United States
                       Securities and Exchange Commission
                             Washington, D.C. 20549

                                    FORM 10-Q

             |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended: March 31, 2005

                                       or

            |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

       For the transition period from _______________ to ________________

                        Commission File Number 001-05558

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

        Delaware                                         75--1277589
(State of Incorporation)                    (I.R.S. Employer Identification No.)

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

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

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

                         Yes |X|                 No |_|

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

                         Yes |_|                 No |X|

      Indicate the number of shares  outstanding of each of the issuer's classes
of common stock as of the latest practicable date.

          Class                                    Outstanding at April 30, 2005
Common Stock, $1 Par Value                                   7,945,377

<PAGE>

                              KATY INDUSTRIES, INC.
                                    FORM 10-Q
                                 March 31, 2005

                                      INDEX

<TABLE>
<CAPTION>
                                                                                     Page
                                                                                     ----
<S>                                                                                 <C>
PART I  FINANCIAL INFORMATION

        Item 1.  Financial Statements:

                 Condensed Consolidated Balance Sheets
                 March 31, 2005 and December 31, 2004 (unaudited)                     2,3

                 Condensed Consolidated Statements of Operations
                 Three Months Ended March 31, 2005 and 2004 (unaudited)                 4

                 Condensed Consolidated Statements of Cash Flows
                 Three Months Ended March 31, 2005 and 2004 (unaudited)                 5

                 Notes to Condensed Consolidated Financial Statements (unaudited)       6

        Item 2.  Management's Discussion and Analysis of Financial
                 Condition and Results of Operations                                   20

        Item 3.  Quantitative and Qualitative Disclosures about Market Risk            31

        Item 4.  Controls and Procedures                                               31

PART II OTHER INFORMATION

        Item 1.  Legal Proceedings                                                     32

        Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds           32

        Item 5.  Other Information                                                     32

        Item 6.  Exhibits                                                              32

        Signatures                                                                     33

        Certifications                                                              34-37
</TABLE>


                                     - 1 -
<PAGE>

                          PART I FINANCIAL INFORMATION

                          Item 1. Financial Statements

                     KATY INDUSTRIES, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Amounts in Thousands)
                                   (Unaudited)

                                     ASSETS

                                                    March 31,       December 31,
                                                       2005             2004
                                                    ---------       ------------

CURRENT ASSETS:

     Cash and cash equivalents                      $   7,099        $   8,525
     Accounts receivable, net                          50,288           66,689
     Inventories, net                                  61,900           65,674
     Other current assets                               5,287            4,233
                                                    ---------        ---------

       Total current assets                           124,574          145,121
                                                    ---------        ---------

OTHER ASSETS:

     Goodwill                                           2,239            2,239
     Intangibles, net                                   7,352            7,428
     Other                                              9,581            9,946
                                                    ---------        ---------

       Total other assets                              19,172           19,613
                                                    ---------        ---------

PROPERTY AND EQUIPMENT
     Land and improvements                              1,867            1,897
     Buildings and improvements                        14,016           13,537
     Machinery and equipment                          132,841          132,825
                                                    ---------        ---------

                                                      148,724          148,259
     Less - Accumulated depreciation                  (90,763)         (88,529)
                                                    ---------        ---------

       Property and equipment, net                     57,961           59,730
                                                    ---------        ---------

       Total assets                                 $ 201,707        $ 224,464
                                                    =========        =========

See Notes to Condensed Consolidated Financial Statements.


                                     - 2 -
<PAGE>

                     KATY INDUSTRIES, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                    (Amounts in Thousands, Except Share Data)
                                   (Unaudited)
<TABLE>
<CAPTION>

                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                                        March 31,       December 31,
                                                                          2005              2004
                                                                        ---------       ------------

CURRENT LIABILITIES
<S>                                                                     <C>              <C>
     Accounts payable                                                   $  27,070        $  39,079
     Accrued compensation                                                   5,088            5,269
     Accrued expenses                                                      37,102           39,939
     Current maturities of long-term debt                                   2,857            2,857
     Revolving credit agreement                                            39,646           40,166
                                                                        ---------        ---------

       Total current liabilities                                          111,763          127,310
                                                                        ---------        ---------
LONG-TERM DEBT, less current maturities                                    14,286           15,714

OTHER LIABILITIES                                                          12,120           12,855
                                                                        ---------        ---------

       Total liabilities                                                  138,169          155,879
                                                                        ---------        ----------
COMMITMENTS AND CONTINGENCIES (Note 8)                                         --               --
                                                                        ---------        ----------
STOCKHOLDERS'EQUITY
 15% Convertible preferred stock, $100 par value, authorized
  1,200,000 shares, issued and outstanding 1,131,551 shares,
  liquidation value $113,155                                              108,256          108,256
 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           25,111
 Accumulated other comprehensive income                                     4,165            4,564
 Accumulated deficit                                                      (61,906)         (57,258)
 Treasury stock, at cost, 1,876,827 ahares                                (21,910)         (21,910)
   Total stockholders'equity                                             ---------        ----------


   Total liabilities and stockholders' equity                              63,538           68,585
                                                                        ---------        ---------

                                                                        $ 201,707       $  224,464
                                                                        =========       ===========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.


                                     - 3 -
<PAGE>

                     KATY INDUSTRIES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
               FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
                 (Amounts in Thousands, Except Per Share Data)
                                  (Unaudited)

                                                             2005        2004
                                                           --------    --------

Net sales                                                  $ 95,513    $ 99,895
Cost of goods sold                                           85,990      83,265
                                                           --------    --------
   Gross profit                                               9,523      16,630
Selling, general and administrative expenses                 12,354      14,748
Severance, restructuring and related charges                    373       1,898
                                                           --------    --------
   Operating loss                                            (3,204)        (16)
Interest expense                                             (1,264)       (800)
Other, net                                                      (48)       (375)
                                                           --------    --------

Loss before provision for income taxes                       (4,516)     (1,191)

Provision for income taxes                                      132         590
                                                           --------    --------

Net loss                                                     (4,648)     (1,781)

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

Net loss attributable to common stockholders               $ (4,648)   $ (5,243)
                                                           ========    ========

Loss per share of common stock - Basic and diluted         $  (0.59)   $  (0.67)
                                                           ========    ========

Weighted average common shares outstanding (thousands):
      Basic and diluted                                       7,945       7,881
                                                           ========    ========

See Notes to Condensed Consolidated Financial Statements.


                                     - 4 -
<PAGE>

                     KATY INDUSTRIES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE THREE MONTHS ENDED MARCH 31, 2005 and 2004
                             (Amounts in Thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                  2005         2004
                                                                --------     --------
<S>                                                             <C>          <C>
Cash flows from operating activities:
    Net Loss                                                    $ (4,648)    $ (1,781)
    Depreciation and amortization                                  2,847        3,802
    Amortization of debt issuance costs                              276          264
                                                                --------     --------
                                                                  (1,525)       2,285
                                                                --------     --------
    Changes in operating assets and liabilities:
       Accounts receivable                                        16,164        5,956
       Inventories                                                 3,627      (13,188)
       Other assets                                                 (756)      (2,514)
       Accounts payable                                          (11,839)      (6,243)
       Accrued expenses                                           (2,964)      (1,923)
       Other, net                                                   (738)         (91)
                                                                --------     --------
                                                                   3,494      (18,003)
                                                                --------     --------

                                                                --------     --------
    Net cash provided by (used in) in operating activities         1,969      (15,718)
                                                                --------     --------

Cash flows from investing activities:
    Capital expenditures                                          (1,403)      (2,415)
    Collections of note receivable from sale of subsidiary            71           --
    Proceeds from sale of assets                                      --        3,673
                                                                --------     --------
    Net cash (used in) provided by investing activities           (1,332)       1,258
                                                                --------     --------

Cash flows from financing activities:
    Net (repayments) borrowings on revolving loans                  (466)      13,906
    Repayments of term loans                                      (1,429)      (1,815)
    Direct costs associated with debt facilities                    (138)        (209)
                                                                --------     --------
    Net cash (used in) provided by financing activities           (2,033)      11,882
                                                                --------     --------

Effect of exchange rate changes on cash and cash equivalents         (30)        (174)
                                                                --------     --------
Net decrease in cash and cash equivalents                         (1,426)      (2,752)
Cash and cash equivalents, beginning of period                     8,525        6,748
                                                                --------     --------
Cash and cash equivalents, end of period                        $  7,099     $  3,996
                                                                ========     ========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.


                                     - 5 -
<PAGE>

                     KATY INDUSTRIES, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2005

(1) Significant Accounting Policies

Consolidation Policy and Basis of Presentation

      The condensed  consolidated  financial  statements include the accounts of
Katy  Industries,  Inc.  and  subsidiaries  in which it has a  greater  than 50%
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.  The
condensed  consolidated  financial statements at March 31, 2005 and December 31,
2004 and for the three month periods ended March 31, 2005 and March 31, 2004 are
unaudited  and  reflect all  adjustments  (consisting  only of normal  recurring
adjustments)  which are,  in the  opinion of  management,  necessary  for a fair
presentation  of the  financial  condition  and  results  of  operations  of the
Company. Interim results may not be indicative of results to be realized for the
entire year. The condensed  consolidated  financial statements should be read in
conjunction  with the  consolidated  financial  statements  and  notes  thereto,
together with  management's  discussion and analysis of financial  condition and
results of operations, contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 2004.

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.

Inventories

      The components of inventories are as follows (amounts in thousands):

                                          March 31,    December 31,
                                            2005           2004
                                          ---------    ------------

                  Raw materials           $ 23,665       $ 23,220
                  Work in process            2,223          1,826
                  Finished goods            40,242         45,299
                  Inventory reserves        (4,230)        (4,671)
                                          --------       --------
                                          $ 61,900       $ 65,674
                                          ========       ========

      At March  31,  2005 and  December  31,  2004,  approximately  38% and 39%,
respectively,  of Katy's  inventories  were  accounted  for  using the  last-in,
first-out  ("LIFO")  method of costing,  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 $6.0 million and $4.7
million at March 31, 2005 and December 31, 2004, respectively.

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 was $2.7 million and $3.4
million in the three-month periods ending March 31, 2005 and 2004, 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


                                     - 6 -
<PAGE>

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 March 31, 2005 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
December 31, 2004 is included in the table below (amounts in thousands):

            SFAS No. 143 Obligation at December 31, 2004      $ 1,237
               Accretion expense                                   12
               Changes in estimates, including timing             (22)
                                                              -------
            SFAS No. 143 Obligation at March 31, 2005         $ 1,227
                                                              =======

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  ("APB No.  25"),
regarding  accounting  for stock  options  and other  stock  awards.  APB 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 and restricted stock awards which
are accounted for as variable stock compensation awards and compensation expense
or income has been  recorded  for these  awards.  No  compensation  expense  was
recorded relative to restricted stock awards during the three months ended March
31,  2005  and  2004,  respectively.   Compensation  (income)  expense  recorded
associated with the vesting of stock appreciation  rights was $(0.6) million and
$20.0  thousand  for the three  month  periods  ended  March 31,  2005 and 2004,
respectively.  Compensation  expense  or  income  for  stock  awards  and  stock
appreciation rights is recorded in selling,  general and administrative expenses
in the Condensed Consolidated Statements of Operations.

      SFAS No. 123,  Accounting  for  Stock-Based  Compensation  ("SFAS No. 123)
changes  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. No options were granted during the three months
ended March 31, 2005 and 2004, respectively.

      The fair  value of each  option  grant is  estimated  on the date of grant
using a Black-Scholes  option-pricing model with an expected life of five to ten
years for all grants.  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  adjusted  to the pro  forma  amounts  indicated  below  (amounts  in
thousands, except per share data).

<TABLE>
<CAPTION>
                                                                                         Three Months
                                                                                       Ended March 31,
                                                                                       2005        2004
                                                                                     -------     -------
<S>                                                                                  <C>         <C>
      Net loss attributable to common stockholders, as reported                      $(4,648)    $(5,243)
      Deduct: Total stock-based employee compensation expense determined
         under fair value based method for all awards, net of related tax effects         --      (1,840)
                                                                                     -------     -------

      Pro forma net loss                                                             $(4,648)    $(7,083)
                                                                                     =======     =======

      Loss per share:
          Basic and diluted - as reported                                            $ (0.59)    $ (0.67)
          Basic and diluted - pro forma                                              $ (0.59)    $ (0.90)
</TABLE>


                                     - 7 -
<PAGE>

      In  December  2004,  the FASB issued  Statement  No. 123  (revised  2004),
Share-Based  Payment (SFAS 123R), which is a revision of SFAS No. 123. SFAS 123R
supersedes  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 2005,  since SFAS 123R must
be adopted no later than the first  interim  or annual  period  beginning  after
December  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.

(2) 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 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.

      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 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.


                                     - 8 -
<PAGE>

(3) Intangible Assets

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

                                                    March 31,     December 31,
                                                      2005            2004
                                                    ---------     ------------
                  Customer lists                    $ 10,968        $ 10,976
                  Tradenames                           6,574           6,577
                  Patents                              3,037           2,932
                                                    --------        --------

                       Subtotal                       20,579          20,485
                  Accumulated amortization           (13,227)        (13,057)
                                                    --------        --------

                       Intangible assets, net       $  7,352        $  7,428
                                                    ========        ========

      All of Katy's intangible assets are definite long-lived intangibles.  Katy
recorded  amortization  expense on  intangible  assets of $0.2  million and $0.4
million in the three-month periods ending March 31, 2005 and 2004, respectively.
Estimated aggregate future amortization  expense related to intangible assets is
as follows (amounts in thousands):

                           2005            $508
                           2006             658
                           2007             653
                           2008             647
                           2009             635

(4) 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
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.


                                     - 9 -
<PAGE>

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 March 31, 2005
which  are  reflected  in  accrued   expenses  and  other   liabilities  in  the
Consolidated Balance Sheet (amounts 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 March 31, 2005, 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) (amounts in thousands):

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

(5) 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


                                     - 10 -
<PAGE>

the  syndicate  from the previous  credit  agreement.  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 $18.3 million
at March 31, 2005.  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  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 increased  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 March 31, 2005.

      Long-term debt consists of the following (amounts in thousands):

<TABLE>
<CAPTION>
                                                                              March 31,    December 31,
                                                                                2005           2004
                                                                              ---------    ------------
<S>                                                                           <C>            <C>
Term loan payable under Bank of America Credit Agreement, interest based
   on LIBOR and Prime Rates (5.38% - 6.50%), due through 2009                 $ 17,143       $ 18,571
Revolving loans payable under the Bank of America Credit Agreement,
   interest based on LIBOR and Prime Rates (5.13% - 6.25%)                      39,646         40,166
                                                                              --------       --------
Total debt                                                                      56,789         58,737
Less revolving loans, classified as current (see below)                        (39,646)       (40,166)
Less current maturities                                                         (2,857)        (2,857)
                                                                              --------       --------
Long-term debt                                                                $ 14,286       $ 15,714
                                                                              ========       ========
</TABLE>

      Aggregate remaining scheduled  maturities of the Term Loan as of March 31,
2005 are as follows (amounts in thousands):

                         2005      $1,429
                         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


                                     - 11 -
<PAGE>

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  March  31,  2005,  and to
management's knowledge, the Company was not in violation of any provision of the
Bank of America Credit Agreement, as amended, at March 31, 2005.

      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 its 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.  Effective April 13,
2005, interest accrues on the Revolving Credit Facility and Term Loan borrowings
at 275 and 300 basis points over LIBOR, respectively. 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 may be required 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  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  $8.6  million were  outstanding  at March 31,
2005, 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 March 31, 2005.

      Katy 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.  During the first  quarter of 2004,  Katy incurred fees and expenses of
$0.4 million (reported in Other, net on the Condensed  Consolidated Statement of
Operations) associated with a financing which the Company chose not to pursue.


                                     - 12 -
<PAGE>

(6) Retirement Benefit 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  requirement  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 of December 31 for the majority
of its pension and other  postretirement  benefit plans for all years presented.
Information  regarding the  Company's net periodic  benefit cost for pension and
other  postretirement  benefit plans as of March 31, 2005 is as follows (amounts
in thousands):

<TABLE>
<CAPTION>
                                                   Pension Benefits        Other Benefits
                                                ---------------------   --------------------
                                                March 31,   March 31,   March 31,  March 31,
                                                  2005        2004        2005       2004
                                                ---------   ---------   ---------  ---------
<S>                                               <C>         <C>         <C>        <C>
   Components of net periodic benefit cost:
   Service cost                                   $  2        $  1        $ --       $  7
   Interest cost                                    23          32          47         40
   Expected return on plan assets                  (26)        (33)         --         --
   Amortization of prior service cost               --          --          15         15
   Amortization of net gain                         20          17          15         --
                                                  ----        ----        ----       ----
   Net periodic benefit cost                      $ 19        $ 17        $ 77       $ 62
                                                  ====        ====        ====       ====
</TABLE>

There are no required  contributions  to the pension plans for 2005 and Katy did
not make any contributions during the first quarter of 2005.

(7) Income Taxes

      As of March 31, 2005 and December  31, 2004,  the Company had deferred tax
assets,  net of  deferred  tax  liabilities,  of  $61.3  million.  Domestic  net
operating loss (NOL) carry forwards  comprised $28.9 million of the deferred tax
assets.  Katy's history of operating losses in many of its taxing  jurisdictions
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 on the  Condensed  Consolidated  Balance  Sheets.  For this  reason,  the
Company was unable to conclude at March 31, 2005 and December 31, 2004 that NOLs
and other  deferred  tax assets in the United  States and  certain  unprofitable
foreign  jurisdictions  would be utilized in the future. As a result,  valuation
allowances for these entities were recorded as of such dates for the full amount
of deferred tax assets, net of the amount of deferred tax liabilities.

      The  provision  for income taxes for the three months ended March 31, 2005
and 2004  reflects  current  expense for state and  foreign  income  taxes.  Tax
benefits were not recorded on the pre-tax net loss for the first quarter of 2005
as valuation  allowances were recorded related to deferred tax assets created as
a  result  of  operating  losses  in  the  United  States  and  certain  foreign
jurisdictions.


                                     - 13 -
<PAGE>

(8) 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 (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
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  USEPA  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 W.J. Smith Wood Preserving facility in Denison,  Texas. 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 Wood Preserving Company,  Inc. 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.


                                     - 14 -
<PAGE>

      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. The liability of the Company cannot be determined at this time.

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.
With respect to one case,  Sterling has  demanded  that Katy  indemnify it for a
$200,000  settlement  entered  into  by  Sterling  with  one of its  plaintiffs.
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, including the one settled
by Sterling for  $200,000,  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,  a  subsidiary  of Katy,  and
against certain past and/or then present  officers,  directors and former owners
of Woods (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
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  purchased  certain  assets in 1993 (prior to Woods'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.


                                     - 15 -
<PAGE>

      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  alleged 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
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 and others for,  among other  things,  violations of
covenants,  representations  and warranties under the purchase agreement through
which Katy acquired  Woods,  and under state,  federal and common law. Woods may
also have  indemnity  claims  against  the former  officers  and  directors.  In
addition, there is a dispute with the former owners of Woods 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.

      Other Claims

      Katy also has a number of  product  liability  and  workers'  compensation
claims  pending  against  it and its  subsidiaries.  Many of  these  claims  are
proceeding  through the  litigation  process and the final  outcome  will not be
known  until  a  settlement  is  reached  with  the  claimant  or  the  case  is
adjudicated. The Company estimates that it can take up to 10 years from the date
of the injury to reach a final  outcome on certain  claims.  With respect to the
product liability and workers'  compensation  claims,  Katy has provided for its
share of expected  losses beyond the applicable  insurance  coverage,  including
those incurred but not reported to the Company or its insurance providers, which
are developed  using  actuarial  techniques.  Such accruals are developed  using
currently   available  claim  information,   and  represent   management's  best
estimates.  The ultimate cost of any individual claim can vary based upon, among
other factors,  the nature of the injury, the duration of the disability period,
the length of the claim period,  the jurisdiction of the claim and the nature of
the final outcome.

      Although  management  believes  that the actions  specified  above in this
section  individually  and in the aggregate are not likely to have outcomes that
will have a material adverse effect on the Company's financial position, results
of  operations  or cash flow,  further  costs could be  significant  and will be
recorded as a charge to operations when, and if, current information  dictates a
change in management's estimates.


                                     - 16 -
<PAGE>

(9) Industry Segment 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.  The
following table sets forth information by segment (amounts in thousands):

<TABLE>
<CAPTION>
                                                                                       Three months ended March 31,
                                                                                            2005            2004
                                                                                         ---------       ---------
<S>                                                                                      <C>             <C>
Maintenance Products Group
     Net external sales                                                                  $  61,473       $  70,490
     Operating (loss) income                                                                (4,078)          2,406
     Operating margin                                                                         (6.6%)           3.4%
     Depreciation and amortization                                                           2,489           3,447
     Capital expenditures                                                                    1,296           2,366

Electrical Products Group
     Net external sales                                                                  $  34,040       $  29,405
     Operating income                                                                        2,913           2,037
     Operating margin                                                                          8.6%            6.9%
     Depreciation and amortization                                                             354             303
     Capital expenditures                                                                      107              48

Total
     Net external sales               - Operating segments                               $  95,513       $  99,895
                                                                                         ---------       ---------
                                        Total                                            $  95,513       $  99,895
                                                                                         =========       =========

     Operating loss                   - Operating segments                               $  (1,165)      $   4,443
                                      - Unallocated corporate                               (1,666)         (2,561)
                                      - Severance, restructuring and related charges          (373)         (1,898)
                                                                                         ---------       ---------
                                        Total                                            $  (3,204)      $     (16)
                                                                                         =========       =========

     Depreciation and amortization    - Operating segments                               $   2,843       $   3,750
                                      - Unallocated corporate                                    4              52
                                                                                         ---------       ---------
                                        Total                                            $   2,847       $   3,802
                                                                                         =========       =========

     Capital expenditures             - Operating segments                               $   1,403       $   2,414
                                      - Unallocated corporate                                   --               1
                                                                                         ---------       ---------
                                        Total                                            $   1,403       $   2,415
                                                                                         =========       =========

<CAPTION>
                                                                                         March 31,      December 31,
                                                                                            2005            2004
                                                                                         ---------      ------------
<S>                                                                                      <C>             <C>
     Total assets                     - Maintenance Products Group                       $ 140,985       $ 154,635
                                      - Electrical Products Group                           49,498          57,698
                                      - Other [a]                                            1,617           1,624
                                      - Unallocated corporate                                9,607          10,507
                                                                                         ---------       ---------
                                        Total                                            $ 201,707       $ 224,464
                                                                                         =========       =========
</TABLE>

[a] Amounts shown as "Other" primarily represent items associated with an equity
investment in a shrimp harvesting and farming operation.


                                     - 17 -
<PAGE>

(10) Severance, Restructuring and Related Charges

      The  Company  has   initiated   several   cost   reduction   and  facility
consolidation  initiatives since its recapitalization in mid-2001,  resulting in
severance,  restructuring  and  related  charges  over the past three  years.  A
summary of severance,  restructuring  and related charges (by major  initiative)
for the three months ended March 31, 2005 and 2004, respectively,  is as follows
(amounts in thousands):

<TABLE>
<CAPTION>
                                                                           Three Months Ended March 31,
                                                                               2005           2004
                                                                              ------         ------
<S>                                                                           <C>            <C>
      Consolidation of abrasives facilities                                   $  115         $  346
      Consolidation of St. Louis manufacturing/distribution facilities            81            177
      Consolidation of administrative functions for CCP                           21            140
      Shutdown of Woods Canada manufacturing                                     (19)         1,102
      Other                                                                      175            133
                                                                              ------         ------
      Total severance, restructuring and related charges                      $  373         $1,898
                                                                              ======         ======
</TABLE>

      Consolidation of abrasives  facilities - In 2002, 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 Pineville, North Carolina facilities will be closed
in 2005 and those operations consolidated into the newly expanded Wrens, Georgia
facility.  Costs  incurred in the three  months  ended March 31, 2005 related to
severance for expected terminations at the Lawrence facility.  Costs incurred in
the three  months  ended  March 31,  2004  related  to  severance  for  expected
terminations  at the  Lawrence  facility  ($0.2  million)  and  expenses for the
preparation of the Wrens facility ($0.1 million).

      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
2005 related to a  non-cancelable  lease  adjustment at the Hazelwood  facility,
miscellaneous  costs for the termination of the Warson Road facility lease,  and
the movement of equipment from  Hazelwood to Bridgeton.  In the first quarter of
2004, costs of $0.2 million were incurred  related  primarily to the movement of
inventory and equipment.

      Consolidation  of  administrative  functions  for CCP - Katy has  incurred
various  costs  in  2004  and  2005  for the  integration  of  back  office  and
administrative  functions  into St. Louis,  Missouri from the various  operating
divisions  within the  Maintenance  Products  Group.  For the three months ended
March 31,  2005  costs  related to an  accrual  for idle  space at our  Textiles
facility in Atlanta.  For the three  months  ended  March 31,  2004,  costs were
incurred  for  system   conversions  and  the  consolidation  of  administrative
personnel.

      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 the first quarter of 2005, a credit
was  recorded  to finalize  the  severance  paid in 2003 and 2004.  In the first
quarter  of  2004,  Woods  Canada  incurred  a  charge  of  $1.0  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 the first
quarter of 2004, Woods Canada recorded $0.1 million for additional severance.

      Other -  Charges  in the  first  quarter  of  2005  related  to  severance
associated  with  the  reduction  in  workforce  principally  due to the exit of
certain product lines in the Consumer Plastics business unit. Costs in the first
quarter of 2004 relate  primarily to the closure of CCP's facility in Canada and
the subsequent  consolidation into the Woods Canada facility, and the closure of
CCP's metals facility in Santa Fe Springs, California.


                                     - 18 -
<PAGE>

The table below details  activity in  restructuring  reserves since December 31,
2004 (amounts in thousands):

<TABLE>
<CAPTION>
                                                                       One-time       Contract
                                                                     Termination    Termination
                                                        Total        Benefits [a]     Costs [b]       Other [c]
                                                       -------       ------------   ------------      ---------
<S>                                                    <C>             <C>             <C>             <C>
Restructuring liabilities at December 31, 2004         $ 4,454         $   807         $ 3,647         $    --
   Additions                                               392             290              76              26
   Reductions                                              (19)            (19)             --              --
   Payments                                               (521)           (183)           (312)            (26)
Foreign Exchange                                            (4)             (1)             (3)             --
                                                       -------         -------         -------         -------
Restructuring liabilities at March 31, 2005 [d]        $ 4,302         $   894         $ 3,408         $    --
                                                       =======         =======         =======         =======
</TABLE>

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

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

[c] Includes charges  associated with moving inventory,  machinery and equipment
and the consolidation of administrative and operational functions.

[d] Katy expects to substantially  complete its  restructuring  program in 2005.
The remaining severance, restructuring and related charges for these initiatives
are  expected  to be in the  range of $1.0  million  to $2.0  million.  Payments
associated with  non-cancelable  lease liabilities for abandoned  facilities are
scheduled to end in 2011.

      The table below details activity in restructuring  and related reserves by
operating segment since December 31, 2004 (amounts in thousands):

<TABLE>
<CAPTION>
                                                                          Maintenance     Electrical
                                                                           Products        Products
                                                             Total           Group           Group
                                                            -------       -----------     ----------
<S>                                                         <C>             <C>             <C>
      Restructuring liabilities at December 31, 2004        $ 4,454         $ 3,385         $ 1,069
         Additions                                              392             392              --
         Reductions                                             (19)             --             (19)
         Payments                                              (521)           (415)           (106)
         Foreign Exchange                                        (4)             --              (4)
                                                            -------         -------         -------
      Restructuring liabilities at March 31, 2005           $ 4,302         $ 3,362         $   940
                                                            =======         =======         =======
</TABLE>

      The  table  below   summarizes   the  future   payments   for   severance,
restructuring  and other related  charges by operating  segment  detailed  above
(amounts in thousands):

                                                   Maintenance    Electrical
                                                     Products      Products
                                        Total          Group        Group
                                        ------     -----------    ----------
                      2005              $1,996        $1,657        $  339
                      2006                 770           574           196
                      2007                 428           249           179
                      2008                 389           200           189
                      2009                 248           211            37
                   Thereafter              471           471            --
                                        ------        ------        ------
                  Total Payments        $4,302        $3,362        $  940
                                        ======        ======        ======


                                     - 19 -
<PAGE>

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

RESULTS OF OPERATIONS

Three Months Ended March 31, 2005 versus Three Months Ended March 31, 2004

<TABLE>
<CAPTION>
                                                                     2005                   2004
                                                             --------------------   --------------------
                                                             (Amounts in Millions, Except Per Share Data)

                                                             ------    ----------   ------    ----------
                                                                $      % to Sales     $       % to Sales
                                                             ------    ----------   ------    ----------
<S>                                                          <C>          <C>       <C>          <C>
Net sales                                                    $ 95.5       100.0     $ 99.9       100.0
Cost of goods sold                                             86.0        90.0       83.3        83.4
                                                             ------      ------     ------      ------
       Gross profit                                             9.5        10.0       16.6        16.6
Selling, general and administrative expenses                   12.3        12.9       14.7        14.8
Severance, restructuring and related charges                    0.4         0.5        1.9         1.8
                                                             ------      ------     ------      ------
       Operating loss                                          (3.2)       (3.4)        --          --
                                                                         ======                 ======

Interest expense                                               (1.3)                  (0.8)
Other, net                                                       --                   (0.4)
                                                             ------                 ------

Loss before provision for income taxes                         (4.5)                  (1.2)

Provision for income taxes                                      0.1                    0.6
                                                             ------                 ------

Net loss                                                       (4.6)                  (1.8)

Payment-in-kind dividends on convertible preferred stock         --                   (3.4)
                                                             ------                 ------

Net loss attributable to common stockholders                   (4.6)                  (5.2)
                                                             ======                 ======

Loss per share of common stock - basic and diluted:

Net loss                                                     $(0.59)                $(0.23)
Payment-in-kind dividends on convertible preferred stock         --                  (0.44)
                                                             ------                 ------
       Net loss attributable to common stockholders          $(0.59)                $(0.67)
                                                             ======                 ======
</TABLE>

Overview

      Our  consolidated  net sales for the three month  period  ending March 31,
2005 decreased $4.4 million  compared to the three month period ending March 31,
2004.  The decline in net sales of 4% was  comprised of lower  volumes  [(11%)],
higher pricing [6%] and favorable currency  translation [1%]. Gross margins were
10.0%  for the three  month  period  ending  March 31,  2005 a  decrease  of 6.6
percentage  points  compared to the three month  period  ending  March 31, 2004.
Higher 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,   and  selling  price
increases. Selling, general and administrative expense (SG&A) as a percentage of
sales  declined  from 14.8% for the first  quarter of 2004 to 12.9% in the first
quarter of 2005,  primarily due to cost  containment in the Electrical  Products
Group.  The operating loss decreased by $3.2 million to $(3.2)  million,  mostly
due to lower sales volumes and lower gross margins.

      Overall,  we reported a net loss  attributable  to common  shareholders of
($4.6)  million  [($0.59) per share] for the three month period ending March 31,
2005,  versus a net loss  attributable to common  shareholders of ($5.2) million
[($0.67)  per share] in the same  period of 2004.  During  the first  quarter of
2004,  we  recorded  the  impact  of  payment-in-kind  dividends  earned  on our
convertible   preferred  stock  of  ($3.4)  million  [($0.44)  per  share].  The
payment-in-kind dividends ended in December 2004.


                                     - 20 -
<PAGE>

Net Sales

Maintenance Products Group

      Net sales from the Maintenance Products Group decreased from $70.5 million
during the three month period ending March 31, 2004 to $61.5 million  during the
three month period ending March 31, 2005.  Overall,  this decline of 13% was due
to lower volumes [(16%)] and higher pricing [3%].  Sales volume for the Consumer
Plastics  business  units in the US and the UK,  which  sell  primarily  to mass
merchant customers,  was significantly lower due to our decision to exit certain
unprofitable lines of business. In addition, volumes at our UK Consumer Plastics
business unit were  negatively  impacted by softening  demand due to a weakening
retail sector in the UK. 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. The disruption to our Abrasives operations has resulted in
the loss of certain customers. These decreases in Abrasives sales were partially
offset by stronger sales of roofing products to the construction industry. Sales
of Metal Truck Box products  declined in first  quarter of 2005 versus the first
quarter  of 2004  primarily  due to  lower  demand  from a major  retail  outlet
customer;  while  sales of  Textiles  were  down  slightly  due to the loss of a
customer.  On a positive  note,  sales volumes for our  Container  business unit
improved over last year principally due to available  production capacity at our
Norwalk,  California  facility,  which resulted from the exit of certain product
lines by the Consumer Plastics business.

      Higher pricing resulted from the implementation of selling price increases
across the Maintenance  Products  Group,  most of which took effect in the first
quarter of 2005. The  implementation  of price  increases was in response to the
accelerating cost of our primary raw materials,  packaging materials,  utilities
and  freight.  In 2004,  we  experienced  $24  million of these  cost  increases
compared to 2003.  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.

Electrical Products Group

      The Electrical  Products Group's sales improved from $29.4 million for the
three month period  ending  March 31, 2004 to $34.0  million for the three month
period  ending March 31, 2005.  The sales  improvement  of 16% was a result of a
higher pricing [13%],  favorable currency  translation [2%] and increased volume
[1%].  Multiple selling price increases were implemented  since the beginning of
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 increased
promotional activity at one of its largest mass merchant retailers. Woods Canada
experienced  a volume  decline  primarily  due to the  timing of  sales.  Garden
lighting  sales were  stronger  in the first  quarter  of 2004 as  corresponding
seasonal sales came in ahead of the first quarter of 2005. Sales at Woods Canada
were favorably  impacted by a stronger Canadian dollar versus the U.S. dollar in
the first quarter of 2005 as compared to the same period in 2004.

Operating Income

<TABLE>
<CAPTION>
                                                            Three months ended March 31,
                                                                (Amounts in Millions)
         Operating income (loss)                              2005                 2004                Change
                                                       ------------------   ------------------   ------------------
                                                         $       % Margin     $       % Margin     $       % Margin
                                                       -----     --------   -----     --------   -----     --------
<S>                                                    <C>         <C>      <C>          <C>     <C>        <C>
      Maintenance Products Group                       $(4.1)      (6.6)    $ 2.4        3.4     $(6.5)     (10.0)
      Electrical Products Group                          2.9        8.6       2.0        6.9       0.9        1.7
      Unallocated corporate expense                     (1.6)                (2.5)                 0.9
      Severance, restructuring and related charges      (0.4)                (1.9)                 1.5
                                                       -----                -----                -----
      Operating loss                                   $(3.2)               $  --                $(3.2)
                                                       =====                =====                =====
</TABLE>


                                     - 21 -
<PAGE>

Maintenance Products Group

      The Maintenance  Products  Group's  operating  income  decreased from $2.4
million  (3.4% of net sales) during the three month period ending March 31, 2004
to an operating  loss of $4.1  million  (-6.6% of net sales) for the three month
period ending March 31, 2005. The decrease was primarily  attributable  to lower
volumes and higher raw  material  costs in the first  quarter of 2005 versus the
first quarter of 2004 that were only partially  recovered through higher selling
prices.  The impact of  accelerating  raw material costs had the most pronounced
effect on the gross margins of our business units which sell plastics  products.
In addition, manufacturing throughput was low at our plastics molding facilities
in the U.S. and the U.K. as we reduced  inventory  and  adjusted our  production
levels in  connection  with our decision to exit certain  unprofitable  lines of
Consumer Plastics  business.  We also experienced 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 fourth  quarter of 2004
that  disrupted  production.  SG&A as a  percentage  of net sales,  in the first
quarter of 2005, was essentially unchanged versus the first quarter of 2004.

Electrical Products Group

      The  Electrical  Products  Group's  operating  income  increased from $2.0
million  (6.9% of net sales) for the three month period ending March 31, 2004 to
$2.9  million  (8.6% of net sales) for the three month  period  ending March 31,
2005,  an increase of 43%. The increase in  profitability  was due to the strong
volume  increases  at the Woods US  business  unit as well as a decrease in SG&A
expenses on  significantly  higher  sales.  Lower SG&A was primarily due to cost
containment initiatives. Despite slightly higher volumes in the first quarter of
2005, gross margins declined slightly as a result of selling price increases not
quite keeping pace with the increasing costs of copper and PVC.

Corporate

      Corporate  operating  expenses  decreased  from $2.5  million in the three
month period  ending March 31, 2004 to $1.6 million in three month period ending
March 31, 2005  principally due to lower bonus expense  resulting from a decline
in operating performance and decreased expense for stock appreciation rights due
to a lower stock price.

Severance, Restructuring and Related Charges

      Operating  results for the Company during the three months ended March 31,
2005 and 2004 were negatively  impacted by severance,  restructuring and related
charges of $0.4 million and $1.9 million, respectively.  Charges in 2005 related
to severance  associated with the reduction in workforce  principally due to the
exit of certain  product  lines in the  Consumer  Plastics  business  unit ($0.2
million);  severance  associated  with the planned  closure of one our abrasives
facilities  ($0.1  million);  and  charges  aggregating  to $0.1  million  for a
non-cancelable  lease adjustment at the Hazelwood facility,  miscellaneous costs
for the  termination  of the Warson Road  facility  lease,  and the  movement of
equipment from Hazelwood to Bridgeton .

      Charges in the first  quarter of 2004  related to a  non-cancelable  lease
accrual  associated  with a  sale/leaseback  transaction and idle capacity ($1.0
million) and additional  severance ($0.1 million) as a result of the shutdown of
manufacturing at Woods Canada; the restructuring of the abrasives business ($0.3
million);  the  movement of  inventory  and  equipment  in  connection  with the
consolidation  of St. Louis  manufacturing  and  distribution  facilities  ($0.2
million);  costs incurred for the consolidation of administrative  functions for
CCP ($0.1  million) and expenses for the closure of CCP's facility in Canada and
the subsequent consolidation into the Woods Canada facility ($0.1 million).

Other Items

      Interest  expense  increased by $0.5 million in the first  quarter of 2005
versus the same period of 2004,  primarily as a result of higher  interest rates
and higher  average  borrowings in 2005.  The increased  level of borrowings was
principally  due  to  increased   working  capital  levels  and  poor  financial
performance  in the second half of 2004.  Other,  net for the three months ended
March 31, 2004  included  the  write-off  of fees and  expenses of $0.4  million
associated with a financing which the Company chose not to pursue.


                                     - 22 -
<PAGE>

      The  provision  for income taxes for the three months ended March 31, 2005
and 2004  reflects  current  expense for state and  foreign  income  taxes.  Tax
benefits were not recorded on the pre-tax net loss for the first quarter of 2005
as valuation  allowances were recorded related to deferred tax assets created as
a  result  of  operating  losses  in  the  United  States  and  certain  foreign
jurisdictions.

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 March 31, 2005, we had cash
and cash  equivalents of $7.1 million  versus cash and cash  equivalents of $8.5
million at December 31,  2004.  Also as of March 31,  2005,  we had  outstanding
borrowings  of $56.8  million [47% of total  capitalization],  under the Bank of
America Credit  Agreement with unused  borrowing  availability  on the Revolving
Credit  Facility of $18.3 million.  As of December 31, 2004, we had  outstanding
borrowings of $58.7  million [46% of total  capitalization].  We generated  $2.0
million of cash flow from  operations  during the  quarter  ended March 31, 2005
versus the utilization of $15.7 million of cash flow from operations  during the
quarter ended March 31, 2004. The  improvement in cash flow from  operations was
primarily  attributable  to a reduction of inventory in 2005 versus an inventory
build in 2004. We expect these trends to generally  continue  throughout 2005 as
inventory is being reduced (except for seasonal builds at the Woods US and Woods
Canada business units) 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. 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.

      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 $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.  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  restrictions  apply  under the Bank of  America
Credit Agreement.


                                     - 23 -
<PAGE>

      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 March
31, 2005, total outstanding letters of credit were $8.6 million.

      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 March 31, 2005.

      In the first quarter of 2005, we paid a fee of $0.1 million to our lenders
in connection  with the Second  Amendment to our credit  agreement.  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. Also,  during the first quarter of
2004, we incurred fees and expenses of $0.4 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  March  31,  2005,  and we were  not in  default  of any
provision of the Bank of America Credit Agreement, as amended at March 31, 2005.

      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 eliminated the maximum  Consolidated  Leverage
Ratio and the Minimum Consolidated EBITDA as established by the Second Amendment
and adjusted the Minimum  Availability  such that our


                                     - 24 -
<PAGE>

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  reestablished  the  minimum  Fixed  Charge  Coverage  Ratio as
originally  set  forth  in the  Bank of  America  Credit  Agreement.  The  Third
Amendment also reduced the maximum allowable capital  expenditures for 2005 from
$15 million to $10 million,  and  increased  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.  Effective April 13,
2005, interest accrues on the Revolving Credit Facility and Term Loan borrowings
at 275 and 300 basis points over LIBOR, respectively. 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 may
be required to obtain further amendments and pursue increased  liquidity through
additional debt financing and/or the sale of assets (see discussion above).

Contractual Obligations and Commercial Obligations

      Katy's  obligations as of March 31, 2005 are summarized  below (amounts in
thousands):

<TABLE>
<CAPTION>
                                                 Due in less      Due in        Due in       Due after
Contractual Cash Obligations          Total      than 1 year    1-3 years     3-5 years       5 years
                                     --------    -----------    ---------     ---------      ---------
<S>                                  <C>           <C>           <C>           <C>           <C>
Revolving credit facility [a]        $ 39,646      $     --      $     --      $ 39,646      $     --
Term loans                             17,143         2,857         5,714         8,572            --
Interest on debt [b]                   11,592         3,314         5,588         2,690            --
Operating leases [c]                   27,313         7,824        10,640         5,313         3,536
Severance and restructuring [c]         2,713         1,337           682           351           343
SESCO payable to Montenay [d]           3,800         1,050         2,200           550            --
                                     --------      --------      --------      --------      --------
Total Contractual Obligations        $102,207      $ 16,382      $ 24,824      $ 57,122      $  3,879
                                     ========      ========      ========      ========      ========

<CAPTION>
                                                 Due in less      Due in        Due in       Due after
Other Commercial Commitments          Total      than 1 year    1-3 years     3-5 years       5 years
                                     --------    -----------    ---------     ---------      ---------
<S>                                  <C>           <C>           <C>           <C>           <C>
Commercial letters of credit         $    511      $    511      $     --      $     --      $     --
Stand-by letters of credit              8,116         8,116            --            --            --
Guarantees [e]                         23,670         8,370        15,300            --            --
                                     --------      --------      --------      --------      --------
Total Commercial Commitments         $ 32,297      $ 16,997      $ 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] Represents  interest on the Revolving  Credit  Facility and Term Loan of the
Bank of America Credit Agreement. Amounts assume interest accrues at the current
rate in effect, including the effect the impact of the increased margins through
the end of the first  quarter of 2006  pursuant to the Third  Amendment.  Amount
also assumes the principal  balance of the  Revolving  Credit  Facility  remains
constant through its expiration date of April 20, 2009 and the principal balance
of the Term Loan  amortizes in accordance  with the terms of the Bank of America
Credit  Agreement.  Due to the  variable  nature of the Bank of  America  Credit
Agreement,  actual  interest rates could differ from the  assumptions  above. In
addition, actual borrowing levels could differ from the assumptions above due to
liquidity needs.


                                     - 25 -
<PAGE>

[c] 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 March 31, 2005 and
December 31, 2004, includes $3.4 and $3.6 million,  respectively,  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.

[d] Amount owed to Montenay as a result of the SESCO  partnership,  discussed in
Note 4 to the Consolidated Financial Statements. $1.1 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.

[e] As discussed in Note 4 to the Consolidated  Financial  Statements in Part I,
Item 1,  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 4 to the Consolidated Financial Statements in Part II, Item 8 for
a discussion of SESCO.

Cash Flow

      Liquidity was  positively  impacted  during the first quarter of 2005 as a
result of higher operating cash flow and lower capital expenditures. We provided
$2.0 million of operating  cash compared to operating cash used of $15.7 million
during the first quarter of 2004.  Debt  obligations at March 31, 2005 decreased
$1.9  million  from  December  31, 2004  primarily  the result of lower  working
capital.

Operating Activities

      Cash flow used in operating  activities before changes in operating assets
was $1.5  million in the first  quarter of 2005  versus  cash flow  provided  by
operating  activities  before changes in operating assets of $2.3 million in the
first quarter of 2004.  While we had net losses in both  periods,  these amounts
included  non-cash items such as depreciation,  amortization and amortization of
debt  issuance  costs.  We  generated  $3.5 million of cash related to operating
assets and liabilities  during the three months ended March 31, 2005 versus cash
used related to operating  assets and  liabilities  of $18.0 million  during the
three  months  ended  March 31,  2004.  Our  operating  cash flow was  favorably
impacted  in the  first  quarter  of 2005 by a  decrease  in  inventory  of $3.6
million,  mostly in the business units in the  Maintenance  Products Group which
sell  plastics  products.  Operating  cash flow in the first quarter of 2004 was
negatively impacted by an increase in inventory of $13.2 million principally due
to the early  purchase of certain  materials  in advance of  scheduled  supplier
price  increases and to a seasonal  increase in the Electrical  Products  Group.
During the first quarter of 2005, we were turning our inventory at 5.5 times per
year versus 5.1 times per year during the first quarter of 2004.  Operating cash
flow in the first quarter of 2005 was also favorably  impacted by lower accounts
receivable,  principally  resulting  from a  decrease  in net sales in the first
quarter of 2005 versus the fourth quarter of 2004. Cash of $0.5 million and $2.5
million  was  used  in  the  three   months  ended  March  31,  2005  and  2004,
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.

Investing Activities

      Capital  expenditures  totaled $1.4 million  during the three months ended
March 31, 2005 as compared to $2.4  million  during the three months ended March
31, 2004.  Anticipated  capital  expenditures  are expected to be  significantly
lower in 2005 than in 2004,  mainly due to an equipment  replacement  program in
2004. 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.


                                     - 26 -
<PAGE>

Financing Activities

      Overall,  debt  decreased $1.9 million during three months ended March 31,
2005 versus an increase of $12.1 million during the three months ended March 31,
2004,  primarily  relating to the changes in  inventory  balances  during  those
periods.  Direct debt costs  totaling  $0.1 million in the first quarter of 2005
represents a fee paid to our lenders in connection with the Second Amendment and
$0.2 million in the first quarter 2004 relates to the April 20, 2004 refinancing
of the Bank of America Credit Agreement.  On May 10, 2004, we suspended our $5.0
million share repurchase  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.

SEVERANCE, RESTRUCTURING AND RELATED CHARGES

      See Note 10 to the Condensed  Consolidated Financial Statements in Part I,
Item 1 for a discussion of severance, restructuring and related charges.

OUTLOOK FOR 2005

      We continue to  experience  a strong  sales  performance  during the first
quarter of 2005 from the Woods US business unit,  offset by lower volumes in our
Consumer  Plastics and Abrasives  business  units.  Price  increases were passed
along to our Woods US  customers  during  2004 and early 2005 as a result of the
rise in copper prices from late 2003 through  early 2005.  While we anticipate a
continued  strong top line  performance from Woods US, only modest volume growth
is expected.  We also expect continued  softness in the U.K.,  especially in the
consumer /retail sector. 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 when complete,
will result in improved  profitability of our Abrasives business. The disruption
to our Abrasives operations has 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 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,  Consumer  Plastics  and  Container
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 generally increased from late 2003 through early 2005.
Prices for resin and copper  appear to have  stabilized in a  historically  high
range early in the second  quarter of 2005.  Prices for  aluminum and steel (raw
materials used in our Metal Truck Box business),  corrugated  packaging material
and other raw  materials  have also  increased  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  $24 million of cost increases in our
primary raw materials,  packaging  materials,  utilities and freight compared to
2003; these  extraordinary 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
higher costs through price increases. We announced additional price increases in
the first quarter of 2005 and expect to announce even further price increases in
the second  quarter.  In a climate of rising raw material  costs  (especially in
2004 and early 2005), we experience  difficulty in raising prices to shift these
higher costs to our customers for


                                     - 27 -
<PAGE>

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;  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.

      SG&A has  continually  declined as a percentage of sales 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.  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

      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 March 31, 2005 and  December  31, 2004,  and we do not expect to
record the benefit of any deferred tax assets that may be generated in 2005 from
domestic and certain  unprofitable  foreign  jurisdictions.  We will continue to
record current expense associated with 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 seasonal  builds in the Electrical  Products Group in the
second and third quarters of 2005.  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.

      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


                                     - 28 -
<PAGE>

(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 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 the Third Amendment to the Bank of America Credit Agreement.  The Third
Amendment  eliminated  the maximum  Consolidated  Leverage Ratio and the Minimum
Consolidated  EBITDA as  established  by the Second  Amendment  and adjusted 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  reestablished  the minimum  Fixed
Charge  Coverage  Ratio as  originally  set forth in the Bank of America  Credit
Agreement.  The Third  Amendment  also  reduced  the maximum  allowable  capital
expenditures  for 2005  from $15  million  to $10  million,  and  increased  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.  Effective April 13, 2005,  interest  accrues on the Revolving Credit
Facility  and Term Loan  borrowings  at 275 and 300  basis  points  over  LIBOR,
respectively.  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.  We expect to be in
compliance  with the amended  covenants in the Bank of America Credit  Agreement
for the remainder of 2005.

      If we are unable to comply with the terms of the amended covenants, we may
be required 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  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.


                                     - 29 -
<PAGE>

      -     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.  These  factors are not  intended to
represent  a  complete  list of all  risks  and  uncertainties  inherent  in our
business and should be read in conjunction  with the  cautionary  statements and
risks included in our other filings with the SEC, including, but not limited to,
our Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

ENVIRONMENTAL AND OTHER CONTINGENCIES

      See Note 8 to the Condensed  Consolidated  Financial Statements in Part I,
Item 1 for a discussion of environmental and other contingencies.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      See Note 2 to the Condensed  Consolidated  Financial Statements in Part I,
Item 1 for a discussion of recently issued accounting pronouncements.

CRITICAL ACCOUNTING POLICIES

      We disclosed details regarding certain of our critical accounting policies
in the Management's Discussion and Analysis section of our 2004 Annual Report on
Form 10-K (Part II, Item 7).  There have been no changes to policies as of March
31, 2005.


                                     - 30 -
<PAGE>

Item 3. 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 March 31, 2005 were indexed from  short-term  LIBOR and the
prime rate. As a result of the current rising interest rate  environment and the
increase in the interest rate margins on our borrowings as a result of the Third
Amendment to the Bank of America  Credit  Agreement,  our  exposures to interest
rate risks could be material to our financial position or results of operations.

Foreign Exchange Risk

      We are exposed to fluctuations in the Euro, British pound, Canadian dollar
and Chinese Yuan Renminbi. Some of our subsidiaries make significant U.S. dollar
purchases  from Asian  suppliers,  particularly  in China.  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.

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 Item 2.  MANAGEMENT'S  DISCUSSION  AND
ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF  OPERATIONS - OUTLOOK FOR 2005,
for further discussion of our exposure to increasing raw material costs.

Item 4. 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 the management,  including the Chief Executive
Officer and Chief Financial Officer,  as appropriate,  to allow timely decisions
regarding   required   disclosure.   We  also  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 in
timely  alerting them to material  information  relating to Katy  (including its
consolidated subsidiaries) required to be included in our periodic SEC filings.

(b) Change in Internal Controls

      There have been no  changes  in Katy's  internal  control  over  financial
reporting during the quarter ended March 31, 2005 that has materially  affected,
or is  reasonable  likely to  materially  affect  Katy's  internal  control over
financial reporting.


                                     - 31 -
<PAGE>

                           PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

      During  the  quarter  for which this  report is filed,  there have been no
material  developments in previously  reported legal  proceedings,  and no other
cases or legal proceedings, other than ordinary routine litigation incidental to
the Company's business and other nonmaterial  proceedings,  were brought against
the Company.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

      On  April  20,  2003,  the  Company  announced  a plan to spend up to $5.0
million to  repurchase  shares of its common  stock.  In 2004,  12,000 shares of
common stock were repurchased on the open market for  approximately $75 thousand
under this plan, while in 2003,  482,800 shares of common stock were repurchased
on the open market for approximately $2.6 million. The Company suspended further
purchases under the plan on May 10, 2004.

Item 5. OTHER INFORMATION

      None.

Item 6. EXHIBITS

      10.1  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)

      10.2  Third  Amendment to Amended and Restated Loan Agreement  dated as of
            April 13,  2005 with  Fleet  Capital  Corporation  (incorporated  by
            reference to Exhibit  10.17 of the  Company's  Annual Report on Form
            10-K filed April 15, 2005)

      31.1  CEO Certification  pursuant to Securities  Exchange Act 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 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, as adopted
            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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


                                     - 32 -
<PAGE>

                                   Signatures

      Pursuant to the  requirements  of the Securities and Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                              KATY INDUSTRIES, INC.
                              ---------------------
                                   Registrant


DATE: May 9, 2005                               By /s/ C. Michael Jacobi
                                                   ---------------------------
                                                   C. Michael Jacobi
                                                   President and Chief Executive
                                                   Officer


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


                                     - 33 -