers,  particularly in our Abrasives
Canada, Textiles, Filters and Grillbricks business units. Abrasives Canada sales
benefited from an improving North American economy,  while sales of Textiles and
Filters and  Grillbricks  products  benefited  from the ability of  customers to
order products from all CCP divisions on one purchase order. The JanSan Plastics
business unit experienced volume declines primarily due to bid business obtained
in 2003 but not repeated in 2004,  customer "buy-ins" to achieve certain rebates
in 2003 also not repeated in 2004 and lost market share.  Lower JanSan  Plastics
volume  was  partially   offset  by  price   increases   implemented  to  combat
accelerating raw material costs. UK JanSan Plastics volumes increased  primarily
as a result of the  acquisition  of Spraychem  Limited on April 1, 2003.  The UK
Consumer  Plastics and UK JanSan  Plastics  business  units also  benefited from
favorable exchange rates in 2004 versus 2003.

Electrical Products Group

      The Electrical Products Group's sales improved from $151.1 million for the
year ended  December 31, 2003 to $178.7  million for the year ended December 31,
2004, an increase of 18%.  Sales improved as a result of a higher pricing of 9%,
an increase in volume of 7%, and favorable currency  translation of 2%. Multiple
selling price increases were  implemented  throughout 2004 at Woods US (and to a
lesser  extent at Woods  Canada) to offset  the  rising  cost of copper and PVC.
Volume at Woods US benefited principally from the acquisition of significant new
product lines with both existing and new customers.  Woods Canada  experienced a
slight volume increase as sales to its two largest customers  benefited from new
product  offerings and higher demand was partially offset by the loss of certain
lines  of  business  at  certain  customers.  Sales at Woods  Canada  were  also
favorably  impacted by a stronger Canadian dollar versus the U.S. dollar in 2004
versus 2003.


                                       17
<PAGE>

Operating Income

<TABLE>
<CAPTION>
    Operating income (loss)                              2004                       2003                     Change
                                                ----------------------    ----------------------    -----------------------
                                                     $        % Margin        $         % Margin        $          % Margin
                                                     -        --------        -         --------        -          --------
<S>                                             <C>              <C>      <C>               <C>     <C>              <C>
Maintenance Products Group                      $   (2.7)        (1.0)    $    9.3          3.3     $  (12.0)        (4.3)
Electrical Products Group                           16.8          9.4         15.6         10.3          1.2         (0.9)
Unallocated corporate expense                      (10.4)                    (13.8)                      3.4
                                                --------                  --------                  --------
                                                     3.7          0.8         11.1          2.5         (7.4)        (1.7)
Impairments of long-lived assets                   (30.8)                    (11.9)                    (18.9)
Severance, restructuring and related charges        (3.5)                     (8.1)                      4.6
                                                --------                  --------                  --------
Operating loss                                  $  (30.6)        (6.7)    $   (8.9)        (2.0)    $  (21.7)        (4.7)
                                                ========                  ========                  ========
</TABLE>

Maintenance Products Group

      The Maintenance  Products  Group's  operating  income  decreased from $9.3
million  (3.3% of net  sales)  during  the year ended  December  31,  2003 to an
operating  loss of $2.7 million (-1.0% of net sales) for the year ended December
31, 2004.  The decrease was primarily  attributable  to lower volumes and higher
raw  material  costs in 2004  versus  2003 (that were only  partially  recovered
through higher selling prices), as well as a decline in the profitability of our
Abrasives business resulting from shipping and production  inefficiencies caused
by the delayed  consolidation of two facilities into the Wrens, Georgia facility
and the fire at our facility in Wrens in the 4th quarter of 2004 that  disrupted
production for several weeks. Operating results were positively impacted by $5.4
million of  incremental  depreciation  in 2003  related to the  revision  of the
estimated useful lives of certain  manufacturing  assets,  effective  January 1,
2003.  Operating income was also favorably  impacted  through benefits  realized
from the implementation of cost reduction strategies.

Electrical Products Group

      The Electrical  Products  Group's  operating  income  increased from $15.6
million  (10.3% of net  sales)  for the year ended  December  31,  2003 to $16.8
million (9.4% of net sales) for the year ended December 31, 2004, an increase of
8%. The increase in profitability  was due to the strong volume increases at the
Woods US  business  unit as well as  improved  margins due to the closure of the
Woods Canada  manufacturing  facility in December  2003 and the  completion of a
fully outsourced product strategy for that business.  Overall,  margins declined
as a result of selling price  increases  (especially  at Woods Canada) not quite
keeping  pace  with the  increasing  costs of copper  and PVC and the  impact of
increased lower-margin direct import sales.

Corporate

      Corporate operating expenses decreased from $13.8 million in 2003 to $10.4
million in 2004 principally due to lower casualty  insurance costs,  lower bonus
expense resulting from a decline in operating  performance and decreased expense
for stock appreciation  rights due to a lower stock price affecting the variable
plan accounting for these awards.

Impairments of Long-lived Assets

      During the fourth  quarter of 2004, we  recognized  an impairment  loss of
$29.9  million  related to the US  Plastics  business  units  (JanSan  Plastics,
Consumer Plastics and Container - see discussion of reporting units in Note 4 to
the Consolidated Financial Statements in Part II, Item 8) including $8.0 million
related to goodwill,  $8.4 million  related to machinery  and  equipment,  $10.9
million  related to a customer  list  intangible  and $2.6 million  related to a
trademark.  In the fourth  quarter of 2004,  the  profitability  of the Consumer
Plastics  business  unit  declined  sharply  as we were  unable  to  pass  along
sufficient  selling price increases to combat the accelerating  cost of resin (a
key raw  material  used in all of the US Plastics  units).  We believe  that our
future earnings and cash flow could be negatively impacted to the extent further
increases  in resin and other raw  material  costs cannot be offset or recovered
through  higher  selling  prices.  In  accordance  with  Statement  of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Intangible Assets, we (through
an independent  third party  valuation firm) performed an analysis of discounted
future cash flows which  indicated  that the book value of the US Plastics units
was significantly greater than the fair value of those businesses.  In addition,
as a result of the goodwill analysis, we also assessed whether there had been an
impairment of the long-lived assets in accordance with SFAS No. 144,  Accounting
for the Impairment or Disposal of Long-Lived  Assets. The Company concluded that
the book value of equipment, a customer list intangible and trademark associated
with the US Plastics  business  unit  significantly  exceeded the fair value and
impairment had occurred.  Also in 2004, we recorded  impairment  charges of $0.8
million  related to property and  equipment at our Metal Truck Box business unit
and $0.1 million related to certain assets at the Woods US business unit.


                                       18
<PAGE>

      Impairment  charges  in 2003  included  $7.2  million  related to idle and
obsolete  equipment,   tooling  and  leasehold   improvements  at  Warson  Road,
Hazelwood, Bridgeton, and the Santa Fe Springs, California metals facility, $1.3
million of costs  related to the  partial  closure of  Abrasives  facilities  in
Lawrence, Massachusetts and Pineville, North Carolina and the consolidation into
the Wrens,  Georgia facility,  $0.4 million of obsolete molds and tooling at our
UK Consumer Plastics facility and $0.4 million associated with the write down of
certain equipment at Woods Canada and Woods US as a result of the closure of the
manufacturing  operations at both business units.  In addition,  $2.6 million of
goodwill and patents of the Abrasives  Canada  business unit were impaired as it
was  determined  that future cash flows of this  business  could not support the
carrying value of its intangible  assets.  This business unit has  experienced a
decline in profitability  in recent years  principally as a result of increasing
foreign competition.

Severance, Restructuring and Related Charges

      Operating results for the Company during the years ended December 31, 2004
and 2003 were  negatively  impacted  by  severance,  restructuring  and  related
charges of $3.5 million and $8.1 million, respectively.  Charges in 2004 related
to adjustments to previously  established  non-cancelable  lease liabilities for
abandoned   facilities  ($0.9  million);  a  non-cancelable  lease  accrual  and
severance as a result of the shutdown of  manufacturing  and  severance at Woods
Canada  ($0.9  million);  the  restructuring  of the  Abrasives  business  ($0.8
million);  costs for the movement of inventory and equipment in connection  with
the consolidation of St. Louis  manufacturing and distribution  facilities ($0.3
million);  the shutdown and  relocation  of a  procurement  office in Asia ($0.3
million);  costs incurred for the consolidation of administrative  functions for
CCP ($0.2  million);  and expenses for the closure of CCP Canada's  facility and
the subsequent consolidation into the Woods Canada facility ($0.1 million).

      The largest of these charges in 2003 related to  non-cancelable  leases at
abandoned  facilities as a result of the  consolidation of the CCP facilities in
the St.  Louis area into  CCP's  largest  and most  modern  plant in  Bridgeton,
Missouri  ($3.7  million).  A charge of $1.5  million  was  recorded  related to
severance  associated  with  the  shutdown  of the  Woods  Canada  manufacturing
operations in December 2003. Charges of $1.2 million were also incurred relating
to the restructuring of the Abrasives business unit,  principally to consolidate
the Lawrence,  Massachusetts and Pineville,  North Carolina  facilities into the
newly expanded Wrens, Georgia location. We also incurred charges in 2003 related
to severance costs for headcount  reductions ($0.6 million),  an adjustment to a
non-cancelable  lease accrual due to a change in sub-lease  assumptions at Woods
US ($0.5 million),  the consolidation of the customer service and administrative
functions for CCP ($0.3  million),  costs related to the closure of CCP's metals
facility in Santa Fe Springs,  California  ($0.2  million) and  consulting  fees
associated with product outsourcing strategies ($0.1 million).

Other

      Upon review of Sahlman's  results for 2002 and the first half of 2003, and
after  initial  study of the status of the shrimp  industry  and  markets in the
United States,  we evaluated the business further to determine if there had been
a loss in the value of the investment that was other than temporary.  Based upon
the  results of a third  party  appraisal,  we  estimated  the fair value of the
Sahlman business  through a liquidation  value analysis whereby all of Sahlman's
assets would be sold and all of its obligations would be settled.  Also based on
the  aforementioned  appraisal,  we  evaluated  the  business  by using  various
discounted cash flow analyses, estimating future free cash flows of the business
with  different  assumptions  regarding  growth,  and  reducing the value of the
business  arrived at through this analysis by its  outstanding  debt. All values
were then multiplied by 43%, Katy's investment  percentage.  The answers derived
by each of the three  assumption  models were then  probability  weighted.  As a
result,  Katy concluded that $1.6 million was a reasonable estimate of the value
of its  investment  in  Sahlman,  and  therefore  a charge of $5.5  million  was
recorded  in the third  quarter  of 2003 to  reduce  the  carrying  value of the
investment. Based on our assessment at December 31, 2004, we continue to believe
that $1.6 million is a reasonable estimate of our investment in Sahlman.

      Interest expense decreased by $2.2 million in 2004 versus 2003,  primarily
due to the write-off of unamortized debt costs of $1.8 million in 2003 resulting
from a February 2003 refinancing and other  reductions in overall  availability.
The  remaining  decrease in interest  expense of $0.4  million was due mainly to
slightly  lower  average  borrowings  during  2004,  principally  as a result of
applying  the  proceeds  from the sale of non-core  businesses  in 2003 to repay
debt.

      Other,  net for the year ended December 31, 2004 included the write-off of
certain  receivables  related  to  businesses  disposed  of prior to 2002  ($0.8
million)  and the  write-off of fees and  expenses  associated  with a financing
which we chose not to  pursue  ($0.5  million).  Other,  net for the year  ended
December 31, 2003  included  the  write-off  of certain  receivables  related to
businesses  disposed prior to 2002 ($0.7  million),  realized  foreign  exchange
losses ($0.6  million) and costs  associated  with the proposed  sale of certain
subsidiaries  ($0.3  million).  The gain on sale of assets in 2004 and 2003 were
primarily due to the sales of excess real estate.


                                       19
<PAGE>

      The  provision  for income  taxes for the year  ended  December  31,  2004
reflects  current  expense  for state and  foreign  income  taxes  offset by the
reduction  of certain  tax  reserves  and the  recognition  of  certain  foreign
deferred tax assets.  During the year ended  December 31, 2003, a tax benefit of
$3.2 million was recorded on pre-tax loss to the extent a provision was provided
for the gain on sale of  discontinued  businesses and income from  operations of
discontinued businesses. A further benefit was not recorded due to the valuation
allowance  recorded  against our net  deferred  tax assets.  Also in 2003,  $1.1
million and $3.8 million of income tax expense were  attributable to income from
discontinued  businesses  and the gain on the sale of  discontinued  businesses,
respectively.

Discontinued Operations

      The GC/Waldom  and Duckback  business  units are reported as  discontinued
operations  for the year ended  December  31,  2003.  There was no  discontinued
operations activity for 2004.

      GC/Waldom  reported  income of $0.1 million (net of tax) in the first half
of 2003. We sold  GC/Waldom on April 2, 2003 and  recognized a loss (net of tax)
of $0.2 million in the second quarter of 2003 as a result of the sale.

      Duckback  generated  income of $2.0 million (net of tax) in the first nine
months of 2003.  We sold  Duckback on September  16, 2003 and  recognized a gain
(net of tax) of $7.6  million  in the third  quarter  of 2003 as a result of the
sale.

2003 COMPARED TO 2002

Overview

      Our consolidated  net sales for the Company  declined $9.3 million,  or 2%
from  2002  levels,  due to a volume  decline  of 3% and  lower  pricing  of 1%,
partially  offset by favorable  currency  translation  of 2%. Gross margins held
constant at  approximately  16.2% as the benefit of  implemented  cost reduction
strategies,  offset  lower  pricing,  higher  resin  costs and  atypically  high
depreciation (see Operating Income -Maintenance Products Group below). SG&A as a
percentage of sales  declined from 14.3% in 2002 to 13.7% in 2003. The operating
deficit was reduced significantly from $37.8 million to $8.9 million mostly as a
result  of  reduced   severance,   restructuring  and  related  charges,   lower
impairments  of  long-lived  assets and the loss on the SESCO  joint  venture in
2002.

      Overall,  we reported a net loss  attributable  to common  shareholders of
($15.6) million [($1.90) per share] for the year ended December 31, 2003, versus
a net loss  attributable to common  shareholders of ($67.9) million,  or ($8.11)
per share in the same period of 2002.  During the year ended  December 31, 2003,
we reported  income from  discontinued  operations of $9.5  million,  net of tax
[$1.16 per share], a gain on the early  redemption of a preferred  interest in a
subsidiary  of $6.6  million,  net of tax [$0.80 per  share],  and the impact of
paid-in-kind  dividends earned on convertible preferred stock of ($12.8) million
[($1.56)  per  share].  During the year ended  December  31,  2002,  we reported
results of discontinued  operations of ($1.2)  million,  net of tax [($0.14) per
share],  a  cumulative  effect of a change  in  accounting  principle  of ($2.5)
million  [($0.30) per share],  as well as the impact of  paid-in-kind  dividends
earned on convertible preferred stock of ($11.1) million [($1.33) per share].

      The  tables  and  narrative   below  summarize  the  key  factors  in  the
year-to-year changes in operating results.

Net Sales

Maintenance Products Group

      Net sales  from the  Maintenance  Products  Group  decreased  from  $300.3
million in 2002 to $285.3 million in 2003, a decrease of 5%. The decline was due
to a volume decrease of 6%, partially offset by the favorable impact of exchange
rates of 1%. The decline in sales is attributed to both  commercial and consumer
customers.  On the  commercial  side,  sales were lower at the Abrasives  Canada
business  unit,  primarily  due to  increased  foreign  competition,  and in the
Abrasives  business unit,  primarily  because a major customer  increased  their
supplier base in 2003. In addition, we believe that the JanSan Plastics business
unit was  impacted  during  the  first  three  quarters  of 2003 by the  general
economic conditions and reduced demand for cleaning products,  due to commercial
real  estate  vacancy  rates and  reduced  demand in the travel and  hospitality
industries.  In the fourth quarter,  sales for the JanSan Plastics business unit
were higher in 2003 than in 2002  representing  an  improvement in the health of
the aforementioned  industries.  Sales were higher in the international  markets
for Katy's  commercial and sanitary  maintenance  products,  primarily in the UK
JanSan Plastics unit. Sales for the Consumer Plastics business unit, which sells
primarily  to mass  merchant  retail  customers,  were  lower due to the loss of
certain  product  lines with major  retailers and to a lesser  extent,  downward
pricing  pressures and allowance,  rebate,  and other programs.  The UK Consumer
Plastics business


                                       20
<PAGE>

benefited overall from stronger volumes and favorable exchange rates,  partially
offset by price erosion similar to that in the JanSan Plastics business.

Electrical Products Group

      The Electrical Product Group's sales increased from $144.3 million in 2002
to $151.1  million in 2003,  an  increase of 5%. An increase in volume of 5% and
favorable  currency  translation of 3% was partially  offset by lower pricing of
3%. The Woods US business unit experienced a  year-over-year  increase in volume
as a result of a strong fourth  quarter in 2003. The  improvement  was primarily
due to higher volumes of direct import  merchandise (such as extension cords and
power strips),  which are shipped  directly from our suppliers to our customers.
Woods US sales  performance in 2003 also benefited from the  introduction of new
surge  products,  sales to new  customers  and same store growth for its largest
customer,  a  national  home  improvement  retailer.   Offsetting  these  volume
increases  was a slight  reduction in pricing  which was  implemented  to remain
competitive  in certain  product  lines.  Higher  sales at Woods  Canada in 2003
compared  to 2002 were  principally  due to the  impact of a  stronger  Canadian
dollar  versus the U.S.  dollar.  This  increase  was offset  partially by lower
pricing mostly due to a shift during 2003 to direct import products.

Other

      Sales from other operations  decreased by $1.2 million, as a result of the
SESCO  waste-to-energy  operation  being  turned  over to a third party in April
2002.

Operating Income

<TABLE>
<CAPTION>
        Operating income (loss)                           2003                      2002                     Change
                                                ---------------------------------------------------------------------------
                                                    $         % Margin        $         % Margin       $           % Margin
                                                    -         --------        -         --------       -           --------
<S>                                             <C>              <C>      <C>               <C>     <C>              <C>
Maintenance Products Group                      $    9.3          3.3     $   11.7          3.9     $   (2.4)        (0.6)
Electrical Products Group                           15.6         10.3          8.5          5.9          7.1          4.4
Other                                                                         (0.8)                      0.8
Unallocated corporate expense                      (13.8)                    (10.9)                     (2.9)
                                                --------                  --------                  --------
                                                    11.1          2.5          8.5          1.9          2.6          0.6
Impairments of long-lived assets                   (11.9)                    (21.2)                      9.3
Severance, restructuring and related charges        (8.1)                    (19.1)                     11.0
Loss on SESCO joint venture transaction                                       (6.0)                      6.0
                                                --------                  --------                  --------
Operating loss                                  $   (8.9)        (2.0)    $  (37.8)        (8.5)    $   28.9          6.5
                                                ========                  ========                  ========
</TABLE>

Maintenance Products Group

      Operating  income  decreased by $2.4  million  from $11.7  million in 2002
(3.9% of net  sales) to $9.3  million in 2003  (3.3% of net  sales).  An overall
decline in net sales for the year  (mostly  due to volume  declines)  along with
high raw material  costs and  atypically  high  depreciation  contributed to the
reduced profitability  (excluding  severance,  restructuring and related charges
and impairments of long-lived  assets) of this group in 2003.  Profitability for
the year was  lower at the Metal  Truck  Box,  Abrasives  and  Abrasives  Canada
business units, due to  volume-related  issues,  while the Consumer Plastics and
Consumer  Plastics UK businesses  were negatively  impacted by top-line  pricing
pressures and an  unfavorable  mix of lower margin  products.  In addition,  all
Consumer Plastics and JanSan Plastics  businesses  worldwide  experienced higher
raw material  costs  (principally  resin) in 2003.  Operating  results were also
negatively impacted by $5.4 million of incremental  depreciation  related to the
revision  of  the  estimated  useful  lives  of  certain  manufacturing  assets,
specifically  molds and tooling  equipment  used in the  manufacture  of plastic
products,  from seven to five years,  effective  January 1, 2003. This change in
estimate was made  following  significant  impairments  to these types of assets
recorded during 2002. These shortfalls were partially offset by improved results
at the JanSan Plastics business unit which benefited from the  implementation of
cost reduction  strategies.  Operating results continue to be favorably impacted
by the numerous cost reduction  initiatives  including the  consolidation of our
manufacturing  and distribution  facilities in the St. Louis area. In the fourth
quarter of 2003,  net sales were only down 1% from the fourth quarter of 2002 as
compared to a 6% decline for the first nine months of the year. Operating income
for the fourth  quarter of 2003 was $4.6  million as compared to $3.4 million in
the fourth quarter of 2002, an increase of 36%.

Electrical Products Group


                                       21
<PAGE>

      The  Electrical  Products Group  continued its solid  performance in 2003,
once again driven primarily by improved sales volume over 2002, and secondarily,
by higher margins over the prior year. Operating income jumped from $8.5 million
(5.9% of net sales) in 2002 to $15.6  million  (10.3% of net sales) in 2003,  an
increase of 82%. Profitability in 2003 was positively impacted by cost reduction
strategies  at both  Woods US and  Woods  Canada.  After  significant  study and
research  into  different  sourcing  alternatives,  we decided that Woods US and
Woods Canada would source  substantially  all of their  products  from Asia.  In
December 2002,  Woods US shut down all of its  manufacturing  facilities,  which
were in  suburban  Indianapolis  and in  southern  Indiana.  This  was the  most
significant  initiative benefiting 2003, resulting in approximately $4.6 million
in  savings.  We believe  that  restructuring  steps  executed  in 2002 and 2003
related to the Woods US and Woods Canada  businesses will allow those businesses
to  remain  competitive  within  their  markets.  The fully  outsourced  product
strategy  has  reduced  headcount  at Woods US by 361  employees  (effective  in
December 2002) and Woods Canada by 100 employees (effective in December 2003).

      Cost reduction  initiatives at Woods Canada to reduce product and variable
costs also had a favorable  impact on 2003.  Higher sales  volumes and favorable
currency  translation also aided in maintaining  margins.  During 2002, Woods US
incurred a loss of $0.9 million  related to obsolete raw material and  packaging
inventory  on hand which could not be  utilized  following  the  shutdown of its
manufacturing facilities.

Corporate

      Corporate operating expenses increased from $10.9 million in 2002 to $13.8
million  in  2003  principally  due to  higher  casualty  insurance  costs,  and
increased expense for stock appreciation rights due to an increasing stock price
affecting the variable plan accounting for these awards.

Impairments of Long-lived Assets

      The Company  recorded  impairments  of long-lived  assets of $11.9 million
during 2003 and $21.2 million during 2002. Charges in 2003 included $7.2 million
related to idle and obsolete  equipment,  tooling and leasehold  improvements at
Warson Road, Hazelwood,  Bridgeton, and the Santa Fe Springs,  California metals
facility,  $1.3 million of costs related to the closure of Abrasives  facilities
in Lawrence,  Massachusetts and Pineville,  North Carolina and the consolidation
into the Wrens, Georgia facility,  $0.4 million of obsolete molds and tooling at
our UK Consumer  Plastics  facility and $0.4 million  associated  with the write
down of  certain  equipment  at Woods  Canada  and  Woods US as a result  of the
closure of the  manufacturing  operations at both business  units.  In addition,
$2.6 million of goodwill and patents of the Abrasives  Canada business unit were
impaired as it was determined  that future cash flows of this business could not
support the carrying  value of its  intangible  assets.  This  business unit has
experienced a decline in profitability  in recent years  principally as a result
of increasing foreign competition.

      In 2002, CCP impaired property,  plant and equipment  (primarily molds and
tooling  assets)  and a  customer  list  intangible  by $15.3  million  and $3.6
million,  respectively.  The impairments  were primarily  associated with assets
used in the  Consumer  Plastics  business,  and  were  the  result  of  analyses
indicating  insufficient future cash flows over the remaining useful life of the
assets to cover the carrying  values of the assets.  Given the unique  nature of
molds for  specific  products,  the fair  values are often less than  historical
cost,  resulting in  impairments.  The Textiles  business  unit  recorded  asset
impairments of $1.9 million,  resulting from management  decisions on the future
use of certain  manufacturing  assets in their  Atlanta,  Georgia  facility.  In
addition, Woods US impaired $0.4 million of equipment as a result of the closure
of its manufacturing operations in December 2002.

Severance, Restructuring and Related Charges

      Operating results for the Company during the years ended December 31, 2003
and 2002 were  negatively  impacted  by  severance,  restructuring  and  related
charges of $8.1 million and $19.1  million,  respectively.  The largest of these
charges in 2003 related to  non-cancelable  leases at abandoned  facilities as a
result of the  consolidation  of the CCP  facilities  in the St. Louis area into
CCP's largest and most modern plant in Bridgeton,  Missouri  ($3.7  million).  A
charge of $1.5 million was recorded  related to  severance  associated  with the
shutdown of the Woods Canada manufacturing  operations in December 2003. Charges
of  $1.2  million  were  also  incurred  relating  to the  restructuring  of the
Abrasives business unit, principally to consolidate the Lawrence,  Massachusetts
and Pineville,  North Carolina facilities into the newly expanded Wrens, Georgia
location.  We also  incurred  charges  in 2003  related to  severance  costs for
headcount  reductions ($0.6 million),  an adjustment to a  non-cancelable  lease
accrual due to a change in sub-lease assumptions at Woods US ($0.5 million), the
consolidation of the customer service and administrative functions for CCP ($0.3
million),  costs  related to the  closure of CCP's  metals  facility in Santa Fe
Springs,  California  ($0.2 million) and consulting fees associated with product
outsourcing strategies ($0.1 million).

      During 2002, the Company  recorded $11.7 million  related to the St. Louis
facility consolidation (mostly for non-cancelable lease payments);  $3.6 million
in consulting fees associated with product outsourcing  strategies,  relating to
the Woods


                                       22
<PAGE>

US, Woods Canada and Textiles  business  units;  $2.4 million for  severance and
other  exit  costs  related  to the  shut  down of all  Woods  US  manufacturing
operations;  $0.9  million  for  severance  costs  related to various  headcount
reductions,  mostly in the  management  level of various  business  units;  $0.3
million for legal fees and involuntary  termination  benefits  related to SESCO;
and $0.2  million  related to the  consolidation  of the  customer  service  and
administrative functions for CCP.

SESCO Joint Venture Transaction

      During  2002,  we recorded a charge of $6.0 million  consisting  of 1) the
discounted  value of an  obligation  created by Katy to the third party who took
over daily  operation of the SESCO  facility,  2) the carrying  value of certain
assets contributed to the partnership formed in connection with this transaction
and 3) costs to close the transaction.

Other

      Upon review of Sahlman's  results for 2002 and the first half of 2003, and
after  initial  study of the status of the shrimp  industry  and  markets in the
United States,  we evaluated the business further to determine if there had been
a loss in the value of the investment that was other than temporary.  Based upon
the  results of a third  party  appraisal,  we  estimated  the fair value of the
Sahlman business  through a liquidation  value analysis whereby all of Sahlman's
assets would be sold and all of its obligations would be settled.  Also based on
the  aforementioned  appraisal,  we  evaluated  the  business  by using  various
discounted cash flow analyses, estimating future free cash flows of the business
with  different  assumptions  regarding  growth,  and  reducing the value of the
business  arrived at through this analysis by its  outstanding  debt. All values
were then multiplied by 43%, Katy's investment  percentage.  The answers derived
by each of the three  assumption  models were then  probability  weighted.  As a
result,  Katy concluded that $1.6 million was a reasonable estimate of the value
of its  investment  in  Sahlman,  and  therefore  a charge of $5.5  million  was
recorded  in the third  quarter  of 2003 to  reduce  the  carrying  value of the
investment.

      Interest  expense was  essentially  unchanged in 2003 as compared to 2002.
During 2003, we wrote off $1.8 million of unamortized debt issuance costs due to
the reduction in our borrowing  capacity as a result of the  refinancing  of our
debt  obligations  in February 2003. The amount of this write-off is included in
interest  expense.  The offsetting  decrease in interest expense in 2003 was due
mainly to lower  average  borrowings  during  2003,  principally  as a result of
applying  proceeds  from the sale of non-core  businesses in 2002 and 2003. To a
lesser  extent,  lower  interest  rates  contributed  to the decline in interest
expense.

      Other,  net in 2003  included the  write-off of certain  deferred  payment
receivables  associated with businesses disposed of prior to 2002 ($0.7 million)
and realized  foreign  exchange  losses ($0.6 million).  Other,  net in 2002 was
comprised  primarily of realized foreign  exchange  losses.  The gain on sale of
assets in 2003 was primarily due to the sales of excess real estate.

      Our effective tax rate in 2003 was 14%, indicating that a $3.2 million tax
benefit was recorded on a $22.0 million pretax loss from continuing  operations.
A tax  benefit  was  recorded  on  pre-tax  loss to the extent a  provision  was
provided  for the  gain  on sale of  discontinued  businesses  and  income  from
operations of discontinued businesses. A further benefit was not recorded due to
the  valuation  allowance  recorded  against our net  deferred  tax assets.  See
"Deferred  Income  Taxes" in "Critical  Accounting  Policies" and Note 14 to the
Consolidated  Financial Statements in Part II, Item 8, for further discussion of
income tax accounting.

      In 2002, we recorded a $2.5 million transitional  goodwill impairment (net
of tax),  as a result of the  adoption  of SFAS No.  142,  which is shown on the
Consolidated  Statements  of  Operations  as a cumulative  effect of a change in
accounting  principle.  See Note 3 to the Consolidated  Financial  Statements in
Part II, Item 8 for a further discussion of goodwill impairments.

Discontinued Operations

      Three business units are reported as discontinued  operations for 2003 and
2002: Hamilton Precisions Metals, L.P. (Hamilton), GC/Waldom and Duckback.

      Hamilton  generated  $0.2 million (net of tax) of income in 2002 (prior to
its sale on  October  31,  2002)  and a gain  (net of tax) of $3.3  million  was
recognized in the fourth quarter of 2002 as a result of the sale.

      GC/Waldom  reported  operating income of $0.1 million (net of tax) in 2003
(prior to its sale on April 2, 2003),  versus a $6.4 million  operating  loss in
2002.  Nearly the entire  operating  loss of GC/Waldom in 2002 was the result of
asset  valuation  adjustments in anticipation of a sale of this business unit. A
loss (net of tax) of $0.2 million was  recognized in the second  quarter of 2003
as a result of the GC/Waldom sale.


                                       23
<PAGE>

      Duckback  generated  operating income of $2.0 million (net of tax) in 2003
(prior to its sale on  September  16,  2003) versus $1.7 million (net of tax) in
2002. A gain (net of tax) of $7.6 million was recognized in the third quarter of
2003 as a result of the Duckback sale.

LIQUIDITY AND CAPITAL RESOURCES

      We require funding for working capital needs and capital expenditures.  We
believe that our cash flow from  operations and the use of available  borrowings
under the Bank of America Credit Agreement (as defined below) provide sufficient
liquidity for our operations going forward. As of December 31, 2004, we had cash
and cash  equivalents of $8.5 million  versus cash and cash  equivalents of $6.7
million at December 31, 2003.  Also as of December 31, 2004, we had  outstanding
borrowings  of $58.7  million [46% of total  capitalization],  under the Bank of
America Credit  Agreement with unused  borrowing  availability  on the Revolving
Credit  Facility of $33.0 million.  As of December 31, 2003, we had  outstanding
borrowings  of $39.7  million [28% of total  capitalization].  We used cash flow
from  operations of $8.0 million  during the year ended December 31, 2004 versus
the $8.0  million  provided by cash flow from  operations  during the year ended
December 31, 2003.  The increased use of cash flow from  operations  during 2004
versus 2003 was  primarily  attributable  to higher  inventories  in 2004 due to
higher  material  costs and increased  levels to support  higher  volumes in the
Electrical  Products  Group and provide  higher levels of customer  service.  We
expect these  liquidity  trends to reverse in 2005 as capital  expenditures  are
expected to be lower in 2005,  inventory is being reduced and other  elements of
working capital are being managed.

      We have a number of obligations and  commitments,  which are listed on the
schedule   later  in  this  section   entitled   "Contractual   and   Commercial
Obligations."  We have  considered all of these  obligations  and commitments in
structuring our capital  resources to ensure that they can be met. See the notes
accompanying  the table in that section for further  discussions of those items.
We believe that given our strong  working  capital  base,  additional  liquidity
could be obtained  through  additional  debt financing,  if necessary.  However,
there is no guarantee that such financing could be obtained. In addition, we are
continually  evaluating  alternatives  relating to the sale of excess assets and
divestitures  of  certain  of our  business  units.  Asset  sales  and  business
divestitures   present   opportunities  to  provide   additional   liquidity  by
de-leveraging our financial position.

Bank of America Credit Agreement

      On  April  20,  2004,  we  completed  a  refinancing  of  our  outstanding
indebtedness (the  "Refinancing")  and entered into a new agreement with Bank of
America  Business  Capital  (formerly Fleet Capital  Corporation)  (the "Bank of
America  Credit  Agreement").  Like the  previous  credit  agreement  with Fleet
Capital  Corporation,  the Bank of America  Credit  Agreement  is a $110 million
facility with a $20 million term loan ("Term Loan") and a $90 million  revolving
credit facility ("Revolving Credit Facility") with essentially the same terms as
the  previous  credit  agreement.  The Bank of America  Credit  Agreement  is an
asset-based  lending  agreement  and involves a syndicate of four banks,  all of
which  participated in the syndicate from the previous credit  agreement.  Since
the inception of the previous credit  agreement,  we had repaid $18.2 million of
the  previous  Term  Loan.  The  ability  to repay  that  loan on a faster  than
anticipated  timetable  was  primarily  due to  funds  generated  by the sale of
GC/Waldom  in April 2003,  the sale of Duckback  in  September  2003 and various
sales of excess  real  estate.  The Bank of America  Credit  Agreement,  and the
additional  borrowing  ability under the Revolving  Credit Facility  obtained by
incurring  new term debt,  results in three  important  benefits  related to our
long-term  strategy:  (1)  additional  borrowing  capacity  to invest in capital
expenditures and/or acquisitions key to our strategic  direction,  (2) increased
working  capital  flexibility  to build  inventory when necessary to accommodate
lower cost  outsourced  finished  goods  inventory and (3) the ability to borrow
locally in Canada and the United  Kingdom  and provide a natural  hedge  against
currency fluctuations.

      Below is a summary of the sources and uses  associated with the funding of
the Bank of America Credit Agreement (in thousands):

<TABLE>
<S>                                                                               <C>
            Sources:
            Term Loan incremental borrowings                                      $18,152
                                                                                  =======

            Uses:
            Repayment of Revolving Credit Facility borrowings                     $16,713
            Certain costs associated with the Bank of America Credit Agreement      1,439
                                                                                  -------
                                                                                  $18,152
                                                                                  =======
</TABLE>

      The Revolving Credit Facility has an expiration date of April 20, 2009 and
its borrowing base is determined by eligible inventory and accounts  receivable.
The Term Loan also has a final  maturity  date of April 20, 2009 with  quarterly
payments of


                                       24
<PAGE>

$0.7  million.  A final payment of $6.4 million is scheduled to be paid in April
2009. The term loan is collateralized by our property, plant and equipment.

      Our borrowing base under the Bank of America  Credit  Agreement is reduced
by the outstanding amount of standby and commercial letters of credit.  Vendors,
financial  institutions  and other  parties  with whom we conduct  business  may
require  letters of credit in the future  that  either (1) do not exist today or
(2) would be at higher  amounts  than  those that exist  today.  Currently,  our
largest letters of credit relate to our casualty insurance programs. At December
31, 2004, total outstanding letters of credit were $8.7 million.

      All  extensions of credit under the Bank of America  Credit  Agreement are
collateralized  by a first  priority  security  interest  in and  lien  upon the
capital stock of each material domestic  subsidiary (65% of the capital stock of
certain  foreign  subsidiaries),  and all of our present  and future  assets and
properties.  Customary financial covenants and restrictions apply under the Bank
of America Credit Agreement.  Until September 30, 2004,  interest accrued on the
Revolving  Credit Facility  borrowings at 175 basis points over applicable LIBOR
rate and at 200 basis points over LIBOR for  borrowings  under the Term Loan. In
accordance  with the Bank of America  Credit  Agreement,  our margins (i.e.  the
interest  rate spread  above  LIBOR)  increased by 25 basis points in the fourth
quarter of 2004 based upon certain leverage  measurements.  Margins increased an
additional  25 basis  points in the first  quarter of 2005 based on our leverage
ratio (as defined in the Bank of America  Credit  Agreement)  as of December 31,
2004 and will increase  another 50 basis points upon the  effective  date of the
Third Amendment (see below).  Also in accordance with the Bank of America Credit
Agreement,  margins  on the term  borrowings  will  drop 25 basis  points if the
balance of the Term Loan is reduced  below $10.0  million.  Interest  accrues at
higher margins on prime rates for swing loans, the amounts of which were nominal
at December 31, 2004.

      We incurred  additional  debt issuance costs in 2004  associated  with the
Bank of America Credit Agreement.  Additionally, at the time of the inception of
the Bank of America  Credit  Agreement,  we had  approximately  $4.0  million of
unamortized debt issuance costs  associated with the previous credit  agreement.
The remainder of the previously  capitalized  costs,  along with the capitalized
costs from the Bank of America Credit Agreement, will be amortized over the life
of the Bank of America  Credit  Agreement  through April 2009.  Based on the pro
rata  reduction  in  borrowing  capacity  from  a  previous  refinancing  of the
Company's  credit  facility  and in the  connection  with  the  sale  of  assets
(primarily  the GC/Waldom and Duckback  businesses) to repay the term loan under
the  previous  agreement,  we  charged  to expense  $1.8  million of  previously
unamortized debt issuance costs during 2003.  Also,  during the first quarter of
2004, we incurred fees and expenses of $0.5 million  associated with a financing
which we chose not to pursue.

      The revolving  credit facility under the Bank of America Credit  Agreement
requires lockbox  agreements which provide for all receipts to be swept daily to
reduce borrowings outstanding. These agreements,  combined with the existence of
a  material  adverse  effect  ("MAE")  clause  in the  Bank  of  America  Credit
Agreement,  caused the revolving  credit  facility to be classified as a current
liability  (except as noted  below),  per guidance in the  Emerging  Issues Task
Force Issue No. 95-22 , Balance Sheet  Classification of Borrowings  Outstanding
under Revolving  Credit  Agreements that Include Both a Subjective  Acceleration
Clause and a Lock-Box Arrangement.  We do not expect to repay, or be required to
repay,  within one year, the balance of the revolving credit facility classified
as a current liability. The MAE clause, which is a fairly typical requirement in
commercial credit  agreements,  allows the lenders to require the loan to become
due  if  they  determine  there  has  been  a  material  adverse  effect  on our
operations,  business, properties, assets, liabilities,  condition or prospects.
The  classification  of the  revolving  credit  facility as a current  liability
(except  as noted  above) is a result  only of the  combination  of the  lockbox
agreements  and the MAE clause.  The Bank of America  Credit  Agreement does not
expire  or  have a  maturity  date  within  one  year,  but  rather  has a final
expiration  date of April  20,  2009.  The  lender  had not  notified  us of any
indication  of a MAE at  December  31,  2004,  and we were not in default of any
provision of the Bank of America Credit Agreement at December 31, 2004.

      We were in compliance with the applicable  financial covenants in the Bank
of America Credit  Agreement at December 31, 2004.  However,  we determined that
due to declining  profitability in the fourth quarter of 2004, potentially lower
profitability in the first half of 2005 and the timing of certain  restructuring
payments,  we would not meet our Fixed Charge  Coverage Ratio (as defined in the
Bank of America  Credit  Agreement)  and could  potentially  exceed our  maximum
Consolidated  Leverage  Ratio  (also as defined  in the Bank of  America  Credit
Agreement)  as of the end of the first,  second and third  quarters of 2005.  In
anticipation  of not  achieving  the  minimum  Fixed  Charge  Coverage  Ratio or
exceeding the maximum  Consolidated  Leverage Ratio, we obtained an amendment to
the Bank of  America  Credit  Agreement  (the  "Second  Amendment").  The Second
Amendment  applied  only to the first three  quarters of 2005 and the  covenants
would have  returned to their  original  levels for the fourth  quarter of 2005.
Specifically,  the Second Amendment  eliminated the Fixed Charge Coverage Ratio,
increased  the  maximum  Consolidated  Leverage  Ratio,  established  a  Minimum
Consolidated  EBITDA (on a latest  twelve  months basis) for each of the periods
and also established a Minimum  Availability (the eligible  collateral base less
outstanding  borrowings and letters of credit) on each day within the nine-month
period.

      Subsequent to the Second Amendment's effective date, we determined that we
would likely not meet our amended  financial  covenants.  On April 13, 2005,  we
obtained a further amendment to the Bank of America Credit Agreement (the "Third
Amendment").  The Third Amendment eliminates the maximum  Consolidated  Leverage
Ratio and the Minimum Consolidated EBITDA as established by the Second Amendment
and adjusts the Minimum  Availability  such that our  eligible  collateral  must
exceed the sum of our  outstanding  borrowings  and letters of credit  under the
Revolving  Credit Facility by at least $5 million from the effective date of the
Third  Amendment  through  September  29, 2005 and by at least $7.5 million from
September  30, 2005 until the date we deliver our financial  statements  for the
first  quarter  of  2006  to our  lenders.  Subsequent  to the  delivery  of the
financial  statements  for the  first  quarter  of  2006,  the  Third  Amendment
reestablishes the minimum Fixed Charge Coverage Ratio as originally set forth in
the Bank of America  Credit  Agreement.  The Third  Amendment  also  reduces the
maximum allowable capital expenditures for 2005 from $15 million to $10 million,
and increases the interest rate margins on all of our outstanding borrowings and
letters of credit to the largest margins set forth in the Bank of America Credit
Agreement.  Interest rate margins will return to levels set forth in the Bank of
America Credit Agreement  subsequent to the delivery of our financial statements
for the first quarter of 2006 to our lenders.

      If we are unable to comply with the terms of amended  covenants,  we could
seek to  obtain  further  amendments  and  pursue  increased  liquidity  through
additional debt financing and/or the sale of assets (see discussion above).


                                       25
<PAGE>

Contractual and Commercial Obligations

      We have contractual obligations associated with operating lease agreements
(many of which relate to our facilities) in the ordinary course of business.

      Our  obligations  as of  December  31,  2004,  are  summarized  below  (in
thousands of dollars):

<TABLE>
<CAPTION>

                                                                Due in less         Due in          Due in       Due after
Contractual Cash Obligations                         Total      than 1 year      1-3 years       4-5 years         5 years
----------------------------                         -----      -----------      ---------       ---------         -------
<S>                                             <C>             <C>             <C>             <C>             <C>
Revolving credit facility [a]                   $   40,166      $       --      $       --      $   40,166      $       --
Term loans                                          18,571           2,857           5,714           5,714           4,286
Operating leases [b]                                29,355           8,170          11,075           6,253           3,857
Severance and restructuring [b]                      2,670           1,323             681             425             241
SESCO payable to Montenay [c]                        3,800           1,050           2,200             550              --
                                                ----------      ----------      ----------      ----------      ----------
Total Contractual Obligations                   $   94,562      $   13,400      $   19,670      $   53,108      $    8,384
                                                ==========      ==========      ==========      ==========      ==========

<CAPTION>
                                                               Due in less          Due in          Due in       Due after
Other Commercial Commitments                         Total     than 1 year       1-3 years       4-5 years         5 years
----------------------------                         -----     -----------       ---------       ---------         -------
<S>                                             <C>             <C>             <C>             <C>             <C>
Commercial letters of credit                    $      831      $      831      $       --      $       --      $       --
Stand-by letters of credit                           7,853           7,853              --              --              --
Guarantees [d]                                      23,670           8,370          15,300              --              --
                                                ----------      ----------      ----------      ----------      ----------
Total Commercial Commitments                    $   32,354      $   17,054      $   15,300      $       --      $       --
                                                ==========      ==========      ==========      ==========      ==========
</TABLE>

[a] As discussed in the  Liquidity  and Capital  Resources  section  above,  the
entire  revolving  credit  facility under the Bank of America  Revolving  Credit
Agreement is classified as a current liability on the Consolidated Statements of
Financial  Position as a result of the combination in the Bank of America Credit
Agreement of 1) lockbox  agreements on Katy's  depository bank accounts and 2) a
subjective  Material Adverse Effect (MAE) clause.  The Revolving Credit Facility
expires in April of 2009.

[b] Future  non-cancelable  lease  rentals  are  included  in the line  entitled
"Operating   leases,"   which  also   includes   obligations   associated   with
restructuring  activities.  The Consolidated Balance Sheet at December 31, 2004,
includes $3.6 million in discounted  liabilities  associated with non-cancelable
operating  lease  rentals,  net of  estimated  sub-lease  revenues,  related  to
facilities  that  have  been  abandoned  as  a  result  of   restructuring   and
consolidation activities.

[c] Amount owed to Montenay as a result of the SESCO  partnership,  discussed in
Note 7 to the Consolidated Financial Statements. $1.0 million of this obligation
is  classified  in the  Consolidated  Balance  Sheets as an  Accrued  Expense in
Current  Liabilities,  while the  remainder  is included  in Other  Liabilities,
recorded on a discounted basis.

[d] As discussed in Note 7 to the Consolidated  Financial Statements in Part II,
Item 8,  SESCO,  an  indirect  wholly-owned  subsidiary  of Katy,  is party to a
partnership  that  operates  a   waste-to-energy   facility,   and  has  certain
contractual  obligations,  for which Katy provides  certain  guarantees.  If the
partnership is not able to perform its  obligations  under the contracts,  under
certain  circumstances  SESCO and Katy could be subject to damages  equal to the
amount of Industrial Revenue Bonds outstanding  (which financed  construction of
the  facility)  less amounts  held by the  partnership  in debt service  reserve
funds.  Katy and  SESCO do not  anticipate  non-performance  by  parties  to the
contracts.

Off-balance Sheet Arrangements

      See Note 7 to the Consolidated Financial Statements in Part II, Item 8 for
a discussion of SESCO.

Cash Flow

      Liquidity  was  negatively  impacted  during  2004 as a  result  of  lower
operating  cash  flow.  We used $8.0  million  of  operating  cash  compared  to
operating  cash  provided  during  2003 of $8.0  million.  Debt  obligations  at
December 31, 2004


                                       26
<PAGE>

increased  $18.9  million  from  December 31,  2003.  This  increase in debt was
primarily the result of higher  inventory and  increased  capital  expenditures,
partially offset by the proceeds from the sale of assets.

Operating Activities

      Cash flow from operating activities before changes in operating assets and
discontinued  operations  was $8.5 million in 2004 versus $23.0 million in 2003.
While we had net losses in both periods,  these  amounts  included many non-cash
items such as depreciation and amortization,  impairments of long-lived  assets,
the write-off and  amortization of debt issuance costs,  the gain or loss on the
sale of assets and the change in the ownership of our equity method  investment.
We used $16.5  million and $9.8 million of cash related to operating  assets and
liabilities during the years ended December 31, 2004 and 2003, respectively. Our
operating cash flow was unfavorably impacted in 2004 by an increase in inventory
of $11.1 million,  due primarily to higher material costs,  and increased levels
to support higher  volumes in the  Electrical  Products Group and provide higher
levels of customer service. By the end of 2004, we were turning our inventory at
5.0 times per year versus 5.6 times per year in 2003.  Cash of $7.0  million and
$14.7  million was used in 2004 and 2003,  respectively,  to satisfy  severance,
restructuring   and  related   obligations.   Restructuring   and  consolidation
activities,  which are  expected to end in 2005,  are  important to reducing our
cost structure to a competitive  level.  Discontinued  operations  (Duckback and
GC/Waldom) used $5.2 million of cash flow in 2003.

Investing Activities

      Capital  expenditures  totaled  $13.9 million in 2004 as compared to $13.4
million in 2003 as spending for an equipment  replacement program (primarily for
plastics  products)  in 2004 was  mostly  offset by lower  capital  expenditures
related to  restructuring  and  consolidation  activities.  Anticipated  capital
expenditures are expected to be significantly lower in 2005 than in 2004, mainly
due to an equipment  replacement  program in 2004. We sold additional  assets in
2004 and 2003 for net proceeds of $5.8 million and $2.8  million,  respectively.
On March 31, 2004, Woods Canada sold its manufacturing facility for net proceeds
of $3.2 million and  immediately  entered into a  sale/leaseback  arrangement to
allow that business unit to occupy this property as a distribution  facility. On
June  28,  2004,  CCP sold  its  vacant  metals  facility  in Santa Fe  Springs,
California for net proceeds of $1.9 million.  On February 3, 2003, Woods US sold
its manufacturing facility in Moorseville,  for net proceeds of $1.8 million, of
which  $0.7  million  was used to repay a  mortgage  loan on that  property.  In
addition to the sale of real estate assets,  we received  aggregate net proceeds
of $23.6 million for the sale of the GC/Waldom and Duckback businesses in 2003.

Financing Activities

      Cash  flows  from  financing  activities  in 2004  and  2003  reflect  the
refinancing  of our  outstanding  obligations  in April 2004 and February  2003,
respectively. Overall, debt increased $18.9 million in 2004 versus a decrease of
$5.1 million in 2003. Direct debt costs, primarily associated with the refinance
transactions,   totaled  $1.5  million  and  $1.6  million  in  2004  and  2003,
respectively.  In  2003,  we  redeemed  for  $9.8  million  (representing  a 40%
discount),  the remainder of a preferred  interest in CCP.  During 2004,  12,000
shares of common  stock were  repurchased  on the open market for  approximately
$0.1 million under our $5.0 million  share  repurchase  program,  while in 2003,
482,800  shares  of  common  stock  were  repurchased  on the  open  market  for
approximately  $2.5  million.  On May 10, 2004,  we suspended  the program after
announcing  the  resumption  of the plan on April 20,  2004.  We had  previously
suspended the program in November 2003.  There  currently are no plans to resume
the share repurchase program.

TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES

      In connection with the Contico International, L.L.C. (now CCP) acquisition
on January 8, 1999, we entered into building  lease  agreements  with  Newcastle
Industries, Inc. (Newcastle). Lester Miller, the former owner of CCP, and a Katy
director from 1999 to 2000, is the majority owner of Newcastle.  Currently,  the
Hazelwood,   Missouri  facility  is  the  only  property  leased  directly  from
Newcastle.  Rental  expense  for these  properties  approximates  market  rates.
Related  party rental  expense for the years ended  December 31, 2004,  2003 and
2002  was   approximately   $0.5   million,   $0.5  million  and  $0.8  million,
respectively.

      Upon our  purchase  of the  common  interest  of CCP on  January  8, 1999,
Newcastle  retained a preferred  interest in CCP,  represented  by 329 preferred
units,  each with a stated value of $100,000,  for an aggregate  stated value of
$32.9 million.  The preferred interest yielded an 8% cumulative annual return on
its stated value while  outstanding,  payable  quarterly in cash.  In connection
with the Recapitalization,  the Company entered into an agreement with Newcastle
to redeem at a 40%  discount 165  preferred  units,  plus accrued  distributions
thereon,   which,  as  disclosed   above,  had  a  stated  value  prior  to  the
Recapitalization  of $32.9 million.  We utilized  approximately $10.2 million of
the proceeds  from the  Recapitalization  for the purpose of  redeeming  the 165
preferred  units.  The holder of the preferred  interest  retained 164 preferred
units, with a stated value of $16.4 million. In


                                       27
<PAGE>

connection  with a previous  credit  agreement  completed in February  2003, the
remaining 164 preferred units were redeemed early at a similar 40% discount.  We
paid Newcastle $0.1 million and $1.3 million of preferred distributions for each
of the years ended  December 31, 2003 and 2002,  respectively,  on the preferred
units of CCP held by Newcastle.  The decreases in distributions  were due to the
early  redemptions  of the  preferred  interest in February  2003 (which was the
remainder of the preferred interest) and in June 2001. We do not owe any further
distributions.

      Kohlberg & Co., L.L.C., an affiliate of Kohlberg Investors IV, L.P., whose
affiliate  holds  all  1,131,551  shares  of our  Convertible  Preferred  Stock,
provides  ongoing  management  oversight and advisory  services to Katy. We paid
$0.5 million annually for such services in 2004, 2003 and 2002. We expect to pay
$0.5 million annually in future years.

SEVERANCE, RESTRUCTURING AND RELATED CHARGES

      See Note 19 to the  Consolidated  Financial  Statements in Part II, Item 8
for a discussion of severance, restructuring and related charges.

OUTLOOK FOR 2005

      We  experienced  strong  sales  performance  during 2004 from the Woods US
retail  electrical  corded  products  business,  offset by lower  volumes in our
JanSan Plastics, Consumer Plastics and Abrasives business units. Price increases
were passed along to our Woods US customers  during 2004 as a result of the rise
in copper prices in late 2003 and early 2004 and we are implementing  additional
price  increases  in 2005.  While we  anticipate  a  continued  strong  top line
performance from Woods US, only modest volume growth is expected. We continue to
implement  price  increases  for the JanSan  Plastics,  Container  and  Consumer
Plastics  business  units and for our Metal  Truck Box  business  in response to
higher raw material costs.  However, in the Consumer Plastics business,  we face
the  continuing  challenge of passing  through  price  increases to offset these
higher  costs,  and sales  volumes have been and will  continue to be negatively
impacted as a result of raising prices.

      We expect that the continued shipping and production inefficiencies at our
Abrasives   facilities   will  result  in  higher   operating  costs  until  the
consolidation  of two facilities into the Wrens,  Georgia facility is completed.
We currently  believe this  consolidation  will occur in 2005 and will result in
improved  profitability  of  our  Abrasives  business.  The  disruption  to  our
Abrasives operations in 2004 resulted in the loss of certain customers. While we
expect  to  recover  some of  these  lost  sales  in the  current  year,  we may
experience  additional lost sales in 2005.  Early in the fourth quarter of 2004,
we  experienced  a small fire at the Wrens  facility.  The fire damaged  certain
production  equipment and affected the  operations of certain of our  production
lines.  However,  we have been able to continue to operate the  remainder of our
production lines at this facility and have recently obtained  equipment allowing
us to operate all product lines at this facility.

      Cost of goods sold is subject to variability in the prices for certain raw
materials,  most significantly  thermoplastic  resins used in the manufacture of
plastic  products  for the JanSan  Plastics and  Consumer  Plastics  businesses.
Prices of plastic resins,  such as polyethylene and polypropylene have increased
steadily  from  the  latter  half of 2002  through  the  early  months  of 2005.
Management  has  observed  that the  prices of  plastic  resins are driven to an
extent by prices for crude oil and natural  gas,  in  addition to other  factors
specific  to the  supply and demand of the  resins  themselves.  We are  equally
exposed to price  changes for copper at our Woods US and Woods  Canada  business
units. Prices for copper increased in late 2003 and early 2004,  stabilized in a
historically  high range in mid-2004 and increased  again in late 2004 and early
2005.  Prices for aluminum and steel (raw  materials used in our Metal Truck Box
business),  corrugated  packaging  material  and other raw  materials  have also
accelerated  over the past year. We have not employed an active hedging  program
related to our commodity  price risk,  but are employing  other  strategies  for
managing  this risk,  including  contracting  for a certain  percentage of resin
needs through  supply  agreements  and  opportunistic  spot  purchases.  We have
experienced  cost  increases in the prices of primary raw materials  used in our
products and inflation on other costs such as packaging materials, utilities and
freight.  In total,  these cost increases have continued in the first quarter of
2005, and if sustained  throughout 2005, would amount to an increase of over $50
million  compared  to 2003.  In 2004,  we passed on about $15  million  of these
increases through price increases and are announcing  additional price increases
in the first and second  quarters this year. In a climate of rising raw material
costs (and  especially in 2004),  we experience  difficulty in raising prices to
shift these higher costs to our customers for our plastic  products.  Our future
earnings may be negatively impacted to the extent further increases in costs for
raw materials  cannot be recovered or offset through higher selling  prices.  We
cannot  predict the direction our raw material  prices will take during 2005 and
beyond.

      Since the Recapitalization, our management has been focused on a number of
restructuring  and cost reduction  initiatives,  including the  consolidation of
facilities,   divestiture   of   non-core   operations,   selling   general  and
administrative  (SG&A) cost  rationalization and organizational  changes. In the
future,  we expect to benefit from various profit  enhancing  strategies such as
process  improvements  (including  Lean  Manufacturing  and  Six  Sigma),  value
engineering products, improved sourcing/purchasing and lean administration.


                                       28
<PAGE>

      SG&A  expenses  declined in 2004 as a percentage  of sales versus 2003 and
should  remain  stable as a percentage  of sales in 2005.  We expect to maintain
modest  headcount and rental costs for our corporate  office.  We have completed
the process of  transferring  back-office  functions  of our  Textiles  (Wilen),
Abrasives  (Glit-Microtron portion) and Filters and Grillbricks (Disco) business
units from Georgia to Bridgeton, Missouri, the headquarters of CCP. We expect to
consolidate  administrative  processes  at our Loren  portion  of the  Abrasives
business  in 2005 and will  continue  to  evaluate  the  possibility  of further
consolidation  of  administrative   processes.

      Our cost  reduction  efforts,  integration  of back office  functions  and
simplifications  of our business  transactions  are all dependent on executing a
system  integration  plan.  This plan  involves  the  migration  of data  across
information   technology  platforms  and  implementation  of  new  software  and
hardware.  The domestic systems integration plan was substantially  completed in
October 2003, while we expect the international  systems  integration plan to be
completed during 2005.

      Interest  rates  rose in the  second  half of 2004 and we expect  rates to
continue to rise in 2005.  Ultimately,  we cannot  predict the future  levels of
interest  rates.  Until  September  30,  2004,  interest  accrued on the Bank of
America Credit  Facility  borrowings at 175 basis points over  applicable  LIBOR
rates,  and at 200  basis  points  over  LIBOR  for  Term  Loan  borrowings.  In
accordance  with the Bank of America  Credit  Agreement,  our margins (i.e.  the
interest  rate spread  above  LIBOR)  increased by 25 basis points in the fourth
quarter of 2004 based upon certain leverage  measurements.  Margins increased an
additional  25 basis  points in the first  quarter of 2005 based on our leverage
ratio (as defined in the Bank of America  Credit  Agreement)  as of December 31,
2004 and will increase  another 50 basis points upon the  effective  date of the
Third Amendment. Margins on the term borrowings will drop 25 basis points if the
balance of the Term Loan is reduced below $10.0 million.

      Given our history of operating losses, along with guidance provided by the
accounting  literature  covering  accounting for income taxes,  we are unable to
conclude  it is more  likely  than not that we will be able to  generate  future
taxable  income  sufficient  to realize the  benefits of domestic  deferred  tax
assets  carried  on our books.  Therefore,  except  for our  profitable  foreign
subsidiaries,  a full valuation allowance on the net deferred tax asset position
was recorded at December  31, 2004 and 2003,  and we do not expect to record the
benefit  of any  deferred  tax assets  that may be  generated  in 2005.  We will
continue to record current expense  associated  with federal,  foreign and state
income taxes.

      In 2004,  our financial  performance  benefited  from  favorable  currency
translation as the British Pound Sterling and the Canadian  dollar  strengthened
throughout  the year  against  the U.S.  dollar.  While we  cannot  predict  the
ultimate direction of exchange rates, we do not expect to see the same favorable
impact on our financial performance in 2005.

      We expect our working  capital  levels to remain  constant or improve as a
percentage of sales as the liquidation of excess  inventory in the first half of
2005 will be  offset by higher  levels  to  support  increased  sales.  However,
inventory  carrying values may be impacted by higher  material costs.  Cash flow
will be used in 2005 for additional  costs related to the  consolidation  of the
Abrasives  facilities  as  well  as the  settlement  of  previously  established
restructuring  accruals. The majority of these accruals relate to non-cancelable
lease  obligations  for  abandoned  facilities.  These  accruals  do not  create
incremental  cash  obligations  in that we are obligated to make the  associated
payments  whether we occupy the facilities or not. The amount we will ultimately
pay out under these accruals is dependent on our ability to successfully  sublet
all or a portion of the abandoned facilities.

      On March 29, 2005,  in  anticipation  of not  achieving  the minimum Fixed
Charge Coverage Ratio or exceeding the maximum Consolidated Leverage Ratio as of
the end of the first,  second and third quarters of 2005, we obtained the Second
Amendment to the Bank of America Credit Agreement.  The Second Amendment applied
only to the first three  quarters of 2005 and the covenants  would have returned
to their  original  levels for the fourth  quarter  of 2005.  Specifically,  the
Second  Amendment  eliminated  the Fixed Charge  Coverage  Ratio,  increased the
maximum Consolidated  Leverage Ratio,  established a Minimum Consolidated EBITDA
(on a latest twelve months basis) for each of the periods and also established a
Minimum  Availability (the eligible collateral base less outstanding  borrowings
and letters of credit) on each day within the nine-month period.

      Subsequent to the Second Amendment's effective date, we determined that we
would likely not meet our amended  financial  covenants.  On April 13, 2005,  we
obtained a further amendment to the Bank of America Credit Agreement (the "Third
Amendment").  The Third Amendment eliminates the maximum  Consolidated  Leverage
Ratio and the Minimum Consolidated EBITDA as established by the Second Amendment
and adjusts the Minimum  Availability  such that our  eligible  collateral  must
exceed the sum of our  outstanding  borrowings  and letters of credit  under the
Revolving  Credit Facility by at least $5 million from the effective date of the
Third  Amendment  through  September  29, 2005 and by at least $7.5 million from
September  30, 2005 until the date we deliver our financial  statements  for the
first  quarter  of  2006  to our  lenders.  Subsequent  to the  delivery  of the
financial  statements  for the  first  quarter  of  2006,  the  Third  Amendment
reestablishes the minimum Fixed Charge Coverage Ratio as originally set forth in
the Bank of America  Credit  Agreement.  The Third  Amendment  also  reduces the
maximum allowable capital expenditures for 2005 from $15 million to $10 million,
and increases the interest rate margins on all of our outstanding borrowings and
letters of credit to the largest margins set forth in the Bank of America Credit
Agreement.  Interest rate margins will return to levels set forth in the Bank of
America Credit Agreement  subsequent to the delivery of our financial statements
for the first quarter of 2006 to our lenders.

      If we are unable to comply  with the terms of the  amended  covenants,  we
could seek to obtain further  amendments and pursue increased  liquidity through
additional debt financing  and/or the sale of assets.  We believe that given our
strong working  capital base,  additional  liquidity  could be obtained  through
additional debt  financing,  if necessary.  However,  there is no guarantee that
such financing could be obtained.  In addition,  we are  continually  evaluating
alternatives  relating to the sale of excess assets and  divestitures of certain
of  our  business  units.   Asset  sales  and  business   divestitures   present
opportunities to provide  additional  liquidity by  de-leveraging  our financial
position.

Cautionary   Statement  Pursuant  to  Safe  Harbor  Provisions  of  the  Private
Securities Litigation Reform Act of 1995

      This report and the  information  incorporated by reference in this report
contain  various  "forward-looking  statements" as defined in Section 27A of the
Securities  Act of 1933 and Section 21E of the Exchange Act of 1934, as amended.
The  forward-looking  statements are based on the beliefs of our management,  as
well as assumptions made by, and information currently


                                       29
<PAGE>

available to, our management. We have based these forward-looking  statements on
current  expectations  and projections  about future events and trends affecting
the financial condition of our business.  These  forward-looking  statements are
subject  to  risks  and  uncertainties  that  may lead to  results  that  differ
materially from those expressed in any  forward-looking  statement made by us or
on our behalf, including, among other things:

      -     Increases  in the cost of, or in some  cases  continuation  of,  the
            current  price  levels  of  plastic  resins,   copper,  paper  board
            packaging, and other raw materials.

      -     Our  inability to reduce  product  costs,  including  manufacturing,
            sourcing, freight, and other product costs.

      -     Greater  reliance  on third  parties  for our  finished  goods as we
            increase the portion of our manufacturing that is outsourced.

      -     Our inability to reduce  administrative costs through  consolidation
            of functions and systems improvements.

      -     Our inability to execute our systems integration plan.

      -     Our inability to  successfully  integrate our operations as a result
            of the facility consolidations.

      -     Our  inability  to  sub-lease  rented  facilities  which  have  been
            abandoned   as  a  result   of   consolidation   and   restructuring
            initiatives.

      -     Our inability to achieve product price increases, especially as they
            relate to potentially higher raw material costs.

      -     The  potential  impact of losing  lines of  business  at large  mass
            merchant retailers in the discount and do-it-yourself markets.

      -     Competition from foreign competitors.

      -     The potential  impact of rising  interest  rates on our  LIBOR-based
            Bank of America Credit Agreement.

      -     Our inability to meet covenants  associated with the Bank of America
            Credit Agreement.

      -     The potential  impact of rising costs for  insurance for  properties
            and various forms of liabilities.

      -     The potential impact of changes in foreign  currency  exchange rates
            related to our foreign operations.

      -     Labor issues, including union activities that require an increase in
            production costs or lead to a strike, thus impairing  production and
            decreasing  sales. We are also subject to labor relations  issues at
            entities involved in our supply chain,  including both suppliers and
            those involved in transportation and shipping.

      -     Changes in  significant  laws and government  regulations  affecting
            environmental compliance and income taxes.

      Words and  phrases  such as  "expects,"  "estimates,"  "will,"  "intends,"
      "plans,"  "believes,"  "anticipates" and the like are intended to identify
      forward-looking  statements.  The results  referred to in  forward-looking
      statements may differ  materially from actual results because they involve
      estimates,  assumptions  and  uncertainties.   Forward-looking  statements
      included  herein are as of the date hereof and we undertake no  obligation
      to revise or update such  statements  to reflect  events or  circumstances
      after the date  hereof  or to  reflect  the  occurrence  of  unanticipated
      events. All forward-looking statements should be viewed with caution.

CRITICAL ACCOUNTING POLICIES

      Our significant  accounting policies are more fully described in Note 2 to
the  Consolidated  Financial  Statements  of Katy  included  in Part II, Item 8.
Certain of our accounting policies as discussed below require the application of
significant judgment by management in selecting the appropriate  assumptions for
calculating  amounts to record in our  financial  statements.  By their  nature,
these judgments are subject to an inherent degree of uncertainty.

      Revenue Recognition - Revenue is recognized for all sales, including sales
to agents and  distributors,  at the time the products are shipped and title has
transferred to the customer, provided that a purchase order has been received or
a contract has


                                       30
<PAGE>

been executed,  there are no uncertainties  regarding customer acceptances,  the
sales price is fixed and  determinable  and collection is deemed  probable.  The
Company's  standard  shipping  terms are FOB shipping  point.  Sales  discounts,
returns and allowances,  and cooperative  advertising are included in net sales,
and the  provision  for  doubtful  accounts is included in selling,  general and
administrative expenses.

      Stock-based   Compensation  -  The  Company   follows  the  provisions  of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees,  regarding  accounting for stock options and other stock awards.  APB
Opinion No. 25  dictates a  measurement  date  concept in the  determination  of
compensation expense related to stock awards including stock options, restricted
stock, and stock appreciation rights.  Katy's outstanding stock options all have
established  measurement dates and therefore,  fixed plan accounting is applied,
generally resulting in no compensation expense for stock option awards. However,
the Company has issued stock  appreciation  rights,  stock awards and restricted
stock awards which are accounted for as variable stock  compensation  awards and
compensation  expense has been recorded for these awards.  Compensation  expense
for stock awards and stock appreciation  rights is recorded in selling,  general
and administrative expenses in the Consolidated Statements of Operations.

      Accounts  Receivable  - We  perform  ongoing  credit  evaluations  of  our
customers and adjust credit limits based upon payment history and the customer's
current  creditworthiness,  as determined by our review of their current  credit
information.  We continuously monitor collections and payment from our customers
and maintain a provision for estimated  credit losses based upon our  historical
experience and any specific customer  collection issues that we have identified.
While such credit losses have  historically been within our expectations and the
provision  established,  we cannot guarantee that we will continue to experience
the  same  credit  loss  rates  that we have in the  past.  Since  our  accounts
receivable are concentrated in a relatively few number of large sized customers,
especially our consumer/retail  customers, a significant change in the liquidity
or  financial  position  of any one of these  customers  could  have a  material
adverse impact on our ability to collect our accounts  receivable and our future
operating results.

      Inventories  - We value our  inventory  at the lower of the actual cost to
purchase and/or  manufacture the inventory or the current estimated market value
of the inventory.  We regularly review inventory quantities on hand and record a
provision  for excess and obsolete  inventory  based  primarily on our estimated
forecast  of product  demand and  production  requirements  for the next  twelve
months. Our accounting  policies state that operating divisions are to identify,
at a  minimum,  those  inventory  items  that are in excess of either one year's
historical  or one year's  forecasted  usage,  and to use  business  judgment in
determining  which is the more  appropriate  metric.  Those inventory items must
then  be  evaluated  on a lower  of cost or  market  basis  for  realization.  A
significant increase in the demand for our products could result in a short-term
increase in the cost of  inventory  purchases  while a  significant  decrease in
demand could result in an increase in the amount of excess inventory  quantities
on hand.  Additionally,  our estimates of future  product demand may prove to be
inaccurate,  in which case we may have  understated  or overstated the provision
required for excess and obsolete  inventory.  In the future, if our inventory is
determined to be overvalued, we would be required to recognize such costs in our
cost of goods sold at the time of such  determination.  Therefore,  although  we
make every  effort to ensure the  accuracy of our  forecasts  of future  product
demand, any significant  unanticipated changes in demand or product developments
could have a  significant  impact on the value of our inventory and our reported
operating  results.  Our reserves for excess and  obsolete  inventory  were $4.7
million and $5.6 million, respectively, as of December 31, 2004 and 2003.

      Goodwill and Impairments of Long-Lived Assets - In connection with certain
acquisitions,  we recorded goodwill  representing the cost of the acquisition in
excess  of the  fair  value  of the net  assets  acquired.  In  accordance  with
Statement  of  Financial  Accounting  Standards  (SFAS) No.  142,  Goodwill  and
Intangible  Assets,  the fair value of each reporting unit that carries goodwill
is determined annually,  and the fair value is compared to the carrying value of
the  reporting  unit.  If the fair value  exceeds the  carrying  value,  then no
adjustment is necessary. If the carrying value of the reporting unit exceeds the
fair value,  appraisals are performed of long-lived assets and other adjustments
are made to arrive at a revised  fair value  balance  sheet.  This  revised fair
value  balance  sheet  (without  goodwill)  is compared to the fair value of the
business previously determined, and a revised goodwill amount is reached. If the
indicated  goodwill  amount  meets or  exceeds  the  current  carrying  value of
goodwill,  then no adjustment is required.  However,  if the result  indicates a
reduced  level of goodwill,  an  impairment is recorded to state the goodwill at
the revised level. Any future  impairments of goodwill  determined in accordance
with SFAS No. 142 would be  recorded as a  component  of income from  continuing
operations.

      We review our long-lived assets for impairment in accordance with SFAS No.
144,  Accounting for the Impairment or Disposal of Long-Lived  Assets,  whenever
triggering events indicate that an impairment may have occurred.  We monitor our
operations  to look for  triggering  events  that may  cause  us to  perform  an
impairment analysis.  These events include, among others, loss of product lines,
poor operating  performance  and  abandonment  of  facilities.  We determine the
lowest  level at which cash flows are  separately  identifiable  to perform  the
future cash flows  tests,  and apply the results to the assets  related to those
separately identifiable cash flows. In some cases, this may be at the individual
asset level,  but in other cases, it is more appropriate to perform this testing
at a business unit level  (especially  when poor operating  performance  was the
triggering  event).  For  assets  that  are to be  held  and  used,  we  compare
undiscounted  future cash flows  associated  with the asset (or asset


                                       31
<PAGE>

group) and  determine if the carrying  value of the asset (asset  group) will be
recovered by those cash flows over the remaining useful life of the asset (or of
the primary  asset of an asset  group).  If the future  undiscounted  cash flows
indicate  that  the  carrying  value  of the  asset  (asset  group)  will not be
recovered,  then the asset is marked to fair  value.  For assets  that are to be
disposed of by sale or by a means other than by sale, the  identified  asset (or
disposal  group if a group of assets or entire  business unit) is marked to fair
value less costs to sell.  In the case of the planned  sale of a business  unit,
SFAS No. 144 indicates that disposal  groups should be reported as  discontinued
operations  on the  consolidated  financial  statements  if  cash  flows  of the
disposal  group are separately  identifiable.  SFAS No. 144 has had an impact on
the application of accounting for discontinued operations,  making it in general
much  easier to  classify a business  unit  (disposal  group) held for sale as a
discontinued operation. The rules covering discontinued operations prior to SFAS
No. 144 generally  required that an entire  segment of a business be planned for
disposal  in order to  classify  it as a  discontinued  operation.  We  recorded
impairments of long-lived  assets during 2004, 2003, and 2002 in accordance with
SFAS No. 144, which are discussed in Notes 3 and 4 to the Consolidated Financial
Statements  in  Part  II.,  Item 8. We also  recorded  amounts  as  discontinued
operations in 2003 (and for all periods  presented),  which are detailed further
in Note 6 to the Consolidated Financial Statements.

      Deferred  income  taxes - We  recognize  deferred  income  tax  assets and
liabilities based on the differences  between the financial  statement  carrying
amounts and the tax bases of assets and liabilities.  Deferred income tax assets
also  include  federal,  state and foreign net  operating  loss carry  forwards,
primarily due to the significant  operating losses incurred during recent years,
as well as various tax  credits.  We regularly  review our  deferred  income tax
assets  for  recoverability  taking  into  consideration  historical  net income
(losses),  projected  future  income  (losses)  and the  expected  timing of the
reversals of existing temporary differences.  We establish a valuation allowance
when it is more likely than not that these assets will not be  recovered.  As of
December 31, 2004,  we had a valuation  allowance of $60.0  million.  During the
year ended  December 31, 2004,  we increased  the  valuation  allowance by $13.9
million  primarily to provide a full reserve  against our net deferred tax asset
position.  Except for certain of our foreign  subsidiaries,  given the  negative
evidence provided by our history of operating losses,  and considering  guidance
provided  by SFAS No.  109,  Accounting  for  Income  Taxes,  we were  unable to
conclude  that it is more likely that not that our  deferred tax assets would be
recoverable through the generation of future taxable income. We will continue to
evaluate our valuation allowance  requirements based on future operating results
and business  acquisitions and dispositions,  and we may adjust our deferred tax
asset  valuation  allowance.  Such changes in our  deferred tax asset  valuation
allowance  will be  reflected  in  current  operations  through  our  income tax
provision.

      Workers'  compensation  and product  liabilities  - We make  payments  for
workers'  compensation and product liability claims generally through the use of
a third party claims  administrator.  We have purchased  insurance  coverage for
large claims over our self-insured  retention levels. Our workers'  compensation
and health benefit  liabilities are developed using actuarial methods based upon
historical data for payment patterns,  cost trends,  and other relevant factors.
In order to consider a range of possible  outcomes,  we have based our estimates
of liabilities  in this area on several  different  sources of loss  development
factors,   including  those  from  the  insurance  industry,  the  manufacturing
industry,  and factors developed in-house. Our general approach is to identify a
reasonable,  logical  conclusion,  typically in the middle range of the possible
outcomes.  While we believe that our liabilities for workers'  compensation  and
product  liability  claims as of  December  31, 2004 are  adequate  and that the
judgment  applied  is  appropriate,  such  estimated  liabilities  could  differ
materially from what will actually transpire in the future.

      Environmental and Other  Contingencies - We and certain of our current and
former direct and indirect  corporate  predecessors,  subsidiaries and divisions
are involved in remedial  activities at certain present and former locations and
have been identified by the United States Environmental Protection Agency, state
environmental  agencies and private parties as potentially  responsible  parties
(PRPs) at a number of hazardous  waste  disposal  sites under the  Comprehensive
Environmental Response, Compensation and Liability Act (Superfund) or equivalent
state  laws  and,  as such,  may be  liable  for the cost of  cleanup  and other
remedial  activities  at these  sites.  Responsibility  for  cleanup  and  other
remedial  activities at a Superfund site is typically shared among PRPs based on
an allocation  formula.  Under the federal Superfund  statute,  parties could be
held jointly and severally liable, thus subjecting them to potential  individual
liability  for the entire cost of cleanup at the site.  Based on our estimate of
allocation of liability  among PRPs, the  probability  that other PRPs,  many of
whom are large, solvent, public companies,  will fully pay the costs apportioned
to them, currently available information  concerning the scope of contamination,
estimated  remediation  costs,  estimated legal fees and other factors,  we have
recorded  and  accrued for  environmental  liabilities  in amounts  that we deem
reasonable. The ultimate costs will depend on a number of factors and the amount
currently accrued  represents our best current estimate of the total costs to be
incurred.  We expect this amount to be  substantially  paid over the next one to
four  years.  See Item 3 - LEGAL  PROCEEDINGS  and  Note 18 to the  Consolidated
Financial Statements in Part II. Item 8.

      Severance,  Restructuring and Related Charges - Since the Recapitalization
in mid-2001, we have initiated several cost reduction and facility consolidation
initiatives  including  1) the  closure or  consolidation  of 35  manufacturing,
distribution and office  facilities 2) the  centralization of business units and
3) the  outsourcing of our  Electrical  Products  manufacturing  to Asia . These
initiatives have resulted in significant  severance,  restructuring  and related
charges over the past three and one-half  years.  Included in these  charges are
one-time   termination   benefits  including   severance,   benefits  and  other
employee-related costs


                                       32
<PAGE>

associated with employee terminations; contract termination costs mostly related
to non-cancelable  lease liabilities for abandoned  facilities,  net of sublease
revenue; and other costs associated with the moving of inventory,  machinery and
equipment,   consolidation  of  administrative  and  operational  functions  and
consultants   working  on  sourcing  and  other   manufacturing  and  production
efficiency  initiatives.  We expect to substantially  complete our restructuring
program  in  2005.  In  accordance  with  SFAS No.  146,  Accounting  for  Costs
Associated with Exit or Disposal Activities, we recognize costs (including costs
for one-time  termination  benefits) associated with exit or disposal activities
as they are incurred.  However, charges related to non-cancelable leases require
estimates of sublease income and  adjustments to these  liabilities are possible
in the future depending on the accuracy of the sublease assumptions made.

NEW ACCOUNTING PRONOUNCEMENTS

      See Note 2 of the Notes to the Consolidated  Financial  Statements in Part
II, Item 8 for a discussion of new accounting  pronouncements  and the potential
impact  to the  Company's  consolidated  results  of  operations  and  financial
position

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

      Our  exposure to market risk  associated  with  changes in interest  rates
relates  primarily to our debt  obligations.  We currently do not use derivative
financial  instruments  relating to this exposure.  Our interest  obligations on
outstanding debt at December 31, 2004 were indexed from short-term LIBOR (London
Inter-bank  Offered  Rates).  We do not believe our  exposures to interest  rate
risks are material to our financial position or results of operations.

      The  following  table  presents as of December  31,  2004,  our  financial
instruments, rates of interest and indications of fair value:

                             Expected Maturity Dates
                             (Amounts in Thousands)

<TABLE>
<CAPTION>
ASSETS

                                   2005         2006         2007         2008          2009      Thereafter     Total   Fair Value
                                   ----         ----         ----         ----          ----      ----------     -----   ----------
<S>                               <C>          <C>          <C>          <C>          <C>           <C>         <C>        <C>
Temporary cash investments
       Fixed rate                 $   --       $   --       $   --       $   --       $    --       $   --      $    --    $    --
       Average interest rate          --           --           --           --            --           --           --         --

INDEBTEDNESS

Fixed rate debt                   $   --       $   --       $   --       $   --       $    --       $   --      $    --    $    --
       Average interest rate          --           --           --           --            --           --           --         --
Variable interest rate            $2,857       $2,857       $2,857       $2,857       $47,310       $   --      $58,738    $58,738
       Average interest rate        4.79%        4.79%        4.79%        4.79%         4.53%          --         4.58%        --
</TABLE>

Foreign Exchange Risk

      We are exposed to fluctuations in the Euro, British pound, Canadian dollar
and  various  Asian  currencies  such  as  the  Chinese  Renminbi.  Some  of our
subsidiaries  make  significant  U.S.  dollar  purchases  from Asian  suppliers,
particularly in China, Taiwan and the Philippines.  An adverse change in foreign
currency  exchange rates of Asian  countries  could result in an increase in the
cost of purchases.  We do not currently  hedge foreign  currency  transaction or
translation  exposures.  Our net investment in foreign  subsidiaries  translated
into U.S. dollars at December 31, 2004 is $32.3 million. A 10% change in foreign
currency  exchange  rates  would  amount  to  $3.3  million  change  in our  net
investment in foreign subsidiaries at December 31, 2004.

Commodity Price Risk

      We have not employed an active  hedging  program  related to our commodity
price risk, but are employing other strategies for managing this risk, including
contracting  for a certain  percentage of resin needs through supply  agreements
and opportunistic  spot purchases.  See Part I - Item 1 - Raw Materials and Part
II - Item 7 - OUTLOOK FOR 2005 for a further discussion of our raw materials.


                                       33
<PAGE>

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements  of  operations,  stockholders'  equity  and cash flows
present  fairly,  in all  material  respects,  the  financial  position  of Katy
Industries,  Inc. and its  subsidiaries  at December 31, 2004 and 2003,  and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31, 2004 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 2 to the  consolidated  financial  statements,  in 2002 the
Company changed its method of accounting for goodwill to conform to Statement of
Financial Accounting Standards No. 142.


/S/ PricewaterhouseCoopers LLP

St. Louis, Missouri
March 29, 2005, except for Note 8,
  which is as of April 13, 2005


                                       34
<PAGE>

                     KATY INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 2004 and 2003
                             (Amounts in Thousands)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                 2004            2003
                                                                                 ----            ----
<S>                                                                         <C>             <C>
CURRENT ASSETS:

     Cash and cash equivalents                                              $   8,525       $   6,748
     Trade accounts receivable, net of allowances of $2,827 and $3,029         66,689          65,197
     Inventories, net                                                          65,674          53,545
     Other current assets                                                       4,233           1,658
                                                                            ---------       ---------

       Total current assets                                                   145,121         127,148
                                                                            ---------       ---------

OTHER ASSETS:

     Goodwill                                                                   2,239          10,215
     Intangibles, net                                                           7,428          22,399
     Other                                                                      9,946          10,352
                                                                            ---------       ---------

       Total other assets                                                      19,613          42,966
                                                                            ---------       ---------

PROPERTY AND EQUIPMENT
     Land and improvements                                                      1,897           3,196
     Buildings and improvements                                                13,537          17,198
     Machinery and equipment                                                  132,825         129,240
                                                                            ---------       ---------

                                                                              148,259         149,634
     Less - Accumulated depreciation                                          (88,529)        (78,040)
                                                                            ---------       ---------

       Property and equipment, net                                             59,730          71,594
                                                                            ---------       ---------

       Total assets                                                         $ 224,464       $ 241,708
                                                                            =========       =========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       35
<PAGE>

                     KATY INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 2004 and 2003
                    (Amounts in Thousands, except Share Data)

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                               2004             2003
                                                                                               ----             ----
<S>                                                                                     <C>               <C>
CURRENT LIABILITIES:

     Accounts payable                                                                   $    39,079       $    37,259
     Accrued compensation                                                                     5,269             6,212
     Accrued expenses                                                                        39,939            40,238
     Current maturities, long-term debt                                                       2,857             2,857
     Revolving credit agreement                                                              40,166            36,000
                                                                                        -----------       -----------

        Total current liabilities                                                           127,310           122,566
                                                                                        -----------       -----------

LONG-TERM DEBT, less current maturities                                                      15,714               806

OTHER LIABILITIES                                                                            12,855            16,044
                                                                                        -----------       -----------

        Total liabilities                                                                   155,879           139,416
                                                                                        -----------       -----------

COMMITMENTS AND CONTINGENCIES (Notes 18 and 21)                                                  --                --
                                                                                        -----------       -----------

STOCKHOLDERS' EQUITY
     15% Convertible preferred stock, $100 par value, authorized
        1,200,000 shares, issued and outstanding 1,131,551 shares and 925,750
        shares, respectively, liquidation value $113,155 and $98,396, respectively          108,256            93,507
     Common stock, $1 par value; authorized 35,000,000 shares;
        issued 9,822,204 shares                                                               9,822             9,822
     Additional paid-in capital                                                              25,111            40,441
     Accumulated other comprehensive income                                                   4,564             2,387
     Accumulated deficit                                                                    (57,258)          (21,137)
     Treasury stock, at cost, 1,876,827 shares
        and 1,941,327 shares, respectively                                                  (21,910)          (22,728)
                                                                                        -----------       -----------

        Total stockholders' equity                                                           68,585           102,292
                                                                                        -----------       -----------

        Total liabilities and stockholders' equity                                      $   224,464       $   241,708
                                                                                        ===========       ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       36
<PAGE>

                     KATY INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
                (Amounts in Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>
                                                                                   2004             2003               2002
                                                                                   ----             ----               ----
<S>                                                                         <C>               <C>               <C>
Net sales                                                                   $   457,642       $   436,410       $   445,755
Cost of goods sold                                                              396,608           365,563           373,578
                                                                            -----------       -----------       -----------
   Gross profit                                                                  61,034            70,847            72,177
Selling, general and administrative expenses                                     57,283            59,740            63,657
Impairments of long-lived assets                                                 30,831            11,880            21,204
Severance, restructuring and related charges                                      3,505             8,132            19,155
Loss on SESCO joint venture transaction                                              --                --             6,010
                                                                            -----------       -----------       -----------
   Operating loss                                                               (30,585)           (8,905)          (37,849)
Equity in (loss) income of equity method investment (including
   impairment charge of $5.5 million in 2003)                                        --            (5,689)              295
Gain (loss) on sale of assets                                                       278               627              (160)
Interest expense                                                                 (3,968)           (6,193)           (6,205)
Other, net                                                                         (963)           (1,805)              (89)
                                                                            -----------       -----------       -----------

Loss from continuing operations before (provision) benefit
   for income taxes                                                             (35,238)          (21,965)          (44,008)

(Provision) benefit for income taxes from continuing operations                    (883)            3,158            (7,482)
                                                                            -----------       -----------       -----------

Loss from continuing operations before distributions on preferred
       interest of subsidiary                                                   (36,121)          (18,807)          (51,490)

Distributions on preferred interest of subsidiary (net of tax)                       --               (80)           (1,593)

                                                                            -----------       -----------       -----------

Loss from continuing operations                                                 (36,121)          (18,887)          (53,083)

Income (loss) from operations of discontinued businesses (net of tax)                --             2,081            (4,458)
Gain on sale of discontinued businesses (net of tax)                                 --             7,442             3,306
                                                                            -----------       -----------       -----------

Loss before cumulative effect of a change in accounting principle               (36,121)           (9,364)          (54,235)

Cumulative effect of a change in accounting principle (net of tax)                   --                --            (2,514)
                                                                            -----------       -----------       -----------

Net loss                                                                        (36,121)           (9,364)          (56,749)

Gain on early redemption of preferred interest of subsidiary                         --             6,560                --

Payment-in-kind of dividends on convertible preferred stock                     (14,749)          (12,811)          (11,136)
                                                                            -----------       -----------       -----------

Net loss attributable to common stockholders                                $   (50,870)      $   (15,615)      $   (67,885)
                                                                            ===========       ===========       ===========

Loss (earnings) per share of common stock - Basic and diluted
   Loss from continuing operations attributable to common stockholders      $     (6.45)      $     (3.06)      $     (7.67)
   Discontinued operations (net of tax)                                              --              1.16             (0.14)
   Cumulative effect of a change in accounting principle                             --                --             (0.30)
                                                                            -----------       -----------       -----------
   Net loss attributable to common stockholders                             $     (6.45)      $     (1.90)      $     (8.11)
                                                                            ===========       ===========       ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       37
<PAGE>

                     KATY INDUSTRIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
                             (Amounts in Thousands)

<TABLE>
<CAPTION>
                                                      Convertible                     Common                              Other
                                                    Preferred Stock                   Stock              Additional      Compre-
                                               Number of         Par         Number of         Par        Paid-in        hensive
                                                 Shares         Value          Shares         Value       Capital     (Loss) Income
                                               -------------------------------------------------------------------------------------
<S>                                              <C>          <C>            <C>            <C>          <C>             <C>
Balance, January 1, 2002                         700,000      $  69,560      9,822,204      $   9,822    $  58,314       $  (4,625)
Net loss                                              --             --             --             --           --              --
Foreign currency translation adjustment               --             --             --             --           --           1,913
Pension minimum liability adjustment                  --             --             --             --           --            (334)

Comprehensive loss

Issuance of convertible preferred stock
      related to PIK dividends accrued           105,000             --             --             --           --              --
Payment in kind dividends accrued                     --         11,136             --             --      (11,136)             --
Stock option grant                                    --             --             --             --         (477)             --
Other                                                 --             --             --             --           --              --
                                               -------------------------------------------------------------------------------------
Balance, December 31, 2002                       805,000         80,696      9,822,204          9,822       46,701          (3,046)
Net loss                                              --             --             --             --           --              --
Foreign currency translation adjustment               --             --             --             --           --           5,419
Pension minimum liability adjustment                  --             --             --             --           --              14

Comprehensive loss

Purchase of treasury stock                            --             --             --             --           --              --
Issuance of convertible preferred stock
      related to PIK dividends accrued           120,750             --             --             --           --              --
Redemption of preferred
       interest in subsidiary, net of tax             --             --             --             --        6,560              --
Payment in kind dividends accrued                     --         12,811             --             --      (12,811)             --
Other                                                 --             --             --             --           (9)             --
                                               -------------------------------------------------------------------------------------
Balance, December 31, 2003                       925,750         93,507      9,822,204          9,822       40,441           2,387
Net loss                                              --             --             --             --           --              --
Foreign currency translation adjustment               --             --             --             --           --           2,065
Pension minimum liability adjustment                  --             --             --             --           --             112

Comprehensive loss

Purchase of treasury stock                            --             --             --             --           --              --
Issuance of convertible preferred stock
      related to PIK dividends accrued           205,801             --             --             --           --              --
Payment in kind dividends accrued                     --         14,749             --             --      (14,749)             --
Stock option exercise                                 --             --             --             --         (571)             --
Other                                                 --             --             --             --          (10)             --
                                               -------------------------------------------------------------------------------------
Balance, December 31, 2004                     1,131,551      $ 108,256      9,822,204      $   9,822    $  25,111       $   4,564
                                               =====================================================================================

<CAPTION>
                                                                 Retained                        Compre-
                                                                 Earnings                        hensive        Total
                                                Unearned      (Accumulated       Treasury        Income      Stockholders'
                                               Compensation      Deficit)          Stock         (Loss)         Equity
                                               ---------------------------------------------------------------------------
<S>                                              <C>            <C>             <C>             <C>            <C>
Balance, January 1, 2002                         $    (106)     $  44,976       $ (20,077)                     $ 157,864
Net loss                                                --        (56,749)             --       $ (56,749)       (56,749)
Foreign currency translation adjustment                 --             --              --           1,913          1,913
Pension minimum liability adjustment                    --             --              --            (334)          (334)
                                                                                                ---------
Comprehensive loss                                                                              $ (55,170)
                                                                                                =========
Issuance of convertible preferred stock
      related to PIK dividends accrued                  --             --              --
Payment in kind dividends accrued                       --             --                                             --
Stock option grant                                      --             --              --                           (477)
Other                                                  106             --            (151)                           (45)
                                               -------------------------------------------------------------------------
Balance, December 31, 2002                              --        (11,773)        (20,228)                       102,172
Net loss                                                --         (9,364)             --       $  (9,364)        (9,364)
Foreign currency translation adjustment                 --             --              --           5,419          5,419
Pension minimum liability adjustment                    --             --              --              14             14
                                                                                                ---------
Comprehensive loss                                                                              $  (3,931)
                                                                                                =========
Purchase of treasury stock                              --             --          (2,520)                        (2,520)
Issuance of convertible preferred stock
      related to PIK dividends accrued                  --             --              --
Redemption of preferred
       interest in subsidiary, net of tax               --             --              --                          6,560
Payment in kind dividends accrued                       --             --              --                             --
Other                                                   --             --              20                             11
                                               -------------------------------------------------------------------------
Balance, December 31, 2003                              --        (21,137)        (22,728)                       102,292
Net loss                                                --        (36,121)             --       $ (36,121)       (36,121)
Foreign currency translation adjustment                 --             --              --           2,065          2,065
Pension minimum liability adjustment                    --             --              --             112            112
                                                                                                ---------
Comprehensive loss                                                                              $ (33,944)
                                                                                                =========
Purchase of treasury stock                              --             --             (75)                           (75)
Issuance of convertible preferred stock
      related to PIK dividends accrued                  --             --              --
Payment in kind dividends accrued                       --             --              --                             --
Stock option exercise                                   --             --             875                            304
Other                                                   --             --              18                              8
                                               -------------------------------------------------------------------------
Balance, December 31, 2004                       $      --      $ (57,258)      $ (21,910)                     $  68,585
                                               =========================================================================
</TABLE>

See Notes to Consolidated Financial Statements


                                       38
<PAGE>

                     KATY INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
                             (Amounts in Thousands)

<TABLE>
<CAPTION>
                                                                        2004            2003             2002
                                                                        ----            ----             ----
<S>                                                                 <C>              <C>              <C>
Cash flows from operating activities:
    Net loss                                                        $  (36,121)      $   (9,364)      $  (56,749)
    (Income) loss from discontinued operations                              --           (9,523)      $    1,152
                                                                    ----------       ----------       ----------
       Loss from continuing operations                              $  (36,121)      $  (18,887)      $  (55,597)
    Cumulative effect of a change in accounting principle                   --               --            2,514
    Depreciation and amortization                                       14,266           21,954           19,259
    Impairments of long-lived assets                                    30,831           11,880           21,204
    Write-off and amortization of debt issuance costs                    1,076            2,981            1,605
    (Gain) loss on sale of assets                                         (278)            (627)             160
    Loss on SESCO joint venture transaction                                 --               --            6,010
    Equity in loss (income) of equity method investment                     --            5,689             (295)
    Deferred income taxes                                               (1,228)              --            8,889
                                                                    ----------       ----------       ----------
                                                                         8,546           22,990            3,749
                                                                    ----------       ----------       ----------
    Changes in operating assets and liabilities:
       Accounts receivable                                                (177)          (3,869)           9,591
       Inventories                                                     (11,146)           5,504           (4,150)
       Other assets                                                     (1,313)           1,100              776
       Accounts payable                                                    918             (727)           3,369
       Accrued expenses                                                 (1,662)          (9,679)           6,640
       Other, net                                                       (3,137)          (2,125)           4,997
                                                                    ----------       ----------       ----------
                                                                       (16,517)          (9,796)          21,223
                                                                    ----------       ----------       ----------

    Net cash (used in) provided by continuing operations                (7,971)          13,194           24,972
    Net cash (used in) provided by discontinued operations                  --           (5,159)           6,931
                                                                    ----------       ----------       ----------
    Net cash (used in) provided by operating activities                 (7,971)           8,035           31,903
                                                                    ----------       ----------       ----------

Cash flows from investing activities:
    Capital expenditures of continuing operations                      (13,876)         (13,324)          (9,987)
    Capital expenditures of discontinued operations                         --             (111)            (132)
    Acquisition of subsidiary, net of cash acquired                         --           (1,161)              --
    Collections of notes receivable from sales of subsidiaries              43            1,035              820
    Proceeds from sale of subsidiaries, net                                 --           23,647           13,947
    Proceeds from sale of assets, net                                    5,778            2,839              249
                                                                    ----------       ----------       ----------
    Net cash (used in) provided by investing activities                 (8,055)          12,925            4,897
                                                                    ----------       ----------       ----------

Cash flows from financing activities:
    Net borrowings (repayments) of revolving loans                       4,037           (8,751)         (12,249)
    Proceeds of term loans                                              18,152           20,000               --
    Repayments of term loans                                            (3,244)         (16,337)         (26,393)
    Direct costs associated with debt facilities                        (1,485)          (1,583)            (720)
    Redemption of preferred interest of subsidiary                          --           (9,840)              --
    Repayment of real estate mortgage                                       --             (700)              --
    Repurchases of common stock                                            (75)          (2,520)              --
    Proceeds from the exercise of stock options                            304               --               --
                                                                    ----------       ----------       ----------
    Net cash provided by (used in) financing activities                 17,689          (19,731)         (39,362)
                                                                    ----------       ----------       ----------

Effect of exchange rate changes on cash and cash equivalents               114              677             (432)
                                                                    ----------       ----------       ----------
Net increase (decrease) in cash and cash equivalents                     1,777            1,906           (2,994)
Cash and cash equivalents, beginning of period                           6,748            4,842            7,836
                                                                    ----------       ----------       ----------
Cash and cash equivalents, end of period                            $    8,525       $    6,748       $    4,842
                                                                    ==========       ==========       ==========
</TABLE>

See Notes to Consolidated Financial Statements


                                       39
<PAGE>

                     KATY INDUSTRIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        As of December 31, 2004 and 2003
                  (Thousands of dollars, except per share data)

Note 1. ORGANIZATION OF THE BUSINESS

      The Company is organized  into two  operating  segments:  the  Maintenance
Products  Group  and  the  Electrical  Products  Group.  The  activities  of the
Maintenance Products Group include the manufacture and distribution of a variety
of  commercial  cleaning  supplies  and  consumer  home and  automotive  storage
products.  The Electrical Products Group is a distributor of consumer electrical
corded products.  Principal geographic markets are in the United States, Canada,
and Europe and include the  sanitary  maintenance,  foodservice,  mass  merchant
retail, home improvement and automotive, markets.

Note 2. SIGNIFICANT ACCOUNTING POLICIES

      Consolidation  Policy - The consolidated  financial statements include the
accounts of Katy  Industries,  Inc. and  subsidiaries  in which it has a greater
than 50% voting interest,  collectively "Katy" or the "Company". All significant
intercompany  accounts,   profits  and  transactions  have  been  eliminated  in
consolidation.  Investments in affiliates that are not  majority-owned and where
the  Company  exercises  significant  influence  are  reported  using the equity
method.

      As part of the continuous evaluation of its operations,  Katy has acquired
and  disposed of certain of its  operating  units in recent  years.  Those which
affected the Consolidated  Financial Statements for the years ended December 31,
2003 and 2002 are discussed in Note 6.

      At December 31, 2004,  the Company owns 30,000 shares of common  stock,  a
43% interest,  in Sahlman Holding Company,  Inc. (Sahlman) that is accounted for
under the equity method. Sahlman is engaged in the business of harvesting shrimp
off the coast of South and Central  America and shrimp farming in Nicaragua.  As
of December 31, 2004 and 2003, the investment balance was $1.6 million. See Note
5 on impairment of equity method investment.

      Use of Estimates - The  preparation of financial  statements in conformity
with accounting  principles  generally  accepted in the United States of America
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 amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from those estimates.

      Revenue Recognition - Revenue is recognized for all sales, including sales
to agents and  distributors,  at the time the products are shipped and title has
transferred to the customer, provided that a purchase order has been received or
a contract has been  executed,  there are no  uncertainties  regarding  customer
acceptances,  the sales price is fixed and  determinable and  collectibility  is
deemed probable.  The Company's  standard shipping terms are FOB shipping point.
Sales  discounts,  returns  and  allowances,  and  cooperative  advertising  are
included in net sales,  and the provision  for doubtful  accounts is included in
selling, general and administrative expenses.

      Cash and Cash  Equivalents  - Cash  equivalents  consist of highly  liquid
investments with original maturities of three months or less.

      Advertising   Costs  -   Advertising   costs  are  expensed  as  incurred.
Advertising  costs  expensed  in 2004,  2003 and 2002  were $3.8  million,  $3.3
million and $3.9 million, respectively.

      Accounts  Receivable and Allowance for Doubtful  Accounts - Trade accounts
receivable  are recorded at the invoiced  amount and do not bear  interest.  The
allowance for doubtful  accounts is the Company's best estimate of the amount of
probable  credit  losses  in  its  existing  accounts  receivable.  The  Company
determines  the allowance  based on its  historical  write-off  experience.  The
Company reviews its allowance for doubtful accounts quarterly,  which includes a
review  of past  due  balances  over 90 days  and over a  specified  amount  for
collectibility.  All other  balances  are  reviewed on a pooled  basis by market
distribution  channels.  Account  balances are charged off against the allowance
when the Company determines it is probable the receivable will not be recovered.
The Company does not have any  off-balance-sheet  credit exposure related to its
customers. Charges to expense for probable credit losses were $3.1 million, $3.2
million and $3.7 million in 2004, 2003 and 2002, respectively.


                                       40
<PAGE>

      Inventories - Inventories are stated at the lower of cost or market value,
and reserves are established for excess and obsolete  inventory  (shown below in
the table as  "Inventory  reserves")  in order to  ensure  proper  valuation  of
inventories.  Cost includes materials,  labor and overhead. At December 31, 2004
and 2003,  approximately 39% and 35%,  respectively,  of Katy's inventories were
accounted for using the last-in,  first-out  (LIFO) method,  while the remaining
inventories  were  accounted for using the first-in,  first-out  (FIFO)  method.
Current cost, as  determined  using the FIFO method,  exceeded LIFO cost by $4.7
million  and $1.9  million at  December  31,  2004 and 2003,  respectively.  The
components of inventories are:

                                                           December 31,
                                                  ------------------------------
                                                    2004                  2003
                                                    ----                  ----
                                                       (Amounts in Thousands)

Raw materials                                     $ 23,220             $ 18,664
Work in process                                      1,826                1,573
Finished goods                                      45,299               38,938
Inventory reserves                                  (4,671)              (5,630)
                                                  --------             --------
                                                  $ 65,674             $ 53,545
                                                  ========             ========

      Goodwill - In connection with certain  acquisitions,  the Company recorded
goodwill representing the cost of the acquisition in excess of the fair value of
the net  assets  acquired.  Beginning  in 2002,  goodwill  is not  amortized  in
accordance  with  Statement of Financial  Accounting  Standards  (SFAS) No. 142,
Goodwill  and  Intangible  Assets.  The fair value of each  reporting  unit that
carries goodwill is determined  annually,  and the fair value is compared to the
carrying  value of the  reporting  unit.  If the fair value exceeds the carrying
value,  then no adjustment is necessary.  If the carrying value of the reporting
unit exceeds the fair value,  appraisals are performed of long-lived  assets and
other adjustments are made to arrive at a revised fair value balance sheet. This
revised  fair value  balance  sheet  (without  goodwill) is compared to the fair
value of the business  previously  determined,  and a revised goodwill amount is
reached.  If the indicated goodwill amount meets or exceeds the current carrying
value of  goodwill,  then no  adjustment  is  required.  However,  if the result
indicates a reduced  level of goodwill,  an  impairment is recorded to state the
goodwill at the revised level. Any future impairments of goodwill  determined in
accordance  with SFAS No. 142 would be recorded  as a  component  of income from
continuing operations. See Note 3.

      Property  and  Equipment - Property and  equipment  are stated at cost and
depreciated over their estimated useful lives: buildings (10-40 years) generally
using the  straight-line  method;  machinery  and  equipment  (3-20 years) using
straight-line or composite  methods;  tooling (5 years) using the  straight-line
method;  and  leasehold  improvements  using the  straight-line  method over the
remaining  lease  period or useful  life,  if  shorter.  Costs  for  repair  and
maintenance  of machinery  and  equipment  are expensed as incurred,  unless the
result significantly increases the useful life or functionality of the asset, in
which case  capitalization is considered.  Depreciation  expense from continuing
operations for 2004, 2003 and 2002 was $12.5 million,  $19.8 million,  and $16.6
million, respectively.

      Katy adopted SFAS No. 143, Accounting for Asset Retirement Obligations, on
January 1, 2003 (SFAS No. 143).  SFAS No. 143 requires that an asset  retirement
obligation  associated  with the  retirement of a tangible  long-lived  asset be
recognized  as a  liability  in the  period in which it is  incurred  or becomes
determinable,  with an associated increase in the carrying amount of the related
long-term  asset.  The  cost of the  tangible  asset,  including  the  initially
recognized  asset  retirement  cost, is depreciated  over the useful life of the
asset.  In accordance with SFAS No. 143, the Company has recorded as of December
31,  2004 an asset of $0.9  million and related  liability  of $1.2  million for
retirement  obligations  associated with returning  certain leased properties to
the respective lessors upon the termination of the lease arrangements. A summary
of the  changes in asset  retirement  obligation  since the date of  adoption is
included in the table below (in thousands):


                                       41
<PAGE>

<TABLE>
<S>                                                                          <C>
      January 1, 2003, balance upon adoption of SFAS No. 143                 $ 1,026
         Obligations incurred                                                    148
         Accretion expense                                                        19
         Abandonment obligations settled through property divestitures           (34)
         Changes in estimates, including timing                                   11
                                                                             -------
      SFAS No. 143 Obligation at December 31, 2003                           $ 1,170
         Accretion expense                                                        49
         Changes in estimates, including timing                                   18
                                                                             -------
      SFAS No. 143 Obligation at December 31, 2004                           $ 1,237
                                                                             =======
</TABLE>

      Impairment  of  Long-lived  Assets -  Long-lived  assets are  reviewed for
impairment  if events or  circumstances  indicate the  carrying  amount of these
assets may not be recoverable  through future  undiscounted  cash flows. If this
review   indicates  that  the  carrying  value  of  these  assets  will  not  be
recoverable,  based  on  future  undiscounted  net  cash  flows  from the use or
disposition  of the asset,  the  carrying  value is reduced to fair value.  Katy
adopted SFAS No. 144,  Accounting  for the  Impairment or Disposal of Long-Lived
Assets on January 1, 2002. See Note 4.

      Income  Taxes - Income  taxes are  accounted  for  using a  balance  sheet
approach  known as the  liability  method.  The  liability  method  accounts for
deferred  income taxes by applying the statutory tax rates in effect at the date
of the balance sheet to the differences  between the book basis and tax basis of
the assets and liabilities. The Company records a valuation allowance when it is
more likely than not that some portion or all of the  deferred  income tax asset
will not be realizable. See Note 14.

      Foreign  Currency  Translation  - The  results  of the  Company's  foreign
subsidiaries  are  translated  to U.S.  dollars using the  current-rate  method.
Assets  and  liabilities  are  translated  at the year end spot  exchange  rate,
revenue  and  expenses  at average  exchange  rates and equity  transactions  at
historical  exchange  rates.  Exchange  differences  arising on translation  are
recorded as a component of accumulated other  comprehensive  income (loss). Katy
recorded gains (losses) on foreign exchange transactions (included in other, net
in the Consolidated Statement of Operations) of $0.3 million, ($0.6 million) and
($0.4 million), in 2004, 2003 and 2002, respectively.

      Fair  Value of  Financial  Instruments  - Where the fair  values of Katy's
financial  instrument assets and liabilities differ from their carrying value or
Katy is unable to establish the fair value without  incurring  excessive  costs,
appropriate  disclosures  have  been  given  in the  Notes  to the  Consolidated
Financial Statements.  All other financial instrument assets and liabilities not
specifically  addressed  are  believed  to be carried at their fair value in the
accompanying Consolidated Balance Sheets.

      Stock Options and Other Stock Awards - The Company  follows the provisions
of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, regarding accounting for stock options and other stock awards. APB
Opinion No. 25  dictates a  measurement  date  concept in the  determination  of
compensation expense related to stock awards including stock options, restricted
stock, and stock appreciation rights.  Katy's outstanding stock options all have
established  measurement dates and therefore,  fixed plan accounting is applied,
generally resulting in no compensation expense for stock option awards. However,
the Company has issued stock  appreciation  rights,  stock awards and restricted
stock awards which are accounted for as variable stock  compensation  awards for
which compensation expense is recorded. Compensation (income) expense associated
with the vesting of stock appreciation  rights was ($0.1 million),  $1.0 million
and $13.0 thousand in 2004, 2003 and 2002,  respectively.  Compensation  expense
relative to stock awards was $8.9  thousand,  $6.5 thousand and $8.0 thousand in
2004, 2003 and 2002, respectively. Compensation expense recorded associated with
restricted stock awards was zero, $13.0 thousand, and $0.1 million in 2004, 2003
and  2002,  respectively.  Compensation  expense  for  stock  awards  and  stock
appreciation rights is recorded in selling,  general and administrative expenses
in the Consolidated Statements of Operations.


                                       42
<PAGE>

      Application of SFAS No. 123, Accounting for Stock-Based  Compensation,  if
fully adopted by the Company, would change the method for recognition of expense
related to option grants to  employees.  Under SFAS No. 123,  compensation  cost
would be recorded  based upon the fair value of each option at the date of grant
using an  option-pricing  model that takes into account as of the grant date the
exercise  price  and  expected  life of the  option,  the  current  price of the
underlying stock and its expected  volatility,  expected  dividends on the stock
and the risk-free  interest  rate for the expected  term of the option.  Options
granted  during  2004,  2003  and  2002  totaled  6,000,   36,000  and  295,000,
respectively.  The weighted  average fair value for stock options granted during
2004, 2003 and 2002 is $5.91, $4.76 and $3.62, respectively.

      In December 2002, the Financial  Accounting  Standards Board (FASB) issued
SFAS  No.  148,  Accounting  for  Stock-Based   Compensation  -  Transition  and
Disclosure.  This standard  provides  alternative  methods of  transition  for a
voluntary  change to the fair value based methods of accounting for  stock-based
employee  compensation.   In  addition,  SFAS  No.  148  amends  the  disclosure
requirements of SFAS No. 123, to require prominent disclosure in both annual and
interim  financial  statements  about the method of accounting  for  stock-based
employee compensation and the effect of the method used on reported results. The
disclosure  provisions  of SFAS No. 148 were  adopted by the Company at December
31, 2002. Katy will continue to comply with the provisions under APB Opinion No.
25 for accounting for stock-based employee compensation.

      The fair  value of each  option  grant is  estimated  on the date of grant
using a  Black-Scholes  option-pricing  model  with the  following  assumptions:
dividend  yield  from 0% to 3.53%;  expected  volatility  at  56.26%;  risk-free
interest  rates  ranging from 4.0% to 6.40%;  and expected  lives of nine to ten
years. Had  compensation  cost been determined based on the fair value method of
SFAS No.  123,  the  Company's  net loss and loss  per  share  would  have  been
increased to the pro forma amounts indicated below (thousands of dollars, except
per share data).

<TABLE>
<CAPTION>
                                                                       For the years ended December 31,
                                                               --------------------------------------------
                                                                      2004            2003             2002
                                                                      ----            ----             ----
<S>                                                            <C>              <C>              <C>
Net loss attributable to common stockholders, as reported      $  (50,870)      $  (15,615)      $  (67,885)
Deduct: Total stock-based employee
    compensation expense determined under fair
    value based method for all awards, net of
    related tax effects                                             1,852              378              281
                                                               ----------       ----------       ----------

Pro forma net loss                                             $  (52,722)      $  (15,993)      $  (68,166)
                                                               ==========       ==========       ==========

Earnings per share
    Basic and diluted-as reported                              $    (6.45)      $    (1.90)      $    (8.11)
                                                               ==========       ==========       ==========
    Basic and diluted-pro forma                                $    (6.69)      $    (1.95)      $    (8.14)
                                                               ==========       ==========       ==========
</TABLE>

      The effects of applying SFAS No. 123 in this pro forma  disclosure are not
indicative of future amounts.

      New Accounting Pronouncements

      On December 8, 2003,  the  Medicare  Prescription  Drug,  Improvement  and
Modernization  Act of 2003 (the "Act") became law in the U.S. The Act introduces
a  prescription  drug benefit under  Medicare,  as well as a federal  subsidy to
sponsors of retiree health care benefit plans that provide  retiree  benefits in
certain  circumstances.   FASB  Staff  Position  (FSP)  106--2,  Accounting  and
Disclosure  Requirements Related to the Medicare Prescription Drug,  Improvement
and  Modernization  Act of 2003  ("FSP  106--2"),  issued in May 2004,  requires
measures of the accumulated  postretirement  benefit obligation ("APBO") and net
periodic  postretirement  benefit  cost  ("NPPBC") to reflect the effects of the
Act.  FSP 106--2 is  effective  for the  Company in the third  quarter of fiscal
2004, however Katy had chosen to defer adoption until its next measurement date,
subject to the final  provisions of the Act.  While the Company  expects that it
may


                                       43
<PAGE>

be  entitled to the Federal  subsidy  for certain of its plans,  management  has
estimated that the effect of the Act on the Company's accumulated postretirement
benefit  obligations  will  not be  material.  See  Note 9 of the  Notes  to the
Consolidated  Financial  Statements  of this Annual  Report for the  disclosures
required by FSP 106-2.

      In  November  2004,  the FASB issued SFAS No.  151,  Inventory  Costs,  an
amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 clarifies the accounting
for abnormal  amounts of idle  facility  expense,  freight,  handling  costs and
spoilage.  In addition,  SFAS 151 requires that  allocation of fixed  production
overhead  to the costs of  conversion  be based on the  normal  capacity  of the
production  facilities.  The  provisions of SFAS 151 are effective for inventory
costs incurred  during fiscal years  beginning  after June 15, 2005. The Company
expects the adoption of SFAS 151 will not have a material  impact on its results
of operations and financial position.

      In  December  2004,  the FASB issued  Statement  No. 123  (revised  2004),
Share-Based  Payment (SFAS 123R), which is a revision of FASB Statement No. 123,
Accounting  for  Stock-Based  Compensation.   SFAS  123R  supersedes  Accounting
Principles  Board Opinion No. 25,  Accounting for Stock Issued to Employees (APB
25), and amends FASB Statement No. 95,  Statement of Cash Flows. The approach to
quantifying  stock-based  compensation  expense  in SFAS 123R is similar to SFAS
123.  However,  the  revised  statement  requires  all  share-based  payments to
employees,  including  grants of employee stock options,  to be recognized as an
expense in the Consolidated  Statements of Operations based on their fair values
as they  are  earned  by the  employees  under  the  vesting  terms.  Pro  forma
disclosure of stock-based  compensation  expense,  as is the Company's  practice
under SFAS 123, will not be permitted  after the first half of 2005,  since SFAS
123R must be adopted no later than the first interim or annual period  beginning
after June 15, 2005.  The Company  expects to follow the "modified  prospective"
method of adoption of SFAS 123R whereby  earnings for prior  periods will not be
restated as though stock based  compensation had been expensed,  rather than the
"modified  retrospective"  method of adoption which would entail restatements of
previously published earnings. The Company is currently evaluating the effect of
this Statement on the Company, which will be dependent in large part upon future
equity-based grants.

      In December  2004,  the FASB  issued FSP No.  109-1,  Application  of FASB
Statement  No.  109,  Accounting  for  Income  Taxes,  to the Tax  Deduction  on
Qualified  Production  Activities  Provided by the American Jobs Creation Act of
2004.  The American  Jobs Creation Act of 2004 includes a tax deduction of up to
9% of the lesser of  qualified  production  activities  income,  as defined,  or
taxable  income,  after the deduction for the  utilization  of any net operating
loss  carryforwards.  The FSP clarified that this deduction  should be accounted
for as a special tax  deduction  in  accordance  with SFAS No. 109.  The Company
expects that due to its net operating loss  carryforwards  and its full domestic
valuation allowance, the new deduction will have no impact on income tax expense
for fiscal years 2005 and 2006.

      In December 2004, the FASB issued FSP No. 109-2, Accounting and Disclosure
Guidance for the Foreign  Earnings  Repatriation  Provision  within the American
Jobs  Creation  Act of  2004.  The  Company  has  completed  its  review  of the
Repatriation  Provision and has concluded  that it will not benefit from the Act
due to the  Company's  current  tax  position.  As a  result,  the  Repatriation
Provision did not have any impact on income tax expense  during fiscal 2004. See
Note 14.

      Reclassifications   -  Certain   amounts   from  prior   years  have  been
reclassified to conform to the 2004 financial statement presentation.

Note 3. GOODWILL AND INTANGIBLE ASSETS

      During 2002,  Katy completed the transition to SFAS No. 142 with regard to
accounting and reporting of goodwill and other intangible assets.

      The first phase in the  determination of potential  transitional  goodwill
impairment was completed in the second  quarter of 2002.  Valuations of six Katy
reporting  units'  carrying  values were  completed.  Those reporting units were
Contico,  Disco  (Disco),  Duckback  Products,  Inc.  (Duckback),  Gemtex,  Ltd.
(Gemtex),  Loren Products (Loren) and GC/Waldom  Electronics,  Inc. (GC/Waldom).
Contico


                                       44
<PAGE>

is now represented by the JanSan Plastics,  Consumer  Plastics,  Metal Truck Box
and Container business units of Continental  Commercial Products,  L.L.C. (CCP),
while Disco is now referred to as the Filters and  Grillbricks  business unit of
CCP and Loren is now part of the Abrasives  business  unit of CCP.  Duckback and
GC/Waldom are  discontinued  operations.  The analyses  indicated  that the fair
values were less than the carrying values for three of the six reporting  units:
Contico,  Loren and  GC/Waldom.  The second  phase in the  determination  of the
transitional   goodwill   impairment   was  completed  by  September  30,  2002.
Independent  appraisals were obtained on the relevant reporting units' property,
plant and equipment and intangible  assets.  The fair value balance sheets as of
December 31, 2001 which  resulted  from this work  indicated  that  transitional
goodwill impairment charges of $4.2 million (pre-tax) were required at the Loren
and GC/Waldom  reporting units. The goodwill of the Contico business unit, which
was also evaluated in the second phase of the project,  was determined to have a
carrying value that was not in excess of fair value as of December 31, 2001. The
transitional  goodwill impairment of $4.2 million ($2.5 million,  net of tax) is
presented in the Consolidated Statements of Operations as a cumulative effect of
a change in accounting  principle in accordance with SFAS No. 142. Loren is part
of the  Maintenance  Products  Group  and  GC/Waldom  was  formerly  part of the
Electrical  Products  Group. In accordance with SFAS No. 142, Katy evaluated the
carrying  value of goodwill  balances at the reporting  units as of December 31,
2002, and determined that no further impairments were required. During 2004, the
Company  determined  that there was impairment to the goodwill  associated  with
JanSan Plastics,  Consumer Plastics and Container business units  (collectively,
US  Plastics) in the amount of $8.0  million.  In 2003,  the Company  determined
there was impairment associated with its Abrasives Canada (Gemtex) business unit
of $0.3 million. See Note 4 for further discussion of impairments

      Below is a summary of activity (all in the Maintenance  Products Group) in
the goodwill accounts since December 31, 2002 (in thousands):

              Goodwill at December 31, 2002            $ 10,543
                   Impairment charge                       (328)
                                                       --------
              Goodwill at December 31, 2003              10,215
                   Impairment charge                     (7,976)
                                                       --------
              Goodwill at December 31, 2004            $  2,239
                                                       ========

      The Company  adopted the  non-amortization  provisions of SFAS No. 142 for
goodwill and indefinite-lived intangibles during the first quarter of 2002.

      Following is detailed  information  regarding Katy's intangible assets (in
thousands):

                                                       December 31,
                                              ---------------------------
                                                    2004             2003
                                                    ----             ----
      Customer lists                          $   10,976       $   21,890
      Trade names                                  6,577            9,160
      Patents                                      2,932            2,689
                                              ----------       ----------

           Subtotal                               20,485           33,739
      Accumulated amortization                   (13,057)         (11,340)
                                              ----------       ----------

      Intangible assets, net                  $    7,428       $   22,399
                                              ==========       ==========

      Katy reviews its definite-lived  intangible assets for impairment purposes
whenever  events or  circumstances  indicate that the carrying amount may not be
recoverable,  in accordance with SFAS No. 144. All of Katy's  intangible  assets
are  definite-lived  intangibles.  The Company recorded  impairments  related to
certain patents,  customer lists and trademarks in 2004, 2003 and 2002. See Note
4 for further discussion of these impairments.


                                       45
<PAGE>

      Katy recorded  amortization  expense on intangible assets of $1.7 million,
$2.1 million and $2.6 million in 2004,  2003 and 2002,  respectively.  Estimated
aggregate future amortization expense related to intangible assets is as follows
(in thousands):

                    2005                     $678
                    2006                      648
                    2007                      630
                    2008                      620
                    2009                      576

Note 4. IMPAIRMENTS OF LONG-LIVED ASSETS

      The  Company  operates  three  businesses  in the United  States  that are
engaged  in the  manufacture  and  distribution  of  plastics  products,  JanSan
Plastics, Consumer Plastics and Container (collectively, US Plastics). Since all
of  these  business  units   essentially   share   long-lived   assets,   namely
manufacturing  equipment and certain  intangibles,  it is difficult to attribute
separately  identifiable cash flows emanating from each of the units. Therefore,
in  accordance  with  guidance  provided in SFAS No. 142,  SFAS No. 144 and EITF
Topic D-101,  Clarification  of Reporting  Unit Guidance in Paragraph 30 of FASB
Statement No. 142, the Company  determined that the appropriate level of testing
for  impairment  under  SFAS No.  142 and SFAS  No.  144 was at the US  Plastics
combination of units.  In the fourth quarter of 2004, the  profitability  of the
Consumer  Plastics  business unit declined  sharply as the Company was unable to
pass along sufficient selling price increases to combat the accelerating cost of
resin (a key raw material used in the US Plastics  units).  The Company believes
that future  earnings and cash flow could be  negatively  impacted to the extent
further  increases  in resin and other raw  material  costs  cannot be offset or
recovered  through higher selling  prices.  In accordance with SFAS No. 142, the
Company  (through  an  independent  third party  valuation  firm)  performed  an
analysis of discounted  future cash flows which indicated that the book value of
the US Plastics  units was  significantly  greater  than the fair value of those
businesses.  In addition, as a result of the goodwill analysis, the Company also
assessed  whether  there  had been an  impairment  of the  long-lived  assets in
accordance  with SFAS  No.144.  The  Company  concluded  that the book  value of
equipment,  a customer  list  intangible  and trademark  associated  with the US
Plastics business unit significantly  exceeded the fair value and impairment had
occurred.  Accordingly,  the Company  recognized an impairment  loss and related
charge of $29.9  million in 2004.  The charges  include $8.0 million  related to
goodwill, $8.4 million related to machinery and equipment, $10.9 million related
to a customer list and $2.6 million related to the trademark.  Also in 2004, the
Company  recorded  impairment  charges of $0.8  million  related to property and
equipment  at its Metal  Truck Box  business  unit and $0.1  million  related to
certain assets at the Woods US business unit.

      During 2003,  the Company  recorded  impairments  of  property,  plant and
equipment of $9.3 million.  Charges  included  $7.2 million  related to idle and
obsolete equipment, tooling and leasehold improvements at certain CCP facilities
in Missouri and California,  $1.3 million of obsolete or idled assets related to
the closure of Abrasives  facilities in Lawrence,  Massachusetts  and Pineville,
North  Carolina  and  the  subsequent  consolidation  into  the  Wrens,  Georgia
facility,  and $0.4  million  of  obsolete  molds and  tooling  at our  plastics
facility in the United  Kingdom.  In addition,  impairments of $0.4 million were
recorded for certain  equipment at the Woods and Woods Canada  business units in
connection with the shutdown of their manufacturing  operations. At December 31,
2003, the Company's annual goodwill  impairment analysis resulted in a charge of
$0.3 million at the Abrasives  Canada (Gemtex)  business unit due to the decline
in profitability of that business resulting from increasing foreign competition.
In addition,  $2.3 million of patents of the Abrasives Canada business unit were
impaired as it was determined  that future cash flows of this business could not
support the carrying value of its intangible assets.

      In 2002, the Company recorded impairments of property, plant and equipment
of $16.9 million.  CCP impaired  certain assets  (principally  molds and tooling
assets  associated  with the Consumer  Plastics  business  unit)  totaling $15.3
million.  The impairments  were the result of analyses  indicating  insufficient
future  cash flows  over the  remaining  useful  life of the assets to cover the
carrying  values of the assets.  Given the unique  nature of molds for  specific
products,  the fair values are often less than  historical  cost,


                                       46
<PAGE>

resulting in impairments.  The Textiles business unit recorded asset impairments
of $1.2  million,  resulting  from  management  decisions  on the  future use of
certain  manufacturing assets in their Atlanta,  Georgia facility.  In addition,
Woods US impaired  $0.4  million of  equipment as a result of the closure of its
manufacturing  operations in December 2002.  Also during 2002,  Katy  determined
that the  carrying  value of a customer  list  intangible  asset at the Consumer
Plastics  business unit would not be recovered by projected future  undiscounted
cash flows.  As a result,  an  impairment  charge of $3.6  million was  recorded
during 2002,  reducing the carrying  value of that customer  list  intangible to
$6.8  million at  December  31,  2002.  Also during  2002,  Katy  recognized  an
impairment  charge of $0.7  million  on the  trademark  intangible  asset at the
Textiles  (Wilen) business unit. Poor performance in the Textiles unit in recent
years  had  driven  the  profitability  of  that  business  to very  low  levels
(including  some years with operating  losses).  This  performance  continued in
2002, and it was determined that these  performance  levels negated the relative
value of the trademark intangible.

Note 5. IMPAIRMENT OF EQUITY METHOD INVESTMENT

      During the third quarter of 2003,  Katy reduced the carrying  value of its
43%  equity  investment  in Sahlman to $1.6  million,  resulting  in a charge to
operations of $5.5 million.

      Sahlman is in the business of harvesting shrimp off the coast of South and
Central America, and farming shrimp in Nicaragua and its customers are primarily
in the United States.  Sahlman  experienced  poor results of operations in 2002,
primarily  as a result  of  producers  receiving  very low  prices  for  shrimp.
Increased  foreign  competition,  especially  from Asia,  has had a  significant
downward impact on shrimp prices in the United States.  Upon review of Sahlman's
results for 2002 and through the second quarter of 2003, and after initial study
of the status of the shrimp  industry  and  markets in the United  States,  Katy
evaluated  the  business  further to  determine  if there had been a loss in the
value of the  investment  that was other  than  temporary.  Per ABP No.  18, The
Equity Method for of Accounting for  Investments in Common Stock,  losses in the
value of equity investments that are other than temporary should be recognized.

      Based upon the results of a third party appraisal, Katy estimated the fair
value of the Sahlman business  through a liquidation  value analysis whereby all
of Sahlman's  assets would be sold and all of its obligations  would be settled.
Also based on the aforementioned appraisal, Katy evaluated the business by using
various discounted cash flow analyses,  estimating future free cash flows of the
business with different  assumptions regarding growth, and reducing the value of
the  business  arrived at through this  analysis by its  outstanding  debt.  All
values were then multiplied by 43%, Katy's  investment  percentage.  The answers
derived by each of the three assumption  models were then probability  weighted.
As a result,  Katy concluded that $1.6 million was a reasonable  estimate of the
value of its  investment  in Sahlman.  Based on its  assessment  at December 31,
2004,  the  Company  continues  to believe  that $1.6  million  is a  reasonable
estimate of its investment in Sahlman.

Note 6. DISCONTINUED OPERATIONS

      Three of Katy's operations have been classified as discontinued operations
as of December 31, 2002,  and for the years ended December 31, 2003 and 2002, in
accordance with SFAS No. 144, Accounting for the Impairments or Disposal of Long
Lived Assets. There was no discontinued operations activity in 2004.

      Duckback  Products,  Inc.  (Duckback) was sold on September 16, 2003, with
Katy  collecting  net proceeds of $16.2  million.  The proceeds were used to pay
down a portion  of the  Company's  term  loans and  revolving  credit  facility.
Duckback generated  operating profit of $3.1 million ($2.0 million after-tax) in
2003 (prior to its sale) versus $2.8 million ($1.7 million after tax) in 2002. A
gain of $11.7  million  ($7.6  million net of tax) was  recognized  in the third
quarter of 2003 as a result of the sale.

      GC/Waldom Electronics,  Inc. (GC/Waldom) was held for sale at December 31,
2002 and was sold


                                       47
<PAGE>

on April 2,  2003,  with Katy  collecting  net  proceeds  of $7.4  million.  The
proceeds  were used to pay down a portion  of the  Company's  term  loans  ($2.2
million), as well as the Company's revolving credit facility. GC/Waldom reported
operating profit of $0.1 million ($0.1 million  after-tax) in 2003 (prior to its
sale) versus a loss of $6.4 million  (with no related tax benefit) in 2002.  The
loss in 2002  includes  a charge of $6.2  million  related to the  reduction  in
carrying value of GC/Waldoms's  net assets as Katy  anticipated the sale of this
business in early 2003 and  indications  were that a book loss was  probable.  A
loss of $0.3  million  ($0.2  million net of tax) was  recognized  in the second
quarter of 2003 as a result of the sale.

      Hamilton Precision Metals,  L.P.  (Hamilton) was sold on October 31, 2002,
with Katy  collecting  net proceeds of $13.9  million.  These proceeds were used
primarily to pay off the  remaining  balance of the Company's  then  outstanding
term debt. The Company is entitled to receive additional payments dependent upon
the  occurrence  of  certain  events   associated  with   Hamilton's   financial
performance  in 2004,  however  the  Company  does not  anticipate  that it will
receive any proceeds for 2004. This contingent amount has not been recorded as a
receivable on the  Consolidated  Balance Sheets.  Hamilton  generated  operating
profit of $1.6 million ($0.2 million  after-tax) in 2002 (prior to its sale) and
a gain of $5.5 million  ($3.3  million net of tax) was  recognized in the fourth
quarter of 2002 as a result of the sale.

      Duckback  was  previously  presented as part of the  Maintenance  Products
Group for segment  reporting  purposes,  while both Hamilton and GC/Waldom  were
previously  presented as part of the Electrical  Products Group.  Management and
the  board  of Katy  determined  that  these  businesses  were  not  core to the
Company's long-range strategic goals.

      The  historical  operating  results have been  segregated as  discontinued
operations on the Consolidated Statements of Operations. As of December 31, 2004
and December 31, 2003, there were no discontinued operations.

      Selected  financial  data for  discontinued  operations  is  summarized as
follows (in thousands):

<TABLE>
<CAPTION>
                                                               2004            2003            2002
                                                           ----------      ----------      ----------
<S>                                                        <C>             <C>             <C>
      Net sales                                            $       --      $   18,896      $   47,126
      Pre-tax operating profit (loss)                      $       --      $    3,201      $   (1,988)
      Pre-tax gain on sale of discontinued operations      $       --      $   11,449      $    5,462
</TABLE>

Note 7. SESCO PARTNERSHIP

      On April 29, 2002,  SESCO,  an indirect  wholly owned  subsidiary of Katy,
entered into a partnership  agreement  with Montenay Power  Corporation  and its
affiliates  (Montenay)  that turned over the control of SESCO's  waste-to-energy
facility  to the  partnership.  The  Company  caused  SESCO to enter  into  this
agreement as a result of evaluations of SESCO's business.  First, Katy concluded
that  SESCO  was  not a core  component  of  the  Company's  long-term  business
strategy.  Moreover,  Katy did not feel it had the management  expertise to deal
with  certain  risks and  uncertainties  presented  by the  operation of SESCO's
business, given that SESCO was the Company's only waste-to-energy facility. Katy
had explored  options for divesting SESCO for a number of years,  and management
felt that this transaction offered a reasonable strategy to exit this business.

      The partnership,  with Montenay's leadership,  assumed SESCO's position in
various contracts  relating to the facility's  operation.  Under the partnership
agreement,  SESCO  contributed  its  assets  and  liabilities  (except  for  its
liability  under  the loan  agreement  with the  Resource  Recovery  Development
Authority  (the  Authority)  of the City of Savannah and the related  receivable
under the service agreement with the Authority) to the partnership.  While SESCO
has  a  99%  interest  as a  limited  partner,  Montenay  has  the  day  to  day
responsibility for  administration,  operations,  financing and other matters of
the partnership, and accordingly, the partnership will not be consolidated. Katy
agreed to pay  Montenay  $6.6  million over the span of seven years under a note
payable as part of the partnership and related  agreements.  Certain amounts may
be due to SESCO upon expiration of the service agreement in 2008; also, Montenay


                                       48
<PAGE>

may purchase  SESCO's  interest in the  partnership  at that time.  Katy has not
recorded any amounts  receivable or other assets relating to amounts that may be
received at the time the service agreement expires, given their uncertainty.

      The  Company  made a  payment  of $1.0  million  in July  2004 on the $6.6
million note.  The table below  schedules the remaining  payments as of December
31, 2004 which are reflected in accrued  expenses and other  liabilities  in the
Consolidated Balance Sheet (in thousands):

                           2005           1,050
                           2006           1,100
                           2007           1,100
                           2008             550
                                        -------
                                        $ 3,800
                                        =======

      In the first  quarter of 2002,  the  Company  recognized  a charge of $6.0
million  consisting of 1) the discounted  value of the $6.6 million note, 2) the
carrying value of certain  assets  contributed  to the  partnership,  consisting
primarily of machinery spare parts,  and 3) costs to close the  transaction.  It
should be noted that all of SESCO's  long-lived  assets  were  reduced to a zero
value at March 31, 2002, so no additional  impairment  was required.  On a going
forward basis, Katy would expect that income statement activity  associated with
its involvement in the partnership will not be material, and Katy's Consolidated
Balance Sheet will carry the liability mentioned above.

      In 1984,  the Authority  issued $55.0 million of Industrial  Revenue Bonds
and lent the proceeds to SESCO under the loan agreement for the  acquisition and
construction of the  waste-to-energy  facility that has now been  transferred to
the  partnership.  The funds  required to repay the loan agreement come from the
monthly  disposal  fee paid by the  Authority  under the service  agreement  for
certain waste disposal  services,  a component of which is for debt service.  To
induce the  required  parties to consent to the SESCO  partnership  transaction,
SESCO retained its liability under the loan  agreement.  In connection with that
liability,  SESCO also retained its right to receive the debt service  component
of the monthly disposal fee.

      Based on an  opinion  from  outside  legal  counsel,  SESCO  has a legally
enforceable  right to offset  amounts  it owes to the  Authority  under the loan
agreement  against  amounts that are owed from the  Authority  under the service
agreement. At December 31, 2004, this amount was $23.7 million. Accordingly, the
amounts  owed to and due from SESCO have been  netted  for  financial  reporting
purposes and are not shown on the Consolidated Balance Sheets.

      In addition to SESCO retaining its  liabilities  under the loan agreement,
to induce the required parties to consent to the partnership  transaction,  Katy
also continues to guarantee the obligations of the partnership under the service
agreement.  The  partnership is liable for liquidated  damages under the service
agreement  if it fails to accept  the  minimum  amount of waste or to meet other
performance  standards under the service agreement.  The liquidated  damages, an
off  balance  sheet  risk for Katy,  are equal to the  amount of the  Industrial
Revenue  Bonds  outstanding,  less $4.0  million  maintained  in a debt  service
reserve trust.  Management does not expect non-performance by the other parties.
Additionally,  Montenay  has  agreed  to  indemnify  Katy for any  breach of the
service agreement by the partnership.

      Following are scheduled  principal  repayments on the loan  agreement (and
the Industrial Revenue Bonds) (in thousands):

                           2005                8,370
                           2006               15,300
                                            --------
                          Total             $ 23,670
                                            ========


                                       49
<PAGE>

Note 8. INDEBTEDNESS

      On April 20, 2004, the Company  completed a refinancing of its outstanding
indebtedness (the  "Refinancing")  and entered into a new agreement with Bank of
America  Business  Capital  (formerly Fleet Capital  Corporation)  (the "Bank of
America  Credit  Agreement").  Like the  previous  credit  agreement  with Fleet
Capital  Corporation,  the Bank of America  Credit  Agreement  is a $110 million
facility with a $20 million term loan ("Term Loan") and a $90 million  revolving
credit facility ("Revolving Credit Facility") with essentially the same terms as
the  previous  credit  agreement.  The Bank of America  Credit  Agreement  is an
asset-based  lending  agreement  and involves a syndicate of four banks,  all of
which  participated in the syndicate from the previous credit  agreement.  Since
the inception of the previous credit agreement, Katy had repaid $18.2 million of
the  previous  Term  Loan.  The  ability  to repay  that  loan on a faster  than
anticipated  timetable  was  primarily  due to  funds  generated  by the sale of
GC/Waldom  in April 2003,  the sale of Duckback  in  September  2003 and various
sales of excess real estate.  The additional  funds raised by the Term Loan were
used to pay down  revolving  loans  (after costs of the  transaction),  creating
additional borrowing capacity. In addition, the Bank of America Credit Agreement
contains credit sub-facilities in Canada and the United Kingdom which will allow
the Company to borrow  funds  locally in these  countries  and provide a natural
hedge against currency fluctuations.

      Under  the Bank of  America  Credit  Agreement,  the Term Loan has a final
maturity date of April 20, 2009 with  quarterly  payments of $0.7  million.  The
Term Loan is collateralized by the Company's property,  plant and equipment. The
Revolving  Credit Facility also has an expiration date of April 20, 2009 and its
borrowing  base is  determined by eligible  inventory  and accounts  receivable.
Unused borrowing availability on the Revolving Credit Facility was $33.0 million
at December 31, 2004.

      Below is a summary of the sources and uses  associated with the funding of
the Bank of America Credit Agreement (in thousands):

<TABLE>
<S>                                                                             <C>
   Sources:
   Term Loan incremental borrowings                                             $18,152
                                                                                =======

   Uses:
   Repayment of Revolving Credit Facility borrowings                            $16,713
   Certain costs associated with the Bank of America Credit Agreement             1,439
                                                                                -------
                                                                                $18,152
                                                                                =======
</TABLE>

      All  extensions of credit under the Bank of America  Credit  Agreement are
collateralized  by a first  priority  security  interest  in and  lien  upon the
capital stock of each material domestic  subsidiary (65% of the capital stock of
each  material  foreign  subsidiary),  and all  present  and  future  assets and
properties of Katy.  Customary  financial covenants and restrictions apply under
the Bank of America Credit Agreement. Until September 30, 2004, interest accrued
on Revolving  Credit  Facility  borrowings  at 175 basis points over  applicable
LIBOR rates,  and at 200 basis points over LIBOR for  borrowings  under the Term
Loan. In accordance with the Bank of America Credit Agreement, margins (i.e. the
interest  rate spread  above  LIBOR)  increased by 25 basis points in the fourth
quarter of 2004 based upon certain leverage  measurements.  Margins increased an
additional  25 basis  points in the first  quarter of 2005 based on our leverage
ratio (as defined in the Bank of America  Credit  Agreement)  as of December 31,
2004 and will increase  another 50 basis points upon the  effective  date of the
Third Amendment (see below). Additionally, margins on the Term Loan will drop an
additional  25 basis  points if the  balance of the Term Loan is  reduced  below
$10.0  million.  Interest  accrues at higher  margins  on prime  rates for swing
loans, the amounts of which were nominal at December 31, 2004.

      Long-term debt consists of the following:


                                       50
<PAGE>

<TABLE>
<CAPTION>
                                                                                 December 31,
                                                                          --------------------------
                                                                            2004             2003
                                                                            ----             ----
                                                                             (Amounts in Thousands)
<S>                                                                      <C>              <C>
Term loan payable under Fleet Credit Agreement, interest based on
      LIBOR and Prime Rates (4.75%-5.75%), due through 2009              $   18,571       $    3,663
Revolving loans payable under the Bank of America Credit Agreement,
      interest based on LIBOR and Prime Rates (4.375 - 5.50%)                40,166           36,000
                                                                         ----------       ----------
Total debt                                                                   58,737           39,663
Less revolving loans, classified as current (see below)                     (40,166)         (36,000)
Less current maturities                                                      (2,857)          (2,857)
                                                                         ----------       ----------
Long-term debt                                                           $   15,714       $      806
                                                                         ==========       ==========
</TABLE>

      Aggregate remaining  scheduled  maturities of the Term Loan as of December
31, 2004 are as follows (in thousands):

                               2005              $2,857
                               2006               2,857
                               2007               2,857
                               2008               2,857
                               2009               7,143

      The Revolving  Credit Facility under the Bank of America Credit  Agreement
requires lockbox  agreements which provide for all receipts to be swept daily to
reduce borrowings outstanding. These agreements,  combined with the existence of
a  material  adverse  effect  ("MAE")  clause  in the  Bank  of  America  Credit
Agreement,  cause the  Revolving  Credit  Facility to be classified as a current
liability per guidance in Emerging  Issues Task Force Issue No. 95--22,  Balance
Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
that Include Both a Subjective  Acceleration Clause and a Lock-Box  Arrangement.
The Company does not expect to repay, or be required to repay,  within one year,
the balance of the Revolving Credit Facility  classified as a current liability.
The MAE clause,  which is a typical requirement in commercial credit agreements,
allows the lenders to require the loan to become due if they determine there has
been  a  material  adverse  effect  on  the  Company's   operations,   business,
properties,  assets, liabilities,  condition or prospects. The classification of
the Revolving  Credit  Facility as a current  liability was a result only of the
combination of the lockbox  agreements and the MAE clause.  The Revolving Credit
Facility does not expire or have a maturity date within one year, but rather has
a final  expiration  date of April 20, 2009. The lender has not notified Katy of
any indication of a MAE at December 31, 2004, and to management's knowledge, the
Company was not in  violation  of any  provision  of the Bank of America  Credit
Agreement at December 31, 2004.

      The Company was in compliance with the applicable  financial  covenants in
the Bank of America Credit Agreement at December 31, 2004. However,  the Company
determined  that due to declining  profitability  in the fourth quarter of 2004,
potentially  lower  profitability  in the first  half of 2005 and the  timing of
certain  restructuring  payments,  it would not meet our Fixed  Charge  Coverage
Ratio (as defined in the Bank of America Credit Agreement) and could potentially
exceed its maximum  Consolidated  Leverage Ratio (also as defined in the Bank of
America Credit Agreement) as of the end of the first,  second and third quarters
of 2005. In  anticipation  of not  achieving  the minimum Fixed Charge  Coverage
Ratio or exceeding the maximum Consolidated Leverage Ratio, the Company obtained
an amendment to the Bank of America Credit  Agreement (the "Second  Amendment").
The Second  Amendment  applied only to the first three  quarters of 2005 and the
covenants would have returned to their original levels for the fourth quarter of
2005.  Specifically,  the Second Amendment  eliminated the Fixed Charge Coverage
Ratio, increased the maximum Consolidated Leverage Ratio,  established a Minimum
Consolidated  EBITDA (on a latest  twelve  months basis) for each of the periods
and also established a Minimum  Availability (the eligible  collateral base less
outstanding  borrowings and letters of credit) on each day within the nine-month
period.

      Subsequent  to  the  Second   Amendment's   effective  date,  the  Company
determined  that it would likely not meet its amended  financial  covenants.  On
April 13, 2005, the Company obtained a further  amendment to the Bank of America
Credit  Agreement (the "Third  Amendment").  The Third Amendment  eliminates the
maximum  Consolidated  Leverage  Ratio and the  Minimum  Consolidated  EBITDA as
established by the Second  Amendment and adjusts the Minimum  Availability  such
that our eligible  collateral  must exceed the sum of the Company's  outstanding
borrowings and letters of credit under the Revolving Credit Facility by at least
$5 million from the effective date of the Third Amendment  through September 29,
2005 and by at least $7.5  million  from  September  30, 2005 until the date the
Company  delivers its financial  statements for the first quarter of 2006 to its
lenders.  Subsequent to the delivery of the financial  statements  for the first
quarter of 2006 the Third  Amendment  reestablishes  the  minimum  Fixed  Charge
Coverage Ratio as originally set forth in the Bank of America Credit  Agreement.
The Third Amendment also reduces the maximum allowable capital  expenditures for
2005 from $15 million to $10 million, and increases the interest rate margins on
all of the Company's outstanding borrowings and letters of credit to the largest
margins set forth in the Bank of America Credit Agreement. Interest rate margins
will  return  to  levels  set  forth in the  Bank of  America  Credit  Agreement
subsequent to the delivery of the Company's  financial  statements for the first
quarter of 2006 to its lenders.

      If the  Company  is  unable  to  comply  with  the  terms  of the  amended
covenants,  it could seek to obtain  further  amendments  and  pursue  increased
liquidity  through  additional  debt  financing  and/or the sale of assets.  The
Company believes that given its strong


                                       51
<PAGE>

working capital base,  additional liquidity could be obtained through additional
debt financing, if necessary. However, there is no guarantee that such financing
could  be  obtained.  In  addition,   the  Company  is  continually   evaluating
alternatives  relating to the sale of excess assets and  divestitures of certain
of  its  business  units.   Asset  sales  and  business   divestitures   present
opportunities to provide  additional  liquidity by  de-leveraging  our financial
position.

      Letters of credit  totaling $8.7 million were  outstanding at December 31,
2004, which reduced the unused borrowing availability under the Revolving Credit
Facility.

      All of the debt under the Bank of America Credit Agreement is re-priced to
current rates at frequent intervals.  Therefore, its fair value approximates its
carrying value at December 31, 2004.

      Katy has incurred  additional  debt issuance costs in 2004 associated with
the Bank of America Credit Agreement. Additionally, at the time of the inception
of the Bank of America Credit Agreement,  Katy had approximately $4.0 million of
unamortized debt issuance costs  associated with the previous credit  agreement.
The remainder of the previously  capitalized  costs,  along with the capitalized
costs incurred in connection with the Bank of America Credit Agreement,  will be
amortized  over the life of the Bank of America Credit  Agreement  through April
2009. Future quarterly amortization expense is expected to be approximately $0.3
million. Based on the pro rata reduction in borrowing capacity from the previous
credit  facilities  and in  connection  with the sale of assets  (primarily  the
GC/Waldom  and  Duckback  businesses)  to repay  the  term  under  the  previous
facility,  Katy charged to expense $1.8 million of previously  unamortized  debt
issuance  costs in 2003.  During 2004,  Katy  incurred fees and expenses of $0.5
million  (reported  in Other,  net on the  Condensed  Consolidated  Statement of
Operations) associated with a financing which the Company chose not to pursue.

Note 9. EARNINGS PER SHARE

      The  Company's  diluted  earnings  per  share  were  calculated  using the
treasury stock method in accordance with SFAS No. 128,  Earnings Per Share.  The
basic and diluted earnings per share (EPS) calculations are as follows:

<TABLE>
<CAPTION>
For the Year Ended December 31,                                                     2004             2003             2002
-------------------------------                                                     ----             ----             ----
<S>                                                                           <C>              <C>              <C>
Basic and Diluted EPS:
     Loss from continuing operations                                          $  (36,121)      $  (18,887)      $  (53,083)
     Gain on early redemption of preferred interest of subsidiary                     --            6,560               --
     Payment-in-kind dividends on convertible preferred stock                    (14,749)         (12,811)         (11,136)
                                                                              ----------       ----------       ----------
     Loss from continuing operations attributable to common stockholders         (50,870)         (25,138)         (64,219)
     Discontinued operations (net of tax)                                             --            9,523           (1,152)
     Cumulative effect of a change in accounting principle (net of tax)               --               --           (2,514)
                                                                              ----------       ----------       ----------
        Net loss attributable to common stockholders                          $  (50,870)      $  (15,615)      $  (67,885)
                                                                              ==========       ==========       ==========

Weighted average shares - Basic and Diluted                                        7,883            8,215            8,371

Per share amount:
     Loss from continuing operations attributable to common stockholders      $    (6.45)      $    (3.06)      $    (7.67)
     Discontinued operations (net of tax)                                             --             1.16            (0.14)
     Cumulative effect of a change in accounting principle (net of tax)               --               --            (0.30)
                                                                              ----------       ----------       ----------
     Net loss attributable to common stockholders                             $    (6.45)      $    (1.90)      $    (8.11)
                                                                              ==========       ==========       ==========
</TABLE>

As of  December  31,  2004  and  2003,  1,530,000  and  1,605,000  options  were
in-the-money   and  195,650  and  194,200   options   were   out-of-the   money,
respectively.  At December 31, 2004, 1,131,551 convertible preferred shares were
outstanding,  which  are in total  convertible  into  18,859,183  shares of Katy


                                       52
<PAGE>

common stock. At December 31, 2003,  925,750  convertible  preferred shares were
outstanding, along with 58,207 convertible preferred shares accrued through paid
in kind dividends,  which were in total  convertible  into 16,399,283  shares of
Katy common stock. At December 31, 2002,  805,000  convertible  preferred shares
were outstanding, along with 50,947 convertible preferred shares accrued through
PIK dividends,  which were  convertible  into  14,265,783  shares of Katy common
stock.  In-the-money options and convertible  preferred shares were not included
in the calculation of diluted earnings per share in any period presented because
of their anti-dilutive impact as a result of the Company's net loss position.

Note 10. RETIREMENT BENEFIT PLANS

      Pension and Other Postretirement Plans

      Several  subsidiaries  have pension plans  covering  substantially  all of
their employees. These plans are noncontributory, defined benefit pension plans.
The  benefits  to be paid under these plans are  generally  based on  employees'
retirement age and years of service. The companies' funding policies, subject to
the  minimum  funding  requirements  of employee  benefit  and tax laws,  are to
contribute such amounts as determined on an actuarial basis to provide the plans
with assets  sufficient  to meet the benefit  obligations.  Plan assets  consist
primarily  of  fixed  income  investments,  corporate  equities  and  government
securities.  The Company also provides  certain  health care and life  insurance
benefits for some of its retired employees. The post-retirement health plans are
unfunded.  Katy  uses  an  annual  measurement  date as of  December  31 for the
majority  of its pension and other  postretirement  benefit  plans for all years
presented.  Information regarding the Company's pension and other postretirement
benefit  plans  as of for the  years  ended  December  31,  2004 and 2003 are as
follows:


                                       53
<PAGE>

<TABLE>
<CAPTION>
                                                             Pension Benefits                   Other Benefits
                                                       --------------------------        --------------------------
                                                            2004             2003             2004             2003
                                                            ----             ----             ----             ----
                                                                             (Amounts in Thousands)
<S>                                                    <C>              <C>              <C>              <C>
Change in benefit obligation:
Benefit obligation at beginning of year                $   1,608        $   2,595        $   2,613        $   2,506
Service cost                                                   6               29               --               26
Interest cost                                                 95              144              188              169
Plan amendments                                               --             (189)              --               --
Actuarial loss                                                64               20              720              242
Settlement                                                    --               --               --               --
Benefits paid                                               (229)            (991)            (350)            (330)
                                                       ---------        ---------        ---------        ---------
Benefit obligation at end of year                      $   1,544        $   1,608        $   3,171        $   2,613
                                                       =========        =========        =========        =========

Change in plan assets:
Fair value of plan assets at beginning of year         $   1,435        $   1,860        $      --        $      --
Actuarial return on plan assets                              100              152               --               --
Employer contributions                                        --              414              350              330
Settlement                                                    --               --               --               --
Benefits paid                                               (229)            (991)            (350)            (330)
                                                       ---------        ---------        ---------        ---------
Fair value of plan assets at end of year               $   1,306        $   1,435        $      --        $      --
                                                       =========        =========        =========        =========

Reconciliation of prepaid (accrued) benefit cost:
Funded status                                          $    (238)       $    (173)       $  (3,171)       $  (2,613)
Unrecognized net actuarial loss (gain)                       657              645              918              239
Unrecognized prior service cost                               --               --              129              191
                                                       ---------        ---------        ---------        ---------
Prepaid (accrued) benefit cost                         $     419        $     472        $  (2,124)       $  (2,183)
                                                       =========        =========        =========        =========

Amount recognized in financial statements:
Other current assets                                   $     148        $     151        $      --        $      --
Accrued expenses and other liabilities                      (294)            (356)          (2,124)          (2,183)
Accumulated other comprehensive income                       565              677                                --
                                                       ---------        ---------        ---------        ---------
Total recognized                                       $     419        $     472        $  (2,124)       $  (2,183)
                                                       =========        =========        =========        =========

Components of net periodic benefit cost:
Service cost                                           $       6        $      29        $      --        $      26
Interest cost                                                 95              144              188              169
Expected return on plan assets                              (112)            (147)              --               --
Amortization of net transition asset                          11                3               --               --
Amortization of prior service cost                            --               --               60               60
Amortization of net gain                                      53               65               42               --
Curtailment/settlement recognition                            --               33               --               --
                                                       ---------        ---------        ---------        ---------
Net periodic benefit cost                              $      53        $     127        $     290        $     255
                                                       =========        =========        =========        =========

Assumptions as of December 31:
Discount rates                                              5.75%            6.25%            5.75%            6.75%
Expected return on plan assets                              8.00%            6.75%             N/A              N/A
Assumed rates of compensation increases                      N/A              N/A              N/A              N/A
</TABLE>


                                       54
<PAGE>

Impact of one-percent increase in health care trend rate:
Increase in accumulated postretirement benefit obligation      $  288    $  166
Increase in service cost and interest cost                     $   18    $   11
Impact of one-percent decrease in health care trend rate:
Decrease in accumulated postretirement benefit obligation      $  231    $  133
Decrease in service cost and interest cost                     $   14    $    9

      The assumed health care cost trend rate used in measuring the  accumulated
post-retirement  benefit  obligation  as of  December  31,  2004  was 9% in 2005
grading to 5% by 2011.

      In determining the expected return on plan assets,  the Company  considers
the relative weighting of plan assets, the historical  performance of total plan
assets and individual  asset classes and economic and other  indictors of future
performance. In addition, the Company may consult with and consider the opinions
of  financial  and  other   professionals  in  developing   appropriate   return
benchmarks.

      The allocation of pension plan assets is as follows:

                                       Target            Percentage of
                                     Allocation           Plan Assets

              Asset Category            2005           2004           2003
              -----------------       --------       -------        -------
              Equity Securities       30 - 35%         35%            32%

              Debt Securities         60 - 65%         65%            68%

              Real estate                0%             0%            0%

              Other                    0 - 3%           0%            0%

                                                                     100%

      Assets are  rebalanced  to the target asset  allocation  at least once per
quarter.

      There are no required contributions to the pension plans for 2004 and as a
result, Katy does not anticipate making any contributions in 2005.

      The following table presents estimated future benefit payments:

                                  Pension Plans        Other Plans
                                  -------------        ------------
                2005              $          36        $        333
                2006                         36                 347
                2007                         35                 350
                2008                         36                 350
                2009                         41                 347
                2010-2015                   198               1,617
                                  -------------        ------------
                Total             $         382        $      3,344
                                  =============        ============

      In addition to the plans  described  above, in 1993 the Company's Board of
Directors  approved a retirement  compensation  program for certain officers and
employees  of the  Company and a  retirement  compensation  arrangement  for the
Company's then Chairman and Chief Executive Officer.  The Board approved a total
of $3.5 million to fund such plans. This amount represented the best estimate of
the obligation that vested immediately upon Board approval and is to be paid for
services  rendered  to date.


                                       55
<PAGE>

The Company had $2.1 million and $2.4 million  recorded in accrued  compensation
and other  liabilities  at December  31, 2004 and 2003,  respectively,  for this
obligation.

      401(k) Plans

      The  Company   offers  its  employees  the   opportunity   to  voluntarily
participate in one of two 401(k) plans administered by the Company or one of its
subsidiaries.  On January 1, 2002, Katy consolidated certain of its 401(k) plans
and reduced the number of plans within the Company from five to two. The Company
makes matching and other  contributions in accordance with the provisions of the
plans and,  under certain  provisions,  at the  discretion  of the Company.  The
Company  made annual  matching and other  contributions  of $0.7  million,  $0.6
million and $0.5 million in 2004, 2003 and 2002, respectively.

Note 11. PREFERRED INTEREST OF SUBSIDIARY

      Upon the  Company's  purchase  of the  common  interest  of CCP  (formerly
Contico  International  L.L.C) on January 8, 1999,  Newcastle  Industries,  Inc.
(Newcastle)  retained a preferred interest in CCP,  represented by 329 preferred
units,  each with a stated value of $100,000,  for an aggregate  stated value of
$32.9 million.  The preferred interest yielded an 8% cumulative annual return on
its stated value while  outstanding,  payable  quarterly in cash.  In connection
with the Recapitalization,  the Company entered into an agreement with Newcastle
to redeem at a 40%  discount 165  preferred  units,  plus accrued  distributions
thereon,   which,  as  disclosed   above,  had  a  stated  value  prior  to  the
Recapitalization of $32.9 million. Katy utilized  approximately $10.2 million of
the proceeds  from the  Recapitalization  for the purpose of  redeeming  the 165
preferred  units.  The holder of the preferred  interest  retained 164 preferred
units,  with a stated  value of $16.4  million.  In  connection  with a previous
credit  agreement  completed in February 2003, the remaining 164 preferred units
were redeemed early at a similar 40% discount. The difference between the amount
paid on  redemption  and the stated  value of  preferred  interest  redeemed was
recognized  as an increase to  Additional  Paid-in  Capital in the  Consolidated
Statements  of  Stockholders'  Equity,  and  was a  reduction  to the  net  loss
attributable  to common  stockholders  in the  calculation of basic earnings per
share in 2003.

Note 12. STOCKHOLDERS' EQUITY

      Convertible Preferred Stock

      On June 28, 2001, Katy completed a recapitalization following an agreement
on June 2, 2001 with KKTY Holding Company,  LLC (KKTY), an affiliate of Kohlberg
Investors IV, L.P. (Kohlberg) (the  "Recapitalization").  Under the terms of the
Recapitalization, KKTY purchased 700,000 shares of newly issued preferred stock,
$100 par value per share  (Convertible  Preferred  Stock),  which is convertible
into 11,666,666 common shares, for an aggregate purchase price of $70.0 million.
The  Convertible  Preferred  shares were entitled to a 15% payment in kind (PIK)
dividend  (that is,  dividends in the form of additional  shares of  Convertible
Preferred Stock), compounded annually, which started accruing on August 1, 2001.
PIK dividends were paid on August 1, 2002 (105,000 convertible preferred shares,
equivalent to 1,750,000  common  shares);  August 1, 2003  (120,750  convertible
preferred  shares,  equivalent  to  2,012,500  common  shares);  August  1, 2004
(138,862.5  convertible preferred shares equivalent to 2,314,375 common shares);
and on December 31, 2004 (66,938.5 convertible  preferred shares,  equivalent to
1,115,642 common shares).  No dividends accrue or are payable after December 31,
2004. If  converted,  the  11,666,666  common  shares,  along with the 7,192,517
equivalent  common  shares from PIK  dividends  paid through  December 31, 2004,
would represent  approximately 70% of the outstanding  shares of common stock as
of December 31, 2004,  excluding  outstanding  options.  The accruals of the PIK
dividends were recorded as a charge to Retained Earnings in 2001 and as a charge
to Additional  Paid-in Capital starting in 2002 when the Company entered into an
Accumulated  Deficit position,  and an increase to Convertible  Preferred Stock.
The dividends were recorded at fair value,  reduced earnings available to common
shareholders in the calculation of basic and diluted earnings per share, and are
presented on the  Consolidated  Statements  of  Operations  as an  adjustment to
arrive at net loss available to common shareholders.


                                       56
<PAGE>

      The Convertible Preferred Stock is convertible at the option of the holder
at any time  after the  earlier  of 1) June 28,  2006,  2) board  approval  of a
merger,  consolidation  or other  business  combination  involving  a change  in
control of the Company,  or a sale of all or substantially  all of the assets or
liquidation  of the Company,  or 3) a contested  election  for  directors of the
Company  nominated by KKTY. The preferred shares 1) are non-voting (with limited
exceptions),  2) are  non-redeemable,  except in whole,  but not in part, at the
Company's  option (as approved  only by the Class I directors) at any time after
June 30, 2021, 3) were  entitled to receive  cumulative  PIK  dividends  through
December 31,  2004,  as mentioned  above,  at a rate of 15% percent,  4) have no
preemptive rights with respect to any other securities or instruments  issued by
the Company,  and 5) have registration  rights with respect to any common shares
issued upon conversion of the Convertible Preferred Stock. Upon a liquidation of
Katy, the holders of the  Convertible  Preferred Stock would receive the greater
of (i) an amount  equal to the par value  ($100 per share) of their  Convertible
Preferred Stock, or (ii) an amount that the holders of the Convertible Preferred
Stock would have received if their shares of  Convertible  Preferred  Stock were
converted  into  common  stock   immediately  prior  to  the  distribution  upon
liquidation.

      Share Repurchase

      On  April  20,  2003,  the  Company  announced  a plan to spend up to $5.0
million to  repurchase  shares of its common  stock.  During  2003,  the Company
repurchased  482,800  shares  of  its  common  stock  on  the  open  market  for
approximately $2.5 million. The Company suspended this plan in November 2003. On
April 20, 2004,  the Company  announced  the  resumption  of the plan.  In 2004,
12,000  shares  of  common  stock  were  repurchased  on  the  open  market  for
approximately $0.1 million.  The Company suspended further repurchases under the
plan again on May 10, 2004 and there  currently are no plans to resume the share
repurchase program.

      Rights Plan

      In January  1995,  the Board of  Directors  adopted a  Stockholder  Rights
Agreement and distributed one right for each outstanding  share of the Company's
common stock (not  otherwise  exempted  under the terms of the  agreement).  The
rights entitle the  stockholders to purchase,  upon certain  triggering  events,
shares of either the Company's common stock or any acquiring company's stock, at
a reduced  price.  The  rights are not and will not  become  exercisable  unless
certain  change of control  events or increases in certain  parties'  percentage
ownership  occur.  Consistent  with  the  intent  of  the  Rights  Agreement,  a
shareholder  who caused a triggering  event would not be able to exercise  their
rights. If stockholders were to exercise rights, the effect would be to increase
the percentage ownership stakes of those not causing the triggering event, while
decreasing  the percentage  ownership  stake of the party causing the triggering
event.  The Rights  Agreement  was  amended on June 2, 2001 to clarify  that the
Recapitalization  was not a triggering event under the Rights  Agreement.  As of
December 31, 2004,  there are 7,945,377  rights  outstanding,  of which none are
currently exercisable.

Note 13. STOCK INCENTIVE PLANS

      Restricted Stock Grant

      During 2000 and 1999,  the Company issued  restricted  stock grants in the
amount of 3,000 and 45,100 shares, respectively, to certain key employees of the
Company.  These stock grants vest over a three-year  period, of which 25% vested
immediately  upon  distribution.  As a result of restricted  stock  grants,  the
Company recognized compensation expense for 2003 and 2002 in the amount of $13.0
thousand  and  $0.1  million,   respectively.  As  of  December  31,  2003,  all
compensation  associated  with  restricted  stock  grants  had been  earned  and
expensed.


                                       57
<PAGE>

      Director Stock Grant

      During  2004,  2003  and  2002,  the  Company  granted  all   independent,
non-employee  directors  500  shares of  Company  common  stock as part of their
compensation.  The total grant to the directors for the years ended December 31,
2004, 2003 and 2002 was 1,500 shares for each respective period.

      Stock Options

      At the 1995  Annual  Meeting,  the  Company's  stockholders  approved  the
Long-Term Incentive Plan (the "1995 Incentive Plan") authorizing the issuance of
up to 500,000  shares of Company  common stock pursuant to the grant or exercise
of stock options, including incentive stock options, nonqualified stock options,
SARs,  restricted stock,  performance units or shares and other incentive awards
to executives and certain key employees. The Compensation Committee of the Board
of Directors  administers  the 1995 Incentive Plan and determines to whom awards
may be  granted,  the type of award as well as the  number of shares of  Company
common  stock to be covered by each award and the terms and  conditions  of such
awards.  The exercise  price of stock options  granted under the 1995  Incentive
Plan cannot be less than 100  percent of the fair market  value of such stock on
the date of grant.  In the event of a Change in Control of the  Company,  awards
granted  under the 1995  Incentive  Plan are  subject to  substantially  similar
provisions to those  described  under the 1997 Incentive Plan. The definition of
Change in Control of the Company under the 1995 Incentive Plan is  substantially
similar to the definition described under the 1997 Incentive Plan.

      At the 1995  Annual  Meeting,  the  Company's  stockholders  approved  the
Non-Employee  Directors Stock Option Plan (the "Directors Plan") authorizing the
issuance of up to 200,000  shares of Company  common stock pursuant to the grant
or exercise of  nonqualified  stock options to outside  directors.  The Board of
Directors  administers  the Directors  Plan. The exercise price of stock options
granted  under  the  Directors  Plan is equal to the  fair  market  value of the
Company's  common stock on the date of grant.  Stock options granted pursuant to
the  Directors  Plan are  immediately  vested  in full on the date of grant  and
generally expire 10 years after the date of grant.

      At the 1998 Annual Meeting, the Company's  stockholders  approved the 1997
Long-Term  Incentive Plan (the "1997 Incentive Plan"),  authorizing the issuance
of up to  875,000  shares  of  Company  common  stock  pursuant  to the grant or
exercise of stock options, including incentive stock options, nonqualified stock
options, SARs, restricted stock, performance units or shares and other incentive
awards.  The  Compensation  Committee of the Board of Directors  administers the
1997 Incentive  Plan and  determines to whom awards may be granted,  the type of
award as well as the number of shares of Company  common  stock to be covered by
each award,  and the terms and conditions of such awards.  The exercise price of
stock  options  granted  under the 1997  Incentive  Plan cannot be less than 100
percent  of the fair  market  value of such  stock  on the  date of  grant.  The
restricted  stock grants in 1999 and 1998  referred to above were made under the
1997 Incentive  Plan.  Related to the 1997 Incentive  Plan, the Company  granted
SARs as described below.

      The 1997  Incentive  Plan also  provides  that in the event of a Change in
Control  of the  Company,  as  defined  below,  1) any  SARs and  stock  options
outstanding  as of  the  date  of  the  Change  in  Control  which  are  neither
exercisable  or vested will become  fully  exercisable  and vested (the  payment
received  upon the exercise of the SARs shall be equal to the excess of the fair
market  value of a share of the  Company's  Common Stock on the date of exercise
over the grant date price  multiplied by the number of SARs  exercised);  2) the
restrictions applicable to restricted stock will lapse and such restricted stock
will become free of all  restrictions  and fully vested;  and 3) all performance
units or shares will be considered to be fully earned and any other restrictions
will  lapse,  and such  performance  units or shares  will be settled in cash or
stock, as applicable,  within 30 days following the effective date of the Change
in Control.  For  purposes  of  subsection  3), the payout of awards  subject to
performance goals will be a pro rata portion of all targeted award opportunities
associated with such awards based on the number of complete and partial calendar
months within the performance  period which had elapsed as of the effective date
of the  Change  in  Control.  The  Compensation  Committee  will  also  have the
authority,  subject to the  limitations set forth in


                                       58
<PAGE>

the 1997 Incentive  Plan, to make any  modifications  to awards as determined by
the  Compensation  Committee to be appropriate  before the effective date of the
Change in Control.

      For  purposes  of the 1997  Incentive  Plan,  "Change in  Control"  of the
Company  means,  and shall be deemed to have occurred upon, any of the following
events:  1) any person (other than those persons in control of the Company as of
the  effective  date of the 1997  Incentive  Plan, a trustee or other  fiduciary
holding  securities  under  an  employee  benefit  plan  of  the  Company  or  a
corporation  owned directly or indirectly by the  stockholders of the Company in
substantially  the same  proportions as their ownership of stock of the Company)
becomes the  beneficial  owner,  directly or  indirectly,  of  securities of the
Company  representing  30 percent or more of the  combined  voting  power of the
Company's  then  outstanding  securities;   or  2)  during  any  period  of  two
consecutive  years (not including any period prior to the effective  date),  the
individuals  who at the  beginning  of  such  period  constitute  the  Board  of
Directors (and any new director,  whose  election by the Company's  stockholders
was approved by a vote of at least  two-thirds  of the  directors  then still in
office  who  either  were  directors  at the  beginning  of the  period or whose
election or nomination  for election was so  approved),  cease for any reason to
constitute a majority  thereof,  or 3) the  stockholders of the Company approve:
(a) a plan of complete  liquidation of the Company;  or (b) an agreement for the
sale or disposition of all or substantially  all the Company's  assets; or (c) a
merger,  consolidation,  or  reorganization of the Company with or involving any
other corporation,  other than a merger,  consolidation,  or reorganization that
would result in the voting  securities  of the Company  outstanding  immediately
prior thereto continuing to represent at least 50 percent of the combined voting
power  of the  voting  securities  of the  Company  (or such  surviving  entity)
outstanding immediately after such merger, consolidation, or reorganization. The
Company has determined that the Recapitalization did not result in such a Change
in Control.

      On June 28, 2001, the Company entered into an employment agreement with C.
Michael Jacobi, its President and Chief Executive Officer.  To induce Mr. Jacobi
to enter into the  employment  agreement,  on June 28,  2001,  the  Compensation
Committee of the Board of  Directors  approved the Katy  Industries,  Inc.  2001
Chief Executive  Officer's Plan. Under this plan, Mr. Jacobi was granted 978,572
stock  options.  Mr.  Jacobi was also  granted  71,428 stock  options  under the
Company's 1997 Incentive Plan.

      On September 4, 2001,  the Company  entered into an  employment  agreement
with Amir  Rosenthal,  its Vice  President,  Chief  Financial  Officer,  General
Counsel and  Secretary.  To induce Mr.  Rosenthal  to enter into the  employment
agreement,  on September  4, 2001,  the  Compensation  Committee of the Board of
Directors  approved the Katy  Industries,  Inc. 2001 Chief  Financial  Officer's
Plan.  Under this plan, Mr.  Rosenthal was granted  123,077 stock  options.  Mr.
Rosenthal  was also  granted  76,923  stock  options  under the  Company's  1995
Incentive Plan.

      In March 2004,  the Company's  Board of Directors  approved the vesting of
all previously unvested stock options.

      The following  table  summarizes  option  activity  under each of the 1997
Incentive Plan,  1995 Incentive  Plan, the Chief  Executive  Officer's Plan, the
Chief Financial Officer's Plan and the Directors Plan:


                                       59
<PAGE>

<TABLE>
<CAPTION>
                                                                                        Weighted
                                                                                         Average         Weighted
                                                                                        Remaining         Average
                                                                                       Contractual       Exercise
                                                        Options       Exercise Price       Life            Price
                                                        -------       --------------   -----------       --------
<S>                                                    <C>            <C>               <C>                <C>
Outstanding at December 31, 2001                       1,878,650      $ 3.02 - 19.56    8.83 years         $6.03

Granted                                                  295,000      $ 3.11 -  5.15                       $3.65
Exercised                                                     --                  --                          --
Canceled                                                (222,900)     $ 8.50 - 19.56                      $12.38
                                                      ----------

Outstanding at December 31, 2002                       1,950,750      $ 3.02 - 19.56    8.27 years         $4.94

Granted                                                   36,000      $ 4.31 -  4.85                       $4.76
Exercised                                                     --                  --                          --
Canceled                                                (187,550)     $ 3.11 - 19.56                       $5.05
                                                      ----------

Outstanding at December 31, 2003                       1,799,200      $ 3.02 - 19.56    7.28 years         $4.92
                                                      ==========

Granted                                                    6,000      $ 5.91 -  5.91                       $5.91
Exercised                                                (75,000)     $ 4.05 -  4.05                       $4.05
Canceled                                                  (4,550)     $ 9.88 - 17.00                      $12.70
                                                      ----------

Outstanding at December 31, 2004                       1,725,650      $ 3.02 - 19.56    6.25 years         $4.94
                                                      ==========

Vested and Exercisable at December 31, 2004            1,725,650
                                                      ==========

Available to grant as of December 31, 2004               308,889
                                                      ==========
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 2004:

<TABLE>
<CAPTION>
                                         Options Outstanding                                Options Exercisable
                          ------------------------------------------------------------------------------------------------
                                               Weighted-
                              Number            Average              Weighted-          Number              Weighted-
 Range of Exercise        Outstanding at       Remaining        Average Exercise    Exerciseable at       Average Exercise
      Prices                12/31/2004      Contractual Life          Price            12/31/2004              Price
--------------------------------------------------------------------------------------------------------------------------
<S>                           <C>                 <C>                <C>                <C>                     <C>
   $3.02 - 5.91               1,536,000           6.69               $ 4.05             1,536,000               $ 4.05
  $8.50 - 10.50                  90,800            2.7                 9.34                90,800                 9.34
  $13.19 - 13.57                 61,750           1.96                13.23                61,750                13.23
  $16.13 - 19.56                 37,100           4.31                17.20                37,100                17.20
                          ------------------------------------------------------------------------------------------------
                              1,725,650           6.25               $ 4.94             1,725,650               $ 4.94
                          ================================================================================================
</TABLE>

Stock Appreciation Rights

      Under the 1997  Incentive  Plan,  204,473  SARs have been granted and will
become  exercisable  at any  time up to and  including  January  22,  2005,  the
Company's  average closing stock price over a 45 calendar day period has equaled
or exceeded $53.80 per share.  During 2002 and 2001,  159,745 of these SARs were
cancelled due to employee terminations; 44,728 remain outstanding. An additional
163,579 SARs have been granted and will become  exercisable  at such time, up to
and including January 22, 2005, the Company's average closing stock price over a
45-calendar day period has equaled or exceeded $53.80 per share. During 2001 and
2002, 127,796 of these SARS were cancelled due to employee terminations;


                                       60
<PAGE>

35,783 remain outstanding.  All SARs which have met the performance goals above,
as the case may be, will expire  December 9, 2007. As a result of the underlying
stock price,  no  compensation  expense was recorded in 2004,  2003 or 2002. The
exercise price of each SAR is $19.56. Katy would record compensation expense for
each SAR to the extent its stock price were to exceed $19.56.

      During 2002, a non-employee  consultant was awarded 200,000 SARs under the
1997  Incentive  Plan.  As of  December  31,  2004 and  2003,  these  SARs  were
out-of-the-money, and no compensation expense related to this award was recorded
in 2004 or 2003.

      On November  21,  2002,  the Board of  Directors  approved  the 2002 Stock
Appreciation  Rights Plan (the "2002 SAR Plan"),  authorizing the issuance of up
to  1,000,000  stock  appreciation  rights  (SARs).  Vesting of the SARs  occurs
ratably  over  three  years from the date of issue.  The 2002 SAR Plan  provides
limitations  on redemption by holders,  specifying  that no more than 50% of the
cumulative  number of vested SARs held by an employee  could be exercised in any
one calendar year.  The SARs expire ten years from the date of issue.  The Board
approved grants on November 22, 2002, of 717,175 SARs to 60 individuals  with an
exercise  price of $3.15,  which equaled the market price of Katy's stock on the
grant date.  In addition,  50,000 SARs were granted to four  individuals  during
2003 with exercise  prices  ranging from $3.01 through $5.05.  In 2004,  275,000
SARs were granted to fifteen individuals with exercise prices ranging from $5.20
through $6.45.

      At December 31,  2004,  Katy had 740,049  SARS  outstanding  at a weighted
average  exercise  price  of  $4.16.   Compensation  (income)  expense  recorded
associated  with the vesting of stock  appreciation  rights was ($0.1  million),
$1.0 million and $13.0 thousand in 2004, 2003 and 2002,  respectively.  The 2002
SAR Plan also  provides that in the event of a Change in Control of the Company,
all  outstanding  SARs may become fully vested.  In accordance with the 2002 SAR
Plan, a "Change in Control" is deemed to have occurred upon any of the following
events: 1) a sale of 100 percent of the Company's  outstanding capital stock, as
may be outstanding from time to time; 2) a sale of all or  substantially  all of
the Company's operating subsidiaries or assets; or 3) a transaction or series of
transactions  in which any third  party  acquires  an  equity  ownership  in the
Company  greater than that held by KKTY  Holding  Company,  L.L.C.  and in which
Kohlberg & Co.,  L.L.C.  relinquishes  its right to  nominate a majority  of the
candidates for election to the Board of Directors.

      See Note 2 for a discussion  of accounting  for stock awards,  and related
fair value and pro forma earnings disclosures.

Note 14. INCOME TAXES

      The provision for income taxes from continuing  operations is based on the
following pre-tax income:

                                     2004            2003               2002
                                     ----            ----               ----
                                            (Amounts in Thousands)

Domestic                         $(40,134)       $(21,662)          $(48,112)
Foreign                             4,896            (303)             4,104
                                 --------        --------           --------
   Total                         $(35,238)       $(21,965)          $ (44,008)
                                 ========        ========           ========

      The  (benefit)  provision  for  income  taxes from  continuing  operations
consists of the following:


                                       61
<PAGE>


<TABLE>
<CAPTION>
                                                                 2004             2003            2002
                                                                 ----             ----            ----
                                                                      (Amounts in Thousands)
<S>                                                       <C>              <C>              <C>
Current tax (benefit) provision:
   Federal                                                $     (343)      $   (5,084)      $   (2,080)
   State                                                        (204)             970              337
   Foreign                                                     2,658              956            1,466
                                                          ----------       ----------       ----------
     Total                                                $    2,111       $   (3,158)      $     (277)
                                                          ----------       ----------       ----------

Deferred tax (benefit) provision:
   Federal                                                        --               --            6,772
   State                                                          --               --            1,185
   Foreign                                                    (1,228)              --             (198)
                                                          ----------       ----------       ----------
     Total                                                $   (1,228)      $       --            7,759
                                                          ----------       ----------       ----------

Total (benefit) provision from continuing operations      $      883       $   (3,158)      $    7,482
                                                          ==========       ==========       ==========
</TABLE>

      Actual income taxes reported from continuing operations are different than
would have been  computed by applying the federal  statutory  tax rate to income
from continuing  operations before income taxes. The reasons for this difference
are as follows:

<TABLE>
<CAPTION>
                                                                    2004             2003             2002
                                                                    ----             ----             ----
                                                                         (Amounts in Thousands)
<S>                                                           <C>              <C>              <C>
Benefit for income taxes at statutory rate                    $  (12,333)      $   (7,688)      $  (15,403)
   State income taxes, net of federal benefit                       (133)             631              219
   Foreign tax rate differential                                     945            1,062               --
   Foreign tax credits                                              (245)            (406)              --
   Return to provision adjustments                                  (991)              --               --
   Preferred interest of subsidiary                                   --               --             (281)
   Discontinued operations                                            --               --           (3,638)
   Cumulative effect of a change in accounting principle              --               --            1,676
   Valuation allowance adjustments                                13,857            6,222           24,895
   Permanent items                                                   103               --               --
   Reduction of tax reserves                                        (343)          (2,837)              --
   Other, net                                                         23             (142)              14
                                                              ----------       ----------       ----------
Net provision (benefit) for income taxes                      $      883       $   (3,158)      $    7,482
                                                              ==========       ==========       ==========
</TABLE>

      The   significant   components  of  the  Company's   deferred  income  tax
liabilities and assets are as follows:


                                       62
<PAGE>

<TABLE>
<CAPTION>
                                                                                 2004            2003
                                                                                 ----            ----
                                                                             (Amounts in Thousands)
<S>                                                                       <C>              <C>
      Deferred tax liabilities
         Waste-to-energy facility                                         $   (4,531)      $   (7,390)
         Inventory costs                                                      (1,696)          (2,362)
         Unremitted foreign earnings                                          (3,800)              --
                                                                          ----------       ----------
                                                                          $  (10,027)      $   (9,752)
                                                                          ==========       ==========

      Deferred tax assets
         Allowance for doubtful receivables                               $    1,069       $      956
         Accrued expenses and other items                                     14,281           16,622
         Difference between book and tax basis of property                    19,620            8,509
         Operating loss carry-forwards - domestic                             28,877           26,288
         Operating loss carry-forwards - foreign                                 335              492
         Tax credit carry forwards                                             3,301            3,056
         Estimated foreign tax credit related to unremitted earnings           3,800               --
                                                                          ----------       ----------
                                                                              71,283           55,923
         Less valuation allowance                                            (60,028)         (46,171)
                                                                          ----------       ----------
                                                                              11,255            9,752
                                                                          ----------       ----------
         Net deferred income tax asset (liability)                        $    1,228       $       --
                                                                          ==========       ==========
</TABLE>

      At December  31,  2004,  the Company had  approximately  $70.7  million of
Federal net operating loss carry-forwards ("Federal NOLs"), which will expire in
years 2020  through  2024 if not  utilized  prior to that time.  Due to tax laws
governing  change in control events and their relation to the  Recapitalization,
approximately  $25.5  million  of  the  Federal  NOLs  are  subject  to  certain
limitations  as to the amount that can be used to offset  taxable  income in any
single year.  The remainder of the Company's  domestic and foreign net operating
loss  carry-forwards  relate to certain U.S. operating  subsidiaries,  primarily
SESCO, and the Company's Canadian operations, respectively, and can only be used
to offset  income from these  operations.  At December 31, 2004,  the  Company's
Canadian  subsidiaries  have  Canadian  net  operating  loss  carry-forwards  of
approximately $1.0 million that expire in the years 2005 through 2008. SESCO has
state net operating  loss  carry-forwards  of $33.0 million at December 31, 2004
that expire in the years 2005 through 2019. The tax credit carry-forwards relate
to United  States  federal  minimum  tax  credits of $1.2  million  that have no
expiration  date,  general business credits of $0.1 million that expire in years
2011 through 2022, and foreign tax credit carryovers of $1.9 million that expire
in the years 2009 through 2014.

      During  2002,  the  Company  realized a tax  benefit of $2.1  million as a
result of a change in federal tax law that  governs the  utilization  of Federal
NOLs.  The Company  offset this tax  benefit  with an increase in its  valuation
allowance.

      Valuation  allowances are recorded when it is considered  more likely than
not that some portion or all of the deferred tax assets will not be realized.  A
history of  operating  losses  incurred  by the  domestic  and  certain  foreign
subsidiaries   provides  significant  negative  evidence  with  respect  to  the
Company's  ability to generate future taxable income,  a requirement in order to
recognize  deferred  tax  assets.  For this  reason,  the  Company was unable to
conclude that it was more likely that not that certain deferred tax assets would
be utilized in the future. The valuation allowance relates to federal, state and
foreign net operating loss carry-forwards, foreign and domestic tax credits, and
certain  other  deferred  tax  assets to the extent  they  exceed  deferred  tax
liabilities  with the  exception  of  deferred  tax  assets of  certain  foreign
subsidiaries which are considered realizable.

Deduction for Qualified Domestic Production Activities

      On October 22, 2004,  the President  signed the American Jobs Creation Act
of 2004 (the  "Act").  The Act  provides a deduction  for income from  qualified
domestic production activities,  which will be phased in from 2005 through 2010.
In return,  the Act also  provides  for a  two-year  phase-out  of the  existing


                                       63
<PAGE>

extra-territorial income exclusion (ETI) for foreign sales that was viewed to be
inconsistent  with  international  trade  protocols by the European  Union.  The
Company  expects that due to its net operating  loss carry forwards and its full
valuation  allowance  the  phase  out of the ETI and the  phase  in of this  new
deduction to have no effect on its  effective tax rate for fiscal years 2005 and
2006.

Repatriation of Foreign Earnings

      The American  Jobs  Creation Act of 2004  provides for a special  one-time
elective  dividends  received  deduction on the  repatriation of certain foreign
earnings to a U.S. taxpayer (Repatriation Provision).  The Company has completed
its review of the  Repatriation  Provision  and has  concluded  that it will not
benefit from the Act because of the Company's current tax position. As a result,
the Repatriation  Provision did not have any impact on income tax expense during
fiscal 2004.

      During 2004, the Company provided U.S. federal and foreign withholding tax
on  approximately  $7.0 million of its  Canadian  subsidiary  earnings  which we
intend to  repatriate  in 2005.  The  Company  provided  no federal  and foreign
withholding  tax on the  undistributed  earnings of its UK  subsidiary  as these
earnings are intended to be re-invested  indefinitely.  It is not practicable to
determine the amount of income tax liability that would result had such earnings
actually been repatriated.

Note 15. LEASE OBLIGATIONS

      The  Company,  a  lessee,  has  entered  into  non-cancelable  leases  for
manufacturing  and data processing  equipment and real property with lease terms
of up to ten years. Future minimum lease payments as of December 31, 2004 are as
follows:

      2005                          $  8,170
      2006                             5,853
      2007                             5,222
      2008                             4,887
      2009                             1,367
      Later years                      3,857
                                    --------
      Total minimum payments        $ 29,356
                                    ========

      Liabilities  totaling  $3.6  million  were  recorded  on the  Consolidated
Balance Sheet at December 31, 2004,  related to leased facilities that have been
fully or partially abandoned and available for sub-lease.  These facilities were
abandoned  as cost  saving  measures as a result of efforts to  restructure  the
Company's  operations.  These  liabilities  are  stated  at  fair  value  (i.e.,
discounted), and include estimates of sub-lease revenue. See Note 21 for further
detail on accrued amounts in both current and long-term  liabilities  related to
non-cancelable, abandoned, leased facilities.

      Rental  expense  for 2004,  2003 and 2002 for  operating  leases was $11.4
million,  $10.0 million and $12.5 million,  respectively.  Also, $2.4 million of
rent was paid and charged against liabilities in 2004 for non-cancelable  leases
at facilities abandoned as a result of restructuring  initiatives.  In 2004, the
Company bought out the remaining  obligation for its non-cancelable lease at the
Warson Road  facility  for $2.3  million.  In 2003,  the Company  bought out the
remaining obligation for its non-cancelable lease at the Earth City facility for
$3.4 million.

Note 16. RELATED PARTY TRANSACTIONS

      In  connection  with  the CCP  (formerly  Contico  International,  L.L.C.)
acquisition  on  January  8, 1999,  the  Company  entered  into  building  lease
agreements  with Newcastle.  Lester Miller,  the former owner of CCP, and a Katy
director  from  1999 to 2000,  is the  majority  owner of  Newcastle.  Since the
acquisition of CCP,  several  additional  properties  utilized by CCP are leased
directly from Lester Miller.  Rental expense for these  properties  approximates
historical  market  rates.  Related  party rental  payments for


                                       64
<PAGE>

the years  ending  December  31,  2004,  2003 and 2002 were  approximately  $0.5
million, $0.5 million and $0.8 million, respectively.

      The Company  paid  Newcastle  $0.1  million and $1.3  million of preferred
dividends for the years ended December 31, 2003 and 2002,  respectively,  on the
preferred units of CCP held by Newcastle. The decreases in dividends were due to
the early  redemption  (at a 40%  discount) of the  remainder  of the  preferred
units. See Note 11.

      Kohlberg,  whose affiliate  holds all 1,131,551  shares of our Convertible
Preferred Stock,  provides ongoing management oversight and advisory services to
Katy. We paid $0.5 million  annually for such  services in 2004,  2003 and 2002,
respectively,  and expect to pay $0.5  million  annually in future  years.  Such
amounts  are  recorded in selling,  general and  administrative  expenses in the
Consolidated Statements of Operations.

Note 17. INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION

      The Company is organized into two operating segments: Maintenance Products
and  Electrical  Products.  The  activities of the  Maintenance  Products  Group
include the  manufacture and  distribution  of a variety of commercial  cleaning
supplies and consumer  home and  automotive  storage  products.  The  Electrical
Products  Group  is  a  distributor  of  consumer  electrical  corded  products.
Principal  geographic  markets are in the United States,  Canada, and Europe and
include the  sanitary  maintenance,  foodservice,  mass  merchant  retail,  home
improvement and automotive,  markets. During 2004, Wal*Mart and Lowe's accounted
for 17% and 12%, respectively,  of consolidated net sales. Sales to Wal*Mart are
made by six separate  business units (Woods US,  Consumer  Plastics,  Abrasives,
Woods  Canada,  Textiles and JanSan  Plastics).  Sales to Lowe's are made by two
separate business units (Woods US and Consumer Plastics).  A significant loss of
business at either of these retail outlets could have a material  adverse impact
on the  Company's  results.  The table  below  and the  narrative  that  follows
summarize the key factors in the year-to-year changes in operating results.


                                       65
<PAGE>

<TABLE>
<CAPTION>
                                                                                                  Years Ended December 31,
                                                                                                  ------------------------
                                                                                         2004             2003             2002
                                                                                         ----             ----             ----
                                                                                                  (Thousands of dollars)
<S>                                                                                   <C>              <C>              <C>
Maintenance Products Group
   Net external sales                                                                 $  278,888       $  285,289       $  300,336
   Operating (loss) income                                                                (2,717)           9,339           11,705
   Operating (deficit) margin                                                               (1.0%)            3.3%             3.9%
   Depreciation and amortization                                                          12,714           20,162           17,625
   Capital expenditures                                                                   13,205           12,366            9,228
   Total assets                                                                          154,635          176,214          195,121

Electrical Products Group
   Net external sales                                                                 $  178,754       $  151,121       $  144,242
   Operating income                                                                       16,809           15,557            8,505
   Operating margin                                                                          9.4%            10.3%             5.9%
   Depreciation and amortization                                                           1,327            1,217            1,484
   Capital expenditures                                                                      671              833              601
   Total assets                                                                           57,698           51,353           48,228

   Net sales                        -  Operating segments                             $  457,642       $  436,410       $  444,578
                                    -  Other [a]                                              --               --            1,177
                                                                                      ----------       ----------       ----------
                                       Total                                          $  457,642       $  436,410       $  445,755
                                                                                      ==========       ==========       ==========

   Operating (loss) income          -  Operating segments                             $   14,092       $   24,896       $   20,210
                                    -  Other [a]                                              --               --             (772)
                                    -  Unallocated corporate                             (10,341)         (13,789)         (10,918)
                                    -  Impairments of long-lived assets                  (30,831)         (11,880)         (21,204)
                                    -  Severance, restructuring and related charges       (3,505)          (8,132)         (19,155)
                                    -  Loss on SESCO joint venture transaction                --               --           (6,010)
                                                                                      ----------       ----------       ----------
                                       Total                                          $  (30,585)      $   (8,905)      $  (37,849)
                                                                                      ==========       ==========       ==========

   Depreciation and amortization    -  Operating segments                             $   14,041       $   21,379       $   19,109
                                    -  Unallocated corporate                                 225              575              150
                                                                                      ----------       ----------       ----------
                                       Total                                          $   14,266       $   21,954       $   19,259
                                                                                      ==========       ==========       ==========

   Capital expenditures             -  Operating segments                             $   13,876       $   13,199       $    9,829
                                    -  Unallocated corporate                                  --              125              158
                                    -  Discontinued operations                                --              111              132
                                                                                      ----------       ----------       ----------
                                       Total                                          $   13,876       $   13,435       $   10,119
                                                                                      ==========       ==========       ==========

   Total assets                     -  Operating segments                                212,333          227,567       $  243,349
                                    -  Other [a]                                           1,624            1,627            7,626
                                    -  Unallocated corporate                              10,507           12,514           13,185
                                    -  Discontinued operations                                --               --           11,817
                                                                                      ----------       ----------       ----------
                                       Total                                          $  224,464       $  241,708       $  275,977
                                                                                      ==========       ==========       ==========
</TABLE>

[a]   Amounts shown as "other" represent items associated with SESCO and
      Sahlman.

      The Company operates businesses in the United States and foreign
countries. The operations for 2004, 2003 and 2002 of businesses within major
geographic areas are summarized as follows:


                                       66
<PAGE>

<TABLE>
<CAPTION>
                                          United                                      Europe
(Thousands of Dollars)                    States         Canada          U.K.    (Excluding U.K.)      Other      Consolidated
----------------------                    ------         ------          ----    ----------------      -----      ------------
<S>                                       <C>           <C>            <C>            <C>            <C>            <C>
2004:
Sales to unaffiliated customers           364,209       $ 47,555       $ 36,453       $  5,214       $  4,211       $457,642
Total assets                              170,166       $ 23,513       $ 30,227       $    558       $     --       $224,464

2003:
Sales to unaffiliated customers           351,796       $ 42,765       $ 32,333       $  5,167       $  4,349       $436,410
Total assets                              191,599       $ 23,260       $ 26,615       $     --       $    234       $241,708

2002:
Sales to unaffiliated customers           367,427       $ 40,486       $ 28,121       $  5,376       $  4,345       $445,755
Total assets                              235,802       $ 16,616       $ 23,559       $     --       $     --       $275,977
</TABLE>

      Net sales for each geographic  area include sales of products  produced in
that area and sold to unaffiliated  customers,  as reported in the  Consolidated
Statements of Operations.

Note 18. COMMITMENTS AND CONTINGENCIES

      General Environmental Claims

      The Company and  certain of its  current  and former  direct and  indirect
corporate  predecessors,  subsidiaries  and  divisions  are involved in remedial
activities at certain  present and former  locations and have been identified by
the United States Environmental  Protection Agency, state environmental agencies
and private  parties as  potentially  responsible  parties (PRPs) at a number of
hazardous waste disposal sites under the Comprehensive  Environmental  Response,
Compensation  and Liability  Act  (Superfund)  or equivalent  state laws and, as
such,  may be liable for the cost of cleanup and other  remedial  activities  at
these  sites.  Responsibility  for cleanup and other  remedial  activities  at a
Superfund  site is typically  shared among PRPs based on an allocation  formula.
Under the federal Superfund statute, parties could be held jointly and severally
liable,  thus subjecting them to potential  individual  liability for the entire
cost of cleanup at the site.  Based on its estimate of  allocation  of liability
among PRPs, the probability  that other PRPs,  many of whom are large,  solvent,
public  companies,  will  fully pay the  costs  apportioned  to them,  currently
available   information   concerning  the  scope  of  contamination,   estimated
remediation  costs,  estimated  legal fees and other  factors,  the  Company has
recorded  and accrued for  environmental  liabilities  in amounts  that it deems
reasonable. The ultimate costs will depend on a number of factors and the amount
currently  accrued  represents  management's  best current estimate of the total
costs to be incurred.  The Company  expects this amount to be paid over the next
several years.

      W.J. Smith Wood Preserving Company ("W.J. Smith")

      The  most  significant  environmental  matter  in  which  the  Company  is
currently  involved  relates to the W.J.  Smith  site.  The W. J.  Smith  matter
originated in the 1980s when the United  States and the State of Texas,  through
the Texas Water Commission,  initiated environmental enforcement actions against
W.J.  Smith  alleging  that certain  conditions  on the W.J.  Smith  property in
Denison, Texas (the "Property") violated environmental laws. In order to resolve
the enforcement actions, W.J. Smith engaged in a series of cleanup activities on
the Property and implemented a groundwater monitoring program.

      In 1993, the United States Environmental Protection Agency (EPA) initiated
a proceeding  under Section 7003 of the Resource  Conservation  and Recovery Act
(RCRA) against W.J. Smith and Katy. The proceeding sought certain actions at the
site and at certain off-site areas, as well as development and implementation of
additional cleanup  activities to mitigate off-site releases.  In December 1995,
W.J.  Smith,  Katy and the EPA  agreed to  resolve  the  proceeding  through  an
Administrative Order on Consent


                                       67
<PAGE>

under  Section  7003 of RCRA.  W. J. Smith and Katy have  completed  the cleanup
activities required by the Order.

      In addition to the administrative  claim specifically  identified above, a
purported class action lawsuit was filed by twenty  individuals in federal court
in the  Marshall  Division  of the  Eastern  District  of  Texas,  on  behalf of
"landowners  and persons who reside and/or work in" an  identified  geographical
area  surrounding  the  Property.  The lawsuit  purported to allege claims under
state law for negligence,  trespass, nuisance and assault and battery. It sought
damages for personal injury and property  damage,  as well as punitive  damages.
The named  defendants  were Union Pacific  Corporation,  Union Pacific  Railroad
Company,  Katy  Industries and W.J. Smith. On June 10, 2002, Katy and W.J. Smith
filed a motion to dismiss the case for lack of federal  jurisdiction,  or in the
alternative,  to  transfer  the  case  to the  Sherman  Division.  In  response,
plaintiffs  filed a motion  for  leave to amend the  complaint  to add a federal
claim under the Resource  Conservation  and Recovery Act. On July 30, 2002,  the
court dismissed plaintiffs' lawsuit in its entirety.

      On  July  31,  2002,  plaintiffs  filed a new  lawsuit  against  the  same
defendants,  again in the  Marshall  Division of the Eastern  District of Texas,
alleging  property  damage class action  claims under the federal  Comprehensive
Environmental  Response  Compensation & Liability Act (CERCLA), as well as state
common  law   theories.   The  Company   deposed  all  of  the  proposed   class
representatives  and on October 31, 2003, filed a motion for summary judgment on
the grounds that the court lacks  jurisdiction and that  Plaintiffs'  claims are
barred by the applicable  statute of limitations.  Plaintiffs filed a motion for
class  certification  on the  property  damage  claims on that date as well.  By
Memorandum Opinion and Order dated June 8, 2004, the Court granted the Company's
Motion for Summary  Judgment on the federal  jurisdictional  claim and dismissed
the case.  The  Company  has not been  notified  of an  appeal  and the time for
appealing the decision has passed.

      Since 1990,  the Company has spent in excess of $7.0  million  undertaking
cleanup and compliance activities in connection with this matter. While ultimate
liability  with  respect to the WJ Smith  matter is not easy to  determine,  the
Company  has  recorded  and  accrued  amounts  that  it  deems   reasonable  for
prospective liabilities with respect to this matter.

      Asbestos Claims

A. The Company has recently been named as a defendant in four lawsuits  filed in
state court in Alabama by a total of  approximately  24  individual  plaintiffs.
There  are over  100  defendants  named in each  case.  In all four  cases,  the
plaintiffs  claim  that they were  exposed  to  asbestos  in the course of their
employment at a former U.S. Steel plant in Alabama and, as a result,  contracted
mesothelioma,  asbestosis,  lung cancer or other  illness.  They claim that they
were  exposed to asbestos in  products in the plant which were  manufactured  by
each  defendant.  In three of the cases,  plaintiffs  also assert wrongful death
claims.  The  Company  will  vigorously  defend the  claims  against it in these
matters.

B.  Sterling  Fluid  Systems  (USA) has  tendered  over 1,500  cases  pending in
Michigan,  New  Jersey,  Illinois,  Nevada,  Mississippi,   Wyoming,  Louisiana,
Massachusetts  and  California  to the Company for defense and  indemnification.
Sterling  bases its tender of the  complaints on the  provisions  contained in a
1993  Purchase  Agreement  between the parties  whereby  Sterling  purchased the
LaBour Pump business and other assets from the Company. Sterling has not filed a
lawsuit against Katy in connection with these matters.

      The tendered  complaints all purport to state claims against  Sterling and
its  subsidiaries.  The Company and its  current  subsidiaries  are not named as
defendants.  The  plaintiffs  in the cases also allege that they were exposed to
asbestos and  products  containing  asbestos in the course of their  employment.
Each complaint names as defendants  many  manufacturers  of products  containing
asbestos,  apparently  because  plaintiffs  came into  contact with a variety of
different  products in the course of their  employment.  Plaintiffs'  claim that
LaBour Pump and/or Sterling may have manufactured some of those products.


                                       68
<PAGE>

      With respect to many of the tendered complaints, the Company has taken the
position  that  Sterling  has waived its right to indemnity by failing to timely
request it as required  under the 1993 Purchase  Agreement.  With respect to the
balance of the  tendered  complaints,  the Company has elected not to assume the
defense of Sterling in these matters.

C. LaBour Pump Company, a former subsidiary of the Company,  has been named as a
defendant  in over 280 similar  cases in New Jersey.  These cases have also been
tendered by Sterling.  The Company has elected to defend  these  cases,  many of
which have been dismissed or settled for nominal sums.

      While the  ultimate  liability  of the  Company  related  to the  asbestos
matters above cannot be  determined  at this time,  the Company has recorded and
accrued  amounts  that it deems  reasonable  for  prospective  liabilities  with
respect to this matter.

      Non-Environmental Litigation - Banco del Atlantico, S.A.

      In December  1996,  Banco del Atlantico  ("plaintiff"),  a bank located in
Mexico,  filed a lawsuit in Texas against  Woods US, a subsidiary  of Katy,  and
against certain past and/or then present  officers,  directors and former owners
of  Woods  US  (collectively,  "defendants").  The  plaintiff  alleges  that the
defendants  participated  in violations of the Racketeer  Influenced and Corrupt
Organizations Act ("RICO") involving, among other things, allegedly fraudulently
obtained  loans  from  Mexican  banks   (including  the  plaintiff)  and  "money
laundering"  of the proceeds of the illegal  enterprise.  The plaintiff  alleges
that it made loans to a Mexican corporation  controlled by certain past officers
and directors of Woods US based upon fraudulent  representations and guarantees.
The plaintiff also alleges violations of the Indiana RICO and Crime Victims Act,
common law fraud and conspiracy,  fraudulent transfer claims, and seeks recovery
upon certain  alleged  guarantees  purportedly  executed by Woods Wire Products,
Inc., a predecessor company from which Woods US purchased certain assets in 1993
(prior to Woods US's  ownership  by Katy,  which  began in December  1996).  The
primary legal theories under which the plaintiff  seeks to hold Woods liable for
its alleged damages are respondeat superior, conspiracy, successor liability, or
a combination of the three.

      After several years of procedural  disputes,  this lawsuit has become more
active recently.  In 2003, by order of the Southern District of Texas court, the
case was  transferred  to the  Southern  District  of Indiana on the ground that
Indiana has a closer relationship to this case than Texas. The case is currently
pending in the Southern  District of Indiana.  In December  2003,  the plaintiff
filed an Amended Complaint.  There have been various motions to dismiss filed by
the  defendants.  These  motions  have been  denied by the court or have  become
mooted by subsequent filings by the plaintiff.

      In September  2004,  the  plaintiff and HSBC Mexico,  S.A.  (collectively,
"plaintiffs"), an additional owner of the Amended Complaint's claims against the
defendants, filed a Second Amended Complaint, which includes new allegations and
seeks additional  relief from the defendants.  The Second Amended Complaint also
adds new defendants  (none of which is affiliated  with the Company) and claims,
although the fundamental  nature of the lawsuit,  described  above,  remains the
same.

      The Defendants  filed motions to dismiss the Second  Amended  Complaint on
November 8, 2004. These motions sought  dismissal of plaintiffs'  Second Amended
Complaint on grounds of, among other things, forum non conveniens and failure to
state a claim.  The plaintiffs  have  responded to  defendants'  motions and the
defendants have replied. A new Case Management Plan has also been entered in the
case,  which  ties  further  case  deadlines,  including  the date for  close of
discovery and trial of this action,  to the Court's "last ruling" on the pending
motions to dismiss. Discovery is continuing.

            The plaintiffs' Second Amended Complaint claims damages in excess of
$24 million and is requesting  that damages be trebled under Indiana and federal
RICO,  and/or the Indiana Crime Victims Act. The Second  Amended  Complaint also
requests that the Court void certain  transactions  and asset sales as purported
"fraudulent  transfers," including the 1993 Woods Wire Products, Inc. - Woods US
asset  sale,  and  seeks  other  relief.   Because  various  jurisdictional  and
substantive  issues have not yet been fully  adjudicated,  it is not possible at
this time for the  Company to  reasonably  determine  an  outcome or


                                       69
<PAGE>

accurately estimate the range of potential exposure. Katy may also have recourse
against  the  former  owners of Woods US and others  for,  among  other  things,
violations  of  covenants,  representations  and  warranties  under the purchase
agreement  through  which Katy acquired  Woods US, and under state,  federal and
common law. Woods US may also have indemnity  claims against the former officers
and directors.  In addition,  there is a dispute with the former owners of Woods
US regarding the final  disposition of amounts withheld from the purchase price,
which may be  subject  to  further  adjustment  as a result of the claims by the
plaintiff.  The extent or limit of any such  adjustment  cannot be  predicted at
this time.  While the ultimate  liability of the Company  related to this matter
cannot be determined at this time, the Company has recorded and accrued  amounts
that it deems  reasonable  for  prospective  liabilities  with  respect  to this
matter.

Note 19. SEVERANCE, RESTRUCTURING AND RELATED CHARGES

      The  Company  has   initiated   several   cost   reduction   and  facility
consolidation  initiatives since the  Recapitalization,  resulting in severance,
restructuring and related charges since 2001. A summary (by major initiative) is
as follows:

<TABLE>
<CAPTION>
                                                                                 2004           2003           2002
                                                                                 ----           ----           ----
                                                                                     (Amounts in Thousands)
<S>                                                                         <C>            <C>            <C>
      Consolidation of St. Louis manufacturing/distribution facilities      $   1,460      $   3,731      $  11,698
      Shutdown of Woods Canada manufacturing                                      841          1,497             --
      Consolidation of Abrasives facilities                                       791          1,151             --
      Consolidation of administrative functions for CCP                           215            314            205
      Shutdown of Woods U.S. manufacturing                                         38            503          2,447
      Senior management transition and headcount rationalization                   --            645            670
      Consultant - outsourcing                                                     --             84          3,588
      Corporate office relocation                                                  --             --            260
      Other                                                                       160            207            287
                                                                            ---------      ---------      ---------
      Total severance, restructuring and related costs                      $   3,505      $   8,132      $  19,155
                                                                            =========      =========      =========
</TABLE>

      Consolidation  of  St.  Louis   manufacturing/distribution   facilities  -
Starting in 2001, the Company  developed a plan to consolidate the manufacturing
and  distribution  of the four CCP facilities in the St. Louis area.  Charges in
2004 related to  adjustments  to  previously  established  non-cancelable  lease
liabilities for abandoned  facilities  ($1.1 million) and costs for the movement
of  inventory  and  equipment  ($0.3  million).  In 2003,  costs of $3.7 million
related  to  the  establishment  of  and  adjustments  to  non-cancelable  lease
liabilities for abandoned  facilities ($2.3 million),  the movement of inventory
and equipment to other  facilities  ($1.0 million) and severance ($0.4 million).
During 2002, costs were incurred related to the  establishment of non-cancelable
lease  liabilities for abandoned  facilities  ($10.9  million),  the movement of
equipment from Warson to Bridgeton ($0.5 million), and severance and other costs
($0.3 million).

      Shutdown of Woods Canada  manufacturing  - In December 2003,  Woods Canada
closed its manufacturing facility in Toronto, Ontario, after a decision was made
to source all of its products from Asia. In 2004, Woods Canada incurred a charge
of  $0.8  million  for  a  non-cancelable   lease  accrual   associated  with  a
sale/leaseback  transaction  and idle  capacity  as a result of the  shutdown of
manufacturing.  Also in 2004,  Woods Canada  recorded less than $0.1 million for
additional  severance.  In 2003,  a charge  was  recorded  for $1.5  million  of
severance payments to approximately 100 terminated employees.

      Consolidation of abrasives  facilities - In 2003, the Company  initiated a
plan to consolidate the  manufacturing  facilities of its abrasives  business in
order to implement a more  competitive  cost structure.  It is expected that the
Lawrence,  Massachusetts  and the Pineville,  North Carolina  facilities will be
closed in 2005 and  those  operations  will be  consolidated  into the  recently
expanded  Wrens,  Georgia  facility.  Costs  were  incurred  in 2004  related to
severance for expected terminations at the Lawrence facility ($0.4 million), the
closure  of  the  Pineville   facility  ($0.3  million)  and  expenses  for  the
preparation of the Wrens


                                       70
<PAGE>

facility  ($0.1  million).  Costs were  incurred in 2003 related to  preparation
activities at Wrens ($0.7  million) and severance for expected  terminations  at
the Lawrence facility ($0.4 million).

      Consolidation  of  administrative  functions  for CCP - Katy has  incurred
various costs (mostly system conversions and the consolidation of administrative
personnel)  over the past three  years for the  integration  of back  office and
administrative functions into Bridgeton, Missouri from certain businesses within
the  Maintenance   Products  Group.   The  most   significant   project  is  the
centralization  of the  customer  service  functions  for the  JanSan  Plastics,
Abrasives, Textiles and Filters and Grillbricks business unit.

      Shutdown of Woods US  manufacturing  - During  2002 a major  restructuring
occurred at the Woods business unit. After  significant  study and research into
different sourcing alternatives, Katy decided that Woods would source all of its
products from Asia.  In December  2002,  Woods shut down all U.S.  manufacturing
facilities,  which were in suburban Indianapolis and in southern Indiana. During
2004, a charge of $0.3 million was recorded for the shutdown and relocation of a
procurement office in Asia and was offset by a credit of $0.3 million to reverse
a  non-cancelable  lease accrual based on a change in usage of a leased facility
that was  previously  impaired.  In 2003,  Woods  incurred costs of $0.5 million
primarily for an adjustment to a non-cancelable lease accrual due to a change in
sub-lease  assumptions.  During 2002,  costs of $2.4  million were  incurred for
severance  and  other  exit  costs,  including  severance,  pension,  and  other
employee-related costs associated with the employee terminations ($1.5 million),
the  creation  of a  liability  for  non-cancelable  lease  costs  at  abandoned
production  facilities  ($0.8  million) and other exit costs related to facility
repairs and other minor expenses ($0.1 million).

      Senior  management  transition  and headcount  rationalization  - From the
Recapitalization  in 2001 through 2003,  the Company has performed an evaluation
and rationalization of management talent. In 2003, severance costs were incurred
for the elimination of certain  employees at corporate ($0.3 million) and in the
Maintenance  Products  Group  ($0.3  million).  The  amounts  recorded  in  2002
principally  relate to  headcount  reductions  across the  Maintenance  Products
Group.

      Consultant -  outsourcing  - In order to achieve a more  competitive  cost
structure,  the  Company  has worked  with  consultants  on  sourcing  and other
manufacturing and production efficiency initiatives.  During 2003 and 2002, fees
were paid to a consultant for initiatives related primarily to sourcing products
for the Woods US and Woods Canada businesses and the Textiles business unit.

      Corporate office relocation - Following the Recapitalization,  the Company
closed the former corporate  headquarters in Englewood,  Colorado and an adjunct
corporate  office in Chicago,  Illinois.  The costs  incurred in 2002  primarily
related  to  non-cancelable   lease  accruals,   moving  expenses  and  employee
relocations.

      Other - During 2004,  costs were  incurred for the closure of CCP's metals
facility in Santa Fe Springs,  California  ($0.1 million) and for the closure of
CCP's facility in Canada and the subsequent  consolidation into the Woods Canada
facility ($0.1 million). All costs in 2003 relate to the closure of CCP's metals
facility in Santa Fe Springs,  California.  During 2002, costs were incurred for
legal fees and involuntary termination benefits related to SESCO.

      The table below details  activity in  restructuring  and related  reserves
since December 31, 2002.


                                       71
<PAGE>

<TABLE>
<CAPTION>
                                                                                    One-time         Contract
                                                                                  Termination      Termination
                                                                     Total        Benefits [a]       Costs [b]        Other [c]
                                                                  ----------      ------------     -----------       ----------
<S>                                                               <C>              <C>              <C>              <C>
Restructuring and related liabilities at December 31, 2002        $   14,499       $    2,085       $   10,885       $    1,529
        Additions                                                      8,190            3,313            3,040            1,837
        Reductions                                                       (58)              --              (58)              --
        Payments                                                     (14,743)          (3,828)          (7,604)          (3,311)
                                                                  ----------       ----------       ----------       ----------
Restructuring and related liabilities at December 31, 2003        $    7,888       $    1,570       $    6,263       $       55
        Additions                                                      3,974              753            2,439              782
        Reductions                                                      (469)             (10)            (459)              --
        Payments                                                      (7,032)          (1,508)          (4,687)            (837)
        Currency Translation                                              93                2               91               --
                                                                  ----------       ----------       ----------       ----------
Restructuring and related liabilities at December 31, 2004[d]     $    4,454       $      807       $    3,647       $       --
                                                                  ==========       ==========       ==========       ==========
</TABLE>

[a] Includes severance,  benefits,  and other  employee-related costs associated
with the employee terminations.

[b] Includes charges related to  non-cancelable  lease liabilities for abandoned
facilities, net of estimated sub-lease revenue.

[c] Includes charges associated with moving inventory,  machinery and equipment,
consolidation  of  administrative  and  operational  functions,  and consultants
working  on  sourcing  and  other   manufacturing   and  production   efficiency
initiatives.

[d] Katy expects to substantially  complete its  restructuring  program in 2005.
The remaining  capital  expenditures,  and severance,  restructuring and related
costs for these  initiatives  are expected to be in the range of $1.5 million to
$2.5 million.

The table below  details  activity  in  restructuring  and  related  reserves by
operating segment since December 31, 2002.

<TABLE>
<CAPTION>
                                                                                     Maintenance     Electrical
                                                                                       Products       Products
                                                                        Total           Group           Group         Corporate
                                                                      ---------      -----------     ----------       ---------
<S>                                                                   <C>             <C>             <C>             <C>
      Restructuring and related liabilities at December 31, 2002      $  14,499       $  10,684       $   3,312       $     503
               Additions                                                  8,190           5,754           2,084             352
               Reductions                                                   (58)            (58)             --              --
               Payments                                                 (14,743)        (10,399)         (3,647)           (697)
                                                                      ---------       ---------       ---------       ---------
      Restructuring and related liabilities at December 31, 2003      $   7,888       $   5,981       $   1,749       $     158
               Additions                                                  3,974           2,637           1,337              --
               Reductions                                                  (469)            (12)           (457)             --
               Payments                                                  (7,032)         (5,221)         (1,653)           (158)
               Currency Translation                                          93              --              93              --
                                                                      ---------       ---------       ---------       ---------
      Restructuring and related liabilities at December 31, 2004      $   4,454       $   3,385       $   1,069       $      --
                                                                      =========       =========       =========       =========
</TABLE>

      The  table  below   summarizes  the  future   obligations  for  severance,
restructuring and other related charges by operating segment detailed above:


                                       72
<PAGE>

                                             Maintenance      Electrical
                                              Products         Products
                               Total            Group            Group
                             --------        -----------      ----------
          2005               $  2,103         $  1,682         $    421
          2006                    788              574              214
          2007                    423              249              174
          2008                    384              201              183
          2009                    321              244               77
        Thereafter                435              435               --
                             --------         --------         --------
      Total Payments         $  4,454         $  3,385         $  1,069
                             ========         ========         ========

Note 20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

<TABLE>
<CAPTION>
2004                                                              1st Qtr           2nd Qtr          3rd Qtr          4th Qtr
----                                                              -------           -------          -------          -------
<S>                                                              <C>              <C>              <C>              <C>
Net sales                                                        $   99,895       $  100,522       $  135,426       $  121,799
                                                                 ==========       ==========       ==========       ==========

Gross profit                                                     $   16,630       $   13,261       $   17,857       $   13,286
                                                                 ==========       ==========       ==========       ==========

Net loss (income)                                                $   (1,781)      $   (1,283)      $      876       $  (33,933)
                                                                 ----------       ----------       ----------       ----------

Payment in kind of dividends on convertible preferred stock          (3,462)          (3,462)          (3,822)          (4,003)
                                                                 ----------       ----------       ----------       ----------

Net loss attributable to common stockholders                     $   (5,243)      $   (4,745)      $   (2,946)      $  (37,936)
                                                                 ==========       ==========       ==========       ==========

Loss per share of common stock - Basic and diluted [a]           $    (0.67)      $    (0.60)      $    (0.37)      $    (4.80)
                                                                 ==========       ==========       ==========       ==========
</TABLE>

      During 2004, the Company recorded the following  quarterly pre-tax charges
for severance,  restructuring  and related charges and impairments of long-lived
assets:

<TABLE>
<CAPTION>
                                                                      1st Qtr           2nd Qtr          3rd Qtr          4th Qtr
                                                                      -------           -------          -------          -------
<S>                                                                       <C>               <C>               <C>            <C>
Severance, restructuring and related charges (income)                     1,898             (109)             167            1,549
Impairments of long-lived assets                                             --               --               --           30,831

<CAPTION>
2003                                                                  1st Qtr           2nd Qtr          3rd Qtr          4th Qtr
----                                                                  -------           -------          -------          -------
<S>                                                                  <C>              <C>              <C>              <C>
Net sales                                                            $   90,452       $  101,461       $  125,901       $  118,596
                                                                     ==========       ==========       ==========       ==========

Gross profit                                                         $   14,286       $   13,949       $   20,226       $   22,386
                                                                     ==========       ==========       ==========       ==========

Net loss                                                             $   (1,844)      $   (5,202)      $     (418)      $   (1,900)
                                                                     ----------       ----------       ----------       ----------

Gain on early redemption of preferred interest of subsidiary              6,560               --               --               --

Payment in kind of dividends on convertible preferred stock              (3,014)          (3,011)          (3,324)          (3,462)
                                                                     ----------       ----------       ----------       ----------

Net income (loss) attributable to common stockholders                $    1,702       $   (8,213)      $   (3,742)      $   (5,362)
                                                                     ==========       ==========       ==========       ==========

Income (loss) per share of common stock - Basic and diluted [a]
   Income (loss) from continuing operations
   attributable
     to common stockholders                                          $     0.08       $    (1.02)      $    (1.44)      $    (0.68)
   Discontinued operations (net of tax)                                    0.12             0.04             0.99       $       --
                                                                     ----------       ----------       ----------       ----------
    Net income (loss) attributable to common stockholders            $     0.20       $    (0.98)      $    (0.45)      $    (0.68)
                                                                     ==========       ==========       ==========       ==========
</TABLE>


                                       73
<PAGE>

      During 2003, the Company recorded the following  quarterly pre-tax charges
for severance,  restructuring  and related charges and impairments of long-lived
assets:

<TABLE>
<CAPTION>
                                                   1st Qtr        2nd Qtr        3rd Qtr        4th Qtr
                                                   -------        -------        -------        -------
<S>                                               <C>            <C>            <C>            <C>
Severance, restructuring and related charges      $     228      $   1,713      $   3,871      $   2,320
Impairments of long-lived assets                  $      --      $   1,800      $   5,255      $   4,825
</TABLE>

[a] The sum of basic and diluted  loss per share of common  stock does not total
to the basic and diluted loss per share reported in the  Consolidated  Statement
of Operations or Note 9 due to the fluctuation of shares outstanding  throughout
the years ending December 31, 2004 and 2003.

NOTE 21. SUPPLEMENTAL BALANCE SHEET INFORMATION

      The following  table provides  detail  regarding other assets shown on the
Consolidated Balance Sheets:

<TABLE>
<CAPTION>
                                                                       December 31,
                                                                ------------------------
                                                                     2004           2003
                                                                     ----           ----
<S>                                                             <C>            <C>
      Debt issuance costs, net                                  $   4,721      $   4,313
      Equity method investment in unconsolidated affiliate          1,617          1,617
      Notes and other receivables - sales of subsidiaries             106            994
      Other                                                         3,502          3,428
                                                                ---------      ---------
      Total                                                     $   9,946      $  10,352
                                                                =========      =========
</TABLE>

      The following table provides detail  regarding  accrued  expenses shown on
the Consolidated Balance Sheets:

<TABLE>
<CAPTION>
                                                                       December 31,
                                                                ------------------------
                                                                     2004           2003
                                                                     ----           ----
<S>                                                             <C>            <C>
      Contingent liabilities                                    $  14,054      $  15,735
      Advertising and rebates                                      13,551         10,440
      SESCO note payable to Montenay                                1,050          1,000
      Non-cancelable lease liabilities - restructuring              1,023          2,424
      Professional services                                           839            796
      Other restructuring                                             807          1,622
      Other                                                         8,615          8,221
                                                                ---------      ---------
      Total                                                     $  39,939      $  40,238
                                                                =========      =========
</TABLE>

      Contingent liabilities consist of accruals for estimated losses associated
with  environmental  issues,  the  uninsured  portion  of  general  and  product
liability and workers'  compensation  claims,  and a purchase  price  adjustment
associated with the purchase of a subsidiary.

      The following table provides detail regarding other  liabilities  shown on
the Consolidated Balance Sheets:

<TABLE>
<CAPTION>
                                                                       December 31,
                                                                ------------------------
                                                                     2004           2003
                                                                     ----           ----
<S>                                                             <C>            <C>
      Deferred compensation                                     $   3,974      $   4,960
      Non-cancelable lease liabilities - restructuring              2,624          4,427
      SESCO note payable to Montenay                                2,441          3,304
      Other                                                         3,816          3,353
                                                                ---------      ---------
      Total                                                     $  12,855      $  16,044
                                                                =========      =========
</TABLE>


                                       74
<PAGE>

NOTE 22. SUPPLEMENTAL CASH FLOW INFORMATION

      Cash paid  (received)  during the year for interest and income taxes is as
follows:

                                                Years Ended December 31,
                                    ------------------------------------------
                                          2004            2003            2002
                                          ----            ----            ----
         Interest                   $    2,411      $    2,688      $    4,733
                                    ==========      ==========      ==========
         Income taxes               $      759      $    2,924      $     (416)
                                    ==========      ==========      ==========

      Significant non-cash  transactions include the accrual of PIK dividends on
the Convertible Preferred Stock of $14.7 million in 2004, $12.8 million in 2003,
and $11.1 million in 2002. The PIK dividends are recorded at fair value. In this
case, each  convertible  preferred share is translated to its common  equivalent
(16.6667 common shares per each  convertible  preferred share) and multiplied by
$6.00,  which is the value of each common  share  equivalent  given the proceeds
from the issuance of the Convertible  Preferred Stock.  Also during 2003, a gain
of $6.6 million was realized on the early  redemption of the preferred  interest
in a subsidiary (see Note 11).

Item 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

      Not applicable.

Item 9A. CONTROLS AND PROCEDURES

      (a)   Evaluation of Disclosure Controls and Procedures

      We maintain disclosure controls and procedures that are designed to ensure
that information  required to be disclosed in our SEC filings is reported within
the time  periods  specified in the SEC's rules,  and that such  information  is
accumulated and  communicated  to our management,  including the Chief Executive
Officer and Chief Financial Officer,  as appropriate,  to allow timely decisions
regarding  required  disclosure.  We have investments in certain  unconsolidated
entities. As we do not control or manage these entities, the disclosure controls
and procedures with respect to such entities are  necessarily  more limited than
those we maintain with respect to our consolidated subsidiaries.

      Pursuant to Rule  13a--15(b)  under the  Securities  Exchange Act of 1934,
Katy carried out an evaluation, under the supervision and with the participation
of our  management,  including the Chief  Executive  Officer and Chief Financial
Officer,  of the  effectiveness  of the design and  operation of our  disclosure
controls  and  procedures  (pursuant  to Rule  13a-15(e)  under  the  Securities
Exchange  Act of 1934,  as  amended)  as of the end of the period of our report.
Based upon that  evaluation,  the Chief  Executive  Officer and Chief  Financial
Officer  concluded that our disclosure  controls and procedures are effective to
ensure that  information  required to be  disclosed by us in the reports that we
file or  submit  under  the  Securities  Exchange  Act is  recorded,  processed,
summarized and reported within the time periods specified in the SEC's rules and
forms,  and  that  such  information  is  accumulated  and  communicated  to our
management,  including our principal  executive officer and principal  financial
officer,   as  appropriate,   to  allow  timely  decisions   regarding  required
disclosure.

      (b)   Change in Internal Controls

      Our  Abrasives  facility in Wrens,  Georgia  lacks a  perpetual  inventory
system and relies on quarterly physicals to value inventory. Throughout 2004, we
adjusted our material cost of sales estimate (for preparation of non-quarter-end
interim financial statements) to reflect rising material cost of sales.


                                       75
<PAGE>

      Also during 2004, the Wrens  facility  experienced  significant  personnel
turnover,  consolidation  of other  operations  (consistent with our strategy of
consolidating   our  abrasives   operations  into  the  Wrens   facility),   and
manufacturing  disruption events such as the production  interruption  caused by
the air handling  system fire in October 2004.  Management  determined  that key
inventory processes such as receiving, production reporting, scrap, and shipping
required improvement.

      In light of the above  developments,  our  management  requested  that our
independent auditor,  PricewaterhouseCoopers  LLP (PwC), perform a comprehensive
analysis of the Wrens inventory process controls.  As part of the analysis,  PwC
conducted an on-site  review of the  operations  and  inventory-related  process
controls of the Wrens facility as well as related certain back-office  processes
conducted in St. Louis, Missouri.

      The PwC review concluded that inventory  process controls were inadequate.
Among the inadequacies  identified were those relating to shipping and receiving
controls,  bills of  material  and  routings,  security  measures,  and  systems
implementation (we are in the process of re-implementing a new ERP system). As a
result of its review, PwC recommended that we take certain  corrective  actions,
including the establishment of a perpetual inventory system. In response to each
of PwC's detailed  recommendations,  management developed an itemized corrective
action  plan and has  discussed  that plan with our  Audit  Committee,  Board of
Directors and PwC. As of the date of this Annual Report on Form 10-K, we believe
that the action plan developed by our management  will correct the  inadequacies
in our internal control over financial reporting as they relate to our inventory
process at our Wrens facility.  We also believe that despite these inadequacies,
the quarterly  physical  inventory process at this facility has provided us with
an accurate inventory valuation.

      Except as discussed  above,  there have been no changes in Katy's internal
control over financial reporting during the quarter ended December 31, 2004 that
has materially  affected,  or is reasonably  likely to materially  affect Katy's
internal control over financial reporting.

      Pursuant  to Section  404 of the  Sarbanes-Oxley  Act of 2002,  we will be
required to furnish an internal  controls report of  management's  assessment of
the  effectiveness of our internal controls as part of our Annual Report on Form
10-K.  If our public  float  exceeds  $75 million at June 30,  2005,  we will be
required to furnish this report for the year ending December 31, 2005, otherwise
we will be required to furnish  this  report for the year  ending  December  31,
2006.  Our public  float as of June 30, 2004 was  approximately  $22.9  million.
Section  404 will also  require  our  auditors  to attest to, and report on, our
assessment.  In order to issue our report, our management must document both the
design  of  our  internal  controls  and  the  testing  processes  that  support
management's  evaluation and conclusion.  Our management has begun the necessary
processes and procedures for issuing its report on our internal controls.

Item 9B. OTHER INFORMATION

Third Amendment to the Amended and Restated Loan Agreement

      Katy  entered  into the Third  Amendment  to  Amended  and  Restated  Loan
Agreement dated as of April 13, 2005 with Fleet Capital  Corporation  (the Third
Amendment).  The Third Amendment  eliminates the maximum  Consolidated  Leverage
Ratio and the Minimum  Consolidated EBITDA and adjusts the Minimum  Availability
such that our  eligible  collateral  must  exceed the sum of Katy's  outstanding
borrowings and letters of credit under the Revolving Credit Facility by at least
$5 million from the effective date of the Third Amendment  through September 29,
2005 and by at least $7.5  million from  September  30, 2005 until the date Katy
delivers its financial  statements for the first quarter of 2006 to its lenders.
Subsequent to the delivery of the financial  statements for the first quarter of
2006, the Third Amendment  reestablishes the minimum Fixed Charge Coverage Ratio
as  originally  set forth in the Bank of  America  Credit  Agreement.  The Third
Amendment also reduces the maximum allowable capital  expenditures for 2005 from
$15 million to $10 million,  and  increases  the interest rate margins on all of
the Katy's  outstanding  borrowings and letters of credit to the largest margins
set forth in the Amended and Restated Loan Agreement. Interest rate margins will
return to levels set forth in the Bank of America Credit Agreement subsequent to
the delivery of Katy's financial statements for the first quarter of 2006 to its
lenders.

Executive Compensation

      The  following  base  salaries  effective  April  11,  2005 for the  named
executive  officers of Katy were  approved  at the April 8, 2005  meeting of the
Compensation Committee of the Katy Board of Directors.

             C. Michael Jacobi         $565,000
             Amir Rosenthal            $315,000
             David S. Rahilly          $250,000
             David C. Cooksey          $170,000
             Michael C. Paul           $169,700

      As part of his or her  annual  compensation,  each of the named  executive
officers is also eligible for a cash bonus in  accordance  with the terms of the
Katy Industries,  Inc. Executive Bonus Plan, which is set forth as Exhibit 10.18
in this Annual  Report on Form 10-K. In addition to the  foregoing,  the Company
pays automobile and other allowances, certain club memberships, all or a portion
of the premiums for group term life insurance policies for each of the executive
officers and contributes  matching  amounts to each of the executives  under the
Katy's 401(k) plan.


                                       76
<PAGE>

                                    Part III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Information regarding the directors of Katy is incorporated herein by
reference to the information set forth under the section entitled "Election of
Directors" in the Proxy Statement of Katy Industries, Inc. for its 2005 Annual
Meeting.

      Information regarding executive officers of Katy is incorporated herein by
reference to the information set forth under the section entitled "Information
Concerning Directors and Executive Officers" in the Proxy Statement of Katy
Industries, Inc. for its 2005 Annual Meeting.

      Information regarding compliance with Section 16 of the Securities
Exchange Act of 1934 is incorporated herein by reference to the information set
forth under the Section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" for its 2005 Annual Meeting.

      Information regarding Katy's Code of Ethics is incorporated herein by
reference to the information set forth under the Section entitled "Code of
Ethics" in the Proxy Statement of Katy Industries, Inc. for its 2005 Annual
Meeting.

Item 11. EXECUTIVE COMPENSATION

      Information  regarding  compensation of executive officers is incorporated
herein by  reference  to the  information  set forth under the section  entitled
"Executive Compensation" in the Proxy Statement of Katy Industries, Inc. for its
2005 Annual Meeting.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      Information  regarding beneficial ownership of stock by certain beneficial
owners and by management of Katy is incorporated by reference to the information
set forth under the section "Security  Ownership of Certain  Beneficial  Owners"
and  "Security   Ownership  of  Management"  in  the  Proxy  Statement  of  Katy
Industries, Inc. for its 2005 Annual Meeting.


                                       77
<PAGE>

Equity Compensation Plan Information

<TABLE>
<CAPTION>
                                                                                        Number of Securities
                                                                                       Remaining Available for
                              Number of Securities to       Weighted-average        Future Issuances Under Equity
                              Be Issued on Exercise of      Exercise Price of            Compensation Plans
                                Outstanding Option,       Outstanding Options,          (Excluding Securities
Plan Category                   Warrants and Rights        Warrants and Rights        Reflected in Column (a))
-----------------------       ------------------------    --------------------      -----------------------------
                                        (a)                        (b)                            (c)
<S>                                  <C>                           <C>
Equity Compensation
Plans Approved by
Stockholders                           925,262                     $7.33                        308,889

Equity Compensation
Plans Not Approved by
Stockholders                         1,841,698                     $4.16                             --
</TABLE>

Equity Compensation Plans Not Approved by Stockholders

      On June 28, 2001, the Company entered into an employment agreement with C.
Michael Jacobi,  President and Chief Executive Officer.  To induce Mr. Jacobi to
enter  into  the  employment  agreement,  on June  28,  2001,  the  Compensation
Committee of the Board of  Directors  approved the Katy  Industries,  Inc.  2001
Chief Executive  Officer's Plan. Under this plan, Mr. Jacobi was granted 978,572
stock  options.  Pursuant to approval by the Katy Board of Directors,  the stock
options granted to Mr. Jacobi under this plan were vested in March 2004.

      On September 4, 2001,  the Company  entered into an  employment  agreement
with Amir Rosenthal,  Vice President,  Chief Financial Officer,  General Counsel
and Secretary.  To induce Mr. Rosenthal to enter into the employment  agreement,
on  September  4, 2001,  the  Compensation  Committee  of the Board of Directors
approved the Katy  Industries,  Inc. 2001 Chief Financial  Officer's Plan. Under
this plan, Mr. Rosenthal was granted 123,077 stock options. Pursuant to approval
by the Katy Board of Directors, the stock options granted to Mr. Rosenthal under
this plan were vested in March 2004.

      On November  21,  2002,  the Board of  Directors  approved  the 2002 Stock
Appreciation  Rights Plan (the "2002 SAR Plan"),  authorizing the issuance of up
to  1,000,000  stock  appreciation  rights  (SARs).  Vesting of the SARs  occurs
ratably  over  three  years from the date of issue.  The 2002 SAR Plan  provides
limitations  on redemption by holders,  specifying  that no more than 50% of the
cumulative  number of vested SARs held by an employee  could be exercised in any
one calendar year.  The SARs expire ten years from the date of issue.  The Board
approved grants on November 22, 2002, of 717,175 SARs to 60 individuals  with an
exercise  price of $3.15,  which equaled the market price of Katy's stock on the
grant date.  In addition,  50,000 SARs were granted to four  individuals  during
2003 and  275,000  SARs were  granted to fifteen  individuals  during  2004.  At
December  31,  2004,  Katy had 740,049 SARS  outstanding  at a weighted  average
exercise  price of $4.16.  Compensation  (income)  expense  associated  with the
vesting of stock appreciation rights was ($0.1 million),  $1.0 million and $13.0
thousand in 2004, 2003 and 2002,  respectively.  The 2002 SAR Plan also provides
that in the event of a Change in Control of the Company,  all  outstanding  SARs
may become  fully  vested.  In  accordance  with the 2002 SAR Plan, a "Change in
Control" is deemed to have occurred upon any of the following  events: 1) a sale
of 100 percent of the Company's outstanding capital stock, as may be outstanding
from  time to  time;  2) a sale  of all or  substantially  all of the  Company's
operating  subsidiaries or assets; or 3) a transaction or series of transactions
in which any third party  acquires an equity  ownership  in the Company  greater
than that held


                                       78
<PAGE>

by KKTY Holding Company, L.L.C. and in which Kohlberg & Co., L.L.C. relinquishes
its right to nominate a majority of the  candidates for election to the Board of
Directors.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Information  regarding certain relationships and related transactions with
management  is  incorporated  herein by reference to the  information  set forth
under the section  entitled  "Executive  Compensation" in the Proxy Statement of
Katy Industries, Inc. for its 2005 Annual Meeting.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      Information   regarding   principal   accountant   fees  and  services  is
incorporated  herein by reference to the information set forth under the section
entitled  "Proposal 2 - Ratification of the Independent  Public Auditors" in the
Proxy Statement of Katy Industries, Inc. for its 2005 Annual Meeting.


                                       79
<PAGE>

                                     Part IV

Item 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

      (a)   1. Financial Statements

      The following financial  statements of Katy are set forth in Part II, Item
8, of this Form 10-K:

            -     Consolidated Balance Sheets as of December 31, 2004 and 2003

            -     Consolidated  Statements  of  Operations  for the years  ended
                  December 31, 2004, 2003 and 2002

            -     Consolidated  Statements of Stockholders' Equity for the years
                  ended December 31, 2004, 2003 and 2002

            -     Consolidated  Statements  of Cash  Flows for the  years  ended
                  December 31, 2004, 2003 and 2002

            -     Notes to Consolidated Financial Statements

      2. Financial Statement Schedules

      The financial  statement  schedule filed with this report is listed on the
      "Index to Financial Statement Schedules" on page 86 of this Form 10-K.

      3. Exhibits

      The exhibits filed with this report are listed on the "Exhibit Index."

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, thereunto duly authorized.

Dated: April 14, 2005                                      KATY INDUSTRIES, INC.
                                                           Registrant


                                                           /S/ C. Michael Jacobi
                                                           ---------------------
                                                               C. Michael Jacobi
                                           President and Chief Executive Officer


                                                              /S/ Amir Rosenthal
                                                              ------------------
                                                                  Amir Rosenthal
                                         Vice President, Chief Financial Officer
                                                             General Counsel and
                                                                       Secretary


                                       80
<PAGE>

                                POWER OF ATTORNEY

      Each person signing below  appoints C. Michael Jacobi and Amir  Rosenthal,
or either of them, his attorneys-in-fact for him in any and all capacities, with
power of  substitution,  to sign any amendments to this report,  and to file the
same with any exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission.

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities indicated as of this 14th day of April, 2005.

Signature                        Title

/S/ William F. Andrews           Chairman of the Board and Director
---------------------------
William F. Andrews

/S/ C. Michael Jacobi            President, Chief Executive Officer and Director
---------------------------      (Principal Executive Officer)
C. Michael Jacobi

/S/ Amir Rosenthal               Vice President, Chief Financial Officer,
---------------------------      General Counsel and Secretary
Amir Rosenthal                   (Principal Financial and Accounting Officer)


/S/ Christopher Lacovara         Director
---------------------------
Christopher Lacovara

/S/ Robert M. Baratta            Director
---------------------------
Robert M. Baratta

/S/ James A. Kohlberg            Director
---------------------------
James A. Kohlberg

/S/ Daniel B. Carroll            Director
---------------------------
Daniel B. Carroll

/S/ Wallace E. Carroll, Jr.      Director
---------------------------
Wallace E. Carroll, Jr.


                                       81
<PAGE>

/S/ Samuel P. Frieder            Director
---------------------------
Samuel P. Frieder

/S/ Christopher Anderson         Director
---------------------------
Christopher Anderson


                                       82
<PAGE>

INDEX TO FINANCIAL STATEMENT SCHEDULES

Report of Independent Registered Public Accounting Firm                84
Schedule II - Valuation and Qualifying Accounts                        85
Consent of Independent Registered Public Accounting Firm               92

      All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements of Katy or the Notes thereto.


                                       83
<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT
SCHEDULE

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

Our audits of the consolidated financial statements of Katy Industries, Inc. and
its subsidiaries, referred to in our report dated March 29, 2005, except for
Note 8, which is as of April 13, 2005, appearing in this Annual Report on Form
10-K, also included an audit of the financial statement schedule listed in Item
15(a)(2) of this Form 10-K. In our opinion, the financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.


/s/ PricewaterhouseCoopers LLP

St. Louis, Missouri
March 29, 2005, except for Note 8,
  which is as of April 13, 2005


                                       84
<PAGE>

                     KATY INDUSTRIES, INC. AND SUBSIDIARIES
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
                             (Amounts in Thousands)

<TABLE>
<CAPTION>
                                      Balance at        Additions                                              Balance
                                      Beginning        Charged to        Write-offs           Other            at End
Accounts Receivable Reserves           of Year           Expense         to Reserves       Adjustments         of Year
----------------------------           -------           -------         -----------       -----------         -------
<S>                                   <C>              <C>               <C>               <C>               <C>
Year ended December 31, 2004

      Trade receivables               $     3,029      $     3,099       $    (3,092)      $      (209)      $     2,827
      Long-term notes receivable              105              250                --                --               355
                                      -----------      -----------       -----------       -----------       -----------
                                      $     3,134      $     3,349       $    (3,092)      $      (209)      $     3,182

Year ended December 31, 2003

      Trade receivables               $     2,771      $     3,163       $    (3,113)      $       208       $     3,029
      Long-term notes receivable            1,000              105            (1,000)                                105
                                      -----------      -----------       -----------       -----------       -----------
                                      $     3,771      $     3,268       $    (4,113)      $       208       $     3,134

Year ended December 31, 2002

      Trade receivables               $     2,728      $     3,732       $    (4,312)      $       623       $     2,771
      Long-term notes receivable            1,000               --                --                --             1,000
                                      -----------      -----------       -----------       -----------       -----------
                                      $     3,728      $     3,732       $    (4,312)      $       623       $     3,771

<CAPTION>
                                       Balance at       Additions                                              Balance
                                       Beginning       Charged to        Write-offs           Other            at End
Inventory Reserves                      of Year          Expense       to the Reserve      Adjustments         of Year
------------------                      -------          -------       --------------      ------------        -------
<S>                                   <C>              <C>               <C>               <C>               <C>
Year ended December 31, 2004          $     5,630      $     1,758       $    (2,766)      $        49       $     4,671

Year ended December 31, 2003          $     5,730      $     1,822       $    (2,261)      $       339       $     5,630

Year ended December 31, 2002          $     5,862      $     2,620       $    (3,578)      $       826       $     5,730

<CAPTION>
                                       Balance at                                                              Balance
                                        Beginning                                             Other            at End
Income Tax Valuation Allowances          of Year        Provision         Reversals        Adjustments         of Year
-------------------------------          -------        ---------         ---------        -----------         -------
<S>                                   <C>              <C>               <C>               <C>               <C>
Year ended December 31, 2004          $    46,171      $    13,857       $        --       $        --       $    60,028

Year ended December 31, 2003          $    42,828      $     3,343       $        --       $        --       $    46,171

Year ended December 31, 2002          $    13,854      $    28,974       $        --       $        --       $    42,828
</TABLE>


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<PAGE>

                              KATY INDUSTRIES, INC.
                                INDEX OF EXHIBITS
                                DECEMBER 31, 2004

Exhibit
Number         Exhibit Title                                               Page
------         -------------                                               ----

  2            Preferred Stock Purchase and Recapitalization               *
               Agreement, dated as of June 2, 2001 (incorporated by
               reference to Annex B to the Company's Proxy Statement
               on Schedule 14A filed June 8, 2001).

  3.1          The Amended and Restated Certificate of Incorporation       *
               of the Company (incorporated by reference to Exhibit
               3.1 of the Company's Current Report on Form 8-K on July
               13, 2001).

  3.2          The By-laws of the Company, as amended (incorporated by     *
               reference to Exhibit 3.1 to the Company's Quarterly
               Report on Form 10-Q filed May 15, 2001).

  4.1          Rights Agreement dated as of January 13, 1995 between       *
               Katy and Harris Trust and Savings Bank as Rights Agent
               (incorporated by reference to Exhibit 2.1 of Katy's
               Form 8-A filed January 17, 1995).

  4.1a         Amendment dated as of October 31, 1996 to the Rights        *
               Agreement dated as of January 13, 1995 between Katy and
               Harris Trust and Savings Bank as Rights Agent
               (incorporated by reference to Katy's Current Report on
               Form 8-K filed November 8, 1996).

  4.1b         Amendment dated as of January 8, 1999 to the Rights         *
               Agreement dated as of January 13, 1995 between Katy and
               LaSalle National Bank as Rights Agent (incorporated by
               reference to Exhibit 4.1(b) of Katy's Annual Report on
               Form 10-K filed March 18, 1999).

  4.1c         Third Amendment to Rights Agreement, dated March 30,        *
               2001, between the Company and LaSalle Bank, N.A., as
               Rights Agent (incorporated by reference to Exhibit (e)
               (3) to the Company's Solicitation/Recommendation
               Statement on Schedule 14D-9 filed April 25, 2001).

  10.1         Katy Industries, Inc. Long-Term Incentive Plan              *
               (incorporated by reference to Katy's Registration
               Statement on Form S-8 filed June 21, 1995).

  10.2         Katy Industries, Inc. Non-Employee Director Stock           *
               Option Plan (incorporated by reference to Katy's
               Registration Statement on Form S-8 filed June 21, 1995).

  10.3         Katy Industries, Inc. Supplemental Retirement and           *
               Deferral Plan effective as of June 1, 1995
               (incorporated by reference to Katy's Registration
               Statement on Form S-8 filed June 21, 1995)

  10.4         Katy Industries, Inc. Directors' Deferred Compensation      *
               Plan effective as of June 1, 1995 (incorporated by
               reference to Katy's Registration Statement on Form S-8
               filed June 21, 1995).

  10.5         Employment Agreement dated as of June 28, 2001 between      *
               C. Michael Jacobi and the Company (incorporated by
               reference to Exhibit 10.2 to the Company's Quarterly
               Report on Form 10-Q filed August 14, 2001).


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<PAGE>

  10.6         Katy Industries, Inc. 2001 Chief Executive Officer's        *
               Plan (incorporated by reference to Exhibit 10.3 to the
               Company's Quarterly Report on Form 10-Q filed August
               14, 2001).

  10.7         Employment Agreement dated as of September 1, 2001          *
               between Amir Rosenthal and the Company (incorporated by
               reference to Exhibit 10.2 to the Company's Quarterly
               Report on Form 10-Q dated November 14, 2001).

  10.8         Katy Industries, Inc. 2001 Chief Financial Officer's        *
               Plan (incorporated by reference to Exhibit 10.3 to the
               Company's Quarterly Report on Form 10-Q dated November
               14, 2001).

  10.9         Katy Industries, Inc. 2002 Stock Appreciation Rights        *
               Plan, dated November 21, 2002, (incorporated by
               reference to Exhibit 10.17 to the Company's Annual
               Report on Form 10-K dated April 15, 2003).

  10.10        Amended and Restated Loan Agreement dated as of April       *
               20, 2004 with Fleet Capital Corporation, (incorporated
               by reference to Exhibit 10.1 to the Company's Quarterly
               Report on Form 10-Q dated May 10, 2004).

  10.11        First Amendment to Amended and Restated Loan Agreement      *
               dated as of June 29, 2004 with Fleet Capital
               Corporation, (incorporated by reference to Exhibit 10.1
               to the Company's Quarterly Report on Form 10-Q dated
               August 16, 2004).

  10.12        Amendment dated as of October 1, 2004 to the Employment     *
               Agreement dated as of June 28, 2001 between C. Michael
               Jacobi and the Company (incorporated by reference to
               Exhibit 10.1 to the Company's Quarterly Report on Form
               10-Q dated November 10, 2004).

  10.13        Amendment dated as of October 1, 2004 to the Employment     *
               Agreement dated as of September 1, 2001 between Amir
               Rosenthal and the Company (incorporated by reference to
               Exhibit 10.2 to the Company's Quarterly Report on Form
               10-Q dated November 10, 2004).

  10.14        Director Compensation Arrangements                          89

  10.15        Executive Officer Compensation Arrangements                 90

  10.16        Second Amendment to Amended and Restated Loan Agreement     *
               dated as of March 29, 2005 with Fleet Capital
               Corporation (incorporated by reference to Exhibit 10.1
               of the Company's Current Report on Form 8-K filed
               April 1, 2005)

  10.17        Third Amendment to Amended and Restated Loan Agreement      **
               dated as of April 13, 2005 with Fleet Capital
               Corporation

  10.18        Katy Industries, Inc. Executive Bonus Plan dated            **
               December 2001

  21           Subsidiaries of registrant                                  91

  23           Consent of Independent Registered Public Accounting Firm    92

  31.1         CEO Certification pursuant to Securities Exchange Act       93
               Rule 13a-14, as adopted pursuant to Section 302 of the
               Sarbanes-Oxley Act of 2002.

  31.2         CFO Certification pursuant to Securities Exchange Act       94
               Rule 13a-14, as adopted pursuant to Section 302 of the
               Sarbanes-Oxley Act of 2002

  32.1         CEO Certification required by 18 U.S.C. Section 1350,       95
               as adopted pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002.


                                       87
<PAGE>

  32.2         CFO Certification required by 18 U.S.C. Section 1350,       96
               as adopted pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002.

* Indicates incorporated by reference.

** Indicates filed herewith.


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