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, 2006

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

Whether the Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the  Securities  Exchange  Act of 1934  during the  preceding  12
months (or for such shorter period that the Registrant was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days. Yes  X   No
          ---     ---

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

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

Indicate  by check mark  whether  the  registrant  has filed all  documents  and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. Yes  X  No     .
                          ---    ---

Number of shares of common stock outstanding at August 8, 2006: 10,000,000

<PAGE>



                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

                                      INDEX


                                                                        Page
                                                                       number

PART I.           FINANCIAL INFORMATION

  Item 1.         Financial Statements

                  Condensed Consolidated Balance Sheets -
                   December 31, 2005;
                    June 30, 2006 (unaudited)                                 3

                  Condensed Consolidated Statements of Operations -
                   Three months and six months ended
                   June 30, 2005 and 2006 (unaudited)                         5

                  Condensed Consolidated Statements of Cash Flows -
                   Six months ended June 30, 2005 and 2006 (unaudited)        6

                  Condensed Consolidated Statement of Stockholders' Equity -
                   Six months ended June 30, 2006 (unaudited)                 7

                  Notes to Condensed Consolidated Financial Statements
                   (unaudited)                                                8

  Item 2.         Management's Discussion and Analysis of Financial
                   Condition and Results of Operations                       22

  Item 3.         Quantitative and Qualitative Disclosures About Market Risk 32

  Item 4.         Controls and Procedures                                    32


PART II.          OTHER INFORMATION

  Item 1.         Legal Proceedings.                                         34

  Item 1A.        Risk Factors.                                              34

  Item 6.         Exhibits.                                                  34

     Items 2, 3, 4 and 5 of Part II are omitted  because there is no information
to report.


                                     - 2 -

<PAGE>


                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                               December 31,         June 30,
                                 ASSETS                                           2005                2006
                                                                                ---------          ---------
                                                                                                 (unaudited)

 Current assets:
<S>                                                                             <C>                <C>
   Accounts receivable, net                                                     $  46,199          $  57,980
   Inventories, net                                                                69,691             58,170
   Restricted investments                                                           1,040              1,057
   Deferred income taxes                                                             -                15,417
   Prepaid expenses and other                                                       2,760              1,892
                                                                                ---------          ---------

      Total current assets                                                        119,690            134,516
                                                                                ---------          ---------

 Property, plant and equipment:
   Land                                                                             1,193              1,193
   Buildings and improvements                                                      54,189             54,780
   Machinery and equipment                                                        310,446            310,419
   Construction in progress                                                         3,949              8,214
                                                                                ---------          ---------
                                                                                  369,777            374,606
   Less accumulated depreciation                                                  283,004            289,479
                                                                                ---------          ---------

      Net property, plant and equipment                                            86,773             85,127
                                                                                ---------          ---------

 Other assets:
   Restricted investments                                                           4,758              7,097
   Prepaid pension cost                                                           145,152            169,478
   Deferred financing costs                                                           902                782
   Goodwill                                                                           752                752
   Other                                                                              337                308
                                                                                ---------          ---------

      Total other assets                                                          151,901            178,417
                                                                                ---------          ---------

      Total assets                                                              $ 358,364          $ 398,060
                                                                                =========          =========
</TABLE>

                                     - 3 -
<PAGE>

                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

                CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

                                 (In thousands)


<TABLE>
<CAPTION>
  LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                               December 31,           June 30,
                                                                                   2005                2006
                                                                                ----------          ----------
                                                                                                  (unaudited)

 Current liabilities:
   Notes payable and current maturities of
<S>                                                                             <C>                 <C>
     long-term debt                                                             $  41,640           $  56,245
   Accounts payable                                                                 9,797              10,584
   Accrued OPEB cost                                                                4,256               4,256
   Other accrued liabilities                                                       27,624              23,110
                                                                                ---------           ---------

       Total current liabilities                                                   83,317              94,195
                                                                                ---------           ---------

 Noncurrent liabilities:
   Long-term debt                                                                  58,255              35,785
   Accrued OPEB cost                                                              133,208             127,011
   Deferred income taxes                                                                -              18,647
   Other                                                                            5,577               5,893
                                                                                ---------           ---------

       Total noncurrent liabilities                                               197,040             187,336
                                                                                ---------           ---------

 Liabilities subject to compromise                                                 10,476              14,239
                                                                                ---------           ---------

 Stockholders' equity:
   Common stock                                                                       100                 100
   Additional paid-in capital                                                      75,423              75,423
   Retained earnings (accumulated deficit)                                         (7,992)             26,767
                                                                                ---------           ---------

       Total stockholders' equity                                                  67,531             102,290
                                                                                ---------           ---------

       Total liabilities and stockholders'
        equity                                                                  $ 358,364           $ 398,060
                                                                                =========           =========
</TABLE>



Commitments and contingencies (Notes 10 and 11).





     See accompanying Notes to Condensed Consolidated Financial Statements.
                                      - 4 -


<PAGE>

                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                           Three months ended               Six months ended
                                                               June 30,                        June 30,
                                                        ------------------------        -----------------------
                                                        2005                2006        2005               2006
                                                        ----                ----        ----               ----
                                                            (unaudited)                     (unaudited)

<S>                                                     <C>             <C>             <C>            <C>
 Net sales                                              $ 88,992        $129,095        $178,529       $248,210
 Cost of goods sold                                       87,034         119,808         171,516        223,897
                                                        --------        --------        --------       --------

   Gross margin                                            1,958           9,287           7,013         24,313
                                                        --------        --------        --------       --------

 Selling expense                                           1,582           1,672           3,017          3,448
 General and administrative
  expense                                                  2,706           2,869           5,410          5,598
 Defined benefit pension credit                           (3,224)        (12,165)         (6,449)       (24,326)
                                                        --------        --------        --------       --------

       Total operating costs                               1,064          (7,624)          1,978        (15,280)
                                                        --------        --------        --------       --------

 Operating income                                            894          16,911           5,035         39,593
                                                        --------        --------        --------       --------

 Nonoperating income (expense):
   Corporate income (expense)                               (895)            996          (2,191)         1,482
   Interest expense                                         (919)         (1,337)         (1,776)        (2,539)
   Interest income                                            47              90              82             92
   Other income, net                                          16             267             104            267
                                                        --------        --------        --------       --------

       Total nonoperating income
        (expense)                                         (1,751)             16          (3,781)          (698)
                                                        --------        --------        --------       --------

   Income (loss) before
    income taxes and
    reorganization costs                                    (857)         16,927           1,254         38,895

 Reorganization costs                                      2,687             186           5,981            336
                                                        --------        --------        --------       --------

   Income (loss) before income
    taxes                                                 (3,544)         16,741          (4,727)        38,559

 Provision for income taxes                                  115           3,711             208          3,800
                                                        --------        --------        --------       --------

   Net income (loss)                                    $ (3,659)       $ 13,030        $ (4,935)      $ 34,759
                                                        ========        ========        ========       ========

 Basic and diluted income (loss)
  per share                                             $   (.36)       $   1.30        $  ( .49)      $   3.48
                                                        ========        ========        ========       ========

 Basic and diluted shares
  outstanding                                             10,068          10,000          10,068         10,000
                                                        ========        ========        ========       ========
</TABLE>

     See accompanying Notes to Condensed Consolidated Financial Statements.
                                      - 5 -

<PAGE>

                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                     Six months ended June 30, 2005 and 2006
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                         2005            2006
                                                                                       -------         --------
                                                                                           (unaudited)

 Cash flows from operating activities:
<S>                                                                                    <C>             <C>
   Net income (loss)                                                                   $(4,935)        $ 34,759
   Depreciation and amortization                                                         7,889            7,699
   Amortization of deferred financing costs                                                347              135
   Deferred income taxes                                                                     -            3,230
   Non-cash defined benefit pension credit                                              (6,449)         (24,326)
   OPEB expense (credit)                                                                 8,734           (4,200)
   OPEB payments                                                                        (2,973)          (1,999)
   Reorganization costs accrued                                                          5,981              337
   Reorganization costs paid                                                            (5,176)          (3,397)
   Other, net                                                                              116              286
   Change in assets and liabilities:
     Accounts receivable                                                                (9,948)         (11,903)
     Inventories                                                                         2,731           11,521
     Accounts payable                                                                   (2,693)             729
     Other, net                                                                         (2,517)           3,543
                                                                                     ---------         --------

       Net cash provided by (used in) operating
        activities                                                                      (8,893)          16,414
                                                                                     ---------         --------

 Cash flows from investing activities:
   Capital expenditures                                                                 (4,551)          (6,194)
   Restricted investments, net                                                            (296)          (2,356)
   Other, net                                                                              243               17
                                                                                     ---------         --------

       Net cash used in investing activities                                            (4,604)          (8,533)
                                                                                     ---------         --------

 Cash flows from financing activities:
   Revolving credit facilities, net                                                     14,784           (5,427)
   Other notes payable and long-term debt:
     Additions                                                                              47              306
     Principal payments                                                                 (1,319)          (2,745)
   Deferred financing costs paid                                                           (15)             (15)
                                                                                     ---------         --------

       Net cash provided by (used in)
        financing activities                                                            13,497           (7,881)
                                                                                     ---------         --------

 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                                                 $ 1,440         $  2,139
   Income taxes, net                                                                       673              343
</TABLE>

     See accompanying Notes to Condensed Consolidated Financial Statements.
                                      - 6 -

<PAGE>

                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

            CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                         Six months ended June 30, 2006
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                                  Retained
                                                                    Additional    earnings
                                                        Common        paid-in   (accumulated
                                                         stock        capital      deficit)            Total
                                                        -------      ---------    ----------          ---------
                                                                            (unaudited)

<S>                                                       <C>          <C>        <C>                  <C>
 Balance - December 31, 2005                              $100         $75,423    $ (7,992)            $ 67,531

 Net income                                                 -             -         34,759               34,759

 Balance - June 30, 2006                                  $100         $75,423    $ 26,767             $102,290
</TABLE>



     See accompanying Notes to Condensed Consolidated Financial Statements.
                                      - 7 -

<PAGE>

                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                  June 30, 2006

                                   (unaudited)

Note 1 - Organization and basis of presentation:

     The unaudited Condensed Consolidated Financial Statements contained in this
Quarterly   Report  have  been  prepared  on  the  same  basis  as  the  audited
Consolidated Financial Statements in our Annual Report on Form 10-K for the year
ended  December  31,  2005  that we  filed  with  the  Securities  and  Exchange
Commission ("SEC") on March 31, 2006 (the "2005 Annual Report"). In our opinion,
we have made all  necessary  adjustments  (which  include only normal  recurring
adjustments)  in  order  to  state  fairly,  in  all  material   respects,   our
consolidated financial position,  results of operations and cash flows as of the
dates and for the periods presented. Certain reclassifications have been made to
conform the prior year's Consolidated Financial Statements to the current year's
classifications.  We have condensed the  Consolidated  Balance Sheet at December
31,  2005  contained  in  this  Quarterly  Report  as  compared  to our  audited
Consolidated  Financial  Statements  at that date,  and we have omitted  certain
information   and  footnote   disclosures   (including   those  related  to  the
Consolidated  Balance Sheet at December 31, 2005) normally included in financial
statements prepared in accordance with accounting  principles generally accepted
in the United  States of America  ("GAAP").  Our results of  operations  for the
interim  periods  ended June 30,  2006 may not be  indicative  of our  operating
results  for the full year.  The  Condensed  Consolidated  Financial  Statements
contained in this Quarterly  Report should be read in conjunction  with our 2005
Consolidated Financial Statements contained in our 2005 Annual Report.

     Contran  Corporation  beneficially owns 51% of our outstanding common stock
at June 30, 2006.  Substantially  all of Contran's  outstanding  voting stock is
held by trusts established for the benefit of certain children and grandchildren
of Harold C.  Simmons  (for which Mr.  Simmons is the sole  trustee)  or is held
directly by Mr.  Simmons or other persons or companies  related to Mr.  Simmons.
Consequently, Mr. Simmons may be deemed to control Contran and us.

     Net income  (loss) per share is based upon the weighted  average  number of
common  shares  outstanding  during the periods.  Options to purchase our common
stock that were  outstanding  during the first and second  quarters of 2005 were
omitted from the  calculation  of diluted  earnings per share  because they were
anti-dilutive.  We had no other dilutive securities outstanding during the first
and second quarters of 2005 and 2006.

     Unless  otherwise  indicated,  references  in this report to "we",  "us" or
"our" refer to Keystone  Consolidated  Industries,  Inc.  and its  subsidiaries,
taken as a whole.

Note 2 - Bankruptcy:

     On February 26, 2004,  we and five of our direct and indirect  subsidiaries
filed for voluntary  protection under Chapter 11 of the Federal Bankruptcy Code.
We filed our petitions in the U.S.  Bankruptcy Court for the Eastern District of
Wisconsin in Milwaukee  (the  "Court").  We attributed the need to reorganize to
weaknesses  in  product  selling  prices  over  the  preceding   several  years,
unprecedented  increases in ferrous scrap costs,  our primary raw material,  and
significant  liquidity needs to service  retiree  medical costs.  These problems
substantially  limited  our  liquidity  and  undermined  our  ability  to obtain
sufficient debt or equity capital to operate as a going concern.

                                     - 8 -
<PAGE>

     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  we  manage  the  business  as a
debtor-in-possession.  We received approval from the Court to pay certain of our
pre-petition claims.

     We filed a plan of  reorganization on October 4, 2004 and amended that plan
on May 26,  2005,  June  21,  2005  and  June  27,  2005.  Our  amended  plan of
reorganization was accepted by the impacted  constituencies and confirmed by the
Court on August 10, 2005.  We emerged from  bankruptcy  protection on August 31,
2005.  Significant  provisions of our 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"),  our 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;
     o    Our  obligations  due to  pre-petition  secured lenders other than our
          Debtor-In-Possession ("DIP") lenders were reinstated in full;
     o    All  shares of our  common  and  preferred  stock  outstanding  at the
          petition date (February 26, 2004) were cancelled;
     o    Pre-petition  unsecured  creditors with allowed claims against us 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 our new  common
          stock;
     o    Certain  operating  assets and  existing  operations  of Sherman  Wire
          Company ("SWC"),  one of our pre-petition  wholly-owned  subsidiaries,
          were sold at fair market  value (fair market value and book value both
          approximated  $2.0  million)  to us,  which were then used to form and
          operate a newly created wholly-owned subsidiary of ours named Keystone
          Wire Products Inc. ("KWP");
     o    SWC was also  reorganized and the proceeds of the operating asset sale
          to us,  liquidation of SWC's  remaining real estate assets (book value
          approximately $1.6 million), and other funds will be distributed, on a
          pro rata basis,  to SWC's  pre-petition  unsecured  creditors as their
          claims are finally adjudicated;
     o    SWC'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 ours,
          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 our  wholly-owned  subsidiaries,  will
          receive cash in an amount equal to their allowed claims;
     o    One of our DIP lenders,  EWP Financial,  LLC (an affiliate of Contran)
          converted  $5.0  million  of its DIP credit  facility,  certain of its
          pre-petition  unsecured  claims and all of its  administrative  claims
          against us into 51% of our new common stock; and
     o    Our Board of  Directors  now consists of seven  individuals,  two were
          designated  by  Contran  and  two  were  designated  by  the  Official
          Committee of Unsecured  Creditors  (the "OCUC").  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).

                                     - 9 -
<PAGE>

     In general, as a result of our Chapter 11 reorganization and discharge, any
future  government or third-party  private  actions  against us arising from our
alleged pre-petition responsibility for hazardous contamination at any non-owned
sites have been barred.  However,  our Chapter 11 discharge  does not affect our
liability  for  hazardous  contamination  of  property  that we  owned as of the
petition date,  therefore any  associated  clean up costs related to owned sites
remains our responsibility.

     As discussed above,  the proceeds  generated by SWC's asset sale to us, the
funds  generated from the  liquidation of SWC's remaining real estate assets and
other  funds  available  to SWC  (including  the $4.0  million  proceeds  from a
settlement  agreement  received in the second  quarter of 2006,  as discussed in
Notes 6 and 11) will  ultimately be  distributed,  on a pro-rata basis, to SWC's
pre-petition   unsecured   creditors  when  all  of  their  claims  are  finally
adjudicated.  The total  amount that will  ultimately  be  distributed  to SWC's
pre-petition  unsecured creditors will be limited to the lesser of (i) the total
of the claims  granted  by the Court and (ii) the total  funds  available  to be
distributed.  At June 30, 2006,  substantially all of SWC's pre-petition  claims
have been finally  adjudicated,  and the Court has either  discharged or allowed
these claims,  including certain  environmental  claims filed against SWC in its
Chapter 11  proceedings.  However,  one major claim related to an  environmental
site  continues to be litigated,  and therefore  this claim has not been finally
adjudicated.  When this remaining pre-petition claim is finally adjudicated, SWC
will be able to (i) liquidate SWC's remaining real estate and (ii) determine the
total SWC  pre-petition  claims to be distributed  and  consequently  be able to
distribute  the  appropriate  amounts  to  individual   pre-petition   unsecured
creditors  of SWC.  Because  all of the claims of SWC's  pre-petition  unsecured
creditors have not yet been finally  adjudicated,  all of SWC's  liabilities are
still  classified  as  liabilities  subject to  compromise  on our June 30, 2006
Condensed Consolidated Balance Sheet, and they will continue to be so classified
until  all  of  the  pre-petition  claims  are  finally  adjudicated.   Recorded
environmental  liabilities  related to non-owned SWC sites and an owned SWC site
aggregate $8.6 million at June 30, 2006.  Additionally,  any other  pre-petition
litigation  claims against SWC continue to be stayed until all of the claims are
finally adjudicated. See Note 10.


Note 3 - Business Segment Information:

     Our operating segments are organized along our manufacturing facilities and
include three reportable segments:
     o    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,
     o    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
     o    Keystone Wire Products ("KWP") which  manufacturers and sells wire and
          wire products for agricultural,  industrial, construction, commercial,
          original equipment manufacturers and retail consumer markets.

     In  connection  with our  emergence  from  Chapter 11 on August  31,  2005,
certain  operating  assets and existing  operations of Sherman were sold at fair
market  value to us, we then used these assets to form and operate KWP. As such,
operating  results of this segment prior to our  emergence  from Chapter 11 were
operating  results  of  Sherman.  Operating  results of this  segment  after our

                                     - 10 -
<PAGE>
emergence from Chapter 11, were operating results of KWP. In accordance with our
plan  of  reorganization,  the  remaining  assets  of  SWC  will  eventually  be
liquidated.

<TABLE>
<CAPTION>
                                                                Three months ended                Six months ended
                                                                     June 30,                         June 30,
                                                               -----------------------         -------------------------
                                                               2005               2006         2005                 2006
                                                               ----               ----         ----                 ----
                                                                                   (In thousands)

Net sales:
<S>                                                            <C>             <C>              <C>             <C>
  KSW                                                          $ 81,887        $118,805         $171,081        $236,485
  EWP                                                            17,755          18,115           29,806          30,733
  Sherman/KWP                                                     4,113           4,883            9,166           9,805
  Elimination of intersegment sales:
    KSW                                                         (11,866)         (9,314)         (25,186)        (21,904)
    EWP                                                               -            -                -               -
    Sherman/KWP                                                  (2,897)         (3,394)          (6,338)         (6,909)
                                                               --------        --------         --------        --------

     Total net sales                                           $ 88,992        $129,095         $178,529        $248,210
                                                               ========        ========         ========        ========

Operating income (loss):
  KSW                                                          $ (9,119)       $    455         $(10,571)       $  8,654
  EWP                                                             2,992           3,546            4,631           4,419
  Sherman/KWP                                                      (381)             98             (550)             34
  Allocation differences(1)                                       7,402          12,812           11,525          26,486
                                                               --------        --------         --------        --------

     Total operating income                                         894          16,911            5,035          39,593

Nonoperating income (expense):
  Corporate income (expense)                                       (895)            996           (2,191)          1,482
  Interest expense                                                 (919)         (1,337)          (1,776)         (2,539)
  Interest income                                                    47              90               82              92
  Other income, net                                                  16             267              104             267
                                                               --------        --------         --------        --------

  Income (loss) before income taxes
   and reorganization costs                                    $   (857)       $ 16,927         $  1,254        $ 38,895
                                                               ========        ========         ========        ========
</TABLE>

     (1)Allocation  differences  are  (i) the  difference  between  the  defined
benefit pension credit and postretirement benefit expense or credit allocated to
the  operating  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.

Note 4 - Inventories, net:

<TABLE>
<CAPTION>
                                                                                December 31,          June 30,
                                                                                   2005                 2006
                                                                                ------------          ---------
                                                                                       (In thousands)

<S>                                                                              <C>                  <C>
 Raw materials                                                                   $ 10,914             $ 13,746
 Work in process                                                                   29,550               20,482
 Finished goods                                                                    28,018               22,941
 Supplies                                                                          16,421               18,464
                                                                                 --------             --------

   Inventory at FIFO                                                               84,903               75,633
   Less LIFO reserve                                                              (15,212)             (17,463)
                                                                                 --------             --------

     Total                                                                       $ 69,691             $ 58,170
                                                                                 ========             ========
</TABLE>


                                     - 11 -
<PAGE>

Note 5 - Other accrued liabilities:

<TABLE>
<CAPTION>
                                                                                December 31,            June 30,
                                                                                   2005                  2006
                                                                                -----------         -------------
                                                                                        (In thousands)

Current:
<S>                                                                                <C>                  <C>
  Employee benefits                                                                $12,085              $11,710
  Self insurance                                                                     4,455                3,778
  Environmental                                                                      3,000                1,067
  Pre-petition unsecured creditor settlement                                         1,061                1,061
  Income taxes                                                                         939                  807
  Legal and professional                                                               247                  343
  Reorganization costs                                                               3,057                    -
  Other                                                                              2,780                4,344
                                                                                   -------              -------

      Total                                                                        $27,624              $23,110

Noncurrent:
  Environmental                                                                    $ 3,921              $ 3,921
  Workers compensation payments                                                      1,595                1,918
  Other                                                                                 61                   54
                                                                                   -------              -------

      Total                                                                        $ 5,577              $ 5,893
                                                                                   =======              =======
</TABLE>


Note 6 - Liabilities subject to compromise:

<TABLE>
<CAPTION>
                                                                                December 31,            June 30,
                                                                                   2005                  2006
                                                                                -----------             ----------
                                                                                        (In thousands)

<S>                                                                                <C>                    <C>
Environmental                                                                      $ 8,491                $ 8,589
Unearned income                                                                          -                  4,000
Accounts payable                                                                       850                    789
Disposition of former facilities                                                       684                    572
Legal and professional                                                                 244                    100
Other                                                                                  207                    189
                                                                                  --------                -------

     Total                                                                         $10,476                $14,239
                                                                                  ========                =======
</TABLE>

     During the second  quarter of 2006, SWC received $4.0 million from a former
insurer under a Court  approved  settlement  agreement.  Under the terms of that
settlement  agreement,  the insurer withdrew certain claims it had filed against
SWC in SWC's  bankruptcy  proceedings,  in exchange for which SWC released  that
insurer  from their  liability  to insure SWC for  environmental  coverage.  SWC
currently  anticipates  a  significant  portion of the  ultimate  payment of its
pre-petition  unsecured liabilities discussed in Note 2 will be funded with this
$4.0  million.  The  settlement  agreement  limits  SWC's use of the proceeds to
payment of SWC's pre-petition unsecured claims.  Accordingly, we have classified
the $4.0  million we  received as a  noncurrent  asset  included  in  restricted
investments  because  such  funds  will be used to  settle a  liability  we have
classified as noncurrent at June 30, 2006. Because of this restriction,  we have
also classified the $4.0 million as unearned income within  liabilities  subject
to compromise on our June 30, 2006 Condensed Consolidated Financial Statements.

                                     - 12 -
<PAGE>

Note 7 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
                                                                              December 31,           June 30,
                                                                                  2005                 2006
                                                                               ---------          -------------
                                                                                      (In thousands)

<S>                                                                              <C>                   <C>
 Wachovia revolving credit facility                                              $36,174               $30,747
 8% Notes                                                                         26,532                26,136
 UC Note                                                                           4,997                 5,303
 Term loans:
   Wachovia                                                                       21,980                19,685
   County                                                                         10,000                10,000
   Other                                                                             212                   159
                                                                                 -------               -------

 Total debt                                                                       99,895                92,030
   Less current maturities                                                        41,640                56,245
                                                                                 -------               -------


 Total long-term debt                                                            $58,255               $35,785
                                                                                 =======               =======
</TABLE>

Note 8 - 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,
                                                            ---------------------           -----------------------
                                                            2005             2006            2005             2006
                                                            ----             ----           ------           ------
                                                                                (In thousands)
<S>                                                        <C>              <C>              <C>              <C>
Service cost                                               $    938         $    959         $  1,875         $  1,918
Interest cost                                                 5,434            5,106           10,868           10,212
Expected return on plan assets                              (10,732)         (16,863)         (21,467)         (33,726)
Amortization of unrecognized:
  Prior service cost                                            221              227              441              454
  Actuarial losses                                              915           (1,594)           1,834           (3,184)
                                                           --------         --------         --------         --------

      Total                                                $ (3,224)        $(12,165)        $ (6,449)        $(24,326)
                                                           ========         ========         ========         ========
</TABLE>

     We do not expect to make cash  contributions to our defined benefit pension
plan during 2006.

     Postretirement  benefits  other than pensions  ("OPEB") - The components of
net periodic OPEB expense (credit) are presented in the table below.

<TABLE>
<CAPTION>
                                                             Three months ended                 Six months ended
                                                                  June 30,                          June 30,
                                                            ---------------------            ---------------------
                                                            2005             2006            2005             2006
                                                            ----             ----            ----             ----
                                                                                (In thousands)
<S>                                                           <C>             <C>            <C>               <C>
Service cost                                                  $  740          $    63        $  1,480          $   126
Interest cost                                                  3,026              495           6,052              990
Amortization of unrecognized:
  Prior service cost                                             (86)             (84)           (172)            (168)
  Prior service cost due to
   plan amendments                                              (710)          (4,243)         (1,420)          (8,486)
  Actuarial losses                                             1,397            1,669           2,794            3,338
                                                              ------          -------         -------          -------

      Total                                                   $4,367          $(2,100)        $ 8,734          $(4,200)
                                                              ======          =======         =======          =======
</TABLE>
                                     - 13 -
<PAGE>

     We   anticipate   making  $4.3  million  of  cash   contributions   to  our
postretirement benefit plans during 2006.

Note 9 - Provision for income taxes:

<TABLE>
<CAPTION>
                                                                                              Six months ended
                                                                                                  June 30,
                                                                                         ----------------------------
                                                                                         2005                   2006
                                                                                         ----                   ----
                                                                                                (In thousands)

<S>                                                                                       <C>                 <C>
Expected tax (benefit) provision, at statutory rate                                       $(1,654)            $13,496
U. S. state income taxes, net                                                                 102               1,335
Deferred tax asset valuation allowance                                                        (56)            (10,675)
Capitalized reorganization costs                                                            1,804                 118
Other, net                                                                                     12                (474)
                                                                                          -------             -------

Provision for income taxes                                                                $   208             $ 3,800
                                                                                          =======             =======

Comprehensive provision for income taxes:
  Currently payable:
    U.S. federal                                                                          $    86             $   237
    U.S. state                                                                                122                 333
                                                                                          -------             -------
      Net currently payable                                                                   208                 570

  Deferred income taxes, net                                                                 -                  3,230
                                                                                          -------             -------

                                                                                          $   208             $ 3,800
                                                                                          =======             =======
</TABLE>

     Our  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.

     Prior to June 30, 2006, considering all factors believed to be relevant, we
believed our gross  deferred tax assets did not meet the  "more-likely-than-not"
realizability  test.  As such,  we had provided a deferred  tax asset  valuation
allowance  to  offset  our net  deferred  income  tax  asset  (before  valuation
allowance) of approximately $10.7 million at December 31, 2005. During the first
six months of 2006,  we recorded  taxable  income in excess of our available net
operating loss caryforwards.  As such, the valuation  allowance related to those
deferred tax assets was completely reversed during the first six months of 2006.
After such  reversal,  we have a net deferred  income tax  liability at June 30,
2006. Due in part to our continued profitability,  we believe the realization of
our remaining gross deferred income tax assets (including an alternative minimum
tax credit carryforward) meet the "more-likely-than-not" realizability test.

Note 10 - Environmental matters:

     As a result of our  Chapter 11 filings on  February  26,  2004,  litigation
relating to pre-petition  environmental  claims against the filing companies was
stayed.  Upon  emergence  from  Chapter  11 on August  31,  2005,  environmental
liabilities  related  to our  non-owned  sites  ($900,000)  were  discharged  in
connection with our Chapter 11 proceedings. However, the pre-petition litigation
claims against SWC continue to be stayed while these claims are adjudicated.  We
have recorded  environmental  liabilities related to non-owned SWC sites of $7.8
million  and an owned  SWC site of  $830,000.  In  general,  as a result  of our
Chapter 11  reorganization  and  discharge  when we exited  bankruptcy in August
2005, any future  government or third-party  private  actions against us arising
from our alleged  pre-petition  responsibility  for hazardous  contamination  at
environmental  sites  that  we do not own  have  been  barred.  Our  Chapter  11
discharge does not affect our liability for hazardous  contamination of property
that was owned by us as of the petition date therefore,  any associated clean up
costs remains our responsibility.

                                     - 14 -
<PAGE>

     As discussed above,  the proceeds  generated by SWC's asset sale to us, the
funds  generated from the  liquidation of SWC's remaining real estate assets and
other  funds  available  to SWC  (including  the $4.0  million  proceeds  from a
settlement  agreement  received in the second  quarter of 2006,  as discussed in
Notes 6 and 11) will  ultimately be  distributed,  on a pro-rata basis, to SWC's
pre-petition   unsecured   creditors  when  all  of  their  claims  are  finally
adjudicated.  The total  amount that will  ultimately  be  distributed  to SWC's
pre-petition  unsecured creditors will be limited to the lesser of (i) the total
of the claims  granted  by the Court and (ii) the total  funds  available  to be
distributed.  At June 30, 2006,  substantially all of SWC's pre-petition  claims
have  been  finally  adjudicated,  other  than one  major  claim  related  to an
environmental   site.  When  this  remaining   pre-petition   claim  is  finally
adjudicated,  SWC will be able to (i) liquidate  SWC's remaining real estate and
(ii)  determine  the  total  SWC  pre-petition  claims  to  be  distributed  and
consequently  be  able to  distribute  the  appropriate  amounts  to  individual
pre-petition  unsecured  creditors  of SWC.  Because  all of the claims of SWC's
pre-petition  unsecured creditors have not yet been finally adjudicated,  all of
SWC's  liabilities are still classified as liabilities  subject to compromise on
our June 30, 2006 Condensed  Consolidated  Balance Sheet, and they will continue
to  be  so  classified  until  all  of  the  pre-petition   claims  are  finally
adjudicated.

     We have 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 14 governmental
and private  actions  associated  with  environmental  matters,  including waste
disposal sites and facilities currently or previously owned, operated or used by
us, 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 we may be jointly
and severally  liable for such costs, in most cases, we are only one of a number
of PRPs who may also be jointly and severally liable.

     On a quarterly  basis,  we evaluate the potential range of our liability at
sites where we have been named as a PRP or defendant by analyzing and estimating
the range of reasonably  possible costs to us. Such costs  include,  among other
things, expenditures for remedial investigations, monitoring, managing, studies,
certain  legal  fees,  clean-up,  removal  and  remediation.  We believe we have
provided  adequate  accruals  ($13.6  million at June 30, 2006,  $8.6 million of
which is reflected in  liabilities  subject to  compromise  on our June 30, 2006
balance  sheet) for these matters at 10 sites for which we believe our liability
is probable and reasonably estimable, but our 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 we are  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 us to
be required  for such  matters.  With respect to other PRPs and the fact that we
may be jointly and severally  liable for the total  remediation  cost at certain
sites,  we could  ultimately be liable for amounts in excess of our 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 us for these
matters may be substantially in the future.

                                     - 15 -
<PAGE>

     The upper end of the range of reasonably possible costs to us for sites for
which it is  possible  to  estimate  costs  (14  sites) is  approximately  $14.3
million.  Our estimate of such  liabilities  has not been  discounted to present
value,  and other than certain  previously-reported  settlements with respect to
certain of our former  insurance  carriers,  we have 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 four 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 we make  payments  with  respect to our
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 our control.  At each balance sheet date, we make an estimate of
the amount of our  accrued  environmental  costs which will be paid out over the
subsequent 12 months,  and we classify 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 our
environmental accruals for the six months ended June 30, 2006 is as follows:

<TABLE>
<CAPTION>
                                                                                          Six months ended
                                                                                              June 30,
                                                                                          ----------------
                                                                                           (In thousands)

<S>                                                                                             <C>
 Balance at December 31, 2005                                                                   $15,412
 Expense                                                                                              -
 Payments                                                                                        (1,944)
 Reclassification                                                                                   109
                                                                                                -------

 Balance at June 30, 2006                                                                       $13,577
                                                                                                =======

 Amounts classified as:
   Current accrued environmental cost                                                           $ 1,067
   Noncurrent accrued environmental cost                                                          3,921
   Liabilities subject to compromise                                                              8,589
                                                                                                -------

                                                                                                $13,577
                                                                                                =======
</TABLE>

     All of the recorded environmental liability included in liabilities subject
to compromise on our June 30, 2006 balance sheet relates to sites  involving SWC
or one of its  predecessors.  SWC's  environmental  liabilities  continue  to be
negotiated and adjudicated subsequent to its emergence from Chapter 11 on August
31, 2005. See Notes 2 and 6.

Owned sites (no longer subject to compromise at June 30, 2006).

     We are currently  involved in the closure of inactive  waste disposal units
at our 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.  We
recorded an estimated  liability for remediation of the  impoundments  and waste
piles based on a six-phase  remediation  plan. We adjust the recorded  liability

                                     - 16 -
<PAGE>

for each Phase as actual  remediation costs become known.  During 1995, we began
remediation of Phases II and III and completed these Phases, as well as Phase IV
during 1996.  During 1998 and 1999 we did not have any  significant  remediation
efforts relative to Phases V and VI. During 2000, we began  preliminary  efforts
relative to Phase V. Pursuant to agreements with the IEPA and Illinois  Attorney
General's  office  ("IAG"),  we are depositing  $75,000 per quarter into a trust
fund.  Prior to 2005, we were required to continue these quarterly  deposits and
could not withdraw funds from the trust fund until the fund balance exceeded the
sum of the estimated remaining  remediation costs plus $2 million.  During 2005,
this agreement was modified such that the IEPA and IAG now permit us to withdraw
funds from the trust fund as the site is remediated.  However,  the  requirement
for us to make  quarterly  deposits of $75,000 into the trust fund remains until
such time as the site is completely  remediated.  During the first half of 2006,
we paid  approximately  $1.9  million  in  remediation  costs  for this site and
received  approximately  $1.9 million in funds from the trust fund.  At December
31,  2005 and June 30,  2006,  the trust fund had a balance of $4.5  million and
$2.8 million, respectively, which were included in other noncurrent assets.

     In February 2000, we 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 us pursuant to section 3008(h) of the
Resource  Conservation and Recovery Act ("RCRA").  The draft order enclosed with
this  notice  would  require  us to:  (1)  investigate  the nature and extent of
hazardous  constituents  present at and released  from five alleged  solid waste
management units at our Peoria facility;  (2) investigate  hazardous constituent
releases from "any other past or present  locations at our 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 we "have
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 our 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. We have complied with deadlines in the draft order.
During the fourth  quarter of 2000,  we entered  into a modified  Administrative
Order on Consent,  which may require us to conduct cleanup activities at certain
solid waste management units at our Peoria facility  depending on the results of
soil and  groundwater  sampling and risk assessment to be conducted by us during
future periods pursuant to the order.

     In March 2000, the IAG filed and served a seven-count  complaint against us
for alleged  violations of the Illinois  Environmental  Protection Act, 415 ILCS
5/31, and regulations  implementing  RCRA at our Peoria facility.  The complaint
alleges  that we  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 that we 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 that we 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.  We  have  answered  the  complaint  and
proceedings  in the case have been  stayed  pending  the  outcome of  settlement
negotiations between us and the IAG's office.

     In December  2005,  we  received a Notice of  Violation  from the U.S.  EPA
regarding  air permit  issues at our Peoria,  Illinois  facility.  The U.S.  EPA

                                     - 17 -
<PAGE>

alleges  that we 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,  we  reached  a  preliminary  agreement  with the  U.S.  EPA on a plan for
addressing  the  U.S.  EPA's  concerns  without  referring  the  matter  for any
enforcement action.

SWC-related sites still subject to compromise at June 30, 2006.

     Prior to SWC's acquisition of DeSoto, Inc. ("DeSoto"),  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 SWC.
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
that the U.S. EPA will order further remedial action,  the exact extent of which
is not currently  known.  Any further  liability of SWC related to this site was
discharged in the Chapter 11 proceedings.

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

     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 a 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.  The
plaintiffs  were  granted a $750,000  claim in the Chapter 11  proceedings.  Any
further  liability of SWC related to this site was  discharged in the Chapter 11
proceedings.

     SWC 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,  SWC has signed a participation  agreement
which would require SWC to pay no less than 3% of the remediation costs. Valspar
continues  to pay for legal fees in this matter and has  reimbursed  SWC for all
assessments.   The  TNRCC  was  granted  a  $15,000  claim  in  the  Chapter  11
proceedings. Any further liability of SWC related to this site was discharged in
the Chapter 11 proceedings.

                                     - 18 -
<PAGE>


     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,  SWC  entered  into  TNRCC's  Voluntary  Cleanup  Program.
Remediation  costs are  presently  estimated  to be  between  $830,000  and $2.0
million.  Investigation  activities are on-going  including  additional soil and
groundwater sampling.

     In addition to the sites  discussed  above,  SWC is  allegedly  involved at
various  other  sites  and in  related  toxic  tort  lawsuits  which it does not
currently expect to incur significant liability. Pre-petition claims against SWC
continue to be negotiated  and  adjudicated  subsequent  to its  emergence  from
Chapter 11 on August 31, 2005.

Note 11 -  Other commitments and contingencies:

Current litigation

     Pre-petition  claims against SWC continue to be negotiated and  adjudicated
subsequent to its emergence from Chapter 11 on August 31, 2005.

     In July 2001,  SWC  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 SWC and
demanded  that SWC  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 (now SWC), 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  SWC with respect to the  complaint.  SWC has not
indemnified Sears and is unaware if the insurers have agreed to indemnify Sears.

     In May 2002,  SWC 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 our
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.  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 SWC. SWC
believes the request for  indemnification  is invalid.  However,  such Insurance
Company  has  refused  to  accept  SWC's  response  and has  demanded  that  SWC
participate  in mediation  in  accordance  with the terms of a prior  settlement
agreement. SWC 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 SWC. The total amount of these lead paint litigation related
costs and  claims  could be  significant.  However,  we do not have a  liability
recorded with respect to these matters because the liability that may result, if
any, cannot be reasonably estimated at this time.

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

                                     - 19 -
<PAGE>

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

     We are also engaged in various legal  proceedings  incidental to our normal
business  activities.  In our opinion,  none of such  proceedings is material in
relation  to our  consolidated  financial  position,  results of  operations  or
liquidity.

Note 12 - Recent Accounting Pronouncements:

     Inventory costs.  Statement of Financial  Accounting Standards ("SFAS") No.
151,  Inventory  Costs, an amendment of ARB No. 43, Chapter 4, became  effective
for us for inventory  costs  incurred on or after January 1, 2006.  SFAS No. 151
requires that  allocation  of fixed  production  overhead  costs to inventory be
based on normal  capacity of the production  facilities,  as defined by SFAS No.
151. SFAS No. 151 also  clarifies the  accounting  for abnormal  amounts of idle
facility  expense,  freight handling costs and wasted material,  requiring those
items be recognized as  current-period  charges.  Our existing  production  cost
policies complied with the requirements of SFAS No. 151,  therefore the adoption
of SFAS No. 151 did not affect our Consolidated Financial Statements.

     Stock  options.  On January 1, 2006,  SFAS No. 123R,  Share-Based  Payment,
became effective for us. SFAS No. 123R, among other things, requires the cost of
employee  compensation paid with equity  instruments to be measured based on the
grant-date  fair value.  That cost is then  recognized  over the vesting period.
Because  we did not have any  outstanding  awards or options at January 1, 2006,
the  adoption  of SFAS  No.  123R  did not  affect  our  Consolidated  Financial
Statements.  If we or our  subsidiaries  grant a  significant  number  of equity
awards  in  the  future,  the  amount  of  equity  compensation  expense  in our
Consolidated Financial Statements could be material.

     Uncertain  tax  positions.  In the  second  quarter  of 2006 the  Financial
Accounting  Standards Board ("FASB") issued FASB  Interpretation No. ("FIN") 48,
Accounting  for Uncertain Tax Positions,  which will become  effective for us on
January  1,  2007.  FIN No. 48  clarifies  when and how much of a benefit we can
recognize in our Consolidated  Financial  Statements for certain positions taken
in our income tax returns under SFAS No. 109,  Accounting for Income Taxes,  and
enhances the disclosure  requirements  for our income tax policies and reserves.
Among other things,  FIN No. 48 will prohibit us from recognizing the benefit of
a tax position  unless we believe it is  more-likely-than-not  our position will
prevail with the applicable tax authorities and limits the amount of the benefit
to the largest  amount for which we believe the  likelihood  of  realization  is
greater than 50%. FIN No. 48 also  requires  companies to accrue  penalties  and
interest on the difference  between tax positions taken on their tax returns and
the amount of benefit recognized for financial  reporting purposes under the new
standard.  Our current income tax accounting policies comply with this aspect of
the new standard.  We will also be required to  reclassify  any reserves we have


                                     - 20 -
<PAGE>

for uncertain tax positions from deferred income tax liabilities, where they are
currently recognized,  to a separate current or noncurrent liability,  depending
on the nature of the tax position. We are currently evaluating the impact of FIN
No. 48 on our Consolidated Financial Statements.



























                                     - 21 -
<PAGE>


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

Business Overview

     We are a leading  manufacturer of steel  fabricated  wire products,  welded
wire reinforcement,  nails,  coiled rebar,  industrial wire and wire rod for the
agricultural,  industrial,  construction,  original  equipment  manufacturer and
retail consumer  markets.  Historically,  we have 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.  We are also  engaged in the  operation  of a ferrous  scrap  recycling
facility.   The  operations  of  this  ferrous  scrap  recycling  facility  were
insignificant when compared to our consolidated operations. As such, the results
of its operations are not separately addressed in the discussion that follows.

     Our operating  segments are organized by our  manufacturing  facilities and
include three reportable segments:

     o    Keystone  Steel and Wire ("KSW")  which  manufacturers  and sells wire
          rod, industrial wire, nails, coiled rebar and fabricated wire products
          for  agricultural,   industrial,  construction,  commercial,  original
          equipment manufacturers and retail consumer markets,
     o    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
     o    Keystone  Wire  Products   ("KWP")  which   manufacturers   and  sells
          industrial  wire  and  fabricated  wire  products  for   agricultural,
          industrial, construction, commercial, original equipment manufacturers
          and retail consumer markets.

     In  connection  with our  emergence  from  Chapter 11 on August  31,  2005,
certain  operating  assets and existing  operations of Sherman were sold at fair
market  value to us, we then used these assets to form and operate KWP. As such,
operating  results of this segment prior to our  emergence  from Chapter 11 were
operating  results  of  Sherman.  Operating  results of this  segment  after our
emergence from Chapter 11, were operating results of KWP. In accordance with our
plan  of  reorganization,  the  remaining  assets  of  SWC  will  eventually  be
liquidated.

     Our profitability is primarily  dependent on sales volume,  per-ton selling
prices, per-ton ferrous scrap cost, and energy costs.

     We reported  net income of $13.0  million in the second  quarter of 2006 as
compared  to a net loss of $3.7  million  in the  second  quarter  of  2005.  We
reported net income of $34.8 million in the first six months of 2006 as compared
to a net loss of $4.9 million  during the first six months of 2005. The increase
in earnings  from 2005 to 2006 was due to the net effects of increased  shipment
volumes,   lower  costs  for  ferrous   scrap,   postretirement   benefits   and
reorganization  costs as well as a significantly  higher defined benefit pension
credit all  partially  offset by lower per-ton  selling  prices and an increased
provision for income taxes. As discussed in Note 2 to the Condensed Consolidated
Financial  Statements,  we were operating under the protection of our Chapter 11
bankruptcy filing during the first and second quarters of 2005.

                                     - 22 -

<PAGE>

     Our  consolidated  net  sales,  cost of goods  sold  and  gross  margin  by
operating segment are set forth in the following table.

<TABLE>
<CAPTION>
                                                                                        Allocation
                                                                      Sherman/         differences/
                                        KSW             EWP             KWP           eliminations(1)        Total
                                       ------         -------         --------        ---------------       ---------
                                                                      (In thousands)

Three months ended June 30, 2005:

<S>                                    <C>             <C>              <C>                <C>               <C>
  Net sales                            $ 81,887        $17,755          $4,113             $(14,763)         $ 88,992
  Cost of goods sold                     87,958         13,753           4,310              (18,987)           87,034
                                       --------        -------          ------             --------          --------
    Gross margin                       $ (6,071)       $ 4,002          $ (197)            $  4,224          $  1,958
                                       ========        =======          ======             ========          ========

Three months ended June 30, 2006:

  Net sales                            $118,805        $18,115          $4,883             $(12,708)         $129,095
  Cost of goods sold                    113,404         13,414           4,634              (11,644)          119,808
                                       --------        -------          ------             --------          --------
    Gross margin                       $  5,401        $ 4,701          $  249             $ (1,064)         $  9,287
                                       ========        =======          ======             ========          ========

Six months ended June 30, 2005:

  Net sales                            $171,081        $29,806          $9,166             $(31,524)         $178,529
  Cost of goods sold                    175,737         23,148           9,333              (36,702)          171,516
                                       --------        -------          ------             --------          --------
    Gross margin                       $ (4,656)       $ 6,658          $ (167)            $  5,178          $  7,013
                                       ========        =======          ======             ========          ========

Six months ended June 30, 2006:

  Net sales                            $236,485        $30,733          $9,805             $(28,813)         $248,210
  Cost of goods sold                    221,222         24,144           9,446              (30,915)          223,897
                                       --------        -------          ------             --------          --------
    Gross margin                       $ 15,263        $ 6,589          $  359             $  2,102          $ 24,313
                                       ========        =======          ======             ========          ========
</TABLE>

     (1)Allocation  differences  are  (i) the  difference  between  the  defined
benefit pension credit allocated to the operating segments and the actual 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.  See  Note  8  to  the  Condensed  Consolidated
Financial  Statements  for the  amount of our  defined  benefit  pension  credit
included in our consolidated results.







                                     - 23 -
<PAGE>

     Our  consolidated  sales volume and per-ton  selling  prices for the second
quarter and first six months of 2005 and 2006 are as follows:

<TABLE>
<CAPTION>
                                                             Three months ended                 Six months ended
                                                                  June 30,                          June 30,
                                                            ---------------------           ----------------------
                                                            2005             2006            2005             2006
                                                            ----             ----           -----            -----

Sales volume (000 tons):
<S>                                                         <C>              <C>             <C>              <C>
  Fabricated wire products                                  28               33              60               67
  Welded wire reinforcement                                 20               21              33               36
  Nails                                                      3                6               8               11
  Industrial wire                                           15               21              31               39
  Coiled rebar                                               -                (1)             -                (1)
  Wire rod                                                  45              103              88              206
  Billets                                                    3               17               5               27
                                                           ---              ---             ---              ---
    Total                                                  114              201             225              386
                                                           ===              ===             ===              ===

(1) - Less than 1,000 tons

Per-ton selling prices:
  Fabricated wire products                                $1,111           $1,050          $1,110           $1,039
  Welded wire reinforcement                                  894              845             907              858
  Nails                                                      811              710             791              704
  Industrial wire                                            758              707             763              712
  Coiled rebar                                               -                548             -                548
  Wire rod                                                   543              490             555              490
  Billets                                                    355              378             313              366
  All products                                               773              638             785              639
</TABLE>

     The higher  shipment  volume  during the 2006  periods was due to increased
market  demand,  competitor  production  problems as well as an  abnormally  low
shipment volume during the 2005 periods,  in part due to our customers' concerns
about  our  financial  stability  while  we  were  operating  under  Chapter  11
protection.  The lower per-ton  selling  prices during the 2006 periods were due
primarily to  significantly  lower ferrous scrap costs, as the price we sell our
products is influenced in part by the market cost of ferrous scrap.

     As a result of our  strengthened  financial  position due to our  emergence
from  Chapter 11, we believe we have been able to recapture in 2006 a portion of
the market that we lost during the last two years.  We believe a portion of this
market was lost due to customer  concerns  about our financial  stability.  As a
result, we expect 2006 shipment volumes to be higher than 2005 shipment volumes.
However,  due to anticipated  market pressures and lower projected ferrous scrap
costs,  we believe 2006 overall  per-ton  selling prices will be lower than 2005
selling  prices.  Energy costs are expected to remain  relatively  flat in 2006.
Additionally,  we anticipate a higher defined  benefit  pension credit and lower
postretirement  benefit and reorganization costs in 2006. As a result, we expect
to report pre-tax  income and positive cash flows from  operating  activities in
2006.  In  addition,  as a result of the  reversal  of our  deferred  income tax
valuation  allowance during the second quarter of 2006, we believe our provision
for income taxes  during the  remainder  of 2006 will  significantly  exceed the
corresponding  provision for income taxes in the same periods of the prior year.
We  currently  anticipate  recording a  provision  for income  taxes  during the
remainder of the year that will approximate the statutory rate.

     This report contains  forward-looking  statements within the meaning of the
Private Securities  Litigation Reform Act of 1995.  Statements in this Quarterly
Report on Form 10-Q that are not  historical in nature are  forward-looking  and
are not statements of fact.  Statements are found in this report including,  but
not  limited  to,  statements  found in Item 2 -  "Management's  Discussion  and


                                     - 24 -
<PAGE>

Analysis of Financial  Condition and Results of Operations," are forward-looking
statements  that  represent  our  beliefs  and  assumptions  based on  currently
available  information.  In some cases you can  identify  these  forward-looking
statements 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 we believe the  expectations  reflected  in
forward-looking  statements are reasonable, we do not know if these expectations
will be correct.  Forward-looking statements by their nature involve substantial
risks and uncertainties that could significantly impact expected results. Actual
future results could differ  materially  from those  predicted.  While it is not
possible  to  identify  all  factors,   we  continue  to  face  many  risks  and
uncertainties.  Among the factors that could cause our actual future  results to
differ  materially from those described  herein are the risks and  uncertainties
discussed in this Quarterly  Report and those described from time to time in our
other filings with the SEC including, but not limited to, the following:

     o    Future  supply  and  demand for our  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    Our ability 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 2005 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.  We
disclaim any  intention or  obligation  to update or revise any  forward-looking
statement whether as a result of new information, future events or otherwise.

                                     - 25 -
<PAGE>
Segment Operating Results:

Keystone Steel & Wire

<TABLE>
<CAPTION>
                                                                         Three months ended June 30,
                                                         ---------------------------------------------------------
                                                                            % of                             % of
                                                            2005            sales            2006            sales
                                                         ---------          -----           ------           -----
                                                                              ($ in thousands)

<S>                                                      <C>               <C>           <C>                 <C>
 Net sales                                               $ 81,887          100.0%        $118,805            100.0%
 Cost of goods sold                                        87,958          107.4          113,404             95.5
                                                         --------          -----         --------            -----

   Gross margin                                          $ (6,071)          (7.4)%       $  5,401              4.5%
                                                         ========          =====         ========            =====
</TABLE>

<TABLE>
<CAPTION>
                                                                          Six months ended June 30,
                                                         ---------------------------------------------------------
                                                                            % of                             % of
                                                            2005            sales            2006            sales
                                                         ---------          -----           ------           -----
                                                                              ($ in thousands)

<S>                                                      <C>               <C>           <C>                 <C>
 Net sales                                               $171,081          100.0%        $236,485            100.0%
 Cost of goods sold                                       175,737          102.7          221,222             93.5
                                                         --------          -----         --------            -----
   Gross margin                                          $ (4,656)          (2.7)%       $ 15,263              6.5%
                                                         ========          =====         ========            =====
</TABLE>

     The primary  drivers of sales,  cost of goods sold, and the resulting gross
margin are as follows:

<TABLE>
<CAPTION>
                                                                Three months ended              Six months ended
                                                                     June 30,                       June 30,
                                                               --------------------            -------------------
                                                               2005            2006            2005           2006
                                                               ----            ----            ----           ----
Sales volume(000 tons):
<S>                                                            <C>             <C>             <C>             <C>
 Fabricated wire products                                          28              32              60              66
 Nails                                                              3               6               8              11
 Industrial wire                                                   14              19              28              36
 Coiled rebar                                                       -             (1)               -             (1)
 Wire rod                                                          68             123             136             253
 Billets                                                            3              17               5              27
                                                               ------         -------          ------         -------
 Total sales                                                      116             197             237             393
                                                               ======         =======          ======         =======

(1) - Less than 1,000 tons

Per-ton selling prices:
  Fabricated wire products                                     $1,112         $ 1,050          $1,111         $ 1,039
  Nails                                                           811             710             791             704
  Industrial wire                                                 759             707             766             714
  Coiled rebar                                                      -             548               -             548
  Wire rod                                                        531             485             540             484
  Billets                                                         355             378             313             366
  All products                                                    700             597             715             596

Average per-ton ferrous
 scrap purchase cost                                           $  228         $   210          $  242         $   208

Average electricity
 cost per kilowatt hour                                        $ 0.04         $  0.04          $ 0.04         $  0.04

Average natural gas
 cost per therm                                                $ 0.73         $  0.69          $ 0.70         $  0.84

Postretirement benefit expense
 (credit) included in cost of goods
 sold ($000s)                                                  $3,934         $(1,441)         $7,868         $(2,882)
</TABLE>
                                     - 26 -
<PAGE>

     KSW believes the higher  shipment volume during the 2006 periods was due to
increased  market  demand  and  competitor  production  problems  as  well as an
abnormally  low  shipment  volume  during the 2005  periods,  in part due to our
customers'  concerns about our financial stability while we were operating under
Chapter 11 protection.  KSW believes the lower per-ton selling prices during the
2006 periods were due primarily to  significantly  lower ferrous scrap costs, as
the price we sell our  products  is  influenced  in part by the  market  cost of
ferrous scrap. The postretirement benefit credit in the 2006 periods as compared
to  expense  in the 2005  periods  is a result  of the 1114  Agreement  that was
entered into in connection with our emergence from Chapter 11 in August 2005.

Engineered Wire Products

<TABLE>
<CAPTION>
                                                                       Three months ended June 30,
                                                        ------------------------------------------------------
                                                                           % of                        % of
                                                           2005            sales        2006           sales
                                                        ---------       ----------     ------         --------
                                                                             ($ in thousands)

<S>                                                      <C>             <C>          <C>               <C>
 Net sales                                               $17,755         100.0%       $ 18,115          100.0%
 Cost of goods sold                                       13,753          77.5          13,414           74.0
                                                         -------         -----        --------          -----
   Gross margin                                          $ 4,002          22.5%       $  4,701           26.0%
                                                         =======         =====        ========          =====
</TABLE>

<TABLE>
<CAPTION>
                                                                        Six months ended June 30,
                                                        ------------------------------------------------------
                                                                           % of                          % of
                                                             2005          sales          2006           sales
                                                        ---------       ----------     ------         --------
                                                                             ($ in thousands)

<S>                                                      <C>             <C>          <C>               <C>
 Net sales                                               $29,806         100.0%       $ 30,733          100.0%
 Cost of goods sold                                       23,148          77.7          24,144           78.6
                                                         -------         -----        --------          -----
   Gross margin                                          $ 6,658          22.3%       $  6,589           21.4%
                                                         =======         =====        ========          =====
</TABLE>

     The primary  drivers of sales,  cost of goods sold, and the resulting gross
margin are as follows:

<TABLE>
<CAPTION>
                                                                Three months ended              Six months ended
                                                                     June 30,                       June 30,
                                                               --------------------            -------------------
                                                               2005            2006            2005           2006
                                                               ----            ----            ----           ----

Sales volume (000 tons) -
<S>                                                              <C>             <C>             <C>             <C>
 Welded wire reinforcement                                         20              21              33              36

Per-ton selling prices -
  Welded wire reinforcement                                      $894            $845            $907            $858

Average per-ton wire rod
 purchase cost                                                   $549            $498            $556            $495
</TABLE>

     The lower  per-ton  selling  prices  during the 2006 periods as well as the
increase  in gross  margin for the second  quarter  of 2006 as  compared  to the
second quarter of 2005 were due primarily to  significantly  lower cost for wire
rod, EWP's primary raw material.  EWP sources  substantially all of its wire rod
requirements from KSW at prices that approximate market.

                                     - 27 -
<PAGE>

Sherman/KWP

<TABLE>
<CAPTION>
                                                                        Three months ended June 30,
                                                         ------------------------------------------------------
                                                                        % of sales                         % of
                                                            2005                          2006            sales
                                                          -------        --------       -------           -----
                                                                              ($ in thousands)
<S>                                                       <C>           <C>             <C>               <C>
 Net sales                                                $4,113        100.0%          $4,883            100.0%
 Cost of goods sold                                        4,310        104.8            4,634             95.0
                                                          ------        -----           ------            -----
   Gross margin                                           $ (197)        (4.8)%         $  249              5.0%
                                                          ======        =====           ======            =====
</TABLE>

<TABLE>
<CAPTION>
                                                                         Six months ended June 30,
                                                         ------------------------------------------------------
                                                                           % of                            % of
                                                            2005          sales           2006            sales
                                                          -------        --------       -------           -----
                                                                              ($ in thousands)

<S>                                                      <C>            <C>             <C>               <C>
 Net sales                                               $9,166         100.0%          $9,805            100.0%
 Cost of goods sold                                       9,333         101.8            9,446             96.3
                                                          ------        -----           ------            -----
   Gross margin                                          $ (167)         (1.8)%         $  359              3.7%
                                                          ======        =====           ======            =====
</TABLE>

     The primary  drivers of sales,  cost of goods sold, and the resulting gross
margin are as follows:

<TABLE>
<CAPTION>
                                                                Three months ended              Six months ended
                                                                     June 30,                       June 30,
                                                               --------------------           -----------------------
                                                               2005            2006            2005           2006
                                                               ----            ----           ------         --------
Sales volume(000 tons):
<S>                                                            <C>              <C>             <C>             <C>
  Fabricated wire products                                          3               3               6               7
  Industrial wire                                                   2               2               4               4
                                                               ------           -----           -----          ------
  Total sales                                                       5               5              10              11
                                                               ------           -----           -----          ------

Per-ton selling prices:
  Fabricated wire products                                     $1,042          $1,001          $1,037          $1,013
  Industrial wire                                                 745             700             742             684

Average per-ton wire rod
 purchase cost                                                 $  477          $  443          $  476          $  437
</TABLE>

     The  improvement  in the gross margin for the 2006 periods is primarily due
to  significantly  lower cost for wire rod,  KWP's  primary  raw  material.  KWP
sources  substantially  all of its wire rod requirements from KSW at prices that
approximate market.

     Selling  Expense,  Pension and  Postretirement  Benefit  Credits,  Interest
Expense, Provision for Income Taxes, and General Corporate Items

     Selling  expense  during the second quarter and first six months of 2006 of
$1.7 million and $3.4  million,  respectively,  increased  slightly from selling
expense  during  the same  periods  in 2005 of $1.6  million  and $3.0  million,
respectively, primarily due to increased advertising expenses.

     General and administrative  expense during the second quarter and first six
months  of  2006 of $2.9  million  and  $5.6  million,  respectively,  increased
slightly from general and administrative expense during the same periods in 2005
of $2.7  million and $5.4  million,  respectively,  primarily  due to  increased
salaries.

                                     - 28 -
<PAGE>

     During  the second  quarter  and first six  months of 2006,  we  recorded a
defined benefit pension credit of $12.2 million and $24.3 million, respectively,
as compared to recording a defined  benefit  pension  credit in the same periods
during  2005 of $3.2  million  and $6.4  million,  respectively.  The  increased
pension  credit during the 2006 periods was a result of a $277 million  increase
in plan assets from the end of 2004 to the end of 2005. In addition, we were not
required to make any cash  contributions  to the defined  benefit  pension  plan
during  either 2006 or 2005.  We  currently  expect to record a defined  benefit
pension credit of $49.6 million during 2006 and that no plan  contributions will
be required during 2006. However, future variances from assumed actuarial rates,
including the rate of return on pension plan assets,  may result in increases or
decreases in pension expense or credit and future funding requirements.

     During the second quarter and first six months of 2006, we recorded general
corporate  income of $996,000  and $1.5  million,  respectively,  as compared to
recording  general corporate expense during the same periods in 2005 of $895,000
and $2.2 million,  respectively.  The reduction in general corporate expenses is
primarily due to lower general  insurance  expense,  franchise taxes and retiree
medical  costs  during the 2006  periods as compared to the 2005  periods.  As a
result  of the 1114  Agreement  that was  entered  into in  connection  with our
emergence from Chapter 11 in August 2005,  postretirement benefit expense during
periods  subsequent to that date is substantially  less than in periods prior to
that date. During the second quarter and first six months of 2006, we recorded a
postretirement  benefit credit of  approximately  $2.1 million and $4.2 million,
respectively, (of which $605,000 and $1.2 million, respectively, was included in
general  corporate  expenses)  as  compared to a $4.4  million and $8.7  million
postretirement  benefit  expense  recorded  in the second  quarter and first six
months of 2005, respectively, (of which $451,000 and $902,000, respectively, was
included in general corporate expenses).

     During  the  second  quarter  and first six  months  of 2006,  we  incurred
$186,000 and $336,000,  respectively of legal and professional  fees relative to
our  Chapter  11  proceedings  and  the  associated   reorganization  activities
including post emergence  activities related to closing the Chapter 11 cases and
liquidation of certain pre-petition subsidiaries.  During the second quarter and
first  six  months  of  2005,   we  incurred  $2.7  million  and  $6.0  million,
respectively, of legal and professional fees relative to these same activities.

     Interest  expense during the second quarter and first six months of 2006 of
$1.3  million  and $2.5  million,  respectively,  increased  significantly  from
interest  expense  during the same periods in 2005 of $919,000 and $1.8 million,
respectively. The primary drivers of interest expense are as follows:

<TABLE>
<CAPTION>
                                                                Three months ended              Six months ended
                                                                     June 30,                       June 30,
                                                             ------------------------         -----------------------
                                                               2005            2006            2005            2006
                                                             --------         -------         -------         -------
                                                                                ($ in thousands)

<S>                                                           <C>             <C>             <C>             <C>
Average debt balance                                          $85,702         $98,093         $81,143         $96,683

Weighted average interest rates                                  3.6%            5.3%            3.3%            5.1%
</TABLE>

     The overall  weighted  average  interest rates during the 2005 periods were
impacted by the fact that we  discontinued  accruing  interest  on  pre-petition
unsecured debt upon filing for Chapter 11 on February 2, 2004.

     A  tabular  reconciliation  of the  difference  between  the  U.S.  federal
statutory income tax rate and our effective income tax rates is included in Note
9 to the Condensed Consolidated  Financial Statements.  During 2005 and prior to
the second quarter of 2006,  considering all factors believed to be relevant, we

                                     - 29 -
<PAGE>
believed our gross  deferred tax assets did not meet the  "more-likely-than-not"
realizability  test.  As such,  we had provided a deferred  tax asset  valuation
allowance  to  offset  our net  deferred  income  tax  asset  (before  valuation
allowance) of approximately  $10.7 million at December 31, 2005.  Primarily as a
result of the deferred tax asset valuation allowance,  our provisions for income
taxes during those periods were not significant.  However,  during the first six
months of 2006,  we  recorded  taxable  income in  excess of our  available  net
operating loss carryforwards.  As such, the valuation allowance related to those
deferred tax assets was completely reversed during the first six months of 2006.
After such reversal,  we have a net deferred tax liability at June 30, 2006. Due
in part to our  continued  profitability,  we  believe  the  realization  of our
remaining  deferred  tax assets  (including  an  alternative  minimum tax credit
carryforward) meet the  "more-likely-than-not"  realizability test. We currently
expect to  report  pre-tax  income  for  financial  reporting  purposes  for the
remainder  of 2006 and as a result of the  reversal of our  deferred  income tax
valuation  allowance during the second quarter of 2006, we believe our provision
for income taxes  during the  remainder  of 2006 will  significantly  exceed the
corresponding  provision for income taxes in the same periods of the prior year.
We  currently  anticipate  recording a  provision  for income  taxes  during the
remainder of the year that will approximate the statutory rate.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

     At June 30, 2006, we had working capital of $40.3 million,  including $25.5
million of notes  payable and current  maturities  of long-term  debt as well as
outstanding borrowings under our revolving credit facility of $30.7 million. The
amount of available  borrowings  under our revolving credit facility is based on
formula-determined amounts of trade receivables and inventories, less the amount
of outstanding  letters of credit. At June 30, 2006, unused credit available for
borrowing under our revolving  credit facility was $27.8 million.  The revolving
credit  facility  requires  daily cash  receipts  be used to reduce  outstanding
borrowings,  which results in us  maintaining  zero cash balances when there are
balances  outstanding under this credit facility.  Accordingly,  any outstanding
balances  under this  facility  are  always  classified  as a current  liability
regardless of the maturity date of the facility.

Historical Cash Flows

     During the first six months of 2006 net cash provided by operations totaled
$16.4 million as compared to net cash used in operations of $8.9 million  during
the first six months of 2005. The improvement in operating cash flows during the
first six  months of 2006 as  compared  to the first six  months of 2005 was due
primarily  to:

     o    Higher earnings in 2006,
     o    Lower  levels  of  retiree  medical  payments  and a  lower  level  of
          reorganization costs in 2006, and
     o    Relative changes in our inventory levels, which provided $11.5 million
          of cash in 2006 as compared to $2.7 million in 2005.

     The  improvement in our cash provided by relative  changes in our inventory
levels was due to weaker than  anticipated  sales  during the 2005 period due in
part to our  customers'  concerns  about our financial  stability  while we were
operating under Chapter 11 protection.

     During  the  first six  months of 2006,  we made  capital  expenditures  of
approximately $6.2 million primarily related to upgrades of production equipment
at KSW and a plant expansion at EWP. Capital  expenditures for 2006 are expected

                                     - 30 -
<PAGE>
to be  approximately  $23.0  million and are related  primarily to the EWP plant
expansion.  Such capital expenditures are expected to be funded using cash flows
from operations and borrowing availability under our credit facilities.

     As a result of increased profitability,  we decreased our borrowings on our
revolving credit  facilities by $5.4 million during the first six months of 2006
as compared to increasing  our  borrowings on our  revolving  credit  facilities
during  the first six months of 2005.  During  the first six months of 2006,  we
made  principal  payments  of $2.7  million on  long-term  debt as  compared  to
long-term debt principal payments of $1.3 million during the first six months of
2005 due to the fact the credit  facilities we obtained in  connection  with our
emergence from Chapter 11 require larger principal  payments than those required
while under Chapter 11 protection.

Environmental Obligations

     At June 30, 2006, our financial statements reflected accrued liabilities of
$13.6  million  ($8.6  million of which is  included in  liabilities  subject to
compromise  on our  balance  sheet) for  estimated  remediation  costs for those
environmental  matters which we believe are probable and  reasonably  estimable.
Although  we  have   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.  We
believe it is not possible to estimate the range of costs for certain sites. The
upper end of the range of reasonably possible costs to us for sites for which we
believe  it is  possible  to  estimate  costs is  approximately  $14.3  million,
including  the  $13.6  million  currently  accrued.  See  Notes 10 and 11 to the
Condensed Consolidated Financial Statements for discussions of our environmental
liabilities and current litigation.

Pension and Other Postretirement Obligations

     We do not expect to make  contributions to our defined benefit pension plan
during 2006.  However,  we anticipate $4.3 million of cash  contributions to our
postretirement  benefit plans.  Future  variances from assumed  actuarial rates,
including  the rate of  return  on plan  assets,  may  result  in  increases  or
decreases to pension and  postretirement  benefit  expense or credit and funding
requirements in future periods.

Income Taxes

     Prior to the second quarter of 2006, considering all factors believed to be
relevant,   we  believed  our  gross  deferred  tax  assets  did  not  meet  the
"more-likely-than-not"  realizability  test. As such, we had provided a deferred
tax asset  valuation  allowance  to offset  our net  deferred  income  tax asset
(before  valuation  allowance)  of  approximately  $10.7 million at December 31,
2005.  However,  during the first six months of 2006, we recorded taxable income
in excess  of our  available  net  operating  loss  caryforwards.  As such,  the
valuation allowance related to those deferred tax assets was completely reversed
during the fist six months of 2006.  After such reversal,  we had a net deferred
tax liability at June 30, 2006. Due in part to our continued  profitability,  we
believe the  realization of our remaining  gross deferred income tax assets meet
the  "more-likely-than-not"  realizability  test. We currently  expect to report
pre-tax income for financial reporting purposes for the remainder of 2006 and as
a result of the  utilization of our available net operating  loss  carryforwards
during the first six months of 2006,  we will be required  to pay  significantly
higher cash income taxes in future periods with positive taxable income amounts.

                                     - 31 -
<PAGE>
Operating Costs

     We incur significant  ongoing costs for plant and equipment and substantial
employee  benefits  for both  current and  retired  employees.  As such,  we are
vulnerable  to business  downturns  and  increases  in costs,  and  accordingly,
routinely  compare our  liquidity  requirements  and capital  needs  against our
estimated  future  operating cash flows.  We are also taking  additional  action
towards improving our liquidity. We have also considered,  and may in the future
consider,  the sale of certain  divisions or subsidiaries that are not necessary
to achieve our long-term business objectives. However, there can be no assurance
we will be successful in any of these or other  efforts,  or that if successful,
they will provide sufficient liquidity for our operations during the next year.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     Reference is made to the 2005 Annual  Report for a discussion of the market
risks  associated with changes in interest rates that affect us. There have been
no material changes in such market risks since we filed the 2005 Annual Report.

ITEM 4.  CONTROLS AND PROCEDURES

     Evaluation of Disclosure  Controls and Procedures - We maintain a system of
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
we file or submit to the  Securities  and  Exchange  Commission  (the  "SEC") is
recorded, processed,  summarized and reported, within the time periods specified
in the SEC's  rules and  forms.  Disclosure  controls  and  procedures  include,
without limitation,  controls and procedures designed to ensure that information
required to be  disclosed by us in the reports that we file or submit to the SEC
under the Act is accumulated and  communicated to our management,  including our
principal  executive  officer and our 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, our President and
Chief Executive  Officer,  and Bert E. Downing,  Jr., our Vice President,  Chief
Financial  Officer,  Corporate  Controller  and  Treasurer,  have  evaluated our
disclosure  controls  and  procedures  as of June 30,  2006.  Based  upon  their
evaluation, these executive officers have concluded that our disclosure controls
and procedures were effective as of the date of such evaluation.

     Internal  Control  Over  Financial  Reporting  - We  currently  expect that
Section  404 of the  Sarbanes-Oxley  Act of 2002  will  require  us to  annually
include a  management  report  on  internal  control  over  financial  reporting
starting  with our Annual  Report on Form 10-K for the year ended  December  31,
2007.  We will have to document,  test and  evaluate  our internal  control over
financial reporting, using a combination of internal and external resources. The
process of  documenting,  testing  and  evaluating  our  internal  control  over

                                     - 32 -
<PAGE>
financial  reporting  under the applicable  guidelines is expected to be complex
and time consuming,  and available internal and external resources  necessary to
assist us in the  documentation  and testing required to comply with Section 404
could be limited.  While we  currently  believe we will be able to dedicate  the
appropriate resources, and that we will be able to fully comply with Section 404
in our Annual Report on Form 10-K for the year ended December 31, 2007 and be in
a position to conclude  that our 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 our control could arise, there can be no assurance that we
will ultimately be able to fully comply with Section 404 in our Annual Report on
Form 10-K for the year  ended  December  31,  2007 or whether we will be able to
conclude that our internal  control over financial  reporting is effective as of
December 31, 2007.

     Changes in Internal  Control Over Financial  Reporting - There have been no
changes in our internal  control  over  financial  reporting  during the quarter
ended June 30, 2006 that has  materially  affected,  or is reasonably  likely to
materially affect, our internal control over financial reporting.



                                     - 33 -
<PAGE>


PART II.  OTHER INFORMATION

ITEM 1. Legal Proceedings.

     Reference  is  made to  disclosure  provided  under  the  caption  "Current
litigation" in Note 11 to the Consolidated Financial Statements.

ITEM 1A. Risk Factors.

     Reference  is made to the  2005  Annual  Report  for a  discussion  of risk
factors related to our businesses.  There have been no material  changes in such
risk factors since we filed the 2005 Annual Report.

ITEM 6. Exhibits.

(a)  We have  retained  a signed  original  of any  exhibit  listed  below  that
     contains signatures, and we 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.


                                     - 34 -
<PAGE>

                               S I G N A T U R E S



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:  August 8, 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)