SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q


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

For the quarterly period June 30, 2005
                         -------------

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


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


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

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


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

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

                           Yes                           No X
                              ---                          ---

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

Number of shares of common stock outstanding at March 31, 2006: 10,000,000





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

                                      INDEX
                                     -------


                                                                           Page
                                                                          number

PART I.  FINANCIAL INFORMATION

  Item 1.  Financial Statements

            Consolidated Balance Sheets - December 31, 2004;
             and June 30, 2005 (Unaudited)                                  3-4

            Consolidated Statements of Operations - Three months
             and six months ended June 30, 2004 and 2005 (Unaudited)          5

            Consolidated Statements of Cash Flows - Six months
             ended June 30, 2004 and 2005 (Unaudited)                         6

            Consolidated Statement of Stockholders' Equity
             (Deficit) - Six months ended June 30, 2005 (Unaudited)           7

            Notes to Consolidated Financial Statements (Unaudited)         8-26

  Item 2.   Management's Discussion and Analysis of Financial
             Condition and Results of Operations                          27-39

  Item 4.   Controls and Procedures                                       40-41


PART II. OTHER INFORMATION

  Item 1.   Legal Proceedings                                                42

  Item 6.   Exhibits                                                         42




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

                           CONSOLIDATED BALANCE SHEETS

                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                               December 31,          June 30,
                        ASSETS                                     2004                2005
                                                               ------------        -----------
                                                                (Restated)

 Current assets:
<S>                                                              <C>                <C>
   Notes and accounts receivable                                 $ 26,729           $ 36,587
   Inventories                                                     53,017             50,286
   Restricted investments                                           5,373              5,407
   Prepaid expenses and other                                       2,017              2,080
                                                                 --------           --------


      Total current assets                                         87,136             94,360
                                                                 --------           --------

 Property, plant and equipment                                    369,036            371,913
 Less accumulated depreciation                                    275,003            281,412
                                                                 --------           --------

      Net property, plant and equipment                            94,033             90,501
                                                                 --------           --------

 Other assets:
   Restricted investments                                           5,965              6,226
   Prepaid pension cost                                           133,443            139,892
   Deferred financing costs                                         1,226                894
   Goodwill                                                           752                752
   Other                                                              727                614
                                                                 --------           --------

      Total other assets                                          142,113            148,378
                                                                 --------           --------

                                                                 $323,282           $333,239
                                                                 ========           ========
</TABLE>




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

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                               December 31,          June 30,
  LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                   2004                2005
                                                               ------------        -----------
                                                                (Restated)


 Current liabilities not subject to compromise:
   Notes payable and current maturities of
<S>                                                              <C>                <C>
     long-term debt                                              $ 51,640           $ 65,837
   Accounts payable                                                 3,801                887
   Accounts payable to affiliates                                     821              1,042
   Other accrued liabilities                                       18,964             18,450
                                                                 --------           --------

       Total current liabilities not subject
        to compromise                                              75,226             86,216
                                                                 --------           --------

 Noncurrent liabilities not subject to compromise:
   Long-term debt                                                  14,345             13,659
   Accrued OPEB cost                                               13,478             19,239
   Other                                                              988                118
                                                                 --------           --------

       Total noncurrent liabilities not subject
        to compromise                                              28,811             33,016
                                                                 --------           --------

 Liabilities subject to compromise                                212,346            212,043
                                                                 --------           --------

 Redeemable Series A preferred stock                                2,112              2,112
                                                                 --------           --------

 Stockholders' equity (deficit):
   Common stock                                                    10,798             10,798
   Additional paid-in capital                                      41,225             41,225
   Accumulated deficit                                            (47,224)           (52,159)
   Treasury stock, at cost                                            (12)               (12)
                                                                 --------           --------

       Total stockholders' equity (deficit)                         4,787               (148)
                                                                 --------           --------

                                                                 $323,282           $333,239
                                                                 ========           ========
</TABLE>




Commitments and contingencies (Notes 11 and 12).

          See accompanying notes to consolidated financial statements.




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

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                      (In thousands, except per share data)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                     Three months ended        Six months ended
                                                          June 30,                 June 30,
                                                     ------------------        -----------------
                                                      2004        2005          2004       2005
                                                     ------      ------        ------     ------

<S>                                                 <C>         <C>           <C>        <C>
 Net sales                                          $101,827    $ 88,992      $169,004   $178,529
 Cost of goods sold                                   83,118      87,034       151,728    171,516
                                                    --------    --------      --------   --------
   Gross margin                                       18,709       1,958        17,276      7,013
                                                    --------    --------      --------   --------

 Selling expense                                       1,451       1,582         2,709      3,017
 General and administrative
  expense                                              2,718       2,706         5,424      5,410
 Defined benefit pension credit                       (1,500)     (3,224)       (3,000)    (6,449)
                                                    --------    --------      --------   --------

                                                       2,669       1,064         5,133      1,978
                                                    --------    --------      --------   --------

 Operating income                                     16,040         894        12,143      5,035
                                                    --------    --------      --------   --------

 General corporate income
  (expense):
   Corporate expense                                    (632)       (895)       (1,505)    (2,191)
   Interest expense                                     (961)       (919)       (2,025)    (1,776)
   Interest income                                        22          47            32         82
   Other income (expense), net                           (96)         16            17        104
                                                    --------    --------      --------   --------

                                                      (1,667)     (1,751)       (3,481)    (3,781)
                                                    --------    --------      --------   --------

       Income (loss) before
        income taxes and
        reorganization costs                          14,373        (857)        8,662      1,254

 Reorganization costs                                  3,092       2,687         5,019      5,981
                                                    --------    --------      --------   --------

   Income (loss) before income
    taxes                                             11,281      (3,544)        3,643     (4,727)

 Provision for income taxes                              288         115           288        208
                                                    --------    --------      --------   --------

       Net income (loss)                              10,993      (3,659)        3,355     (4,935)

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

 Net income (loss) available
  for common shares                                 $ 10,993    $ (3,659)     $  2,132   $ (4,935)
                                                    ========    ========      ========   ========

 Basic income (loss) per share
  available for common shares                       $   1.09       $(.36)     $    .21   $   (.49)
                                                    ========    ========      ========   ========

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

 Diluted income (loss) per share
  available for common shares                       $    .39    $   (.36)     $    .12   $   (.49)
                                                    ========    ========      ========   ========

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

          See accompanying notes to consolidated financial statements.


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

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                          Six months ended
                                                                              June 30,
                                                                       ----------------------
                                                                        2004            2005
                                                                        ----            ----

 Cash flows from operating activities:
<S>                                                                   <C>             <C>
   Net income (loss)                                                  $  3,355        $ (4,935)
   Depreciation and amortization                                         7,955           7,889
   Amortization of deferred financing costs                                567             347
   Non-cash defined benefit pension credit                              (3,000)         (6,449)
   Non-cash OPEB expense                                                 8,850           5,762
   Reorganization costs accrued                                          5,019           5,981
   Reorganization costs paid                                            (1,930)         (5,176)
   Other, net                                                               48             116
   Change in assets and liabilities:
     Notes and accounts receivable                                     (21,265)         (9,948)
     Inventories                                                       (15,492)          2,731
     Accounts payable                                                    9,101          (2,693)
     Other, net                                                          4,546          (2,518)
                                                                      --------        --------

       Net cash used by operating activities                            (2,246)         (8,893)
                                                                      --------        --------

 Cash flows from investing activities:
   Capital expenditures                                                   (685)         (4,551)
   Collection of notes receivable                                           75              75
   Restricted investments                                               (7,677)           (296)
   Other, net                                                               62             168
                                                                      --------        --------

       Net cash used by investing activities                            (8,225)         (4,604)
                                                                      --------        --------

 Cash flows from financing activities:
   Revolving credit facilities, net                                     (3,635)         14,784
   Other notes payable and long-term debt:
     Additions                                                          15,819              47
     Principal payments                                                 (1,188)         (1,319)
   Deferred financing costs paid                                          (525)            (15)
                                                                      --------        --------

       Net cash provided by financing activities                        10,471          13,497
                                                                      --------        --------

 Net change in cash and cash equivalents                                  -               -

 Cash and cash equivalents, beginning of period                           -               -
                                                                      --------        --------

 Cash and cash equivalents, end of period                             $   -            $  -
                                                                      ========        ========

 Supplemental disclosures:
   Cash paid for:
     Interest, net of amount capitalized                              $  1,112         $ 1,440
     Income taxes, net                                                    -                673
</TABLE>


          See accompanying notes to consolidated financial statements.


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

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

                         Six months ended June 30, 2005
                                 (In thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                       Additional
                                             Common      paid-in       Accumulated     Treasury
                                             stock       capital         deficit         stock        Total
                                             -------   -----------     -----------     ---------      ------

<S>                 <C> <C>                  <C>         <C>            <C>              <C>          <C>
 Balance - December 31, 2004                 $10,798     $41,225        $(47,224)        $(12)        $4,787

 Net loss                                       -           -             (4,935)           -         (4,935)
                                             -------     -------        --------         ----         ------

 Balance - June 30, 2005                     $10,798     $41,225        $(52,159)        $(12)        $ (148)
                                             =======     =======        ========         ====         ======
</TABLE>



          See accompanying notes to consolidated financial statements.




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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Note 1 - Restatement, organization and basis of presentation:

Restatement.

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

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

     The following table shows (i) selected  consolidated  financial  statements
data as of December 31, 2004, as previously  reported,  (ii) adjustments to such
consolidated  financial statement data to reflect the effect of this restatement
and (iii) such consolidated financial statement data, as restated.

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

                                                                      December 31, 2004
                                                   -------------------------------------------------
                                                    Previously
                                                     Reported           Adjustments      As restated
                                                    ----------          -----------      -----------

Selected balance sheet items:

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

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

Total current liabilities                            $ 75,226            $   -              $ 75,226
                                                     ========            ========           ========

Organization and basis of presentation.
</TABLE>

     The consolidated balance sheet of Keystone  Consolidated  Industries,  Inc.
("Keystone"  or the  "Company") at December 31, 2004 has been condensed from the
Company's audited consolidated financial statements at that date included in the
Company's  2005 Form 10-K. The  consolidated  balance sheet at June 30, 2005 and
the consolidated statements of operations and cash flows for the interim periods
ended  June  30,  2004  and  2005,  and the  consolidated  statement  of  common
stockholders' deficit for the interim period ended June 30, 2005, have each been
prepared by the Company,  without audit, in accordance with GAAP. In the opinion
of management, all adjustments,  consisting only of normal recurring adjustments
necessary to present  fairly the  consolidated  financial  position,  results of
operations and cash flows, have been made. However, it should be understood that
accounting  measurements  at interim dates may be less precise than at year end.
The results of operations for the interim periods are not necessarily indicative
of the operating results for a full year or of future operations.

     Certain information  normally included in financial  statements prepared in
accordance  with GAAP has been  condensed  or omitted,  and  certain  prior year
amounts have been reclassified to conform to the current year presentation.  The
accompanying  consolidated  financial  statements  should be read in conjunction
with the  consolidated  financial  statements  included in the Company's  Annual
Report on Form 10-K for the year ended December 31, 2005 (the "Annual Report").

     At June 30,  2005,  Contran  Corporation  ("Contran")  and  other  entities
related to Mr. Harold C. Simmons,  beneficially  owned  approximately 50% of the
outstanding  common  stock  of  the  Company.  Substantially  all  of  Contran's
outstanding  voting  stock is held by  trusts  established  for the  benefit  of
certain children and grandchildren of Mr. Simmons,  of which Mr. Simmons is sole
trustee,  or is held by Mr. Simmons or persons or other entities  related to Mr.
Simmons.  Keystone may be deemed to be controlled by Contran and Mr. Simmons. At
June 30,  2005,  Contran also owned  54,956  shares of the 71,899  shares of the
Company's outstanding  Redeemable Series A Preferred Stock. Each share of Series
A Preferred Stock is convertible,  at the option of the holder,  into 250 shares
of the Company's common stock (equivalent to a $4.00 per share exchange rate).

     The  accompanying   financial  statements  have  been  prepared  under  the
assumption the Company will continue to operate on a going concern basis,  which
contemplates continuity of operations,  realization of assets and liquidation of
liabilities  in the ordinary  course of business and do not reflect  adjustments
that might result if Keystone is unable to continue as a going concern. However,
on February 26, 2004, Keystone and five of its direct and indirect  subsidiaries
filed for voluntary  protection under Chapter 11 of the Federal Bankruptcy Code.
Keystone and its subsidiaries filed their petitions in the U.S. Bankruptcy Court
for the Eastern  District of Wisconsin in Milwaukee  (the  "Court").  Keystone's
amended plan of reorganization was accepted by the impacted  constitutencies and
confirmed by the Court on August 10, 2005. The Company  emerged from  bankruptcy
protection on August 31, 2005. See Note 2.

     Under  Chapter 11  proceedings,  actions by creditors to collect  claims in
existence at the filing date ("Pre-petition Claims") are stayed, absent specific
authorization  by the Court to pay such claims,  while the Company  continues to
manage the business as a  debtor-in-possession.  Keystone received approval from
the Court to pay certain of its Pre-petition Claims including employee wages and
certain employee benefits.

Note 2 - Bankruptcy

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

     Under Chapter 11 proceedings,  actions by creditors to collect Pre-petition
Claims in existence at the filing date are stayed, absent specific authorization
from the Court to pay such claims  while the Company  manages the  business as a
debtor-in-possession.

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

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

     In addition,  Keystone has obtained a five-year $80 million  secured credit
facility  from Wachovia  Capital  Finance  (Central).  Proceeds from this credit
facility  were  used  to  extinguish  Keystone's  existing  Debtor-In-Possession
("DIP")  credit  facilities  and to  provide  working  capital  for  reorganized
Keystone.  Proceeds from this credit facility were used to extinguish Keystone's
existing  DIP credit  facilities,  the EWP Term Loan,  the EWP  Revolver  and to
provide working capital for reorganized  Keystone.  The facility includes a term
loan  in  the  amount  of up to  $25.0  million,  subject  to a  borrowing  base
calculation  based  on the  market  value of the  Company's  real  property  and
equipment.  To the extent  there is  sufficient  borrowing  base,  the term loan
portion of this credit  facility can be reloaded in the amount of $10.0 million.
The  portion  of the  credit  facility  in excess of the term  loan  balance  is
available to the Company as a revolving  credit facility  subject to a borrowing
base calculation based on eligible receivables and inventory balances.  Interest
rates on the  credit  facility  range from the prime rate to the prime rate plus
..5%  depending  on  Keystone's  excess  availability,  as  defined in the credit
agreement.  The facility also provides for a LIBOR  interest rate option.  Under
the terms of the credit  facility,  the Company is required to annually pay down
the term loan  portion of the facility in the amount of 25% of excess cash flow,
as defined in the agreement, subject to a $2.0 million annual and a $5.0 million
aggregate limit.  The facility also includes  performance  covenants  related to
minimum levels of cash flow and fixed charge coverage  ratio.  Keystone paid the
lender  approximately  $400,000 of  diligence,  commitment  and closing  fees in
connection with this facility.

     At June 30, 2005,  the net assets of the one  subsidiary of Keystone  which
was  not  party  to  the  bankruptcy  proceeding,   included  in  the  Company's
consolidated net assets, was approximately $16.8 million,  consisting of current
assets  of  $25.4  million,   noncurrent  assets  (primarily  net  property  and
equipment) of $5.9 million,  current liabilities of $11.0 million and noncurrent
liabilities (primarily long-term debt) of $3.5 million.

Note 3 - Business Segment Information:

     The  Company's  operating  segments are organized  along its  manufacturing
facilities and include three  reportable  segments:  (i) Keystone Steel and Wire
("KSW")  which  manufacturers  and sells wire rod,  wire and wire  products  for
agricultural,   industrial,   construction,   commercial,   original   equipment
manufacturers and retail consumer markets, (ii) Engineered Wire Products ("EWP")
which  manufacturers and sells welded wire  reinforcement in both roll and sheet
form that is utilized in concrete construction products including pipe, pre-cast
boxes and  applications  for use in  roadways,  buildings  and bridges and (iii)
Sherman Wire ("Sherman")  which  manufacturers  and sells wire and wire products
for  agricultural,  industrial,  construction,  commercial,  original  equipment
manufacturers and retail consumer markets.

Business Segment             Principal entities             Location
----------------             ------------------             --------

Keystone Steel & Wire        Keystone Steel & Wire          Peoria, Illinois

Engineered Wire Products     Engineered Wire Products       Upper Sandusky, Ohio

Sherman                      Sherman Wire                   Sherman, Texas


<TABLE>
<CAPTION>

                                                                                                GAAP
                                                                                            Adjustments,
                                                                                             Corporate
                                                                                               Items
                                                                                Segment          and
                                          KSW           EWP        Sherman       Total       Eliminations      Total
                                          ---           ---        -------      -------      ------------      -----
                                                                        (In thousands)

Three months ended June 30, 2004:

<S>                                     <C>           <C>          <C>          <C>            <C>            <C>
  Third party net sales                 $ 84,203      $15,949      $ 1,651      $101,803       $     24       $101,827
  Intercompany sales                      18,982         -           2,787        21,769        (21,769)          -
                                        --------      -------      -------      --------       --------       --------

                                        $103,185      $15,949      $ 4,438      $123,572       $(21,745)      $101,827
                                        ========      =======      =======      ========       ========       ========

Operating income                        $ 10,295      $ 3,333      $    14      $ 13,642       $  2,398       $ 16,040
                                        ========      =======      =======      ========       ========       ========

Three months ended June 30, 2005:

  Third party net sales                 $ 70,021      $17,755      $ 1,216      $ 88,992       $   -          $ 88,992
  Intercompany sales                      11,866          -           2,897        14,763        (14,763)          -
                                        --------      -------      -------      --------       --------       --------

                                        $ 81,887      $17,755      $ 4,113      $103,755       $(14,763)      $ 88,992
                                        ========      =======      =======      ========       ========       ========

Operating income (loss)                 $(9,119)     $ 2,992       $  (381)     $ (6,508)      $  7,402       $    894
                                        ========      =======      =======      ========       ========       ========

Six months ended June 30, 2004:

  Third party net sales                 $139,431      $27,039      $ 2,490      $168,960       $     44       $169,004
  Intercompany sales                      24,380         -           5,007        29,387        (29,387)          -
                                        --------      -------      -------      --------       --------       --------

                                        $163,811      $27,039      $ 7,497      $198,347       $(29,343)      $169,004
                                        ========      =======      =======      ========       ========       ========

Operating income (loss)                 $  3,307      $ 4,601      $  (561)     $  7,347       $  4,796       $ 12,143
                                        ========      =======      =======      ========       ========       ========

Six months ended June 30, 2005:

  Third party net sales                 $145,895      $29,806      $ 2,828      $178,529       $   -          $178,529
  Intercompany sales                      25,186         -           6,338        31,524        (31,524)          -
                                        --------      -------      -------      --------       --------       --------

                                        $171,081      $29,806      $ 9,166      $210,053       $(31,524)      $178,529
                                        ========      =======      =======      ========       ========       ========

Operating income (loss)                 $(10,571)     $ 4,631      $  (550)     $ (6,490)      $ 11,525       $  5,035
                                        ========      =======      =======      ========       ========       ========
</TABLE>

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

                                                     Three months ended        Six months ended
                                                          June 30,                 June 30,
                                                     ------------------        -----------------
                                                      2004        2005          2004       2005
                                                     ------      ------        ------     ------

<S>                                                 <C>         <C>           <C>        <C>
Operating income                                    $ 16,040    $    894      $ 12,143   $  5,035
General corporate items:
  Interest income                                         22          47            32         82
  Other income (expense)                                 (96)         16            17        104
  Corporate expense                                     (632)       (895)       (1,505)    (2,191)
  Interest expense                                      (961)       (919)       (2,025)    (1,776)
                                                    --------    --------      --------   --------

  Income (loss) before income
   taxes and reorganization costs                   $ 14,373    $   (857)     $  8,662   $  1,254
                                                    ========    ========      ========   ========
</TABLE>




Note 4 - Inventories:
<TABLE>
<CAPTION>

                                                              December 31,         June 30,
                                                                  2004               2005
                                                              ------------        ----------
                                                                       (In thousands)

 Steel and wire products:
<S>                                                             <C>                <C>
   Raw materials                                                $15,142            $13,315
   Work in process                                               21,305             16,694
   Finished goods                                                28,941             27,703
   Supplies                                                      14,844             16,510
                                                                -------            -------
                                                                 80,232             74,222
   Less LIFO reserve                                             27,215             23,936
                                                                -------            -------
                                                                $53,017            $50,286
                                                                =======            =======
</TABLE>


Note 5 - Notes payable and long-term debt:
<TABLE>
<CAPTION>

                                                              December 31,         June 30,
                                                                  2004               2005
                                                              ------------        ----------
                                                               (Restated)
                                                                       (In thousands)

 DIP facilities:
<S>                                                             <C>                <C>
   Congress                                                     $15,108            $26,649
   EWP                                                            5,000              5,000
 EWP revolving credit facility                                    1,989              4,631
 8% Notes                                                        28,116             28,116
 Term loans:
   County                                                        10,000             10,000
   EWP                                                            5,513              4,838
   Other                                                            259                262
                                                                -------            -------
                                                                 65,985             79,496
   Less current maturities                                       51,640             65,837
                                                                -------            -------

                                                                $14,345            $13,659
                                                                =======            =======
</TABLE>

     The indenture  governing  Keystone's 8% Notes  provides the holders of such
Notes with the right to  accelerate  the maturity of the Notes in the event of a
default by Keystone  resulting in an  acceleration of the maturity of any of the
Company's other secured debt. As such, the 8% Notes were classified as a current
liability at December 31, 2004 and June 30, 2005.

     The Company has determined  there is  insufficient  collateral to cover the
interest portion of scheduled  payments on its  pre-petition  unsecured debt. As
such, the Company  discontinued  accruing interest on its unsecured 6% Notes and
unsecured 9 5/8% Notes as of February  26, 2004,  the filing  date.  Contractual
interest on those obligations  during the second quarter and first six months of
2005 was approximately $313,000 and $624,000, respectively.

Note 6 - Series A preferred stock:

     The Company discontinued accruing dividends on its Series A Preferred Stock
upon filing for Chapter 11 on February 26, 2004.

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

Note 7 - Income taxes:

     Summarized  below are (i) the differences  between the provision for income
taxes and the  amounts  that would be  expected  by  applying  the U.S.  federal
statutory  income tax rate of 35% and (ii) the  components of the  comprehensive
provision for income taxes.
<TABLE>
<CAPTION>

                                                   Six months ended
                                                         June 30,
                                                  --------------------
                                                  2004            2005
                                                  ----            ----
                                                    (In thousands)

Expected tax provision (benefit),
<S>                                             <C>             <C>
  at statutory rate                             $ 1,275         $(1,654)
U. S. state income taxes, net                       237             102
Deferred tax asset valuation allowance           (2,998)            (56)
Capitalize reorganization costs                   1,756           1,804
Other, net                                           18              12
                                                -------         -------

Provision for income taxes                      $   288         $   208
                                                =======         =======

Comprehensive provision for income taxes:
  Currently payable:
    U.S. federal                                $   191         $    86
    U.S. state                                       97             122
                                                -------         -------
      Net currently payable                         288             208

  Deferred income taxes, net                       -               -
                                                -------         -------

                                                $   288         $   208
                                                =======         =======
</TABLE>

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

     At  June  30,  2005,  considering  all  factors  believed  to be  relevant,
including the Company's recent operating results,  its expected future near-term
productivity  rates;  cost of raw  materials,  electricity,  labor and  employee
benefits,  environmental  remediation,  and retiree medical  coverage;  interest
rates;  product mix; sales volumes and selling prices; and the fact that accrued
OPEB expenses will become deductible over an extended period of time and require
the  Company to  generate  significant  amounts of future  taxable  income,  the
Company  believes  its  gross  deferred  tax  assets do not  currently  meet the
"more-likely-than-not"  realizability  test. As such, at December 31, 2004,  the
Company had provided a deferred tax asset valuation  allowance of  approximately
$30.3 million.  As a result of the deferred tax asset valuation  allowance,  the
Company does not anticipate recognizing tax expense associated with its expected
pre-tax income during 2005 will be  appropriate.  Accordingly,  during the first
six months of 2005,  the Company  decreased  the  deferred  tax asset  valuation
allowance  by  approximately  $56,000.  Keystone  will  continue  to review  the
recoverability  of its deferred tax assets,  and based on such periodic reviews,
Keystone  could  recognize a change in the  valuation  allowance  related to its
deferred tax assets in the future.


<TABLE>
<CAPTION>

Note 8 - Other accrued liabilities:


                                              December 31,      June 30,
                                                  2004            2005
                                              ------------     ----------
                                                     (In thousands)
Current:
<S>                                             <C>             <C>
  Employee benefits                             $12,019         $ 9,434
  Reorganization costs                            2,883           3,688
  Self insurance                                  1,064           1,689
  Income taxes                                    1,405           1,036
  Legal and professional                            358           1,011
  Other                                           1,235           1,592
                                                -------         -------

                                                $18,964         $18,450
                                                =======         =======
Noncurrent:
  Workers compensation payments                 $   988         $   118
                                                =======         =======
</TABLE>

Note 9 - Liabilities subject to compromise
<TABLE>
<CAPTION>

                                              December 31,      June 30,
                                                  2004            2005
                                              ------------     ----------
                                                     (In thousands)

<S>                                            <C>              <C>
Accrued OPEB cost                              $123,425         $123,425
Environmental                                    19,432           19,386
6% Notes                                         16,031           16,031
Accrued preferred stock dividends                11,846           11,846
Accounts payable                                 10,776           10,776
Deferred vendor payments                         10,518           10,518
9 5/8% Notes                                      6,150            6,150
Self insurance                                    4,549            4,549
Accounts payable to affiliates                    3,027            3,027
Workers compensation                              1,847            1,847
Accrued and deferred interest                     1,237            1,237
Legal and professional                              726              547
Disposition of former facilities                    665              665
Other                                             2,117            2,039
                                               --------         --------

                                               $212,346         $212,043
                                                =======         =======
</TABLE>




Note 10 - Employee benefit plans:

     Defined  benefit  plans.  The  components of net periodic  defined  benefit
pension credit are presented in the table below.
<TABLE>
<CAPTION>

                                                     Three months ended        Six months ended
                                                          June 30,                 June 30,
                                                     ------------------        -----------------
                                                      2004        2005          2004       2005
                                                     ------      ------        ------     ------
                                                                    (In thousands)

<S>                                                 <C>         <C>           <C>        <C>
Service cost                                        $    875    $    938      $  1,750   $  1,875
Interest cost                                          5,439       5,434        10,878     10,868
Expected return on plan assets                        (9,373)    (10,733)      (18,747)   (21,467)
Amortization of unrecognized:
  Prior service cost                                     221         221           441        441
  Actuarial losses                                     1,338         915         2,678      1,834
                                                    --------    --------      --------   --------

                                                    $ (1,500)   $ (3,225)     $ (3,000)  $(6,449)
                                                    ========    ========      ========   ========
</TABLE>

     Postretirement  benfits other than pensions ("OPEB"). The components of net
periodic OPEB cost are presented in the table below.
<TABLE>
<CAPTION>

                                                     Three months ended        Six months ended
                                                          June 30,                 June 30,
                                                     ------------------        -----------------
                                                      2004        2005          2004       2005
                                                     ------      ------        ------     ------
                                                                    (In thousands)

<S>                                                 <C>         <C>           <C>        <C>
Service cost                                        $    725    $    740      $  1,450   $  1,480
Interest cost                                          3,496       3,026         6,991      6,052
Amortization of unrecognized:
  Prior service cost                                     (86)        (86)         (172)      (172)
  Prior service cost due to
   plan amendment                                       (625)       (710)       (1,250)    (1,420)
  Actuarial losses                                     1,015       1,397         2,031      2,794
Settlement loss                                        1,250        -            2,500       -
                                                    --------    --------      --------   --------

                                                    $  5,775    $  4,367      $ 11,550   $  8,734
                                                    ========    ========      ========   ========
</TABLE>

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


     Employer  Contributions.  Keystone  previously  disclosed in its  financial
statements  for the year ended  December  31,  2004,  that it expected not to be
required to contribute to its defined  benefit  pension plan in 2005. As of June
30, 2005, Keystone had not made any contributions to its defined benefit pension
plan during  2005.  The  Company  also  previously  disclosed  in its  financial
statements for the year ended December 31, 2004,  that it expected to contribute
approximately  $8.3 million to its post retirement  benefit plans in 2005. As of
June 30, 2005, Keystone had contributed $3.0 million to these plans during 2005.

Note 11 - Environmental matters:

     As a result of the  Chapter 11 filings on  February  26,  2004,  litigation
relating to prepetition claims against the filing companies,  including Keystone
and Sherman Wire, has been stayed.

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

     On a  quarterly  basis,  Keystone  evaluates  the  potential  range  of its
liability  at sites where it has been named as a PRP or  defendant  by analyzing
and  estimating the range of reasonably  possible costs to Keystone.  Such costs
include,   among  other  things,   expenditures  for  remedial   investigations,
monitoring,  managing,  studies,  certain  legal  fees,  clean-up,  removal  and
remediation.  Keystone believes it has provided adequate accruals ($19.5 million
at June 30, 2005, substantially all of which is reflected in liabilities subject
to compromise on the Company's June 30, 2005 balance sheet) for these matters at
13 sites for which  Keystone  believes its liability is probable and  reasonably
estimable,  but  Keystone's  ultimate  liability  may be affected by a number of
factors,  including the imposition of more stringent  standards or  requirements
under environmental laws or regulations, new developments or changes in remedial
alternatives and costs, the allocation of such costs among PRPs, the solvency of
other PRPs or a determination  that Keystone is potentially  responsible for the
release of hazardous  substances  at other  sites,  any of which could result in
expenditures in excess of amounts currently estimated by Keystone to be required
for such  matters.  With respect to other PRPs and the fact that the Company may
be jointly and severally liable for the total remediation cost at certain sites,
the Company could ultimately be liable for amounts in excess of its accruals due
to, among other things,  reallocation  of costs among PRPs or the  insolvency of
one or more PRPs. In addition, the actual timeframe for payments by Keystone for
these matters may be substantially in the future.

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

     The upper end of the range of  reasonably  possible  costs to Keystone  for
sites for which it is  possible to  estimate  costs (17 sites) is  approximately
$21.4 million. Keystone's estimates of such liabilities have not been discounted
to present value,  and other than certain  previously-reported  settlements with
respect to certain of Keystone's  former  insurance  carriers,  Keystone has not
recognized  any material  insurance  recoveries.  No assurance can be given that
actual costs will not exceed  accrued  amounts or the upper end of the range for
sites for which  estimates  have been made,  and no assurance  can be given that
costs  will not be  incurred  with  respect  to the  eight  sites as to which no
estimate  of  liability   can   presently   be  made   because  the   respective
investigations  are in early stages.  The extent of CERCLA  liability  cannot be
determined  until the  Remedial  Investigation/Feasibility  Study  ("RI/FS")  is
complete,  the U.S.  EPA  issues a Record  of  Decision  ("ROD")  and  costs are
allocated  among PRPs.  The extent of liability  under  analogous  state cleanup
statutes and for common law equivalents is subject to similar uncertainties.

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

     More  detailed  descriptions  of  certain  legal  proceedings  relating  to
environmental  matters  are set  forth  below.  A  summary  of  activity  in the
Company's  environmental  accruals  for the six months ended June 30, 2005 is as
follows:
<TABLE>
<CAPTION>

                                                     Six months ended
                                                          June 30,
                                                    ------------------
                                                      (In thousands)

<S>                  <C> <C>                              <C>
 Balance at December 31, 2004                             $19,432
 Expense                                                     -
 Payments                                                     (45)
 Reclassification                                              71
                                                          -------

 Balance at June 30, 2005                                 $19,458
                                                          =======
</TABLE>

     Substantially  all of the Company's  $19.5 million  recorded  environmental
accrual at June 30, 2005 is included in liabilities subject to compromise on the
Company's   balance   sheet.   Approximately   $10.4  million  of  the  recorded
environmental   liability   relates  to  sites  that  are  owned  by   Keystone.
Significantly  all of the remainder of the recorded $19.5 million  environmental
liability  relates to sites involving  Sherman Wire or one of its  predecessors.
Sherman  Wire's   environmental   liabilities  continue  to  be  negotiated  and
adjudicated  subsequent  to Keystone's  emergence  from Chapter 11 on August 31,
2005.

     The Company is currently involved in the closure of inactive waste disposal
units at its Peoria facility pursuant to a closure plan approved by the Illinois
Environmental Protection Agency ("IEPA") in September 1992. The original closure
plan  provides  for the  in-place  treatment of seven  hazardous  waste  surface
impoundments  and two waste  piles to be  disposed  of as  special  wastes.  The
Company recorded an estimated  liability for remediation of the impoundments and
waste piles  based on a  six-phase  remediation  plan.  The Company  adjusts the
recorded  liability  for each Phase as actual  remediation  costs become  known.
During 1995,  the Company began  remediation  of Phases II and III and completed
these Phases,  as well as Phase IV during 1996. During 1998 and 1999 the Company
did not have any significant  remediation  efforts  relative to Phases V and VI.
During 2000, Keystone began preliminary efforts relative to Phase V. Pursuant to
agreements with the IEPA and Illinois Attorney  General's office, the Company is
depositing  $75,000 per quarter  into a trust fund.  The Company  must  continue
these quarterly deposits and cannot withdraw funds from the trust fund until the
fund balance exceeds the sum of the estimated  remaining  remediation costs plus
$2 million. At December 31, 2004 and June 30, 2005, the trust fund had a balance
of $5.7 million and $6.0  million,  respectively,  which amounts are included in
other  noncurrent  assets  because the Company does not expect to have access to
any of these funds until after 2005.

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

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

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


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

"Superfund" sites

     The Company is subject to federal and state  "Superfund"  legislation  that
imposes  cleanup and remediation  responsibility  upon present and former owners
and  operators of, and persons that  generated  hazardous  substances  deposited
upon,  sites  determined  by state or federal  regulators  to contain  hazardous
substances.  Keystone  has been  notified  by U.S.  EPA that  the  Company  is a
potentially  responsible party ("PRP") under the federal "Superfund" legislation
for the alleged  release or threat of release of hazardous  substances  into the
environment at eight sites.  These  situations  involve cleanup of landfills and
disposal facilities which allegedly received hazardous  substances  generated by
discontinued   operations  of  the  Company.   Although  Keystone  believes  its
comprehensive  general liability insurance policies provide  indemnification for
certain costs the Company incurs at the "Superfund"  sites  discussed  below, it
has only recorded receivables for the estimated insurance recoveries at three of
those  sites.  During 2002,  2003 and the first six months of 2005,  the Company
received approximately $43,000, $32,000 and $71,000, respectively,  from certain
of its  insurers in exchange  for  releasing  such  insurers  from  coverage for
certain years of environmental related liabilities. Such amounts are included in
Keystone's self insurance accruals.  Keystone did not receive any such insurance
recoveries during 2004.

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

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

     In  August  1987,  Keystone  was  notified  by  U.S.  EPA  that it is a PRP
responsible  for  the  alleged  hazardous  substance  contamination  of  a  site
previously  owned  by the  Company  in  Cortland,  New  York.  Four  other  PRPs
participated  in the RI/FS and a contribution  action is pending  against eleven
additional  viable  companies which  contributed  wastes to the site.  Following
completion  of the RI/FS,  U.S. EPA  published in November  1997, a PRAP for the
site  that  recommends  the  excavation  and  disposal  of  contaminated   soil,
installation  of an  impervious  cap over a portion of the site,  placement of a
surface  cover  over  the  remainder  of the site  and  semi-annual  groundwater
monitoring until drinking water standards are met by natural  attenuation.  U.S.
EPA estimates the costs of this recommended plan to be $3.1 million. The highest
cost remedy  evaluated by U.S. EPA but not  recommended in the PRAP is estimated
by U.S. EPA to have a cost of $19.8  million.  In September  1998,  Keystone and
four other PRPs who had funded the prior  remedial  actions  and RI/FS  signed a
proposed  Consent  Decree with U.S.  EPA  calling for them to be  "nonperforming
parties" for the  implementation of a March 1998 Record of Decision.  Under this
Consent Decree,  Keystone could be responsible for an unspecified  share of U.S.
EPA's future costs in the event that changes to the existing ROD are required.

     Prior to its acquisition by Keystone,  DeSoto, Inc. ("DeSoto") was notified
by U.S. EPA that it is one of approximately  50 PRPs at the Chemical  Recyclers,
Inc. site in Wylie,  Texas. In January 1999, DeSoto changed its name to Sherman.
Under a consent  order with the U.S.  EPA, the PRP group has performed a removal
action  and  an  investigation  of  soil  and  groundwater  contamination.  Such
investigation  revealed certain environmental  contamination.  It is anticipated
U.S. EPA will order further  remedial  action,  the exact extent of which is not
currently known. Sherman is paying on a non-binding interim basis, approximately
10% of the costs for this site.  Remediation  costs,  at Sherman  Wire's present
allocation level, are estimated at a range of from $1.5 million to $4 million.

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

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

     In December 1991,  DeSoto and  approximately 600 other PRPs were named in a
complaint alleging DeSoto and the PRPs generated wastes that were disposed of at
a Pennsauken,  New Jersey  municipal  landfill.  The plaintiffs in the complaint
were ordered by the court to show in what manner the  defendants  were connected
to the site. The  plaintiffs  provided an alleged nexus  indicating  garbage and
construction materials from DeSoto's former Pennsauken facility were disposed of
at the site and such  waste  allegedly  contained  hazardous  material  to which
DeSoto objected.  The claim was dismissed  without  prejudice in August 1993. In
1996, DeSoto received an amended complaint containing the same allegations. This
matter is in  discovery  stage at June 30,  2005.  Sherman  Wire has  denied any
liability  with  regard to this  matter  and  expects to  vigorously  defend the
action.

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

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

     In  addition  to the  sites  discussed  above,  Sherman  Wire is  allegedly
involved at various other sites and in related toxic tort lawsuits which it does
not currently expect to incur significant liability.

     Sherman Wire has access to a trust fund  relative to another  environmental
site for any expenses or liabilities it incurs relative to environmental  claims
at that site.  The trust  fund is  included  in  restricted  investments  on the
balance sheet. At December 31, 2004 and June 30, 2005, the balance in this trust
fund was approximately $248,000 and $251,000, respectively.

Note 12 -  Other commitments and contingencies:

Current litigation

     As a result of the  Chapter 11 filings on  February  26,  2004,  litigation
relating to prepetition claims against the filing companies,  including Keystone
and Sherman has been stayed.  These  liabilities that relate to Sherman continue
to be negotiated and adjudicated subsequent to Keystone's emergence from Chapter
11 on August 31, 2005.

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

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

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


Note 13 - Earnings per share:

     Net income  (loss) per share is based upon the weighted  average  number of
common shares and dilutive  securities.  A reconciliation  of the numerators and
denominators  used in the  calculations of basic and diluted  earnings per share
computations  of income  (loss) is  presented  below.  The effect of the assumed
conversion of the Series A Convertible  Preferred Stock was  antidilutive in the
three  months ended June 30, 2005 and both of the six month  periods  ended June
30, 2004 and 2005.  Keystone  stock  options were  omitted from the  calculation
because they were antidilutive in all periods presented.
<TABLE>
<CAPTION>

                                                     Three months ended        Six months ended
                                                          June 30,                 June 30,
                                                     ------------------        -----------------
                                                      2004        2005          2004       2005
                                                     ------      ------        ------     ------
                                                                    (In thousands)

Numerator:
<S>                                                 <C>         <C>           <C>        <C>
  Net income (loss)                                 $ 10,993    $ (3,659)     $  3,355   $ (4,935)


  Less Series A Preferred Stock
   dividends                                            -           -            1,223       -
                                                    --------    --------      --------   -------
  Basic net income (loss)                             10,993      (3,659)        2,132     (4,935)
    Series A Preferred Stock dividends                  -           -            1,223       -
                                                    --------    --------      --------   --------

  Diluted net income (loss)                         $ 10,993    $ (3,659)     $  3,355   $ (4,935)
                                                    ========    ========      ========   ========

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

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

Note 14 - Accounting principles not yet adopted:

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

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


MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS

Bankruptcy:

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

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

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

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

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

Summary

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

     The Company  reported a net loss of $3.7  million in the second  quarter of
2005 as  compared to net income of $11.0  million in the second  quarter of 2004
and during the first six months of 2005, the Company reported a net loss of $4.9
million as compared to net income of $3.4 million during the first six months of
2004.  The  primary  reasons for the decline in net income from both of the 2004
periods to the  respective  periods  in 2005 were due to the net  effects of (i)
significantly  higher costs for ferrous scrap partially offset by higher per-ton
product selling prices, (ii) substantially lower shipment volumes during both of
the 2005 periods as compared to the 2004 periods, (iii) a higher defined benefit
pension credit in the 2005 periods, and (iv) lower retiree medical costs.

OVERALL RESULTS OF OPERATIONS:

     Keystone  believes it is a leading  manufacturer  of steel  fabricated wire
products, nails, industrial wire and wire rod for the agricultural,  industrial,
construction,  original  equipment  manufacturer and retail consumer markets and
believes it is one of the largest  manufacturers  of fabricated wire products in
the United States.  Historically,  the Company has experienced greater sales and
profits  during  the first half of the year due to the  seasonality  of sales in
principal wire products  markets,  including the  agricultural  and construction
markets.  Keystone is also engaged in the operation of a ferrous scrap recycling
facility.   The  operations  of  this  ferrous  scrap  recycling  facility  were
insignificant  when compared to the consolidated  operations of the Company.  As
such,  the  results  of its  operations  are  not  separately  addressed  in the
discussion that follows.

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

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

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

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

                                                     Three months ended        Six months ended
                                                          June 30,                 June 30,
                                                     ------------------        -----------------
                                                      2004        2005          2004       2005
                                                     ------      ------        ------     ------
                                                                 (Tons in thousands)

Production volume (tons):
<S>                                                    <C>          <C>          <C>         <C>
 Billets                                               167          95           286         236
 Wire rod                                              150          98           267         232

Average per-ton ferrous
 scrap purchase cost                                  $189      $  228          $183      $  242

Sales volume(tons):
 Fabricated wire products                               58          48           108          94
 Nails                                                  11           3            21           8
 Industrial wire                                        27          15            44          31
 Wire rod                                               34          45            63          88
 Billets                                                10           3            14           5
                                                      ----      ------          ----      ------

                                                       140         114           250         226
                                                      ====      ======          ====      ======
Per-ton selling prices:
  Fabricated wire products                            $945      $1,021          $857      $1,038
  Nails                                               $800      $  810          $727      $  791
  Industrial wire                                     $697      $  758          $649      $  763
  Wire rod                                            $516      $  543          $470      $  555
  Billets                                             $197      $  355          $166      $  313
  All steel and wire products                         $726      $  773          $673      $  785
</TABLE>

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

                                                     Three months ended        Six months ended
                                                          June 30,                 June 30,
                                                     ------------------        -----------------
                                                      2004        2005          2004       2005
                                                     ------      ------        ------     ------
                                                                     (In millions)

<S>                                                  <C>         <C>           <C>        <C>
Fabricated wire products                             $ 54.3      $48.8         $ 92.4     $ 96.8
Nails                                                   8.7        2.7           15.1        6.5
Industrial wire                                        18.7       11.2           28.9       23.6
Wire rod                                               17.7       24.7           29.7       49.0
Billets                                                 2.0        1.1            2.3        1.7
Other                                                    .4         .5             .6         .9
                                                      ----      ------          ----      ------
                                                     $101.8      $89.0         $169.0     $178.5
                                                      ====      ======          ====      ======
</TABLE>





     The following table sets forth selected  operating data of the Company as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>

                                                     Three months ended        Six months ended
                                                          June 30,                 June 30,
                                                     ------------------        -----------------
                                                      2004        2005          2004       2005
                                                     ------      ------        ------     ------

<S>                                                  <C>         <C>           <C>        <C>
Net sales                                            100.0 %     100.0 %       100.0 %    100.0 %
Cost of goods sold                                    81.6        97.8          89.8       96.1
                                                     -----       -----         -----      -----
Gross margin                                          18.4 %       2.2 %        10.2 %      3.9 %
                                                     =====       =====         =====      =====

Selling expense                                        1.4 %       1.8%          1.6 %      1.7 %
General and administrative expense                     2.7 %       3.0 %         3.2 %      3.0 %
Defined benefit pension credit                        (1.5)%      (3.6)%        (1.8)%     (3.6)%
Corporate expense                                       .6 %       1.0 %          .9 %      1.2 %
Reorganization costs                                   3.0 %       3.0 %         3.0 %      3.4 %

Income (loss) before income taxes                     11.1 %      (4.0)%         2.2 %     (2.6)%
Income tax provision                                    .3          .1            .2         .2
                                                     -----       -----         -----      -----

Net income (loss)                                     10.8%       (4.1)%         2.0 %     (2.8)%
                                                     =====       =====         =====      =====
</TABLE>

Discussion of operating results

     Net sales during the second  quarter of 2005  declined  $12.8  million,  or
12.6% from the second  quarter of 2004 due  primarily to a 26,000 ton decline in
shipment volume  partially  offset by a 6.5% increase in per-ton product selling
prices.  Despite the decline in net sales during the second quarter of 2005, net
sales during the first six months of 2005 increased  $9.5 million,  or 5.6% from
the first six months of 2004 as  significantly  higher per-ton  product  selling
prices more than offset a 24,000 ton decline in shipment volume.  As a result of
lower  shipment  volumes in all  product  lines  except wire rod during the 2005
periods as  compared  to the 2004  periods,  Keystone's  product mix in the 2005
periods  consisted of a lower percentage of fabricated wire products,  nails and
industrial  wire than during the respective  2004 periods.  Keystone was able to
supplement these lower shipment  volumes of fabricated wire products,  nails and
industrial  wire during the 2005 periods with  increased  shipments of wire rod.
However,  the Company  typically  realizes a lower gross margin on sales of wire
rod  than it does on its  other  products.  The 6.5%  increase  ($47 per ton) in
overall  per-ton  product  selling  prices  during  the  second  quarter of 2005
favorably  impacted net sales in that period by approximately $5.4 million while
the 16.6%  increase  ($112 per ton) in overall  per-ton  product  selling prices
during the first six months of 2005 favorably  impacted net sales in that period
by approximately $25.3 million.

     During  both the  second  quarter  and first six  months of 2005,  Keystone
realized increased per-ton selling prices in all product lines over those of the
same periods  during 2004.  During the second quarter of 2005,  fabricated  wire
products  per-ton  selling  prices  increased  by 8.0%,  nails  increased  1.3%,
industrial  wire increased 8.8%, wire rod increased 5.2% and the per-ton selling
prices of billets during the second quarter of 2005 increased  80.2% as compared
to the second quarter of 2004.  During the first six months of 2005,  fabricated
wire products per-ton selling prices  increased by 21.1%,  nails increased 8.8%,
industrial  wire  increased  17.6%,  wire rod  increased  18.1% and the  per-ton
selling prices of billets during the first six months of 2005 increased 88.6% as
compared  to the first six months of 2004.  During  both the second  quarter and
first six months of 2005,  shipment  volumes  declined  as  compared to the same
periods  during 2004 in all  product  lines  except wire rod.  During the second
quarter of 2005,  fabricated wire products shipment volume declined 17.2%, nails
declined  72.7%,  industrial wire declined 44.4% and billet  shipments  declined
70.0% while wire rod  shipment  volume in the second  quarter of 2005  increased
32.4% from the 2004 second quarter levels.  During the first six months of 2005,
fabricated wire products  shipment volume declined 13.0%,  nails declined 61.9%,
industrial  wire declined 29.5% and billet  shipments  declined 64.3% while wire
rod  shipment  volume in the first six months of 2005  increased  39.7% from the
first six months of 2004 levels.  The Company believes the lower shipment volume
in the 2005 periods of both its  fabricated  wire products and  industrial  wire
were due to high inventory levels at Keystone's customers. In addition, Keystone
believes the late winter and inclement  weather during the spring also adversely
impacted fabricated wire product shipments.  The Company also believes the lower
shipment  volume of nails during the 2005 periods was due primarily to a Company
initiative  that began during the last quarter of 2003 to  discontinue  sales to
its less profitable customers.  Throughout 2004, the Company implemented several
price  increases  primarily as a reaction to rapidly  increasing  ferrous  scrap
costs, Keystone's primary raw material. As a result of these efforts, during the
both the second  quarter  and first six months of 2005,  the Company was able to
realize  increases in the per-ton  product  selling prices of all of its product
lines as compared to per-ton selling prices during the respective periods during
2004.

     Billet production during the 2005 second quarter declined by 72,000 tons to
95,000  tons from  167,000  tons  during  the second  quarter of 2004.  Wire rod
production  during the second  quarter of 2005 declined by 52,000 tons to 98,000
tons from  150,000  tons during the second  quarter of 2004.  Billet  production
during the first six months of 2005 declined by 50,000 tons to 236,000 tons from
286,000 tons during the first six months of 2004. Wire rod production during the
first six months of 2005  declined by 35,000 tons to 232,000  tons from  267,000
tons  during  the  first  six  months of 2004.  The  lower  billet  and wire rod
production  during the 2005  periods  was due  primarily  to  Keystone  limiting
production  schedules  during the 2005  periods as a result of the lower  market
demand.

     Despite the lower shipment  volume during both the second quarter and first
six month  periods of 2005,  cost of goods sold during the 2005  second  quarter
increased  by 4.7% to $87.0  million from $83.1  million  during the 2004 second
quarter and during the first six months of 2005, cost of goods sold increased by
13.0% to $171.5 million from $151.7 million during the first six months of 2004.
As a result, the cost of goods sold percentage  increased from 81.6% in the 2004
second quarter to 97.8% of net sales in the second quarter of 2005 and increased
from 89.8%  during  the first six  months of 2004 to 96.1%  during the first six
months of 2005.  This  increase  in the cost of goods  sold  percentage  was due
primarily to significantly higher costs for ferrous scrap in the 2005 periods as
well as higher  costs for  natural  gas and  electrical  power at the  Company's
Peoria,  Illinois  facility  partially  offset by the increased  product per-ton
selling prices and lower retiree  medical costs in the 2005 periods.  Keystone's
per-ton  ferrous scrap costs  increased  20.6% during the 2005 second quarter as
compared  to the 2004 second  quarter  and 32.2%  during the first six months of
2005 as compared to the same period in 2004. During the 2005 second quarter, the
Company  purchased  112,000  tons of ferrous  scrap at an average  price of $228
per-ton as compared  to 2004  second  quarter  purchases  of 180,000  tons at an
average price of $189 per ton.  During the first six months of 2005, the Company
purchased  264,000 tons of ferrous  scrap at an average price of $242 per-ton as
compared  to  purchases  in the first six months of 2004 of  319,000  tons at an
average  price of $183 per ton.  This  increase in per-ton  ferrous  scrap costs
adversely  impacted gross profit during the 2005 second quarter by approximately
$4.4 million and by $15.6 million  during the first six months of 2005. The cost
of natural gas and electrical power at the Company's Peoria facility in both the
2005  second  quarter  and the first  six  months  of 2005 was  higher  than the
respective  periods during 2004.  These higher costs adversely  impacted cost of
goods sold by approximately $382,000 and $661,000,  respectively,  in the second
quarter of 2005 and by approximately $953,000 and $671,000, respectively, in the
first six months of 2005.

     As a result of the above items,  the gross  margin of $18.7  million in the
2004 second quarter declined to a gross margin of $2.0 million in the 2005 first
quarter  and the gross  margin of $17.3  million  during the first six months of
2004 declined to $7.0 million  during the first six months of 2005. As a result,
the gross margin  percentage in the second  quarter of 2004 of 18.4% declined to
2.2% in the 2005 second quarter and the gross margin percentage in the first six
months of 2004 of 10.2% declined to 3.9% in the first six months of 2005.

     Selling expense during the 2005 second quarter of $1.6 million approximated
the 2004 second quarter selling expense of $1.5 million, whereas selling expense
during the first six months of 2004  increased from $2.7 million to $3.0 million
during  the first six  months of 2005 due  primarily  to  increased  advertising
expenses.

     General  and  administrative  expense of $2.7  million  in the 2005  second
quarter  was  relatively  unchanged  from the 2004  level  whereas  general  and
administrative  expense  during  the  first six  months of 2005 of $5.4  million
approximated general and administrative expense in the first six months of 2004.

     During the second quarter and first six months of 2005, Keystone recorded a
defined benefit  pension credit of $3.2 million and $6.4 million,  respectively,
as compared to recording a defined  benefit  pension  credit in the same periods
during  2004 of $1.5  million  and $3.0  million,  respectively.  The  increased
pension credit during the 2005 periods was a result of a $52 million increase in
plan assets from the end of 2003 to the end of 2004.  In addition,  Keystone was
not required to make any cash  contributions  for defined  benefit  pension plan
fundings during either 2005 or 2004. The Company  currently  anticipates  during
2005 it will record a defined  benefit  pension credit of $11.7 million and that
no plan fundings will be required during 2005.  However,  future  variances from
assumed  actuarial  rates,  including the rate of return on pension plan assets,
may result in increases  or  decreases  in pension  expense or credit and future
funding requirements.

     During 2004, the Company  entered into an agreement (the "1114  Agreement")
with  certain  retiree  groups that  substantially  reduced the post  retirement
("OPEB") benefits that will be paid to these retiree groups in the future. Prior
to confirmation of Keystone's definitive plan of reorganization, the Court could
have  rescinded the 1114  Agreement  and  therefore  the 1114  Agreement was not
definitive  until it was  confirmed by the Court in connection  with  Keystone's
emergence  from Chapter 11 on August 31, 2005. As such,  and in accordance  with
GAAP,  the Company has continued to record OPEB expense  through August 31, 2005
at the estimated  level as if Keystone had not entered into the 1114  Agreement,
Keystone  estimates  OPEB  expense  for the  first  eight  months  of 2005  will
approximate $11.5 million.  However, at the time of the Company's emergence from
Chapter  11 on  August  31,  2005,  and  concurrent  confirmation  of  the  1114
Agreement,  GAAP then  requires  the effect of the  substantially  reduced  OPEB
benefits  agreed to as part of the 1114  Agreement  be  accounted  for as a plan
amendment,  the benefit of which is amortized  into income over future  periods.
Accordingly,   Keystone  estimates  that  it  will  record  an  OPEB  credit  of
approximately  $2.7  million for the last four months of 2005,  resulting  in an
$8.9 million expense for the year 2005.

     General   corporate   expenses   during  the  2005  second   quarter   were
approximately  $263,000 higher than general corporate expenses during the second
quarter of 2004 due  primarily to  substantially  higher state  franchise  taxes
during the 2005 period.  General corporate  expenses during the first six months
of 2005 were  approximately  $686,000  higher than  general  corporate  expenses
during  the  first  six  months  of 2004  due  primarily  to  higher  legal  and
professional  fees not  related  to the  Company's  Chapter 11  proceedings  and
reorganization  efforts as well as  substantially  higher state  franchise taxes
during the 2005 period.

     Interest  expense during the second quarter of 2005 was slightly lower than
in the second  quarter of 2004 due primarily to lower  amortization  of deferred
financing costs in the 2005 second quarter  partially  offset by slightly higher
interest rates and debt levels in the 2005 quarter.  Interest expense during the
first  six  months of 2005 was  lower  than in the first six  months of 2004 due
primarily to lower debt levels in 2005 partially offset by higher interest rates
in 2005.  The  overall  average  interest  rates were  impacted  by the fact the
Company  discontinued  accruing  interest on  pre-petition  unsecured  debt upon
filing for  Chapter 11 on February 2, 2004.  Average  borrowings  by the Company
approximated  $85.7  million  during the second  quarter of 2005 as  compared to
$81.3  million  during the second  quarter of 2004.  Average  borrowings  by the
Company  approximated  $81.1  million  during  the first  six  months of 2005 as
compared  to $103.0  million  during  the first six  months of 2004.  During the
second  quarter of 2005, the average  interest rate on outstanding  indebtedness
was 3.6% per annum as compared  2.6% per annum  during the 2004 second  quarter.
During the first six months of 2005,  the average  interest rate on  outstanding
indebtedness  was 3.3% per annum as compared 3.2% per annum during the first six
months of 2004.  Keystone currently  anticipates average interest rates and debt
levels for the year 2005 will be higher  than  their  respective  levels  during
2004.

     During the second quarters of 2005 and 2004, Keystone incurred $2.7 million
and $3.1 million,  respectively of legal and  professional  fees relative to its
Chapter 11 proceedings and related reorganization  activities.  During the first
six month  periods of 2005 and 2004,  Keystone  incurred  $6.0  million and $5.0
million,  respectively  of legal and  professional  fees  relative to these same
activities.

     The principal reasons for the difference between the U.S. federal statutory
income tax rate and the  Company's  effective  income tax rates are explained in
Note 7 to the Consolidated  Financial Statements.  At June 30, 2005, the Company
had recorded a deferred tax asset valuation allowance of $31.2 million resulting
in no net deferred tax assets.  Keystone periodically reviews the recoverability
of  its  deferred  tax  assets  to  determine   whether  such  assets  meet  the
"more-likely-than-not" recognition criteria. The Company will continue to review
the  recoverability  of its  deferred  tax  assets,  and based on such  periodic
reviews,  Keystone could recognize a change in the recorded valuation  allowance
related to its  deferred tax assets in the future.  While the Company  currently
expects to report pre-tax income for financial  reporting  purposes during 2005,
it does not believe it will have sufficient  positive  evidence to conclude that
its  net  deferred  income  tax  assets  will  meet  the  "more-likely-than-not"
recognition  criteria anytime during 2005. As a result of the deferred tax asset
valuation allowance, the Company does not anticipate recognizing a tax provision
associated with its expected pre-tax income during 2005 will be appropriate.

     As a result of the items  discussed  above,  Keystone  recorded  a net loss
during the second  quarter of 2005 of $3.7  million as compared to net income of
$11.0  million  in the  second  quarter  of 2004 and a net loss of $4.9  million
during the first six months of 2005 as  compared  to net income of $3.4  million
during the first six months of 2004.

SEGMENT RESULTS OF OPERATIONS:

     The  Company's  operating  segments are organized  along its  manufacturing
facilities and include three  reportable  segments:  (i) Keystone Steel and Wire
("KSW")  which  manufacturers  and sells wire rod,  wire and wire  products  for
agricultural,   industrial,   construction,   commercial,   original   equipment
manufacturers and retail consumer markets, (ii) Engineered Wire Products ("EWP")
which  manufactures  and sells welded wire  reinforcement in both roll and sheet
form that is utilized in concrete construction products including pipe, pre-cast
boxes and  applications  for use in roadways,  buildings and bridges and,  (iii)
Sherman Wire ("Sherman")  which  manufacturers  and sells wire and wire products
for  agricultural,  industrial,  construction,  commercial,  original  equipment
manufacturers and retail consumer markets.
<TABLE>
<CAPTION>

                                                     Three months ended        Six months ended
                                                          June 30,                 June 30,
                                                     ------------------        -----------------
                                                      2004        2005          2004       2005
                                                     ------      ------        ------     ------
                                                                              (In thousands)

Revenues:
<S>                                                 <C>         <C>           <C>        <C>
  Keystone Steel and Wire                           $103,185    $ 81,887      $163,811   $171,081
  Engineered Wire Products                            15,949      17,755        27,039     29,806
  Sherman                                              4,438       4,113         7,497      9,166
  Elimination of intersegment
    revenues                                         (21,745)    (14,763)      (29,343)   (31,524)
                                                    --------    --------      --------   --------

                                                    $101,827    $ 88,992      $169,004   $178,529
                                                    ========    ========      ========   ========

Operating profit (loss):
  Keystone Steel and Wire                           $ 10,295    $ (9,119)     $  3,307   $(10,571)
  Engineered Wire Products                             3,333       2,992         4,601      4,631
  Sherman                                                 14        (381)         (561)      (550)
  GAAP adjustments and
   eliminations                                        2,398       7,402         4,796     11,525
                                                    --------    --------      --------   --------

                                                    $ 16,040    $    894      $ 12,143   $  5,035
                                                    ========    ========      ========   ========
</TABLE>

     GAAP adjustments and eliminations in the above table consisted primarily of
adjustments to reflect the difference between the defined benefit pension credit
and OPEB expense  allocated  to the  segments  and the actual  expense or credit
included in the  determination of operating profit or loss. GAAP adjustments and
eliminations  included a defined benefit pension credit of $4.1 million and $2.4
million during the three months ended June 30, 2005 and 2004, respectively,  and
$8.2  million  and $4.8  million  during the six months  ended June 30, 2004 and
2005, respectively.

Keystone Steel & Wire

     KSW's net sales in the 2005 second  quarter  declined  by $21.3  million or
20.6% to $81.9  million  from $103.2  million in the second  quarter of 2004 due
primarily to lower shipment  volumes  partially offset by higher overall per-ton
product  selling  prices.  KSW's net sales  during  the first six months of 2005
increased by $7.3 million or 4.4% to $171.1  million from $163.8  million during
the first six months of 2004 due  primarily to higher  overall  per-ton  product
selling  prices   partially   offset  by  lower  shipment   volumes.   KSW  sold
approximately  43,000  less  tons of  products  in the 2005  second  quarter  as
compared to the second  quarter of 2004,  although at selling prices $55 per-ton
higher than per-ton product selling prices in the 2004 second quarter.  KSW sold
approximately  26,000  less tons of  products in the first six months of 2005 as
compared to the first six months of 2004, although at selling prices $98 per-ton
higher than per-ton  product  selling prices in the same period during 2004. KSW
believes the lower  shipment  volume in the 2005 periods of both its  fabricated
wire products and  industrial  wire were due to high  inventory  levels at KSW's
customers.  In  addition,  KSW believes  the late winter and  inclement  weather
during the spring also adversely impacted fabricated wire product shipments. KSW
also believes the lower shipment volume of nails during the 2005 periods was due
primarily  to an  initiative  that  began  during  the last  quarter  of 2003 to
discontinue sales to its less profitable  customers.  KSW was able to supplement
these lower shipment  volumes of fabricated wire products,  nails and industrial
wire during the 2005 periods with increased shipments of wire rod. However,  KSW
typically realizes a lower gross margin on sales of wire rod than it does on its
other  products.  Throughout  2004,  KSW  implemented  several  price  increases
primarily as a reaction to  increasing  ferrous  scrap costs,  KSW's primary raw
material. As a result of these efforts,  during both the 2005 second quarter and
the first six months of 2005,  KSW was able to realize  increases in its per-ton
product  selling  prices over the same  periods in 2004.  During the 2004 second
quarter,  approximately  18% of KSW's  net  sales  were  made to other  Keystone
entities.  During the 2005 second  quarter and the first six months of both 2004
and  2005,  approximately  15% of KSW's net  sales  were made to other  Keystone
entities.  Significantly  all of the KSW sales to other  Keystone  entities were
sales of wire rod.

     During the second  quarter of 2005,  KSW recorded an operating loss of $9.1
million as compared to recording  operating  income of $10.0 million in the 2004
second  quarter.  During the first six months of 2005, KSW recorded an operating
loss of $10.6 million as compared to recording  operating income of $3.3 million
during the first six  months of 2004.  The  primary  reasons  for the  decreased
operating profit in the 2005 periods were the increased costs for ferrous scrap,
natural gas costs and electrical  power  partially  offset by the higher per-ton
product selling prices and lower retiree medical costs in the 2005 periods.

Engineered Wire Products

     EWP's net sales of $17.8  million  during the  second  quarter of 2005 were
approximately  $1.8  million or 11.3%  higher than during the second  quarter of
2004 due primarily to higher overall  per-ton  product selling prices and higher
shipment  volume.  During the first six months of 2005, EWP's net sales of $29.8
million  were  approximately  $2.8 million or 10.2% higher than during the first
six months of 2004 also due primarily to higher overall  per-ton product selling
prices and higher  shipment  volume.  During the 2005 second  quarter,  EWP sold
1,100 more tons of products  than  during the second  quarter of 2004 at per-ton
product  selling prices  approximately  $46 per-ton higher than per-ton  selling
prices in the 2004 second quarter. During the first six months of 2005, EWP sold
900 more tons of  products  than  during the first six months of 2004 at per-ton
product  selling prices  approximately  $88 per-ton higher than per-ton  selling
prices in the same period in 2004.  During 2004, EWP  implemented  several price
increases  primarily as a reaction to rapidly  increasing wire rod costs,  EWP's
primary  raw  material.  As a result of these  efforts,  during  both the second
quarter and first six month periods of 2005,  EWP was able to realize  increases
in its per-ton product selling prices.  EWP sources the majority of its wire rod
requirements from KSW.

     As a result of increased cost for wire rod,  partially offset by the higher
per-ton product selling prices during the second quarter of 2005, EWP recorded a
$341,000  decline  in  operating  income  from the same  period  in 2004 to $3.0
million.  During  the first six months of 2005,  EWP's  higher  per-ton  product
selling  prices were offset by increased  cost for wire rod and, as such,  EWP's
operating income of $4.6 million was unchanged from the same period during 2004.

Sherman Wire

     Sherman  Wire's  net  sales  of $4.1  million  in the 2005  second  quarter
approximated  net sales  during  the second  quarter of 2004 of $4.4  million as
increased  per-ton product selling prices were offset by lower shipment  volume.
However, during the first six months of 2005, Sherman Wire's net sales increased
22.3% to $9.2 million from $7.5 million  during the first six months of 2004 due
to both increased per-ton product selling prices and increased  shipment volume.
Tons shipped by Sherman Wire during the second  quarter of 2005  declined by 900
tons from  shipment  levels  during the second  quarter of 2004.  However,  tons
shipped by Sherman  Wire  during the first six months of 2005  increased  by 900
tons from shipment levels during the same period of 2004.  Sherman Wire believes
its lower  shipment  volume  during the 2005  second  quarter was due to reduced
demand  resulting from high inventory levels at Sherman Wire's customers as well
as the late winter and inclement  weather during the spring adversely  impacting
fabricated  wire product  shipments.  Sherman Wire believes its higher  shipment
volume  during  the first six months of 2005 was due to its  limited  production
schedules  during the period  preceding  and  immediately  following  Keystone's
Chapter 11 filing in 2004.  Sherman Wire's overall per-ton product selling price
increased  by  approximately  $104  per-ton  during the 2005  second  quarter as
compared to the per-ton  product  selling  prices  during the second  quarter of
2004.  Sherman  Wire's  overall  per-ton  product  selling  price  increased  by
approximately $88 per-ton during the first six months of 2005 as compared to the
per-ton product selling prices during the first six months of 2004. During 2004,
Sherman Wire  implemented  several  price  increases  primarily as a reaction to
rapidly  increasing  wire rod costs,  Sherman Wire's primary raw material.  As a
result of these efforts,  during both the second quarter and first six months of
2005,  Sherman  Wire was able to realize  significant  increases  in its per-ton
product  selling prices over the same periods during 2004.  Sherman Wire sources
the majority of its wire rod requirements from KSW. During the second quarter of
2005 and 2004, approximately 63% and 70%, respectively, and during the first six
months of 2004 and 2005,  approximately  67% and 69%,  respectively,  of Sherman
Wire's  net sales  were made to other  Keystone  entities,  primarily  KSW.  The
majority of these sales were fabricated wire products.

     During  the  second  quarter  of 2005,  Sherman  Wire  recorded  a $381,000
operating  loss as  compared to $14,000 of  operating  income in the 2004 second
quarter.  During the first six months of 2005,  Sherman Wire recorded a $550,000
operating  loss as  compared to a $561,000  operating  loss during the first six
months of 2004.  The  primary  reason for the decline in  operating  performance
during the 2005 second  quarter was the  increased  costs for wire rod partially
offset by the higher overall  per-ton  product  selling prices and lower retiree
medical costs.

Outlook for 2005

     During 2005, rod imports have  continued at high levels.  These high import
levels combined with increased  production from domestic mills has resulted in a
decline in per-ton sales prices of the Company's products. In addition, the late
winter and inclement  weather during the spring and summer of 2005 has adversely
impacted  sales. As a result,  management  believes these factors will result in
lower  shipment  volume  in  2005  as  compared  to  2004.  The  Company's  2005
performance  will also be adversely  impacted by higher costs for ferrous  scrap
and the  cost of legal  and  professional  fees  associated  with the  Company's
bankruptcy  and  related  restructuring  efforts.  However,  the  effects of the
Company's  restructuring  efforts in 2004 and 2005 will partially mitigate these
factors,  as the Company expects to report a significant gain upon  cancellation
of debt and other liabilities  concurrent with its emergence from Chapter 11. As
a result,  Keystone  expects it will report net income for  financial  reporting
purposes  although  it expects  to report  negative  cash  flows from  operating
activities  in 2005. In addition,  as a result of  significant  accumulated  net
operating  losses,  the benefit of which has not been previously  recognized for
financial reporting purposes as the Company does not currently believe meets the
"more-likely-than-not"  recognition  criteria,  the  Company  does not expect to
record  significant  net tax expense  associated  with its pre-tax income during
2005.

LIQUIDITY AND CAPITAL RESOURCES:

     The amount of available  borrowings under  Keystone's  revolving credit and
primary  DIP  facilities  is  based  on  formula-determined   amounts  of  trade
receivables and inventories,  less the amount of outstanding  letters of credit.
At June 30, 2005,  unused credit  available for borrowing  under  Keystone's DIP
facilities and EWP's $7 million  revolving credit facility (the "EWP Revolver"),
were $21.9 million and $1.4  million,  respectively.  The Company's  primary DIP
facility requires daily cash receipts be used to reduce outstanding  borrowings,
which  results in the  Company  maintaining  zero cash  balances  when there are
balances  outstanding under this credit facility.  Accordingly,  any outstanding
balances  under the  primary DIP  facility  are always  classified  as a current
liability regardless of the maturity date of the facility.

     On August 31,  2005,  in  connection  with its  emergence  from Chapter 11,
Keystone  entered into a new five-year,  $80.0 million secured credit  facility.
Proceeds from this credit facility were used to extinguish  Keystone's  existing
DIP  credit  facilities,  the EWP Term  Loan,  the EWP  Revolver  and to provide
working capital for reorganized  Keystone.  The facility includes a term loan in
the amount of up to $25.0 million, subject to a borrowing base calculation based
on the market value of the Company's real property and equipment.  To the extent
there is  sufficient  borrowing  base,  the term  loan  portion  of this  credit
facility  can be  reloaded  in the amount of $10.0  million.  The portion of the
credit  facility in excess of the term loan  balance is available to the Company
as a revolving credit facility subject to a borrowing base calculation  based on
eligible  receivables  and  inventory  balances.  Interest  rates on the  credit
facility  range  from the prime  rate to the prime  rate plus .5%  depending  on
Keystone's excess availability, as defined in the credit agreement. The facility
also provides for a LIBOR  interest  rate option.  Under the terms of the credit
facility,  the Company is required to annually pay down the term loan portion of
the  facility  in the  amount of 25% of excess  cash  flow,  as  defined  in the
agreement,  subject to a $2.0 million annual and a $5.0 million aggregate limit.
The facility also includes  performance  covenants  related to minimum levels of
cash  flow  and  fixed  charge   coverage   ratio.   Keystone  paid  the  lender
approximately  $400,000 of diligence,  commitment and closing fees in connection
with this facility.

     Despite an $8.3 million decline in earnings between the first six months of
2004 and the first six months of 2005,  cash flow from  operating  activities in
the first six months of 2005 declined by only $6.7 million as Keystone used $2.2
million of cash in operations during the first six months of 2004 as compared to
using $8.9  million of cash in  operations  during the first six months of 2005.
This increase in cash used in  operations  was due primarily to the 2005 decline
in profitability  partially offset by a smaller increase in accounts  receivable
as well as a decline in inventory levels during the 2005 period as compared to a
substantial increase in inventory levels during the 2004 period.  Because of the
seasonal  nature  of the  Company's  business,  the  2005  changes  in  accounts
receivable  and  inventory  levels was  typical.  The reason the 2004 changes in
these  accounts was not  consistent  with 2005's  changes was due to  Keystone's
limited  liquidity  during the last half of 2003 and the first  portion of 2004,
not allowing the Company to operate on a continuous  basis. As such,  production
levels  declined  and  Keystone  was forced to  substantially  reduce its normal
inventory  levels over the last half of 2003 and the first two months of 2004 in
order to meet customer shipment demand. In addition,  as the Company's liquidity
deteriorated  throughout  2003  and the  first  two  months  of  2004,  Keystone
liquidated as many of its accounts  receivable as possible.  As such, at the end
of 2003, the Company's  accounts  receivable and inventory balances were both at
abnormally low levels.  Keystone's  operations  returned to normal levels during
2004.

     During the first six months of 2005, Keystone made capital  expenditures of
approximately $4.6 million primarily related to upgrades of production equipment
at its  facility in Peoria,  Illinois,  as compared to $700,000 in the first six
months of 2004.  Capital  expenditures for 2005 are expected to be approximately
$7.0 million and are related  primarily to upgrades of  production  equipment at
EWP. Such capital  expenditures  are expected to be funded using cash flows from
operations   together  with  borrowing   availability  under  Keystone's  credit
facilities.

     At June 30, 2005,  the Company's  financial  statements  reflected  accrued
liabilities  of  $19.5  million  (substantially  all of  which  is  included  in
liabilities  subject to compromise on the Company's balance sheet) for estimated
remediation  costs for those  environmental  matters which Keystone believes are
probable  and  reasonably  estimable.  Although the Company has  established  an
accrual for estimated future required environmental  remediation costs, there is
no  assurance  regarding  the  ultimate  cost of  remedial  measures  that might
eventually  be  required  by   environmental   authorities  or  that  additional
environmental  hazards,  requiring further remedial  expenditures,  might not be
asserted  by such  authorities  or private  parties.  Accordingly,  the costs of
remedial  measures may exceed the amounts accrued.  Keystone  believes it is not
possible to  estimate  the range of costs for  certain  sites.  The upper end of
range of reasonably  possible  costs to Keystone for sites for which the Company
believes it is possible to estimate costs is  approximately  $21.4 million.  See
Notes 11 and 12 to the Consolidated  Financial Statements for discussions of the
Company's environmental liabilities and current litigation.

     Keystone  is not  expected  to be  required  to make  contributions  to its
pension  plan during  2005.  Future  variances  from  assumed  actuarial  rates,
including the rate of return on pension plan assets,  may result in increases or
decreases  to  pension  expense  or credit and  funding  requirements  in future
periods.

     The Company  periodically  reviews the  recoverability  of its deferred tax
assets  to  determine  whether  such  assets  meet  the   "more-likely-than-not"
recognition  criteria.  At June 30, 2005, the Company expects that its long-term
profitability  should  ultimately  be  sufficient  to enable it to realize  full
benefit of its future tax deductions, in part due to the long-term nature of its
net  operating  loss  carryforwards,  which  expire in 2023 and 2024.  Although,
considering all factors believed to be relevant,  including the Company's recent
operating results, its expected future near-term productivity rates; cost of raw
materials,  electricity, labor and employee benefits, environmental remediation,
and retiree medical  coverage;  interest  rates;  product mix; sales volumes and
selling  prices and the fact that accrued OPEB expenses  will become  deductible
over an extended period of time and require the Company to generate  significant
amounts of future taxable  income,  the Company  believes its gross deferred tax
assets do not currently meet the  "more-likely-than-not"  realizability test. As
such,  the Company has  provided a deferred  tax asset  valuation  allowance  of
approximately  $31.2 million at June 30, 2005, or all of the Company's  deferred
tax asset.  Keystone will continue to review the  recoverability of its deferred
tax assets,  and based on such  periodic  reviews,  the Company could change the
valuation  allowance  related  to its  deferred  tax assets in the  future.  The
Company  does not  currently  expect it will be  appropriate  to recognize a tax
provision associated with its expected pre-tax income during 2005.

     Keystone  incurs  significant  ongoing  costs for plant and  equipment  and
substantial employee medical benefits for both current and retired employees. As
such,  Keystone is vulnerable to business  downturns and increases in costs, and
accordingly,  routinely  compares its liquidity  requirements  and capital needs
against its  estimated  future  operating  cash  flows.  In  addition,  Keystone
currently  anticipates  incurring legal and  professional  fees of approximately
$10.0 million  during 2005 related to its  reorganization  efforts.  Keystone is
also taking additional action towards improving its liquidity. Keystone has also
considered,  and may in the future  consider,  the sale of certain  divisions or
subsidiaries that are not necessary to achieve the Company's  long-term business
objectives.  However,  there can be no assurance  Keystone will be successful in
any of  these  or  other  efforts,  or that if  successful,  they  will  provide
sufficient liquidity for the Company's operations during the next year.


ITEM 4.  CONTROLS AND PROCEDURES
--------------------------------

     Evaluation of Disclosure  Controls and  Procedures.  The Company  maintains
disclosure   controls  and  procedures.   The  term  "disclosure   controls  and
procedures,"  as defined by Rule 13a-15(e) of the Securities and Exchange Act of
1934 as amended  ("the  Act"),  means  controls  and other  procedures  that are
designed to ensure that information required to be disclosed in the reports that
the Company files or submits to the Securities and Exchange  Commission ("SEC"),
is  recorded,  processed,  summarized  and  reported,  within  the time  periods
specified  in the SEC's  rules and forms.  Disclosure  controls  and  procedures
include,  without  limitation,  controls and procedures  designed to ensure that
information required to be disclosed by the Company in the reports that it files
or  submits  to the SEC under the Act is  accumulated  and  communicated  to the
Company's  management,   including  its  principal  executive  officer  and  its
principal  financial  officer,  or  persons  performing  similar  functions,  as
appropriate to allow timely decisions to be made regarding required  disclosure.
Each of David L. Cheek, the Company's President and Chief Executive Officer, and
Bert E. Downing,  Jr., the Company's Vice President,  Chief  Financial  Officer,
Corporate  Controller  and Treasurer,  have  evaluated the Company's  disclosure
controls and procedures as of June 30, 2005.  Based upon their  evaluation,  and
solely as a result of the material  weaknesses  discussed below, these executive
officers have concluded the Company's  disclosure  controls and procedures  were
not effective as of June 30, 2005.

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

(1)  As of June 30, 2005, the Company did not maintain  effective  controls over
     the  completeness and accuracy of net sales and related cost of goods sold.
     Specifically,  the Company did not have  controls  designed and in place to
     detect  sales  made  under the terms  F.O.B.  at the  customer's  location.
     Additionally,  the Company did not  maintain  effective  controls  over the
     review and  monitoring  of the accuracy and  completeness  of net sales and
     costs of goods sold. This control deficiency resulted in adjustments to net
     sales and cost of goods sold in the third quarter of 2005.
(2)  As of June 30, 2005, the Company did not maintain  effective  controls over
     the  presentation  and  classification  of cash  overdrafts.  Specifically,
     effective  controls  were not  designed  and in place to  ensure  that cash
     overdrafts  were  properly  classified  as  indebtedness  in the  Company's
     consolidated  balance sheet,  and that changes in its cash  overdrafts were
     properly  included  in the  determination  of  cash  flows  from  financing
     activities.  This control  deficiency  resulted in the  restatement  of the
     Company's 2003 and 2004 annual consolidated  financial statements and audit
     adjustments to both its 2004 interim consolidated  financial statements and
     its annual and interim 2005  consolidated  financial  statements  affecting
     accounts payable and the current portion of long-term debt.

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

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

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

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

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

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

PART II.  OTHER INFORMATION

ITEM 1. Legal Proceedings

     Reference  is  made to  disclosure  provided  under  the  caption  "Current
litigation" in Note 12 to the Consolidated Financial Statements.


ITEM 6. Exhibits

(a)  The Company has retained a signed original of any exhibit listed below that
     contains  signatures,  and the Company will provide any such exhibit to the
     Commission  or its staff upon request.  The  following  exhibit is included
     herein:

     31.1 Chief Executive Officer's Certification Pursuant to Section 302 of the
          Sarbanes-Oxley Act of 2002.

     31.2 Chief Financial Officer's Certification Pursuant to Section 302 of the
          Sarbanes-Oxley Act of 2002.

     32.1 Chief Executive and Chief Financial Officers'  Certification  Pursuant
          to 18 U.S.C.  Section  1350 as Adopted  Pursuant to Section 906 of the
          Sarbanes-Oxley Act of 2002.







                               SIGNATURES



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


                                          Keystone Consolidated Industries, Inc.
                                          --------------------------------------
                                                        (Registrant)



Date:  March 31, 2006                       By /s/Bert E. Downing, Jr.
       --------------                          -------------------------------
                                               Bert E. Downing, Jr.
                                               Vice President, Chief Financial
                                               Officer, Corporate Controller
                                               and Treasurer (Principal
                                               Financial and Accounting
                                               Officer)