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 Quarterly period ended: June 30, 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 August 15, 2005
   Common Stock, $1 Par Value                            7,951,377


                                       1
<PAGE>

                              KATY INDUSTRIES, INC.
                                    FORM 10-Q
                                  June 30, 2005

                                      INDEX

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

         Item 1.  Financial Statements:

                  Condensed Consolidated Balance Sheets
                  June 30, 2005 and December 31, 2004 (unaudited)                        3

                  Condensed Consolidated Statements of Operations
                  Three Months and Six Months Ended
                  June 30, 2005 and 2004 (unaudited)                                     5

                  Condensed Consolidated Statements of Cash Flows                        6
                  Six Months Ended June 30, 2005 and 2004 (unaudited)

                  Notes to Condensed Consolidated Financial Statements (unaudited)       7

         Item 2.  Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                                    24

         Item 3.  Quantitative and Qualitative Disclosures about Market Risk             40

         Item 4.  Controls and Procedures                                                41

PART II  OTHER INFORMATION

         Item 1.  Legal Proceedings                                                      42

         Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds            42

         Item 4.  Submission of Matters to a Vote of Security Holders                    42

         Item 5.  Other Information                                                      43

         Item 6.  Exhibits                                                               43

         Signatures                                                                      44

         Certifications                                                                  45
</TABLE>


                                       2
<PAGE>

                          PART I FINANCIAL INFORMATION

                          Item 1. Financial Statements

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

                                     ASSETS

                                                       June 30,    December 31,
                                                         2005          2004
                                                         ----          ----
CURRENT ASSETS:

     Cash and cash equivalents                        $   4,063    $      8,525
     Accounts receivable, net                            56,981          66,689
     Inventories, net                                    58,548          65,674
     Other current assets                                 4,493           4,233
                                                      ---------    ------------

       Total current assets                             124,085         145,121
                                                      ---------    ------------

OTHER ASSETS:

     Goodwill                                             2,239           2,239
     Intangibles, net                                     7,239           7,428
     Other                                                9,298           9,946
                                                      ---------    ------------

       Total other assets                                18,776          19,613
                                                      ---------    ------------

PROPERTY AND EQUIPMENT
     Land and improvements                                1,789           1,897
     Buildings and improvements                          13,805          13,537
     Machinery and equipment                            135,265         132,825
                                                      ---------    ------------

                                                        150,859         148,259
     Less - Accumulated depreciation                    (95,088)        (88,529)
                                                      ---------    ------------

       Property and equipment, net                       55,771          59,730
                                                      ---------    ------------

       Total assets                                   $ 198,632    $    224,464
                                                      =========    ============

See Notes to Condensed Consolidated Financial Statements.


                                       3
<PAGE>

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

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                              June 30,    December 31,
                                                                                2005         2004
                                                                                ----         ----
<S>                                                                          <C>          <C>
CURRENT LIABILITIES:

     Accounts payable                                                        $  32,650    $     39,079
     Accrued compensation                                                        4,592           5,269
     Accrued expenses                                                           36,376          39,939
     Current maturities of long-term debt                                        2,857           2,857
     Revolving credit agreement                                                 39,547          40,166
                                                                             ---------    ------------

        Total current liabilities                                              116,022         127,310
                                                                             ---------    ------------

LONG-TERM DEBT, less current maturities                                         13,572          15,714

OTHER LIABILITIES                                                               10,616          12,855
                                                                             ---------    ------------

        Total liabilities                                                      140,210         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                                                 27,016          25,111
     Accumulated other comprehensive income                                      3,120           4,564
     Accumulated deficit                                                       (67,952)        (57,258)
     Treasury stock, at cost, 1,870,827 and 1,876,827 shares, respectively     (21,840)        (21,910)
                                                                             ---------    ------------

        Total stockholders' equity                                              58,422          68,585
                                                                             ---------    ------------

        Total liabilities and stockholders' equity                           $ 198,632    $    224,464
                                                                             =========    ============
</TABLE>

See Notes to Condensed Consolidated Financial Statements.


                                       4
<PAGE>

                              KATY INDUSTRIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
        FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
             (Thousands of Dollars, Except Share and Per Share Data)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                Three Months                  Six Months
                                                                Ended June 30,              Ended June 30,
                                                              2005          2004          2005          2004
                                                              ----          ----          ----          ----
<S>                                                        <C>           <C>           <C>           <C>
Net sales                                                  $   98,210    $  100,522    $  193,723    $  200,417
Cost of goods sold                                             86,424        87,261       172,414       170,526
                                                           ----------    ----------    ----------    ----------
   Gross profit                                                11,786        13,261        21,309        29,891
Selling, general and administrative expenses                   13,885        14,240        26,239        28,988
Stock option expense                                            1,953            --         1,953            --
Severance, restructuring and related charges (income)             940          (109)        1,313         1,789
Gain on sale of assets                                           (166)         (549)         (166)         (549)
                                                           ----------    ----------    ----------    ----------
   Operating loss                                              (4,826)         (321)       (8,030)         (337)
Interest expense                                               (1,392)         (997)       (2,656)       (1,797)
Other, net                                                         38           144           (10)         (231)
                                                           ----------    ----------    ----------    ----------

Loss before (benefit) provision for income taxes               (6,180)       (1,174)      (10,696)       (2,365)

(Benefit) provision for income taxes                             (134)          109            (2)          699
                                                           ----------    ----------    ----------    ----------

Net loss                                                       (6,046)       (1,283)      (10,694)       (3,064)

Payment-in-kind dividends on convertible preferred stock           --        (3,462)           --        (6,924)
                                                           ----------    ----------    ----------    ----------

Net loss attributable to common stockholders               $   (6,046)   $   (4,745)   $  (10,694)   $   (9,988)
                                                           ==========    ==========    ==========    ==========

Loss per share of common stock - Basic and diluted:
   Net loss attributable to common stockholders            $    (0.76)   $    (0.60)   $    (1.35)   $    (1.27)
                                                           ==========    ==========    ==========    ==========

Weighted average common shares outstanding (thousands):
       Basic and diluted                                        7,948         7,870         7,947         7,877
                                                           ==========    ==========    ==========    ==========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.


                                       5
<PAGE>

                              KATY INDUSTRIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
                             (Thousands of Dollars)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                 2005        2004
                                                                 ----        ----
<S>                                                            <C>         <C>
Cash flows from operating activities:
    Net loss                                                   $(10,694)   $ (3,064)
    Depreciation and amortization                                 5,869       7,709
    Amortization of debt issuance costs                             557         535
    Stock option expense                                          1,953          --
    Gain on sale of assets                                         (166)       (549)
                                                               --------    --------
                                                                 (2,481)      4,631
                                                               --------    --------
    Changes in operating assets and liabilities:
       Accounts receivable                                        8,983       4,175
       Inventories                                                6,552     (14,704)
       Other assets                                                (341)     (3,274)
       Accounts payable                                          (5,922)     (7,870)
       Accrued expenses                                          (4,086)     (3,071)
       Other, net                                                (2,217)     (1,959)
                                                               --------    --------
                                                                  2,969     (26,703)
                                                               --------    --------

    Net cash provided by (used in) operating activities             488     (22,072)
                                                               --------    --------

Cash flows from investing activities:
    Capital expenditures                                         (2,954)     (5,704)
    Collections of note receivable from sale of subsidiary          106          --
    Proceeds from sale of assets                                    600       5,533
                                                               --------    --------
    Net cash used in investing activities                        (2,248)       (171)
                                                               --------    --------

Cash flows from financing activities:
    Net (repayments) borrowings on revolving loans                 (410)      7,022
    Proceeds of term loans                                           --      18,152
    Repayments of term loans                                     (2,142)     (2,529)
    Direct costs associated with debt facilities                   (135)     (1,296)
    Repurchases of common stock                                      --         (75)
                                                               --------    --------
    Net cash (used in) provided by financing activities          (2,687)     21,274
                                                               --------    --------
Effect of exchange rate changes on cash and cash equivalents        (15)        (95)
Net decrease in cash and cash equivalents                        (4,462)     (1,064)
Cash and cash equivalents, beginning of period                    8,525       6,748
                                                               --------    --------
Cash and cash equivalents, end of period                       $  4,063    $  5,684
                                                               ========    ========
</TABLE>

See Notes to Condensed Consolidated Financial Statements


                                       6
<PAGE>

                              KATY INDUSTRIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 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 June 30, 2005 and December 31,
2004 and for the three and six month  periods  ended June 30,  2005 and June 30,
2004 are  unaudited  and  reflect all  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):

                                      June 30,      December 31,
                                        2005            2004
                                        ----            ----

               Raw materials        $     19,805    $     23,220
               Work in process             1,854           1,826
               Finished goods             41,570          45,299
               Inventory reserves         (4,681)         (4,671)
                                    ------------    ------------
                                    $     58,548    $     65,674
                                    ============    ============

      At June  30,  2005  and  December  31,  2004,  approximately  35% 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 $5.0 million and $4.7
million at June 30, 2005 and December 31, 2004, respectively.

Property, Plant and Equipment

      Property  and  equipment  are  stated at cost and  depreciated  over their
estimated   useful  lives:   buildings   (10-40  years)   generally   using  the
straight-line  method;  machinery and equipment (3-20 years) using straight-line
or composite  methods;  tooling (5 years) using the  straight-line  method;  and
leasehold  improvements using the straight-line  method over the remaining lease
period or useful life, if shorter. Costs for repair and maintenance of machinery
and  equipment  are  expensed  as  incurred,  unless  the  result  significantly
increases  the  useful  life  or  functionality  of the  asset,  in  which  case
capitalization is considered.  Depreciation  expense from continuing  operations
was $2.8  million  and $3.5  million and $5.5  million and $6.9  million for the
three and six month periods ended June 30, 2005 and 2004, respectively.

      Katy adopted Statement of Financial Accounting Standards ("SFAS") No. 143,
Accounting for Asset  Retirement  Obligations,  on January 1, 2003. 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


                                       7
<PAGE>

an associated  increase in the carrying amount of the related  long-term  asset.
The  cost of the  tangible  asset,  including  the  initially  recognized  asset
retirement cost, is depreciated over the useful life of the asset. In accordance
with SFAS No. 143, the Company has recorded as of June 30, 2005 an asset of $0.4
million  and  related  liability  of $1.0  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                                23
               Changes in estimates, including timing          (22)
               Payments                                       (250)
                                                           -------
            SFAS No. 143 Obligation at June 30, 2005       $   988
                                                           =======

Stock Options and Other Stock Awards

      The Company follows the provisions of Accounting  Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees,  regarding  accounting
for stock  options  and other  stock  awards.  APB  Opinion  No. 25  dictates  a
measurement date concept in the determination of compensation expense related to
stock awards including stock options,  restricted stock, and stock  appreciation
rights.   The  Company's   outstanding  stock  options   historically  have  had
established measurement dates and therefore,  fixed plan accounting was applied,
generally resulting in no compensation expense for these stock option awards. In
March  2004,  the  Company's  Board of  Directors  approved  the  vesting of all
previously outstanding and unvested stock options. The Company did not recognize
any  compensation  expense  upon this vesting of options  because,  based on the
information available at that time, the Company did not have an expectation that
the holders of the previously  unvested options would terminate their employment
with the Company prior to the original vesting period.  In the second quarter of
2005, our former President and Chief Executive Officer retired from the Company.
Upon this event,  the Company  recognized $2.0 million of  compensation  expense
related to his 1,050,000  options using the intrinsic method of accounting under
APB 25, because he would not have otherwise  vested in these options but for the
March 2004 accelerated  vesting.  Upon his retirement,  our former President and
Chief  Executive  Officer  immediately  forfeited  750,000 options while 300,000
options remain unexercised.  6,000 options were granted during the three and six
months ended both June 30, 2005 and 2004.

      The Company has also 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.  Compensation
expense  recorded  relative to stock awards was $22.1 thousand and $9.0 thousand
for  both the  three  and six  month  periods  ended  June  30,  2005 and  2004,
respectively.  Compensation income recorded associated with the vesting of stock
appreciation  rights  was $0.2  million  and $0.1  million  for the three  month
periods ended June 30, 2005 and 2004, respectively. Compensation income recorded
associated  with the vesting of stock  appreciation  rights was $0.8 million and
$0.2  million  for  the  six  month  periods  ended  June  30,  2005  and  2004,
respectively.  No compensation expense was recorded relative to restricted stock
awards  during  the  three  and  six  months  ended  June  30,  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,  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.  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).


                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                                Three Months             Six Months
                                                                Ended June 30,          Ended June 30,
                                                               2005        2004        2005        2004
                                                               ----        ----        ----        ----
<S>                                                         <C>         <C>         <C>         <C>
Net loss attributable to common stockholders, as reported   $ (6,046)   $ (4,745)   $(10,694)   $ (9,988)
Add: Stock-based employee compensation expense
    included in reported net income, with no related tax
    tax effects                                                1,953          --       1,953          --
Deduct:  Total stock-based employee
    compensation expense determined under fair
    value based method for all awards, with no
    related tax effects                                          (14)        (15)        (14)     (1,855)
                                                            --------    --------    --------    --------

Pro forma net loss                                          $ (4,107)   $ (4,760)   $ (8,755)   $(11,843)
                                                            ========    ========    ========    ========

Loss per share
    Basic and diluted - as reported                         $  (0.76)   $  (0.60)   $  (1.35)   $  (1.27)
    Basic and diluted - pro forma                           $  (0.52)   $  (0.60)   $  (1.10)   $  (1.50)
</TABLE>

      In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123 (revised 2004),  Share-Based Payment ("SFAS 123R"), which is a
revision of SFAS No. 123.  SFAS 123R  supersedes  APB Opinion No. 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 No.  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 No.
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 in the first quarter of 2006,  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 SFAS 123R on the  Company,  which will be dependent in large part upon future
equity-based grants.

Reclassifications

      Certain  amounts from prior periods have been  reclassified  to conform to
the current period presentation.

(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 became  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,  the effect of
the Act on the Company's accumulated  postretirement  benefit obligations is not
material.


                                       9
<PAGE>

      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.

(3) Intangible Assets

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

                                          June 30,      December 31,
                                            2005            2004
                                            ----            ----
          Customer lists                $     10,946    $     10,976
          Tradenames                           6,620           6,577
          Patents                              3,070           2,932
                                        ------------    ------------

               Subtotal                       20,636          20,485
          Accumulated amortization           (13,397)        (13,057)
                                        ------------    ------------

               Intangible assets, net   $      7,239    $      7,428
                                        ============    ============

      All of Katy's intangible assets are definite long-lived intangibles.  Katy
recorded  amortization  expense on  intangible  assets of $0.1  million and $0.4
million for the three-month periods ended June 30, 2005 and 2004,  respectively,
and $0.3 million and $0.8 million for the six-month  periods ended June 30, 2005
and 2004, respectively.  Estimated aggregate future amortization expense related
to intangible assets is as follows (amounts in thousands):

                  2005               $ 321
                  2006                 670
                  2007                 675
                  2008                 665
                  2009                 653

(4) Savannah Energy Systems Company Partnership

      On April 29, 2002, Savannah Energy Systems Company ("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
operational 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


                                       10
<PAGE>

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.

      The Company made a payment of $1.1  million in June 2005 on the  remaining
portion of the $6.6  million  note.  The table  below  schedules  the  remaining
payments as of June 30, 2005 which are  reflected in accrued  expenses and other
liabilities in the Condensed Consolidated Balance Sheet (amounts in thousands):

                         2006       $      1,100
                         2007              1,100
                         2008                550
                                    ------------
                                    $      2,750
                                    ============

      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  Condensed
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 June 30, 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 Condensed 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.


                                       11
<PAGE>

      Following are scheduled  principal  repayments on the loan  agreement (and
the Industrial Revenue Bonds) as of June 30, 2005 (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 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 allows 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 $22.6 million
at June 30, 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 and 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 September 30
and December 31, 2004,  respectively.  Margins increased another 50 basis points
upon the  effective  date of the  Third  Amendment  (see  below).  Additionally,
margins  on the Term Loan will drop 25 basis  points if the  balance of the Term
Loan is reduced below $10.0 million. Interest accrues at higher margins on prime
rates for swing loans, the amounts of which were nominal at June 30, 2005.

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

<TABLE>
<CAPTION>
                                                                           June 30,      December 31,
                                                                             2005            2004
                                                                         ------------    ------------
<S>                                                                      <C>             <C>
Term loan payable under the Bank of America Credit Agreement, interest
      based on LIBOR and Prime Rates (6.375% - 7.5%), due through 2009   $     16,429    $     18,571
Revolving loans payable under the Bank of America Credit Agreement,
        interest based on LIBOR and Prime Rates (6% - 7.25%)                   39,547          40,166
                                                                         ------------    ------------
Total debt                                                                     55,976          58,737
Less revolving loans, classified as current (see below)                       (39,547)        (40,166)
Less current maturities                                                        (2,857)         (2,857)
                                                                         ------------    ------------
Long-term debt                                                           $     13,572    $     15,714
                                                                         ============    ============
</TABLE>


                                       12
<PAGE>

      Aggregate remaining  scheduled  maturities of the Term Loan as of June 30,
2005 are as follows (amounts in thousands):

                               2005             $  715
                               2006              2,857
                               2007              2,857
                               2008              2,857
                               2009              7,143

      The Revolving  Credit Facility under the Bank of America Credit  Agreement
requires lockbox  agreements which provide for all receipts to be swept daily to
reduce borrowings outstanding. These agreements,  combined with the existence of
a  material  adverse  effect  ("MAE")  clause  in the  Bank  of  America  Credit
Agreement,  cause the  Revolving  Credit  Facility to be classified as a current
liability per guidance in Emerging  Issues Task Force Issue No. 95--22,  Balance
Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
that Include Both a Subjective  Acceleration Clause and a Lock-Box  Arrangement.
The Company does not expect to repay, or be required to repay,  within one year,
the balance of the Revolving Credit Facility  classified as a current liability.
The MAE clause,  which is a typical requirement in commercial credit agreements,
allows the lenders to require the loan to become due if they determine there has
been  a  material  adverse  effect  on  the  Company's   operations,   business,
properties,  assets, liabilities,  condition or prospects. The classification of
the Revolving  Credit  Facility as a current  liability was a result only of the
combination of the lockbox  agreements and the MAE clause.  The Revolving Credit
Facility does not expire or have a maturity date within one year, but rather has
a final  expiration  date of April 20, 2009. The lender has not notified Katy of
any indication of a MAE at June 30, 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 June 30, 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


                                       13
<PAGE>

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 $9.1 million were outstanding at June 30, 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 June 30, 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 six months  ended June 30,  2004,  Katy  incurred  fees and
expenses of $0.4 million  (reported in Other, net on the Condensed  Consolidated
Statements of Operations)  associated  with a financing  which the Company chose
not to pursue.

(6) Retirement Benefit Plans

      Several  of  the  Company's   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 for the three and six  months
ended June 30, 2005 and 2004, is as follows (amounts in thousands):

                                                    Pension Benefits
                                          -------------------------------------
                                            Three Months         Six Months
                                            Ended June 30,       Ended June 30,
                                            2005      2004      2005      2004
                                           ------    ------    ------    ------
Components of net periodic benefit cost:
Service cost                               $    2    $    1    $    4    $    2
Interest cost                                  24        32        47        64
Expected return on plan assets                (26)      (32)      (52)      (65)
Amortization of net gain                       19        17        39        34
                                           ------    ------    ------    ------
Net periodic benefit cost                  $   19    $   18    $   38    $   35
                                           ======    ======    ======    ======


                                       14
<PAGE>


                                                       Other Benefits
                                           -------------------------------------
                                             Three Months        Six Months
                                            Ended June 30,      Ended June 30,
                                            2005      2004      2005      2004
                                           ------    ------    ------    ------
Components of net periodic benefit cost:
Service cost                               $   --    $    7    $   --    $   14
Interest cost                                  48        40        95        80
Amortization of prior service cost             15        15        30        30
Amortization of net gain                       15        --        30        --
                                           ------    ------    ------    ------
Net periodic benefit cost                  $   78    $   62    $  155    $  124
                                           ======    ======    ======    ======

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

(7) Income Taxes

      As of June 30, 2005 and December  31,  2004,  the Company had deferred tax
assets,  net of  deferred  tax  liabilities,  of  approximately  $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 June 30, 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 benefit for income  taxes for the three and six months  ended June 30,
2005  reflects a foreign  income tax benefit net of a current  expense for state
income taxes.  The provision for income taxes for the three and six months ended
June 30,  2004  reflects  a foreign  income  tax  provision  offset by a current
benefit for state income  taxes.  In both 2005 and 2004,  tax benefits  were not
recorded in the U.S.  (for federal and most state income  taxes) and for certain
foreign  jurisdictions  on  pre-tax  net  losses.  As a  result  of  accumulated
operating losses in those  jurisdictions,  the Company has concluded that it was
more likely than not that such benefits would not be realized.

(8) Commitments and Contingencies

      General Environmental Claims


                                       15
<PAGE>

      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 ("EPA"),  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  and believes  that any  liability  with respect to these  matters in
excess of the accruals will not be material. The ultimate costs will depend on a
number of factors and the amount currently accrued represents  management's best
current  estimate of the total costs to be  incurred.  The Company  expects this
amount to be substantially paid over the next one to four years.

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

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

      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 this matter is not easy to determine,  the Company has
recorded  and  accrued   amounts  that  it  deems   reasonable  for  prospective
liabilities  with  respect  to this  matter  and  believes  that any  additional
liability  with  respect  to this  matter in excess of the  accrual  will not be
material.

      In addition to the administrative  claim specifically  identified above, a
purported  class action  lawsuit was filed by 20 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 RCRA. 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 lacked  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.

      Asbestos Claims


                                       16
<PAGE>

      A. The Company has recently  been named as a defendant  in seven  lawsuits
filed in state  court in  Alabama  by a total  of  approximately  62  individual
plaintiffs.  There  are over 100  defendants  named in each  case.  In all seven
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 five 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 1,800 cases pending in
Michigan,  New  Jersey,  Illinois,  Nevada,  Mississippi,   Wyoming,  Louisiana,
Georgia,   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.  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 290 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.


                                       17
<PAGE>

      Banco del Atlantico,  S.A. v. Woods Industries,  Inc., et al. Civil Action
No. L-96-139 (U.S.  District  Court,  Southern  District of Texas).  In December
1996,  Banco del  Atlantico  ("plaintiff"),  a bank  located in Mexico,  filed a
lawsuit in Texas against Woods Industries, Inc. ("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.

      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.

      On June 15, 2005, the court denied  defendants'  renewed motion to dismiss
for forum non  conveniens.  The  defendants'  other  motions to  dismiss  remain
pending before the court.

      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


                                       18
<PAGE>

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.

(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):


                                       19
<PAGE>

<TABLE>
<CAPTION>
                                                                     Three months ended June 30,     Six months ended June
                                                                         2005           2004           2005           2004
                                                                         ----           ----           ----           ----
<S>                                   <C>                             <C>            <C>            <C>            <C>
Maintenance Products Group
     Net external sales                                               $   63,869     $   69,736     $  125,342     $  140,226
     Operating (loss) income                                                (450)          (810)        (4,528)    $    1,596
     Operating (deficit) margin                                             (0.7%)         (1.2%)         (3.6%)          1.1%
     Depreciation and amortization                                         2,637          3,554          5,126          7,001
     Capital expenditures                                                  1,507          3,132          2,803          5,498

Electrical Products Group
     Net external sales                                               $   34,341     $   30,786     $   68,381     $   60,191
     Operating income                                                      1,150          2,513          4,063          4,550
     Operating margin                                                        3.3%           8.2%           5.9%           7.6%
     Depreciation and amortization                                           349            281            703            584
     Capital expenditures                                                     44            156            151            204

Total
Net external sales                   - Operating segments             $   98,210     $  100,522     $  193,723     $  200,417
                                                                      -------------------------     -------------------------
                                       Total                          $   98,210     $  100,522     $  193,723     $  200,417
                                                                      =========================     =========================

Operating income (loss)              - Operating segments             $      700     $    1,703     $     (465)    $    6,146
                                     - Unallocated corporate              (2,633)        (2,133)        (4,299)        (4,694)
                                     - Stock option expense               (1,953)            --         (1,953)            --
                                     - Severance, restructuring,
                                       and related charges (income)         (940)           109         (1,313)        (1,789)
                                                                      -------------------------     -------------------------
                                       Total                          $   (4,826)    $     (321)    $   (8,030)    $     (337)
                                                                      =========================     =========================


Depreciation and amortization        - Operating segments             $    2,986     $    3,835     $    5,829     $    7,585
                                     - Unallocated corporate                  36             72             40            124
                                                                      -------------------------     -------------------------
                                       Total                          $    3,022     $    3,907     $    5,869     $    7,709
                                                                      =========================     =========================

Capital expenditures                 - Operating segments             $    1,551     $    3,288     $    2,954     $    5,702
                                     - Unallocated corporate                  --              1             --              2
                                                                      -------------------------     -------------------------
                                       Total                          $    1,551     $    3,289     $    2,954     $    5,704
                                                                      =========================     =========================

                                                                       June 30,     December 31,
                                                                         2005           2004
                                                                         ----           ----
Total assets                         - Maintenance Products Group     $  136,420     $  154,635
                                     - Electrical Products Group          54,210         57,698
                                     - Other [a]                           1,618          1,624
                                     - Unallocated corporate               6,384         10,507
                                                                      -------------------------
                                       Total                          $  198,632     $  224,464
                                                                      =========================
</TABLE>

[a]   The amount shown as "Other"  represents  an equity  investment in a shrimp
      harvesting and farming operation.


                                       20
<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  (income)  (by major
initiative)  for the  three  and six  months  ended  June  30,  2005  and  2004,
respectively, is as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                   Three Months Ended June 30,   Six Months Ended June 30,
                                                                     2005              2004        2005             2004
                                                                   --------          --------    --------         --------
<S>                                                                <C>               <C>         <C>              <C>
Consolidation of abrasives facilities                              $    809          $    317    $    924         $    663
Consolidation of St. Louis manufacturing/distribution facilities        (33)             (279)         48             (102)
Consolidation of administrative functions for CCP                        --                32          21              172
Shutdown of Woods Canada manufacturing                                   --               (60)        (19)           1,042
Other                                                                   164              (119)        339               14
                                                                   --------          --------    --------         --------
Total severance, restructuring and related (income) costs          $    940          $   (109)   $  1,313         $  1,789
                                                                   ========          ========    ========         ========
</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.   The  Lawrence,
Massachusetts,  facility ceased  production in the second quarter of 2005, while
the Pineville, North Carolina, facility is expected to close in early 2006. Each
of these operations will be consolidated into the newly expanded Wrens,  Georgia
facility.  Costs  incurred  in the six  months  ended June 30,  2005  related to
severance  associated with the Lawrence  facility ($0.3 million),  idle facility
costs ($0.2  million),  costs for  demolition  and repair of the Loren  facility
($0.1  million) and various other  consolidation  related costs ($0.3  million).
Costs  incurred in the six months  ended June 30, 2004 related to the closure of
the Pineville  facility ($0.3 million),  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  were for  miscellaneous  costs  for the  termination  of the  Warson  Road
facility lease and the movement of equipment from Hazelwood to Bridgeton, offset
by a credit  related to the  non-cancelable  lease  adjustment  at the Hazelwood
facility.  In the first half of 2004,  a credit of $0.4  million was recorded to
reverse  a  non-cancelable  lease  accrual  based on a change in usage of leased
facility  (Hazelwood,  Missouri) that was previously  impaired and was offset by
costs of $0.2 million  related  primarily  to the movement of equipment  between
facilities.

      Consolidation  of  administrative  functions  for CCP - Katy has  incurred
various  costs  in  2005  and  2004  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 and six months
ended June 30,  2005,  all costs  related  to an  accrual  for idle space at our
Textiles facility in Atlanta.  For the three and six months ended June 30, 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 half 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 half of 2004,  Woods Canada  recorded less
than $0.1 million for additional severance.

            Other - Charges in the first six months 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 units in the U.S. ($0.2
million)  and the U.K.  ($0.1  million).  Costs in the first half of 2004 relate
primarily to the closure of CCP's facility in Canada


                                       21
<PAGE>

and the subsequent consolidation into the Woods Canada facility, and the closure
of CCP's metals facility in Santa Fe Springs, California.

      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                                   1,378             684             241         453
        Reductions                                    (65)            (19)            (46)         --
        Payments                                   (1,773)           (829)           (580)       (364)
        Currency translation and other                 95              (1)             96          --
                                                 --------    ------------    ------------    --------
Restructuring liabilities at June 30, 2005       $  4,089    $        642    $      3,358    $     89
                                                 ========    ============    ============    ========
</TABLE>

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

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

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

      Katy expects to substantially  complete its restructuring program in 2005.
The remaining severance, restructuring and related charges for these initiatives
are  expected  to  be  less  than  $1.0  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                                   1,378           1,378              --
        Reductions                                    (65)            (46)            (19)
        Payments                                   (1,773)         (1,559)           (214)
        Currency translation and other                 95              --              95
                                                 --------    ------------    ------------
Restructuring liabilities at June 30, 2005       $  4,089    $      3,158    $        931
                                                 ========    ============    ============
</TABLE>

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


                                       22
<PAGE>

                                        Maintenance     Electrical
                                          Products       Products
                              Total        Group          Group
                             --------   ------------   ------------
                 2005        $  1,286   $      1,054   $        232
                 2006           1,132            835            297
                 2007             446            275            171
                 2008             412            231            181
                 2009             289            243             46
              Thereafter          524            524             --
                             --------   ------------   ------------
            Total Payments   $  4,089   $      3,162   $        927
                             ========   ============   ============



                                       23
<PAGE>

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

RESULTS OF OPERATIONS

Three Months Ended June 30, 2005 versus Three Months Ended June 30, 2004

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

                                                           ----------    ----------   ----------    ----------
                                                               $         % to Sales       $         % to Sales
                                                           ----------    ----------   ----------    ----------
<S>                                                        <C>                <C>     <C>                <C>
Net sales                                                  $     98.2         100.0   $    100.5         100.0
Cost of goods sold                                               86.4          88.0         87.3          86.8
                                                           ----------    ----------   ----------    ----------
       Gross profit                                              11.8          12.0         13.3          13.2
Selling, general and administrative expenses                     13.9          14.1         14.2          14.2
Stock option expense                                              2.0           2.0           --            --
Severance, restructuring and related charges (income)             0.9           1.0         (0.1)         (0.1)
Gain on sale of assets                                           (0.2)         (0.2)        (0.5)         (0.5)
                                                           ----------    ----------   ----------    ----------
       Operating loss                                            (4.8)         (4.9)        (0.3)         (0.3)
                                                                         ==========                 ==========
Interest expense                                                 (1.4)                      (1.0)
Other, net                                                         --                        0.1
                                                           ----------                 ----------

Loss before (benefit) provision for income taxes                 (6.2)                      (1.2)

(Benefit) provision for income taxes                             (0.1)                       0.1
                                                           ----------                 ----------

Net loss                                                         (6.0)                      (1.3)
Payment-in-kind dividends on convertible preferred stock           --                       (3.5)
                                                           ----------                 ----------

       Net loss attributable to common stockholders        $     (6.0)                $     (4.7)
                                                           ==========                 ==========

Loss per share of common stock - basic and diluted:

Net loss                                                   $    (0.76)                $    (0.16)
Payment-in-kind dividends on convertible preferred stock           --                      (0.44)
                                                           ----------                 ----------

       Net loss attributable to common stockholders        $    (0.76)                $    (0.60)
                                                           ==========                 ==========
</TABLE>

Overview

      Our  consolidated net sales for the three month period ended June 30, 2005
decreased  $2.3 million  compared to the three month period ended June 30, 2004.
The decline in net sales of 2% was  comprised of lower  volumes  [(7%)],  higher
pricing [4%] and favorable  currency  translation [1%]. Gross margins were 12.0%
for the three month period  ended June 30,  2005,  a decrease of 1.2  percentage
points  compared  to the three  month  period  ended June 30,  2004.  Higher raw
material  costs and  incremental  operating  costs  incurred  due to the delayed
consolidation of the abrasives facilities were partially offset by selling price
increases. Selling, general and administrative expense (SG&A) as a percentage of
sales decreased from 14.2% for the second quarter of 2004 to 14.1% in the second
quarter of 2005,  primarily due to cost containment in the Maintenance  Products
Group partially  offset by  non-recurring  corporate  costs.  The operating loss
increased by $4.5 million


                                       24
<PAGE>

to ($4.8)  million,  mostly due to lower sales  volumes,  lower gross  margins ,
higher  non-cash  stock option  expense and higher  severance and  restructuring
costs.

      Overall,  we reported a net loss  attributable  to common  shareholders of
($6.0)  million  [($0.76)  per share] for the three month  period ended June 30,
2005,  versus a net loss  attributable to common  shareholders of ($4.7) million
[($0.60)  per share] in the same  period of 2004.  During the second  quarter of
2004,  we  recorded  the  impact  of  payment-in-kind  dividends  earned  on our
convertible   preferred  stock  of  ($3.5)  million  [($0.44)  per  share].  The
payment-in-kind dividends ended in December 2004.

Net Sales

Maintenance Products Group

      Net sales from the Maintenance Products Group decreased from $69.7 million
during the three month  period ended June 30, 2004 to $63.9  million  during the
three  month  period  ended  June 30,  2005.  Overall,  this  decline  of 8% was
primarily due to lower volumes [(13%)]  partially offset by higher pricing [5%].
Sales volume for the Consumer  Plastics business units in the U.S. and the U.K.,
which sell primarily to mass merchant customers,  was significantly lower due to
our decision to exit certain unprofitable product lines. In addition, volumes at
our U.K. Consumer  Plastics business unit were negatively  impacted by softening
demand  due to a weak  retail  sector  in the U.K.  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
early 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 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,  which took effect  throughout the first
half of 2005,  with the most  significant  increases  in the  domestic  business
units. The implementation of price increases was in response to the accelerating
cost of our primary raw materials,  packaging  materials,  utilities and freight
starting in 2004 and continuing into early 2005.

Electrical Products Group

      The Electrical  Products Group's sales improved from $30.8 million for the
three  month  period  ended June 30,  2004 to $34.3  million for the three month
period ended June 30, 2005.  The sales  improvement  of 12% was a primarily  the
result of increased  volume [7%],  higher  pricing [3%] and  favorable  currency
translation  [2%].  Multiple selling price increases have been implemented since
the  beginning of 2004 at Woods U.S. (and to a lesser extent at Woods Canada) to
offset the  rising  cost of copper  and PVC.  We  continue  to  implement  price
increases;  however  there  can be no  assurance  that  such  increases  will be
accepted.  Woods Canada's pricing was negatively impacted by incremental program
costs  in the  second  quarter  of 2005  necessary  to  retain  business  with a
significant customer. Volume at Woods U.S. benefited principally from the timing
of orders,  which shipped ahead of last year.  Woods Canada  experienced  volume
increases  primarily due to stronger sales of garden  lighting,  cords and multi
outlet/surge  protector  products.  In  addition,  sales  at Woods  Canada  were
favorably  impacted by a stronger  Canadian dollar versus the U.S. dollar in the
second quarter of 2005 as compared to the same period in 2004.


                                       25
<PAGE>

Operating Income

<TABLE>
<CAPTION>
                                                             Three months ended June 30,
                                                        -------------------------------------
                                                               (Amounts in Millions)
Operating income (loss)                                      2005                2004               Change
                                                        -----------------   -----------------   -----------------
                                                                   % of                % of                % of
                                                                   ----                ----                ----
                                                          $       Sales       $       Sales       $       Sales
                                                          -       -----       -       -----       -       -----
<S>                                                     <C>         <C>     <C>         <C>     <C>         <C>
Maintenance Products Group                              $ (0.5)     (0.7)   $ (0.8)     (1.2)   $  0.3       0.5
Electrical Products Group                                  1.2       3.3       2.5       8.2      (1.3)     (4.9)
Unallocated corporate expense                             (2.6)               (2.1)               (0.5)
Stock option expense                                      (2.0)                 --                (2.0)
Severance, restructuring and related income (charges)     (0.9)                0.1                (1.0)
                                                        ------              ------              ------
Operating loss                                          $ (4.8)             $ (0.3)             $ (4.5)
                                                        ======              ======              ======
</TABLE>

Maintenance Products Group

      The Maintenance Products Group's operating loss improved from $0.8 million
(-1.2% of net sales)  during the three  month  period  ended June 30, 2004 to an
operating  loss of $0.5 million  (-0.7% of net sales) for the three month period
ended June 30, 2005. The  improvement  was primarily  attributable  to SG&A cost
containment  and the impact of higher  selling  prices which took effect in 2005
which outpaced the impact of higher raw material costs.  Offsetting  these items
was a decline in the profitability of our domestic  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.  In addition,
the Maintenance  Products Group recorded a gain on the sale of assets during the
three  months  ended  June 30,  2005  primarily  related  to the sale of  excess
equipment at our U.S. plastic molding facilities,  while the gain on the sale of
assets  during  the three  months  ended  June 30,  2004 was for the sale of our
former metals facility in Santa Fe Springs, California.

Electrical Products Group

      The  Electrical  Products  Group's  operating  income  decreased from $2.5
million  (8.2% of net sales) for the three month  period  ended June 30, 2004 to
$1.2 million (3.3% of net sales) for the three month period ended June 30, 2005.
The  decrease  in  profitability  was  principally  the result of selling  price
increases  not quite keeping pace with the  increasing  costs of copper and PVC,
partially offset by stronger volumes. SG&A expenses were up proportionately with
the overall increase in sales.

Corporate

      Corporate  operating  expenses  increased  from $2.1  million in the three
month  period  ended June 30, 2004 to $2.6  million in three month  period ended
June 30, 2005 principally due to  non-recurring  severance costs and search fees
associated with the CEO transition in the second quarter of 2005.

Stock Option Expense

      The non-cash  stock option expense of $2.0 million during the three months
ended June 30, 2005 related to the March 2004 acceleration of vesting of options
that were held by our former CEO at that time.  A  substantial  portion of these
options were forfeited by the former CEO upon his retirement,  however. See Note
1 of the Notes to Condensed Consolidated Financial Statements.

Severance, Restructuring and Related Charges

      Operating  results for the Company  during the three months ended June 30,
2005 and 2004 were  impacted by  severance,  restructuring  and related  charges
(income) of $0.9 million and ($0.1) million, respectively. Charges in 2005


                                       26
<PAGE>

related to severance,  facility  closure costs and inventory and equipment moves
associated with the closure of one of our abrasives  facilities  ($0.8 million);
and severance associated with the reduction in workforce  principally due to the
exit of certain product lines in the U.S. and U.K.  Consumer  Plastics  business
units ($0.1 million).

      Charges in the second quarter of 2004 related to 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  ($0.1  million),   and  costs  incurred  for  the  consolidation  of
administrative  functions for CCP and equipment  removal and occupancy costs for
the Santa Fe Springs,  California  metals  facility  ($0.1  million),  offset by
credits to reverse a non-cancelable  lease accrual based on a change in usage of
a previously impaired leased facility (Hazelwood,  Missouri) ($0.4 million);  to
reverse  a  non-cancelable  lease  accrual  based on a change in usage of leased
facility  that was  previously  impaired  at Woods U.S.  ($0.1  million)  and to
reverse a portion of a severance accrual at Woods Canada related to the December
2003 shutdown of their manufacturing facility ($0.1 million).

Other Items

      Interest  expense  increased by $0.4 million in the second quarter of 2005
compared to the same period of 2004,  primarily  as a result of higher  interest
rates in 2005 and increased  margins over LIBOR pursuant to the Third  Amendment
of our Bank of America  Credit  Agreement  (see Note 5 of the Notes to Condensed
Consolidated Financial Statements).

      The  benefit  for income  taxes for the three  months  ended June 30, 2005
reflects  a current  expense  for state  income  taxes and a foreign  income tax
benefit. The provision for income taxes for the three months ended June 30, 2004
reflects  a current  benefit  for state  income  taxes and a foreign  income tax
provision.  In both 2005 and 2004,  tax  benefits  were not recorded in the U.S.
(for federal and state income  taxes) and for certain  foreign  subsidiaries  on
pre-tax  net  losses as a result of  accumulated  operating  losses in the those
jurisdictions,  as we  concluded  that it was more  likely  than  not that  such
benefits  would not be realized.  We recorded  tax  benefits  for other  foreign
subsidiaries as we concluded that it was more likely than not that such benefits
would be realized.


                                       27
<PAGE>

Six Months Ended June 30, 2005 versus Six Months Ended June 30, 2004

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

                                                           ----------    ----------   ----------    ----------
                                                               $         % to Sales       $         % to Sales
                                                           ----------    ----------   ----------    ----------
<S>                                                        <C>                <C>     <C>                <C>
Net sales                                                  $    193.7         100.0   $    200.4         100.0
Cost of goods sold                                              172.4          89.0        170.5          85.1
                                                           ----------    ----------   ----------    ----------
       Gross profit                                              21.3          11.0         29.9          14.9
Selling, general and administrative expenses                     26.2          13.5         29.0          14.5
Stock option expense                                              2.0           1.0           --            --
Severance, restructuring and related charges                      1.3           0.7          1.8           0.9
Gain of sale of assets                                           (0.2)         (0.1)        (0.5)         (0.3)
                                                           ----------    ----------   ----------    ----------
       Operating loss                                            (8.0)         (4.1)        (0.4)         (0.2)
                                                                         ==========                 ==========
Interest expense                                                 (2.7)                      (1.8)
Other, net                                                         --                       (0.2)
                                                           ----------                 ----------

Loss before provision for income taxes                          (10.7)                      (2.4)

Provision for income taxes                                         --                        0.7
                                                           ----------                 ----------

Net loss                                                        (10.7)                      (3.1)
Payment-in-kind dividends on convertible preferred stock           --                       (6.9)
                                                           ----------                 ----------

       Net loss attributable to common stockholders        $    (10.7)                $    (10.0)
                                                           ==========                 ==========

Loss per share of common stock - basic and diluted:

Net loss                                                   $    (1.35)                $    (0.39)
Payment-in-kind dividends on convertible preferred stock           --                      (0.88)
                                                           ----------                 ----------

       Net loss attributable to common stockholders        $    (1.35)                $    (1.27)
                                                           ==========                 ==========
</TABLE>

Overview

      Our  consolidated  net sales for the six month  period ended June 30, 2005
decreased $6.7 million compared to the six month period ended June 30, 2004. The
decline in net sales of 3% was  comprised  of lower  volumes  [(9%)],  offset by
higher pricing [5%] and favorable currency  translation [1%]. Gross margins were
11.0% for the six month period ended June 30, 2005; a decrease of 3.9 percentage
points compared to the six month period ended June 30, 2004. Higher raw material
costs and incremental  operating costs incurred due to the delayed consolidation
of the abrasives facilities were partially offset by selling price increases and
the favorable impact of restructuring and cost containment. Selling, general and
administrative  expense  (SG&A) as a percentage of sales declined from 14.5% for
the first six months of 2004 to 13.5% in the first six months of 2005, primarily
due to cost  containment  (mostly in the  Electrical  Products  Group) offset by
non-recurring  corporate expenses.  The operating loss increased by $7.7 million
to ($8.0)  million,  mostly due to lower sales volumes,  lower gross margins and
higher non-cash stock option expense.

      Overall,  we reported a net loss  attributable  to common  shareholders of
($10.7)  million  [($1.35)  per share] for the six month  period  ended June 30,
2005, versus a net loss  attributable to common  shareholders of ($10.0) million
[($1.27)  per share] in the same period of 2004.  During the first half of 2004,
we recorded the impact of payment-in-kind dividends


                                       28
<PAGE>

earned on our convertible preferred stock of ($6.9) million [($0.88) per share].
The payment-in-kind dividends ended in December 2004.

Net Sales

Maintenance Products Group

      Net sales  from the  Maintenance  Products  Group  decreased  from  $140.2
million during the six month period ended June 30, 2004 to $125.3 million during
the six month  period  ended June 30,  2005.  Overall,  this  decline of 11% was
primarily due to lower volumes [(15%)] net of higher pricing [4%].  Sales volume
for the Consumer  Plastics  business units in the U.S. and the U.K.,  which sell
primarily  to  mass  merchant  customers,  was  significantly  lower  due to our
decision to exit certain unprofitable product lines. In addition, volumes at our
U.K Consumer Plastics business unit were negatively impacted by softening demand
due to a weak retail sector in the U.K. 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 half of 2005 versus the first half 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.  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 U.S. Consumer Plastics business.

      Higher pricing resulted from the implementation of selling price increases
across the Maintenance  Products Group,  which took effect  throughout the first
half of 2005,  with the most  significant  increases  in the  domestic  business
units. The implementation of price increases was in response to the accelerating
cost of our primary raw materials,  packaging  materials,  utilities and freight
starting in 2004 and continuing into early 2005.

Electrical Products Group

      The Electrical  Products Group's sales improved from $60.2 million for the
six month period  ended June 30, 2004 to $68.4  million for the six month period
ended June 30, 2005.  The sales  improvement  of 14% was primarily the result of
higher pricing [8%],  increased volume [4%] and favorable  currency  translation
[2%].  Multiple selling price increases were implemented  since the beginning of
2004 at Woods U.S. (and to a lesser extent at Woods Canada) to offset the rising
cost of copper and PVC. We continue to implement price increases; however, there
can be no assurance  that such  increases  will be accepted.  Woods Canada's net
pricing was negatively impacted by incremental program costs necessary to retain
business with a significant customer. Volume at Woods U.S. benefited principally
from  increased  promotional  activity  at  one  of its  largest  mass  merchant
retailers  in the first  quarter of 2005 and from the  timing of  orders,  which
shipped ahead of last year.  Sales at Woods Canada were favorably  impacted by a
stronger  Canadian  dollar  versus the U.S.  dollar in the first half of 2005 as
compared to the same period in 2004.


                                       29
<PAGE>

Operating Income

<TABLE>
<CAPTION>
                                                   Six months ended June 30,
                                               ----------------------------------
                                                     (Amounts in Millions)
  Operating income (loss)                            2005              2004                Change
                                               -----------------  ----------------   -----------------
                                                          % of               % of               % of
                                                          ----               ----               ----
                                                 $       Sales      $       Sales      $       Sales
                                                 -       -----      -       -----      -       -----
<S>                                            <C>         <C>    <C>          <C>   <C>         <C>
Maintenance Products Group                     $ (4.5)     (3.6)  $  1.6       1.1   $ (6.1)     (4.7)
Electrical Products Group                         4.1       5.9      4.6       7.6     (0.5)     (1.7)
Unallocated corporate expense                    (4.3)              (4.7)               0.4
Stock option expense                             (2.0)                --               (2.0)
Severance, restructuring and related charges     (1.3)              (1.8)               0.5
                                               ------             ------             ------
Operating loss                                 $ (8.0)            $ (0.3)            $ (7.7)
                                               ======             ======             ======
</TABLE>

Maintenance Products Group

      The Maintenance  Products  Group's  operating  income  decreased from $1.6
million  (1.1% of net sales)  during the six month period ended June 30, 2004 to
an  operating  loss of ($4.5)  million  (-3.6% of net  sales)  for the six month
period ended June 30, 2005.  The decrease was  primarily  attributable  to lower
volumes in the U.S. and U.K. Consumer Plastics and domestic  Abrasives  business
units.  In addition,  higher raw material costs in the first half of 2005 versus
the first half of 2004 were partially  recovered  through higher selling prices.
The impact of higher raw material  costs had the most  pronounced  effect on the
gross margins of our business units which sell plastics  products,  although the
raw material costs appear to have stabilized and we were able to implement price
increases  across most business  units starting in the first quarter of 2005. In
addition, manufacturing throughput was low at our plastics molding facilities in
the U.S. and the U.K. in the first quarter as we reduced  inventory and adjusted
our  production   levels  in  connection  with  our  decision  to  exit  certain
unprofitable  lines of Consumer  Plastics  business.  We continue to  experience
declines 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 half of 2005 was slightly  lower versus the
first half of 2004 due mostly to cost  containment  measures.  In addition,  the
Maintenance  Products Group recorded a gain on the sale of assets during the six
months ended June 30, 2005 primarily  related to the sale of excess equipment at
our U.S. plastic molding facilities, while the gain on the sale of assets during
the six  months  ended  June  30,  2004 was for the  sale of our  former  metals
facility in Santa Fe Springs, California.

Electrical Products Group

      The  Electrical  Products  Group's  operating  income  decreased from $4.6
million (7.6% of net sales) for the six month period ended June 30, 2004 to $4.1
million  (5.9% of net sales) for the six month  period  ended June 30,  2005,  a
decline of 11%. The lower  profitability  was  principally the result of selling
price  increases not quite keeping pace with the increasing  costs of copper and
PVC,  most notably in the second  quarter.  Lower gross  margins were  partially
offset by  stronger  volumes  and lower  SG&A  which was  primarily  due to cost
containment initiatives.

Corporate

      Corporate  operating expenses decreased from $4.7 million in the six month
period  ended June 30, 2004 to $4.3  million in the six month  period ended June
30, 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  offset by  non-recurring  severance  costs and search fees
associated with the CEO transition in the second quarter of 2005.

Stock Option Expense

      The non-cash  stock option  expense of $2.0 million  during the six months
ended June 30, 2005 related to the March 2004 acceleration of vesting of options
that were held by our former CEO at that time.  A  substantial  portion of these
options


                                       30
<PAGE>

were forfeited by the former CEO upon his retirement, however. See Note 1 of the
Notes to Condensed Consolidated Financial Statements.

Severance, Restructuring and Related Charges

      Operating  results  for the Company  during the six months  ended June 30,
2005 and 2004 were negatively  impacted by severance,  restructuring and related
charges of $1.3 million and $1.8 million, respectively.  Charges in 2005 related
to  severance,   facility  closure  costs  and  inventory  and  equipment  moves
associated with the closure of one of our abrasives  facilities  ($0.9 million);
severance associated with the reduction in workforce principally due to the exit
of certain product lines in the U.S. and U.K.  Consumer  Plastics business units
($0.3 million) and charges  aggregating to $0.1 million for miscellaneous  costs
for the  termination  of the Warson  Road  facility  lease and the  movement  of
inventory and equipment from Hazelwood to Bridgeton.

      Charges  in the  first  half of 2004  related  to a  non-cancelable  lease
accrual  associated  with a  sale/leaseback  transaction  and idle capacity as a
result of the shutdown of  manufacturing  at Woods Canada  ($1.0  million);  the
restructuring of the abrasives  business ($0.7 million);  costs incurred for the
consolidation of administrative  functions for CCP ($0.2 million); costs for the
movement of inventory and equipment in connection with the  consolidation of St.
Louis manufacturing and distribution facilities ($0.2 million); and expenses for
the closure of CCP's  facility in Canada and the subsequent  consolidation  into
the Woods  Canada  facility  ($0.1  million);  partially  offset by credits  for
adjustments  to  non-cancelable  leases  based on  changes in the usage of these
leased facilities ($0.4 million).

Other Items

      Interest  expense  increased  by $0.9  million  in the first  half of 2005
versus the same period of 2004,  primarily as a result of higher  interest rates
and increased  margins over LIBOR pursuant to the Third Amendment of our Bank of
America  Credit  Agreement  (see Note 5 of the Notes to  Condensed  Consolidated
Financial   Statements).   In  addition,   higher  average  borrowings  in  2005
(principally  due  to  increased  working  capital  levels  and  poor  financial
performance in the second half of 2004), contributed to the increase. Other, net
for the six months  ended  June 30,  2004  included  the  write-off  of fees and
expenses of $0.4 million associated with a financing which the Company chose not
to pursue,  offset by the  write-off of net  liabilities  related to  previously
divested businesses of $0.1 million.

      The  benefit  for  income  taxes for the six months  ended  June 30,  2005
reflects a net foreign income tax benefit offset by a current  expense for state
income  taxes.  The provision for income taxes for the six months ended June 30,
2004 reflects a current  benefit for state income taxes and a foreign income tax
provision.  In both 2005 and 2004,  tax  benefits  were not recorded in the U.S.
(for federal and state income  taxes) and for certain  foreign  subsidiaries  on
pre-tax  net  losses as a result of  accumulated  operating  losses in the those
jurisdictions,  as we  concluded  that it was more  likely  than  not that  such
benefits  would not be realized.  We recorded  tax  benefits  for other  foreign
subsidiaries as we concluded that it was more likely than not that such benefits
would be realized.

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 for the foreseeable future. As of June 30, 2005, we
had cash and cash  equivalents of $4.1 million versus cash and cash  equivalents
of  $8.5  million  at  December  31,  2004.  Also as of June  30,  2005,  we had
outstanding borrowings of $56.0 million [49% of total capitalization], under the
Bank of America  Credit  Agreement  with unused  borrowing  availability  on the
Revolving  Credit  Facility of $22.6  million.  As of December 31, 2004,  we had
outstanding  borrowings  of  $58.7  million  [46% of total  capitalization].  We
generated $0.5 million of cash flow from operations  during the six months ended
June 30,  2005  versus  the  utilization  of $22.1  million  of cash  flow  from
operations  during the six months ended June 30, 2004.  The  improvement in cash
flow from  operations was primarily  attributable to a reduction of inventory in
the first half of 2005 versus an  inventory  build in the first half of 2004 and
to a lesser extent, lower capital expenditures.


                                       31
<PAGE>

      We expect liquidity to generally stabilize for the remainder of 2005, with
the  exception  of  seasonal  inventory  builds in the third  quarter  offset by
increased  receivable  collections in the fourth quarter (both primarily related
to the Electrical Products Group). Other elements of working capital continue to
be closely managed. Capital expenditures are expected to be higher in the second
half of 2005 versus the first half of 2005, but overall are expected to be lower
than 2004. 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.

      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 June 30,
2005, total outstanding letters of credit were $9.1 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 and 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 September 30
and December 31, 2004,  respectively.  Margins increased another 50 basis points
upon the  effective  date of the  Third  Amendment  (see  below).  Additionally,
margins  on the Term Loan will drop 25 basis  points if the  balance of the Term
Loan is reduced below $10.0 million. Interest accrues at higher margins on prime
rates for swing loans, the amounts of which were nominal at June 30, 2005.


                                       32
<PAGE>

      In the first half 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 half 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 June 30, 2005,  and, to management's  knowledge,  we were
not in default of any  provision  of the Bank of America  Credit  Agreement,  as
amended at June 30, 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 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


                                       33
<PAGE>

      Katy's  obligations as of June 30, 2005 are  summarized  below (amounts in
thousands):

<TABLE>
<CAPTION>
                                                 Due in         Due         Due         Due
                                              less than      in 1-3      in 3-5     after 5
Contractual Cash Obligations          Total      1 year       years       years       years
                                  ---------   ---------   ---------   ---------   ---------
<S>                               <C>         <C>         <C>         <C>         <C>
Revolving credit facility [a]     $  39,547   $      --   $      --   $  39,547   $      --
Term loans                           16,429       2,857       5,714       7,858          --
Interest on debt [b]                 13,394       3,954       6,893       2,547          --
Operating leases [c]                 27,403       7,478      11,415       5,289       3,221
Severance and restructuring [c]       2,697       1,369         700         373         255
SESCO payable to Montenay [d]         2,750       1,100       1,100         550          --
                                  ---------   ---------   ---------   ---------   ---------
Total Contractual Obligations     $ 102,220   $  16,758   $  25,822   $  56,164   $   3,476
                                  =========   =========   =========   =========   =========

<CAPTION>

                                                 Due in         Due         Due         Due
                                              less than      in 1-3      in 3-5     after 5
Other Commercial Commitments          Total      1 year       years       years       years
                                  ---------   ---------   ---------   ---------   ---------
<S>                               <C>         <C>         <C>         <C>         <C>
Commercial letters of credit      $     596   $     596   $      --   $      --   $      --
Stand-by letters of credit            8,506       8,506          --          --          --
Guarantees [e]                       23,670       8,370      15,300          --          --
                                  ---------   ---------   ---------   ---------   ---------
Total Commercial Commitments      $  32,772   $  17,472   $  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 (i) lockbox agreements on Katy's depository bank accounts, and (ii)
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.

[c] Future  non-cancelable  lease  rentals  are  included  in the line  entitled
"Operating   leases,"   which  also   includes   obligations   associated   with
restructuring  activities.  The Condensed Consolidated Balance Sheet at June 30,
2005  and  December  31,  2004,   includes   $3.4  million  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 Condensed Consolidated Financial Statements.  $1.1 million of this
obligation  is classified in the  Condensed  Consolidated  Balance  Sheets as an
Accrued Expense in Current Liabilities, while the remainder is included in Other
Liabilities, recorded on a discounted basis.


                                       34
<PAGE>

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

Cash Flow

Operating Activities

      Cash flow used in operating  activities before changes in operating assets
was $2.5  million  in the  first  half of 2005  versus  cash  flow  provided  by
operating  activities  before changes in operating assets of $4.6 million in the
first  half 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  $3.0 million of cash related to operating
assets and  liabilities  during the six months  ended June 30,  2005 versus cash
used related to operating assets and liabilities of $26.7 million during the six
months ended June 30, 2004.  Our operating  cash flow was favorably  impacted in
the first half of 2005 by a decrease in inventory of $6.6 million, mostly in the
business units in the Maintenance  Products Group which sell plastics  products,
and by lower accounts receivable,  principally  resulting from a decrease in net
sales in the second quarter of 2005 versus the fourth quarter of 2004. Operating
cash  flow  during  the  first  half of 2005 was  negatively  impacted  by lower
accounts  payable (as we limited our purchases from suppliers in connection with
the  aforementioned  reduction  of  inventory)  and  lower  accruals  due to the
settlement of previously recorded restructuring charges.  Operating cash flow in
the first half of 2004 was  negatively  impacted by higher  inventory  and lower
payables and  accruals.  The  inventory  build was due to the early  purchase of
certain  materials in advance of scheduled  supplier price increases,  increased
material  prices  and  planned  builds in  connection  with  facility  closures.
Accounts  payable  were lower as a result of our  decision to take  advantage of
discount  terms offered by certain  vendors while  accruals were impacted by the
settlement of previously recorded restructuring  charges.  During the first half
of 2005,  we were  turning our  inventory at 5.2 times per year versus 4.5 times
per year during the first half of 2004.  Cash of $1.8  million and $3.6  million
was used in the six  months  ended  June 30,  2005 and  2004,  respectively,  to
satisfy   severance,   restructuring   and   related   obligations.   Severance,
restructuring  and related  charges are expected to  substantially  end in 2005,
however,  cash  payments will  continue  through 2011 to satisfy  non-cancelable
lease obligations.  See Note 10 of the Notes to Condensed Consolidated Financial
Statements.

Investing Activities

      Capital expenditures totaled $3.0 million during the six months ended June
30, 2005 as compared to $5.7 million  during the six months ended June 30, 2004.
Capital  expenditures  are  anticipated  to be higher in the second half of 2005
versus the first half of 2005, but overall are expected to be lower in 2005 than
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. On June 28, 2004, CCP sold its vacant metals facility in
Santa Fe Springs, California for net proceeds of $1.9 million.

Financing Activities

      Overall,  debt decreased $2.6 million during the six months ended June 30,
2005 versus an increase of $22.6  million  during the six months  ended June 30,
2004, primarily relating to the changes in working capital during those periods.
Direct  debt costs  totaling  $0.1  million in the first half of 2005  primarily
represents a fee paid to our lenders in connection with the Second Amendment and
$1.3 million in the first half of 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


                                       35
<PAGE>

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 half
of 2005 from the Woods U.S.  business unit,  offset by lower volumes in our U.S.
and  U.K.  Consumer  Plastics  and  domestic  Abrasives  business  units.  Price
increases  were passed along to our Woods U.S.  customers  during 2004 and early
2005 as a result of the rise in copper  prices  since late 2003.  We continue to
implement price increases; however there can be no assurance that such increases
will be accepted.  We do  anticipate  modest  volume  growth from our Woods U.S.
unit. We also expect continued softness in the U.K.,  especially in the consumer
/retail sector.  We have  implemented  price increases for the JanSan  Plastics,
Container  and  Consumer  Plastics  business  units and for our Metal  Truck Box
business  in response to the  increase in raw  material  costs over the past few
years.  However,  in the U.S. and U.K. 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.

      The  continued  shipping and  production  inefficiencies  at our Abrasives
facilities have resulted in higher operating costs. The  consolidation of one of
the two facilities into the Wrens, Georgia facility is nearly complete and while
we may experience  higher  operating  costs in the near term, the  consolidation
will  ultimately  result in improved  profitability  of our Abrasives  business.
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  obtained  equipment  allowing  us to  operate  all  product  lines at this
facility.  These  disruptions to our Abrasives  operations have also resulted in
the loss of certain  customers,  commencing in the second half of 2004. While we
expect  to  recover  some of  these  lost  sales  in the  current  year,  we may
experience  additional  lost  sales in  2005.  We  believe  that  sales  for the
Abrasives  business unit in the second half of 2005 will be approximately  equal
to the sales in the second half of 2004 and the first half of 2005.

      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.  Prices  for resin  decreased  in the  second  quarter  of 2005,  but have
recently returned to historically high levels.  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  U.S.  and Woods  Canada  business  units.  Prices  for  copper  generally
increased from late 2003 and have continued through the present time. Prices for
copper  appear to have  stabilized  in a  historically  high range in the second
quarter of 2005. Prices for aluminum (a raw material used in our Metal Truck Box
business),  corrugated  packaging  material  and  other raw  materials  had also
increased  through  the first  quarter of 2005.  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 continued into the first quarter of 2005. In
2004,  we  passed on about $15  million  of these  higher  costs  through  price
increases.  We announced  additional  price  increases in the first half of 2005
across  almost all business  units.  We continue to implement  price  increases;
however there can be no assurance  that such  increases  will be accepted.  In a
climate of rising raw material  costs  (especially in 2004 and the first half of
2005),  we experienced  difficulty in raising prices to shift these higher costs
to our customers,  particularly  major home  improvement  and mass market retail
outlets.  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 the latter half of 2005 and beyond.


                                       36
<PAGE>

      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 sales growth
opportunities  across our various  business  units. We believe we can accomplish
this  without  having to add  significant  capital  because our  facilities  are
currently under utilized.

      As a percentage of sales, SG&A in the latter half of 2005 should remain in
line with the same period in 2004. SG&A has continually  declined since 2001as a
percentage of sales. 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  and Loren) and
Filters  and  Grillbricks  (Disco)  business  units from  Georgia to  Bridgeton,
Missouri,  the headquarters of CCP. We 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  our
international systems integration plan is nearly complete.

      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 and 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
September  30, 2004 and  December  31,  2004,  respectively.  Margins  increased
another 50 basis  points upon the  effective  date of the Third  Amendment  (see
below). Additionally,  margins on the Term Loan will drop 25 basis points if the
balance of the Term Loan is reduced below $10.0 million

      Given our history of operating losses, along with guidance provided by the
accounting  literature  covering  accounting for income taxes,  we are unable to
conclude  it is more  likely  than not that we will be able to  generate  future
taxable  income  sufficient  to realize the  benefits of domestic  deferred  tax
assets and deferred tax assets of unprofitable foreign subsidiaries.  Therefore,
except for our profitable foreign  subsidiaries,  a full valuation  allowance on
the net deferred  tax asset  position was recorded at June 30, 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.  In the first half of 2005,  the
Canadian  dollar  appears to have  stabilized  against  the U.S.  dollar and the
British Pound Sterling has somewhat weakened against the U.S. dollar in the same
period.  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 current working capital levels to remain constant except for
seasonal  inventory builds during the third quarter of 2005, offset by increased
receivable  collections  in the fourth  quarter of 2005 (both  primarily  in the
Electrical Products Group).  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  (which  is  expected  to  be
substantially  completed  in the third  quarter)  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


                                       37
<PAGE>

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  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.


                                       38
<PAGE>

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:

      -     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.

      -     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.

      -     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.

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

      -     Our inability to execute our systems integration plan.

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

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

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

      -     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 changes in foreign  currency  exchange rates
            related to our foreign operations.

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


                                       39
<PAGE>

      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 June
30, 2005.

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 June 30, 2005 were  indexed  from  short-term  LIBOR.  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. In July, the Chinese Central Bank revalued
the Yuan Renminbi, breaking the link to the U.S. Dollar. We are currently unable
to  determine  the  long-term  effects of  China's  revaluation  on the  foreign
currency exchange rate with the U.S.

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


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<PAGE>

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 our 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 to
ensure that  information  required to be  disclosed by us in the reports that we
file or submit under the Exchange Act is  recorded,  processed,  summarized  and
reported  within the time periods  specified  in the SEC's rules and forms,  and
that  such  information  is  accumulated  and  communicated  to our  management,
including our principal  executive  officer and primary  financial  officer,  as
appropriate, to allow timely decisions regarding required disclosure.

(b) Change in Internal Controls

      There have been no  changes  in Katy's  internal  control  over  financial
reporting  during the quarter ended June 30, 2005 that has materially  affected,
or is  reasonably  likely to  materially  affect  Katy's  internal  control over
financial reporting.


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<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 its  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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      The Annual Meeting of  Stockholders of Katy  Industries,  Inc. was held at
Katy  Industries'  Corporate  Headquarters,  765 Straits  Turnpike,  Suite 2000,
Middlebury,  Connecticut,  at 10:00 AM, on May 26, 2005.  Stockholders  voted on
three  proposals,  summarized  below  with the  accompanying  number of votes in
favor, opposed, or abstained.

PROPOSAL No. 1: Election of Directors

CLASS II DIRECTORS:
Name                           Votes For            Votes Withheld
----                           ---------            --------------
Christopher W. Anderson        6,722,877            783,808
William F. Andrews             6,718,604            788,081
Samuel P. Frieder              6,723,077            783,608
James A. Kohlberg              6,732,881            773,804
Christopher Lacovara           6,723,077            783,608

The required vote for directors was the  affirmative  vote of a plurality of the
votes  cast at the  annual  meeting.  As a result of the vote,  each of the five
nominees for Class II directors was elected. The specified term of the Company's
Class I directors,  Robert M. Baratta,  Daniel B.  Carroll,  Wallace E. Carroll,
Jr., and Anthony T. Castor III, is through the Company's 2006 Annual Meeting.

PROPOSAL  No. 2: To ratify the  selection of  PricewaterhouseCoopers  LLP as the
independent  public  accountants  of Katy for the fiscal year ended December 31,
2005.

Votes For                      Votes Against        Votes Abstained
---------                      -------------        ---------------
7,485,116                      9,269                12,300

The required vote to ratify the  appointment of  PricewaterhouseCoopers  LLP was
the majority of Katy's outstanding common stock present,  in person or by proxy,
at  the  annual   meeting.   As  a  result  of  the  vote,   the   selection  of
PricewaterhouseCoopers LLP was ratified.

PROPOSAL  No. 3: To  consider  and vote upon a  stockholder  proposal  regarding
Katy's Stockholder Rights Agreement:

Votes For                      Votes Against        Votes Abstained
---------                      -------------        ---------------
2,728,694                      3,385,058            9,392

The required vote for the approval of the stockholder  proposal was the majority
of Katy's outstanding common stock present, in person or by proxy, at the annual
meeting. There were present in person or by proxy at the annual meeting


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<PAGE>

7,506,685 shares of common stock, a majority of which was 3,753,343 shares. As a
result of the vote, the stockholder proposal was not approved.

Item 5. OTHER INFORMATION

Entry into Material Definitive Agreement

      We incorporate by reference the disclosure contained in Item 5.02 of our
Current Report on Form 8-K filed with the SEC on May 31, 2005 and Item 5.02 of
our Current Report on Form 8-K/A filed with the SEC on August 15, 2005, whereby
we disclosed that effective June 1, 2005, we entered into an employment
agreement with Anthony T. Castor, III to serve as our President and Chief
Executive Officer, which provides for a base salary of $525,000 with a target
incentive bonus of 70% of his base salary. For 2005 only, one half of Mr.
Castor's target incentive bonus will be guaranteed. On July 15, 2005, pursuant
to his employment agreement, Mr. Castor was also granted 750,000 options to
purchase shares of our common stock with an exercise price of $2.75 per share,
which vest in three annual installments on the anniversary of the effective date
of his employment agreement and have a term of 10 years. Mr. Castor will be
entitled to additional options to purchase common stock equal to 5% of new
common shares issued in connection with a conversion of our 15% convertible
preferred stock to common stock by the holder. These additional options will
have an exercise price equal to the current market price of the common stock
price at the time the 15% convertible preferred stock is converted by the
holder. In addition, Mr. Castor is entitled to be covered by a company-matched
non-qualified savings plan.

      On August 8, 2005, the Board of Directors approved the Katy Industries,
Inc. 2005 Chief Executive Officer's Plan in order to provide the grant of
750,000 options to Mr. Castor.

Item 6. EXHIBITS

      10.1  Agreement effective as of June 1, 2005 between Anthony T. Castor III
            and the Company, filed herewith.

      10.2  Fourth  Amendment to Amended and Restated Loan Agreement dated as of
            June 8, 2005 with Fleet Capital Corporation, filed herewith.

      10.3  Fifth  Amendment to Amended and Restated Loan Agreement  dated as of
            August 4, 2005 with Fleet Capital Corporation, filed herewith.

      10.4  Katy  Industries,  Inc. 2005 Chief Executive  Officer's Plan,  filed
            herewith.

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

      31.2  Certification  of Chief  Financial  Officer  pursuant to  Securities
            Exchange Act Rule 13a-14,  as adopted pursuant to Section 302 of the
            Sarbanes-Oxley Act of 2002.

      32.1  Certification  of Chief  Executive  Officer  pursuant  to 18  U.S.C.
            Section   1350,   as  adopted   pursuant   to  Section  906  of  the
            Sarbanes-Oxley Act of 2002.

      32.2  Certification  of Chief  Financial  Officer  pursuant  to 18  U.S.C.
            Section   1350,   as  adopted   pursuant   to  Section  906  of  the
            Sarbanes-Oxley Act of 2002


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<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: August 15, 2005               By  /s/ Anthony T. Castor III
                                        -------------------------
                                        Anthony T. Castor III
                                        President and Chief Executive Officer


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


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