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 September 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 November 14, 2006: 10,000,000



                                     <PAGE>


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- 3 -



                                [GRAPHIC OMITTED]
                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

                                      INDEX


                                                                          Page
                                                                         number
                                                                         ------
PART I.  FINANCIAL INFORMATION

  Item 1.    Financial Statements

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

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

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

             Condensed Consolidated Statement of Stockholders' Equity -
              Nine months ended September 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      35

  Item 4.    Controls and Procedures                                         35


PART II.     OTHER INFORMATION

  Item 1.    Legal Proceedings.                                              36

  Item 1A.   Risk Factors.                                                   36

  Item 6.    Exhibits.                                                       36

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




                                     <PAGE>


                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (In thousands)
<TABLE>
<CAPTION>

                                                              December 31,       September 30,
                                 ASSETS                          2005                2006
                                                              -----------         ----------
                                                                                 (unaudited)

 Current assets:
<S>                                                             <C>                <C>
   Accounts receivable, net                                     $  46,199          $  51,261
   Inventories, net                                                69,691             65,270
   Restricted investments                                           1,040              1,054
   Deferred income taxes                                             -                15,417
   Prepaid expenses and other                                       2,760              3,125
                                                                ---------          ---------

      Total current assets                                        119,690            136,127
                                                                ---------          ---------

 Property, plant and equipment:
   Land                                                             1,193              1,193
   Buildings and improvements                                      54,189             55,043
   Machinery and equipment                                        310,446            299,082
   Construction in progress                                         3,949              9,387
                                                                ---------          ---------
                                                                  369,777            364,705
   Less accumulated depreciation                                  283,004            280,783
                                                                ---------          ---------

      Net property, plant and equipment                            86,773             83,922
                                                                ---------          ---------

 Other assets:
   Restricted investments                                           4,758              6,016
   Prepaid pension cost                                           145,152            181,639
   Deferred financing costs                                           902                722
   Goodwill                                                           752                752
   Other                                                              337                541
                                                                ---------          ---------

      Total other assets                                          151,901            189,670
                                                                ---------          ---------

      Total assets                                              $ 358,364          $ 409,719
                                                                =========          =========
</TABLE>





                                      - 3 -
                                     <PAGE>


                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

                CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

                                 (In thousands)
<TABLE>
<CAPTION>


  LIABILITIES AND STOCKHOLDERS' EQUITY
                                                              December 31,       September 30,
                                                                  2005                2006
                                                              -----------         -----------
                                                                                  (unaudited)

 Current liabilities:
   Notes payable and current maturities of
<S>                                                             <C>                 <C>
     long-term debt                                             $  41,640           $  54,691
   Accounts payable                                                 9,797              11,836
   Accrued OPEB cost                                                4,256               4,256
   Other accrued liabilities                                       27,624              24,949
                                                                ---------           ---------

       Total current liabilities                                   83,317              95,732
                                                                ---------           ---------

 Noncurrent liabilities:
   Long-term debt                                                  58,255              34,054
   Accrued OPEB cost                                              133,208             123,988
   Deferred income taxes                                                -              24,789
   Other                                                            5,577               5,806
                                                                ---------           ---------

       Total noncurrent liabilities                               197,040             188,637
                                                                ---------           ---------

 Liabilities subject to compromise                                 10,476              13,966
                                                                ---------           ---------

 Stockholders' equity:
   Common stock                                                       100                 100
   Additional paid-in capital                                      75,423              75,423
   Retained earnings (accumulated deficit)                         (7,992)             35,861
                                                                ---------           ---------

       Total stockholders' equity                                  67,531             111,384
                                                                ---------           ---------

       Total liabilities and stockholders'
        equity                                                  $ 358,364           $ 409,719
                                                                =========           =========
</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              Nine months ended
                                                 September 30,                  September 30,
                                              ------------------------       ------------------------
                                                2005            2006           2005            2006
                                              --------        --------       --------        --------
                                                  (unaudited)                     (unaudited)
<S>                                           <C>             <C>             <C>            <C>
 Net sales                                    $ 84,770        $105,212        $263,299       $353,422
 Cost of goods sold                             75,854          96,017         247,370        319,914
                                              --------        --------        --------       --------

   Gross margin                                  8,916           9,195          15,929         33,508
                                              --------        --------        --------       --------

 Selling expense                                 1,630           1,665           4,647          5,113
 General and administrative
  expense                                        3,050           2,645           8,460          8,243
 Defined benefit pension credit                 (3,226)        (12,161)         (9,675)       (36,487)
                                              --------        --------        --------       --------

       Total operating costs                     1,454          (7,851)          3,432        (23,131)
                                              --------        --------        --------       --------

 Operating income                                7,462          17,046          12,497         56,639
                                              --------        --------        --------       --------

 Nonoperating income (expense):
   Corporate income (expense)                     (566)           (209)         (2,757)         1,273
   Interest expense                             (1,040)         (1,189)         (2,816)        (3,728)
   Interest income                                 138              67             220            159
   Other income (expense), net                     167            (361)            271            (94)
                                              --------        --------        --------       --------

       Total nonoperating expense               (1,301)         (1,692)         (5,082)        (2,390)
                                              --------        --------        --------       --------


   Income before income taxes and
    reorganization items                         6,161          15,354           7,415         54,249
                                              --------        --------        --------       --------

  Reorganization items:
   Reorganization costs                         (4,342)           (270)        (10,323)          (606)
   Gain on cancellation of debt                 32,349             -            32,349           -
                                              --------        --------        --------       --------
          Total reorganization items            28,007            (270)         22,026           (606)
                                              --------        --------        --------       --------

   Income before income
    taxes                                       34,168          15,084          29,441         53,643

 Provision for income taxes                         64           5,990             272          9,790
                                              --------        --------        --------       --------

   Net income                                 $ 34,104        $  9,094        $ 29,169       $ 43,853
                                              ========        ========        ========       ========

 Basic income per share                       $   3.61        $   0.91        $   3.11       $   4.39
                                              ========        ========        ========       ========

 Basic shares outstanding                       10,046          10,000          10,061         10,000
                                              ========        ========        ========       ========

 Diluted income per share                     $   1.64        $   0.91        $   1.20       $   4.39
                                              ========        ========        ========       ========

 Diluted shares outstanding                     22,029          10,000          26,039         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
                  Nine months ended September 30, 2005 and 2006
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                   2005               2006
                                                                  ------             ------
                                                                         (unaudited)

 Cash flows from operating activities:
<S>                                                              <C>                <C>
   Net income                                                    $ 29,169           $ 43,853
   Depreciation and amortization                                   11,775             11,354
   Amortization of deferred financing costs                           604                203
   Deferred income taxes                                                -              9,372
   Non-cash defined benefit pension credit                         (9,675)           (36,487)
   OPEB expense (credit)                                           10,956             (6,300)
   OPEB payments                                                   (4,139)            (2,920)
   Reorganization costs accrued                                    10,322                606
   Reorganization costs paid                                       (7,639)            (3,484)
   Impairment of long-lived assets                                      -                529
   Gain on cancellation of debt                                   (32,349)                 -
   Other, net                                                          19                725
   Change in assets and liabilities:
     Accounts receivable                                          (15,541)            (5,292)
     Inventories                                                   (7,437)             4,421
     Accounts payable                                                 720              1,982
     Other, net                                                    (5,126)             3,502
                                                                 --------           --------

       Net cash provided by (used in) operating
        activities                                                (18,341)            22,064
                                                                 --------           --------

 Cash flows from investing activities:
   Capital expenditures                                            (6,057)            (9,645)
   Restricted investments, net                                       (415)            (1,272)
   Other, net                                                       1,336                 27
                                                                 --------           --------

       Net cash used in investing activities                       (5,136)           (10,890)
                                                                 --------           --------

 Cash flows from financing activities:
   Revolving credit facilities, net                                17,451             (7,309)
   Other notes payable and long-term debt:
     Additions                                                     22,553                468
     Principal payments                                           (16,004)            (4,310)
   Deferred financing costs paid                                     (523)               (23)
                                                                 --------           --------

       Net cash provided by (used in)
        financing activities                                       23,477            (11,174)
                                                                 --------           --------

 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                         $  2,255            $  3,115
     Income taxes, net                                                680                 365
   Common stock issued in exchange for extinguishment
    of certain pre-petition unsecured and DIP claims               21,400                  -
   Note issued in exchange for extinguishment of
    certain pre-petition unsecured claims                           4,800                  -
</TABLE>


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

                                     <PAGE>




                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

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

<TABLE>
<CAPTION>

                                                                        Retained
                                                       Additional       earnings
                                          Common        paid-in       (accumulated
                                           stock        capital         deficit)        Total
                                          -------      ---------      ------------      -----
                                                              (unaudited)

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

 Net income                                  -             -             43,853        43,853
                                           ----         -------        --------      --------

 Balance - September 30, 2006              $100         $75,423        $ 35,861      $111,384
                                           ====         =======        ========      ========
</TABLE>



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

                                     <PAGE>


                     KEYSTONE CONSOLIDATED INDUSTRIES, INC.
                                AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                               September 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 September 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 51.1% of our outstanding common stock
at September 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.

     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 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.

     We emerged  from  bankruptcy  protection  on August 31,  2005.  Significant
provisions of our plan of reorganization included greater employee participation
in healthcare costs and a permanent  reduction in healthcare related payments to
retirees.  Before the  bankruptcy can be completely  closed,  all claims must be
adjudicated.  As of September 30, 2006, only two significant claims had not been
adjudicated:  (i) an  environmental  claim against Sherman Wire Company ("SWC"),
one of our  pre-petition  wholly-owned  subsidiaries,  and  (ii)  an  employment
related claim against Keystone.

                                      - 8 -

                                     <PAGE>

     Upon  emergence  from  Chapter 11,  certain  operating  assets and existing
operations  of SWC 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").  SWC  was  also  reorganized  and the  proceeds  of the
operating  assets sold to us,  liquidation of SWC's remaining real estate assets
(book value approximates $1.6 million),  and other funds (including $4.0 million
of proceeds from a settlement  agreement with a former  insurer  received in the
second quarter of 2006, as discussed in Notes 6 and 11) will be distributed,  on
a pro rata basis, to SWC's pre-petition unsecured creditors when all claims have
been 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 U.S.  Bankruptcy  Court for the  Eastern
District  of  Wisconsin  in  Milwaukee  (the  "Court")  and (ii) the total funds
available  to be  distributed.  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
September 30, 2006 Condensed Consolidated Balance Sheet.

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"),   located  in  Peoria,  Illinois,
          manufactures and sells wire rod, coiled rebar,  industrial wire, nails
          and  wire  products  for   agricultural,   industrial,   construction,
          commercial,  original  equipment  manufacturers  and  retail  consumer
          markets,
     o    Engineered Wire Products  ("EWP"),  located in Upper  Sandusky,  Ohio,
          manufactures  and sells  welded  wire  reinforcement  in both roll and
          sheet  form  that  is  utilized  in  concrete   construction  products
          including pipe,  pre-cast boxes and  applications for use in roadways,
          buildings and bridges, and
     o    Keystone Wire Products,  located in Sherman,  Texas,  manufactures and
          sells industrial 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 SWC ("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.

     During the third quarter of 2006, we decided to relocate  KWP's  industrial
wire manufacturing  process to KSW and to discontinue the production of nails at
KSW. KWP will continue to manufacture  and distribute  fabricated wire products,
and KSW  may  sell  nails  manufactured  by  third  parties.  Certain  of  KWP's
industrial wire production equipment will be transferred to KSW, which we expect
will be completed  during the fourth  quarter of 2006. We do not expect the cost
to  relocate  this  equipment  to KSW  will  be  significant.  We are  currently
negotiating  the sale of KWP's remaining  industrial wire production  equipment,
which we expect will also be  completed  during the fourth  quarter of 2006.  We
plan to phase out our nail  production  at KSW over the next six  months,  after
which we plan to sell our nail production equipment. During the third quarter of
2006, we recorded an aggregate  impairment charge of $529,000  (included in cost
of goods sold) to write down the carrying value of the industrial  wire and nail
production equipment to be sold to its estimated fair value of $630,000. Because
we expect to complete the sale of the industrial wire production  equipment that
is not being  transferred to KSW during the fourth quarter of 2006, the carrying
value of these assets is included in other  current  assets on our September 30,
2006 Condensed  Consolidated Balance Sheet. The carrying value of the industrial
wire production  equipment that is being transferred to KSW, as well as the nail
production  equipment  which we will  continue  to use for the next six  months,
continue to be included in machinery  and  equipment on our  September  30, 2006
Condensed  Consolidated  Balance Sheet. The sales and operating income (loss) of
our nail operations is not material to our operating results.

                                      - 9 -
                                     <PAGE>


<TABLE>
<CAPTION>

                                                    Three months ended             Nine months ended
                                                      September 30,                  September 30,
                                                   --------------------           ------------------
                                                   2005            2006           2005          2006
                                                   ----            ----           ----          ----
                                                                      (In thousands)

Net sales:
<S>                                                <C>         <C>               <C>           <C>
  KSW                                              $ 76,455      $ 98,990        $247,536      $335,475
  EWP                                                17,986        16,496          47,792        47,229
  Sherman/KWP                                         4,079         3,838          13,245        13,643
  Elimination of intersegment sales:
    KSW                                             (11,644)      (11,747)        (36,830)      (33,651)
    EWP                                                   -             -               -             -
    Sherman/KWP                                      (2,106)       (2,365)         (8,444)       (9,274)
                                                   --------      --------        --------      --------

     Total net sales                               $ 84,770      $105,212        $263,299      $353,422
                                                   ========      ========        ========      ========

Operating income (loss):
  KSW                                              $   (489)     $  1,852        $(11,060)     $ 10,505
  EWP                                                 2,453         3,554           7,084         7,973
  Sherman/KWP                                          (264)         (445)           (814)         (411)
  Allocation differences(1)                           5,762        12,085          17,287        38,572
                                                   --------      --------        --------      --------

     Total operating income                           7,462        17,046          12,497        56,639

Nonoperating income (expense):
  Corporate income (expense)                           (566)         (209)         (2,757)        1,273
  Interest expense                                   (1,040)       (1,189)         (2,816)       (3,728)
  Interest income                                       138            67             220           159
  Other income (loss), net                              167          (361)            271           (94)
                                                   --------      --------        --------      --------

  Income before income taxes
   and reorganization items                        $  6,161      $ 15,354        $  7,415      $ 54,249
                                                   ========      ========        ========      ========
</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.

                                     - 10 -

                                     <PAGE>

Note 4 - Inventories, net:
<TABLE>
<CAPTION>
                                                              December 31,         September 30,
                                                                  2005                2006
                                                              -----------          -----------
                                                                        (In thousands)

<S>                                                              <C>                  <C>
 Raw materials                                                   $ 10,914             $ 16,198
 Work in process                                                   29,550               26,619
 Finished goods                                                    28,018               19,501
 Supplies                                                          16,421               18,714
                                                                 --------             --------

   Inventory at FIFO                                               84,903               81,032
   Less LIFO reserve                                               15,212               15,762
                                                                 --------             --------

     Total                                                       $ 69,691             $ 65,270
                                                                 ========             ========
</TABLE>


Note 5 - Other accrued liabilities:
<TABLE>
<CAPTION>

                                                              December 31,         September 30,
                                                                  2005                2006
                                                              -----------          -----------
                                                                        (In thousands)

Current:
<S>                                                               <C>                  <C>
  Employee benefits                                               $12,085              $12,992
  Income taxes                                                        939                  633
  Self insurance                                                    4,455                4,158
  Environmental                                                     3,000                  898
  Pre-petition unsecured creditor settlement                        1,061                1,061
  Legal and professional                                              247                  271
  Reorganization costs                                              3,057                  179
  Other                                                             2,780                4,757
                                                                  -------              -------

      Total                                                       $27,624              $24,949
                                                                  =======              =======
Noncurrent:
  Environmental                                                   $ 3,921              $ 3,921
  Workers compensation payments                                     1,595                1,833
  Other                                                                61                   52
                                                                  -------              -------

      Total                                                       $ 5,577              $ 5,806
                                                                  =======              =======
</TABLE>

Note 6 - Liabilities subject to compromise:
<TABLE>
<CAPTION>

                                                              December 31,         September 30,
                                                                  2005                2006
                                                              -----------          -----------
                                                                        (In thousands)

<S>                                                               <C>                  <C>
Environmental                                                     $ 8,491              $ 8,461
Accounts payable                                                      850                  789
Disposition of former facilities                                      684                  417
Legal and professional                                                244                   92
Other                                                                 207                4,207
                                                                  -------              -------

     Total                                                        $10,476              $13,966
                                                                  =======              =======
</TABLE>

                                     - 11 -

                                     <PAGE>


     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,  which we have  classified as
noncurrent  liabilities at September 30, 2006.  Accordingly,  we have classified
the $4.0  million we  received as a  noncurrent  asset  included  in  restricted
investments.  Because  of the  restriction,  we have  also  classified  the $4.0
million as a liability subject to compromise on our September 30, 2006 Condensed
Consolidated Financial Statements.

Note 7 - Notes payable and long-term debt:
<TABLE>
<CAPTION>

                                                             December 31,         September 30,
                                                                  2005                2006
                                                              -----------          -----------
                                                                        (In thousands)


<S>                                                              <C>                   <C>
 Wachovia revolving credit facility                              $36,174               $28,865
 8% Notes                                                         26,532                25,740
 UC Note                                                           4,997                 5,465
 Term loans:
   Wachovia                                                       21,980                18,538
   County                                                         10,000                10,000
   Other                                                             212                   137
                                                                 -------               -------

 Total debt                                                       99,895                88,745
   Less current maturities                                        41,640                54,691
                                                                 -------               -------


 Total long-term debt                                            $58,255               $34,054
                                                                 =======               =======
</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             Nine months ended
                                                             September 30,                  September 30,
                                                         ----------------------        ----------------------
                                                          2005           2006             2005          2006
                                                          ----           ----             ----          ----
                                                                            (In thousands)

<S>                                                      <C>            <C>            <C>           <C>
Service cost                                             $    938       $    959       $  2,813      $  2,877
Interest cost                                               5,432          5,106         16,300        15,318
Expected return on plan assets                            (10,732)       (16,863)       (32,216)      (50,589)
Amortization of unrecognized:
  Prior service cost                                          221            227            662           681
  Actuarial losses                                            915         (1,590)         2,766        (4,774)
                                                         --------       --------       --------      --------

      Total                                              $ (3,226)      $(12,161)      $ (9,675)     $(36,487)
                                                         ========       ========       ========      ========
</TABLE>

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

                                     - 12 -

                                     <PAGE>


     Postretirement  benefits  other  than  pensions  - The  components  of  net
periodic expense (credit) related to postretirement benefits other than pensions
are presented in the table below.
<TABLE>
<CAPTION>
                                                           Three months ended             Nine months ended
                                                             September 30,                    September 30,
                                                          ---------------------           ------------------
                                                          2005             2006            2005         2006
                                                          ----             ----            ----         ----
                                                                             (In thousands)

<S>                                                        <C>           <C>             <C>          <C>
Service cost                                               $  514        $    63         $ 1,995      $   189
Interest cost                                               2,196            495           8,248        1,485
Amortization of unrecognized:
  Prior service cost                                          (86)           (84)           (257)        (252)
  Prior service cost due to
   plan amendments                                         (1,915)        (4,243)         (3,335)     (12,729)
  Actuarial losses                                          1,512          1,669           4,305        5,007
                                                           ------        -------         -------      -------

      Total                                                $2,221        $(2,100)        $10,956      $(6,300)
                                                           ======        =======         =======      =======
</TABLE>
     We  currently   anticipate   contributing  $4.3  million  of  cash  to  our
postretirement benefit plans during 2006.


Note 9 - Provision for income taxes:
<TABLE>
<CAPTION>
                                                                     Nine months ended
                                                                        September 30,
                                                                 ----------------------
                                                                    2005           2006
                                                                    ----           ----
                                                                       (In thousands)

<S>                                                               <C>           <C>
Expected tax provision, at statutory rate                         $10,304       $18,775
U. S. state income taxes, net                                       1,788         1,969
Deferred tax asset valuation allowance                            (15,714)      (10,675)
Capitalized reorganization costs                                    3,613           133
Other, net                                                            281          (412)
                                                                  -------       -------
Provision for income taxes                                        $   272       $ 9,790
                                                                  =======       =======

Comprehensive provision for income taxes:
  Currently payable:
    U.S. federal                                                  $    80       $     6
    U.S. state                                                        192           412
                                                                  -------       -------
     Net currently payable                                            272           418

  Deferred income taxes, net                                            -         9,372
                                                                  -------       -------
                                                                  $   272       $ 9,790
                                                                  =======       =======
</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 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 income tax liability. 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.
                                     - 13 -

                                     <PAGE>

     Certain of our U.S.  tax  returns  are  currently  being  examined  and tax
authorities  could propose tax  deficiencies.  To date, the tax authorities have
not proposed any tax  deficiencies.  We believe the ultimate  disposition of tax
examinations  should  not have a  material  adverse  effect on our  consolidated
financial position, results of operations or liquidity.

Note 10 - Environmental matters:

     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.  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 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
$14.0  million.  Our estimate of such costs 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.  We have provided accruals ($13.3 million at September 30,
2006, $8.5 million of which is reflected in liabilities subject to compromise on
our  September  30,  2006  balance  sheet)  for 10 sites  which we  believe  our
liability is probable and reasonably estimable.  However, 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.
In addition,  the actual  timeframe  for payments by us for these matters may be
substantially  in the future.  It is possible  our actual  costs will exceed the
amounts  we have  accrued  or the  upper  end of the  range  for sites for which
estimates have been made.

     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.
                                     - 14 -
                                     <PAGE>

     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 nine  months  ended  September  30,  2006 is as
follows:
<TABLE>
<CAPTION>

                                                                Nine months ended
                                                                  September 30,
                                                                -----------------
                                                                  (In thousands)

<S>                  <C> <C>                                        <C>
 Balance at December 31, 2005                                       $  15,412
 Expense                                                                    -
 Payments                                                              (2,242)
 Reclassification                                                         110
                                                                    ---------

 Balance at September  30, 2006                                     $  13,280
                                                                    =========

 Amounts classified as:
   Current accrued environmental cost                               $     898
   Noncurrent accrued environmental cost                                3,921
   Liabilities subject to compromise                                    8,461
                                                                    ---------

                                                                    $  13,280
                                                                    =========

</TABLE>

     All of the recorded environmental liability included in liabilities subject
to compromise on our September 30, 2006 balance sheet relates to sites involving
SWC or one of its predecessors and consists of $7.6 million related to non-owned
sites and $826,000 related to an owned site. The pre-petition claims against SWC
continue to be stayed while one final environmental claim is adjudicated.

     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 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.

Sites no longer subject to compromise.

     We are currently  involved in the closure of inactive  waste disposal units
at KSW  pursuant  to a  closure  plan  approved  by the  Illinois  Environmental
Protection Agency ("IEPA") in September 1992 ("the Closure Plan").  The original
closure  plan  provided  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 adjusted the recorded liability
for each Phase as actual remediation costs became known.  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 at KSW plus $2.0  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 KSW sites are remediated.  However,  the requirement for us to
make  quarterly  deposits of $75,000 into the trust fund remains until such time
as the sites are  completely  remediated  in  accordance  with the Closure Plan.
During the first nine  months of 2006,  we paid  approximately  $2.1  million in
remediation  costs for these sites and  received  approximately  $2.8 million in
funds from the trust fund.  At December 31, 2005 and  September  30,  2006,  the
trust fund had a balance of $4.5 million and $2.0 million,  respectively,  which
were  included  in  other  noncurrent   assets.  We  believe  we  completed  the
remediation required by the Closure Plan as it has been amended during the third
quarter of 2006.  However,  as of September 30, 2006,  the IEPA has not approved
the work.
                                     - 15 -
                                     <PAGE>

     In February  2000,  we received a notice  from the 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 KSW; (2) investigate
hazardous  constituent releases from "any other past or present locations at KSW
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 KSW  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 KSW. 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 KSW.  The U.S.  EPA  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.

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

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

     The  pre-petition  claims against SWC continue to be stayed while one final
environmental claim is adjudicated.

     Prior to SWC's 1996  acquisition  of DeSoto,  Inc.  ("DeSoto"),  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 $826,000 and $2.0 million.  Investigation activities are
on-going including additional soil and groundwater sampling.

                                     - 16 -
                                     <PAGE>

SWC-related sites discharged in the Chapter 11 proceedings.

     Prior to SWC's  acquisition of DeSoto,  DeSoto was notified by the U.S. EPA
that it is one of approximately 50 PRPs at the Chemical Recyclers,  Inc. site in
Wylie,  Texas.  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  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,  the 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 above, 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.

                                     - 17 -
                                     <PAGE>

Note 11 -  Other commitments and contingencies:

Current litigation

     We are  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.

     Pre-petition  claims  against  SWC  continue  to be stayed  while one final
environmental claim is adjudicated.

Settled litigation

     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.

     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 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  demanded
indemnification  from the Insurance  Companies.  One of the Insurance  Companies
demanded indemnification and defense from SWC.

     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.  Sears  filed a  notice  with  the  Bankruptcy  Court  indicating  it is
consenting  to the Allstate  Settlement  and withdrew its claims with  prejudice
with respect to this matter.




                                     - 18 -
                                     <PAGE>
Note 12 - Earnings per share:

     Net income per share is based upon the  weighted  average  number of common
shares  and  dilutive  securities  outstanding  during the  periods.  Options to
purchase  our common  stock that were  outstanding  during the 2005 periods were
omitted from the  calculation  of diluted  earnings per share  because they were
anti-dilutive.  A reconciliation  of the numerators and denominators used in the
calculations of basic and diluted  earnings per share  computations of income is
presented below.
<TABLE>
<CAPTION>
                                                    Three months ended            Nine months ended
                                                      September 30,                 September 30,
                                                  -----------------------      ---------------------
                                                   2005            2006           2005          2006
                                                   ----            ----           ----          ----
                                                            (In thousands)
Numerator:
<S>                                               <C>             <C>          <C>          <C>
  Net income                                      $ 34,104        $ 9,094      $ 29,169     $ 43,853

  Cancellation of Series A Preferred
   Stock                                             2,112              -         2,112            -
  Less Series A Preferred Stock
   dividends                                             -              -             -            -
                                                  --------       --------      --------     --------
  Basic net income                                  36,216        $ 9,094        31,281       43,853
    Series A Preferred Stock dividends                   -              -             -            -
                                                  --------       --------      --------     --------

  Diluted net income                              $ 36,216        $ 9,094      $ 31,281     $ 43,853
                                                  ========       ========      ========     ========

Denominator:
  Average common shares outstanding                 10,046         10,000        10,061       10,000
  Dilutive effect of Series A
   Preferred Stock                                  11,983              -        15,978            -
                                                  --------       --------      --------     --------

  Diluted shares                                    22,029         10,000        26,039       10,000
                                                  ========       ========      ========     ========
</TABLE>

Note 13 - 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

                                    - 19 -
                                     <PAGE>

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
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,  and we expect to finalize our
analysis in the fourth quarter of 2006.

     Planned Major Maintenance Activities.  In September,  2006 FASB issued FASB
Staff Position ("FSP") No. AUG AIR-1,  Accounting for Planned Major  Maintenance
Activities,  which will become effective for us in January 2007,  although early
adoption  is  permitted.  Under FSP No. AUG AIR-1  accruing in advance for major
maintenance is no longer permitted. Companies that previously accrued in advance
for major maintenance activities will be required to retroactively restate their
financial  statements  to reflect a permitted  method of expense for all periods
presented.  In the past,  we have  accrued  in  advance  during the year for our
planned major maintenance activities expected to be undertaken within that year.
We will retroactively  restate our interim consolidated  financial statements in
the fourth  quarter of 2006 to reflect the direct  expense method of accounting.
Adoption  of the FSP will not have any  impact on our  previously  reported  net
income for any calendar  year.  Since we did accrue in advance  during the year,
the  adoption  of the FSP  will  have the  following  effect  on our  previously
reported interim net income:
<TABLE>
<CAPTION>
                                                   Increase (decrease) in net
                                                  -----------------------------
                                                             income
                                                             ------
                                                      2005                2006
                                                      ----                ----
 Quarter Ended:                                           (In thousands)

<S>    <C>                                         <C>                  <C>
 March 31                                          $   424              $    507
 June 30                                               370                   387
 September 30                                           48                   362
 December 31                                          (842)                   na
                                                  --------               -------

       Total                                       $    -               $  1,256
                                                  ========              ========
</TABLE>

     Quantifying Financial Statement  Misstatement.  In September,  2006 the SEC
issued  Staff  Accounting  Bulletin  ("SAB")  No.  108  expressing  their  views
regarding the process of quantifying financial statement misstatements.  The SAB
is effective for us no later than the fourth  quarter of 2006.  According to SAB
No. 108 both the  "rollover" and "iron  curtain"  approaches  must be considered
when evaluating a misstatement for materiality. We do not expect the adoption of
the  SAB to  have a  material  effect  on our  previously-reported  consolidated
financial position or results of operations at the date of adoption.

     Fair Value Measurements.  In September,  2006 the FASB issued SFAS No. 157,
Fair Value Measurements,  which will become effective for us on January 1, 2007.
SFAS No. 157 generally  provides a consistent,  single fair value definition and
measurement techniques for GAAP pronouncements.  SFAS No. 157 also establishes a
fair value hierarchy for different measurement techniques based on the objective
nature of the inputs in various valuation methods. We will be required to ensure
all of our fair  value  measurements  are in  compliance  with SFAS No. 157 on a
prospective  basis beginning in the first quarter of 2007. In addition,  we will
be required to expand our disclosures  regarding the valuation methods and level
of inputs we utilize in the first quarter of 2007. The adoption of this standard
will not have a material effect on our Consolidated Financial Statements.

                                     - 20 -
                                     <PAGE>

     Pension and Other Postretirement Plans. In September, 2006 FASB issued SFAS
No.  158,   Employers'   Accounting  for  Defined   Benefit  Pension  and  Other
Postretirement  Plans.  SFAS  No.  158  requires  us to  recognize  an  asset or
liability for the over or under funded status of each of our individual  defined
benefit pension and  postretirement  benefit plans on our  Consolidated  Balance
Sheets. We will recognize through other comprehensive  income prior unrecognized
gains and losses and prior service costs or credits,  net of tax, as of December
31, 2006 that we currently  amortize  through net  periodic  benefit  cost.  All
future  changes in the funded status of these plans will be  recognized  through
comprehensive  income,  net of tax  (either  net  income or other  comprehensive
income).  We will also provide certain new discloses  related to these plans. In
addition,  this  standard  requires  the  measurement  date of all  plans  to be
December  31,  which is currently  the  measurement  date of all our pension and
postretirement  benefit  plans.  SFAS  No.  158  does not  change  the  existing
recognition and measurement  requirements  that determine the amount of periodic
benefit cost recognized in net income.

     The asset and liability  recognition  and disclosure  requirements  of this
standard  will  become  effective  for us as of  December  31,  2006 and must be
adopted  prospectively.  At December 31, 2005 our pension plans were over funded
by  $309.0  million  and  we  had a  $145.2  million  asset  recognized  on  our
Consolidated  Balance  Sheet related to these plans.  At December 31, 2005,  our
postretirement  benefit  plans were under  funded by $38.7  million and we had a
$137.5  million total  liability  recognized on our  Consolidated  Balance Sheet
related to these plans.  We will not complete the 2006  assessment of the funded
status of our pension and postretirement  benefit plans until after December 31,
2006,  and our December 31, 2006 funded  status will be based in part on certain
actuarial  assumptions that we cannot yet determine and differences  between the
actual and expected return on plan assets during the year. Therefore, we are not
able  to  determine  the  ultimate   impact  this  standard  will  have  on  our
Consolidated  Financial  Statements.  However,  we  believe  the net  effect  of
adopting  SFAS No. 158 will  increase our  stockholders'  equity at December 31,
2006. The full  disclosure of the funded status of our defined  benefit  pension
and postretirement benefit plans at December 31, 2005 can be found in Note 10 to
our 2005 Annual Report.



                                     - 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"),   located  in  Peoria,  Illinois,
          manufactures 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"),  located in Upper  Sandusky,  Ohio,
          manufactures  and sells  welded  wire  reinforcement  in both roll and
          sheet  form  that  is  utilized  in  concrete   construction  products
          including pipe,  pre-cast boxes and  applications for use in roadways,
          buildings and bridges, and
     o    Keystone   Wire   Products   ("KWP"),   located  in  Sherman,   Texas,
          manufactures  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 SWC ("Sherman") were sold to
us at fair market  value.  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.

     During the third quarter of 2006, we decided to relocate  KWP's  industrial
wire manufacturing  process to KSW and to discontinue the production of nails at
KSW. KWP will continue to manufacture  and distribute  fabricated wire products,
and KSW  may  sell  nails  manufactured  by  third  parties.  Certain  of  KWP's
industrial  wire  production  equipment will be  transferred to KSW.  During the
third quarter of 2006, we recorded an aggregate impairment charge of $529,000 to
write  down the  carrying  value  of the  industrial  wire  and nail  production
equipment  to be sold to an  estimated  fair  value of  $630,000.  The sales and
operating  income (loss) of our nail operations is not material to our operating
results. See Note 3 to the Condensed Consolidated Financial Statements.

     Our profitability is primarily  dependent on sales volume,  per-ton selling
prices,  per-ton  ferrous scrap cost,  and energy costs.  Additionally,  because
pension  and other  postretirement  benefits  ("OPEB")  expense or  credits  are

                                     - 22 -
                                     <PAGE>

unrelated to the operating  activities  of our business,  we measure our overall
performance  using operating  profit before pension and OPEB.  Operating  profit
before pension and OPEB credit or expense is a non-GAAP measure of profitability
and it shall not be  considered  in isolation  or as a substitute  for a measure
prepared in accordance  with GAAP. A  reconciliation  of statement of operations
line items as  reported to  statement  of  operations  line items  adjusted  for
pension and OPEB expense or credits is set forth in the following tables.
<TABLE>
<CAPTION>

                                                             Three months ended September 30,
                                 ----------------------------------------------------------------------------------------------
                                                                    (In thousands)
                                                 2005                                                2006
                                 ---------------------------------------------     --------------------------------------------
                                                                  Operating                                         Operating
                                              Elimination           Profit                         Elimination       Profit
                                   As             of                before           As               of             before
                                 Reported     Pension/OPEB       Pension/OPEB     Reported       Pension/OPEB     Pension/OPEB
                                 --------     ------------       -------------     --------       ------------    ------------
<S>                              <C>             <C>               <C>             <C>                  <C>         <C>
Net sales                        $84,770         $     -           $84,770         $105,212             $   -       $105,212
Cost of goods sold                75,854          (1,984)           73,870           96,017             1,450         97,467
                                 -------         -------           -------         --------          --------       --------
  Gross margin                     8,916           1,984            10,900            9,195            (1,450)         7,745
                                 -------         -------           -------         --------          --------       --------

Selling Expense                    1,630              (1)            1,629            1,665                15          1,680
General and
 administrative expense            3,050              10             3,060            2,645                29          2,674
Defined benefit pension
 credit                           (3,226)          3,226               -            (12,161)           12,161           -
                                 -------         -------           -------         --------          --------       --------
 Total operating costs             1,454           3,235             4,689           (7,851)           12,205          4,354
                                 -------         -------           -------         --------          --------       --------
Operating income                 $ 7,462         $(1,251)          $ 6,211         $ 17,046          $(13,655)      $  3,391
                                 =======         =======           =======         ========          ========       ========
</TABLE>

<TABLE>
<CAPTION>
                                                           Nine months ended September 30,
                                 -----------------------------------------------------------------------------------------------
                                                                 (In thousands)
                                                 2005                                                2006
                                 ---------------------------------------------     ---------------------------------------------
                                                                  Operating                                         Operating
                                              Elimination           Profit                        Elimination        Profit
                                   As             of                before            As              of             before
                                 Reported     Pension/OPEB        Pension/OPEB     Reported      Pension/OPEB     Pension/OPEB
                                 --------     ------------        ------------     --------      ------------     ------------
<S>                              <C>             <C>              <C>             <C>              <C>             <C>
Net sales                        $263,299        $   -            $263,299         $353,422         $      -        $353,422
Cost of goods sold                247,370        (9,806)           237,564          319,914             4,351        324,265
                                 --------        -------          --------         --------         ---------       ---------
  Gross margin                     15,929         9,806             25,735           33,508            (4,351)        29,157
                                 --------        -------          --------         --------         ---------       --------

Selling Expense                     4,647            (5)             4,642            5,113                44          5,157
General and
 administrative expense             8,460           (25)             8,435            8,243                88          8,331
Defined benefit pension
 credit                            (9,675)        9,675                 -           (36,487)           36,487             -
                                 --------        -------          --------         --------         ---------       --------
 Total operating costs              3,432         9,645             13,077          (23,131)           36,619         13,488
                                 --------        -------          --------         --------         ---------       --------
Operating income                 $ 12,497        $  161           $ 12,658         $ 56,639         $ (40,970)      $ 15,669
                                 ========        =======          ========         ========         =========       ========
</TABLE>

     The decrease in  operating  profit  before  pension and OPEB from the third
quarter of 2005 to the third  quarter of 2006 was  primarily due to higher costs
for  ferrous  scrap  partially  offset by higher  per-ton  selling  prices.  The
increase in operating  profit before  pension and OPEB for the nine months ended
September  30,  2006 as  compared  to the same period in 2005 was due to the net
effects  of  increased  shipment  volumes  and  lower  costs for  ferrous  scrap
partially offset by lower per-ton selling prices.  As discussed in Note 2 to the
Condensed  Consolidated  Financial  Statements,  we  were  operating  under  the
protection  of our Chapter 11  bankruptcy  filing for the first eight  months of
2005.
                                     - 23 -
                                     <PAGE>


     Our  consolidated  net  sales,  cost of goods  sold,  operating  costs  and
operating  profit  before  pension  and  OPEB by  segment  are set  forth in the
following tables.
<TABLE>
<CAPTION>

                                                                                            Allocation
                                                                          Sherman/         differences/
                                                KSW           EWP            KWP          eliminations(1)       Total
                                                ---           ---         -------         --------------        -----
                                                                       (In thousands)

Three months ended September 30, 2005:

<S>                                          <C>            <C>             <C>              <C>              <C>
 Net sales                                   $ 76,455       $ 17,986        $ 4,079          $(13,750)        $ 84,770
 Cost of goods sold                            66,038         14,274          4,145           (10,587)          73,870
                                             --------       --------        -------          --------         --------
   Gross margin                                10,417          3,712            (66)           (3,163)          10,900

 Selling and
   administrative expense                       3,164          1,205             61               259            4,689
                                             --------       --------        -------          --------         --------
 Operating    profit    (loss)   before
     Pension/OPEB                            $  7,253       $  2,507        $  (127)         $ (3,422)        $  6,211
                                             ========       ========        =======          ========         ========

Three months ended September 30, 2006:

 Net sales                                   $ 98,990       $ 16,496        $ 3,838          $(14,112)        $105,212
 Cost of goods sold                            94,307         11,910          4,112           (12,862)          97,467
                                             --------       --------        -------          --------         --------
   Gross margin                                 4,683          4,586           (274)           (1,250)           7,745

 Selling and
   administrative expense                       3,166            994            164                30            4,354
                                             --------       --------        -------          --------         --------
 Operating    profit    (loss)   before
     Pension/OPEB                            $  1,517       $  3,592        $  (438)         $ (1,280)        $  3,391
                                             ========       ========        =======          ========         ========

Nine months ended September 30, 2005:

 Net sales                                   $247,536       $ 47,792        $13,245          $(45,274)        $263,299
 Cost of goods sold                           232,268         37,406         13,490           (45,600)         237,564
                                             --------       --------        -------          --------         --------
   Gross margin                                15,268         10,386           (245)              326           25,735

 Selling and
   administrative expense                       9,068          3,139            595               275           13,077
                                             --------       --------        -------          --------         --------
 Operating    profit    (loss)   before
     Pension/OPEB                            $  6,200       $  7,247        $  (840)         $     51         $ 12,658
                                             ========       ========        =======          ========         ========

Nine months ended September 30, 2006:

 Net sales                                   $335,475       $ 47,229        $13,643          $(42,925)        $353,422
 Cost of goods sold                           316,685         36,043         13,538           (42,001)         324,265
                                             --------       --------        -------          --------         --------
   Gross margin                                18,790         11,186            105              (924)          29,157

 Selling and
   administrative expense                       9,851          3,100            492                45           13,488
                                             --------       --------        -------          --------         --------
 Operating    profit    (loss)   before
     Pension/OPEB                            $  8,939       $  8,086        $  (387)         $   (969)        $ 15,669
                                             ========       ========        =======          ========         ========
</TABLE>


     (1)Allocation  differences are the  elimination of  intercompany  profit or
loss on ending inventory balances and LIFO inventory reserve adjustments.


                                     - 24 -
                                     <PAGE>


     Our  consolidated  sales  volume and per-ton  selling  prices for the third
quarter and first nine months of 2005 and 2006 are as follows:
<TABLE>
<CAPTION>

                                                       Three months ended              Nine months ended
                                                        September 30,                     September 30,
                                                    ----------------------          ---------------------
                                                       2005          2006            2005            2006
                                                       ----          ----            ----            ----

Sales volume (000 tons):
<S>                                                     <C>           <C>              <C>             <C>
  Fabricated wire products                              19            24               79              90
  Welded wire reinforcement                             21            19               54              55
  Nails                                                  4             3               12              15
  Industrial wire                                       19            20               50              59
  Coiled rebar                                           -            (1)               -              (1)
  Wire rod                                              61            85              149             291
  Billets                                                5             5               11              32
                                                      ----          ----             ----            ----
    Total                                              129           156              355             542
                                                      ====          ====             ====            ====

(1) - Less than 1,000 tons

Per-ton selling prices:
  Fabricated wire products                          $1,065          $1,014          $1,099          $1,033
  Welded wire reinforcement                            860             880             888             865
  Nails                                                718             714             768             706
  Industrial wire                                      704             741             741             722
  Coiled rebar                                          -              589              -              559
  Wire rod                                             470             523             520             500
  Billets                                              277             307             295             357
  All products                                         656             667             738             647
</TABLE>

     The higher  shipment volume of fabricated wire products and wire rod during
the third  quarter of 2006 as compared  to the third  quarter of 2005 was due to
increased market demand and competitor production problems.  The higher shipment
volume of all  products  during the nine  months  ended  September  30,  2006 as
compared  to the same  period in 2005 was due to  increased  market  demand  and
competitor  production  problems as well as an  abnormally  low shipment  volume
during the first half of 2005, in part due to our customers'  concerns about our
financial  stability  while we were operating  under Chapter 11 protection.  The
higher  per-ton  selling  prices during the third quarter of 2006 as compared to
the third  quarter of 2005 were due  primarily  to price  increases  implemented
during the third  quarter of 2006.  The lower  overall  per-ton  selling  prices
during the nine months ended  September  30, 2006 as compared to the same period
in 2005,  were due primarily to 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.

                                     - 25 -
                                     <PAGE>

     As  previously   stated,   energy  costs  are  a  primary   driver  of  our
profitability.  Deregulation  of  electricity  in Illinois  (the location of our
largest  manufacturing  facility)  will occur on January  1, 2007,  as such,  we
anticipate higher energy costs in 2007.

     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
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.

                                     - 26 -
                                     <PAGE>

Segment Operating Results:

         The segment operating results presented exclude the effect of pension
and OPEB expense or credits.


Keystone Steel & Wire
<TABLE>
<CAPTION>

                                                                 Three months ended September 30,
                                                             ------------------------------------
                                                                     % of                          % of
                                                      2005          sales            2006         Sales
                                                      ----          -----            ----         -----
                                                                         ($ in thousands)

<S>                                                 <C>             <C>             <C>           <C>
 Net sales                                          $ 76,455        100.0%          $98,990       100.0%
 Cost of goods sold                                   66,038         86.4            94,307        95.3
                                                    --------       ------           -------       -----
   Gross margin                                       10,417         13.6             4,683         4.7
                                                    --------       ------           -------       -----

 Selling and administrative                            3,164          4.1             3,166         3.2
                                                    --------       ------           -------       -----
   Operating profit before
     Pension and OPEB                               $  7,253          9.5%          $ 1,517         1.5%
                                                    ========       ======           =======       =====
</TABLE>


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

<S>                                                 <C>             <C>            <C>            <C>
 Net sales                                          $247,536        100.0%         $335,475       100.0%
 Cost of goods sold                                  232,268         93.8           316,685        94.4
                                                    --------        -----          --------       -----
   Gross margin                                       15,268          6.2            18,790         5.6
                                                    --------        -----          --------       -----

 Selling and administrative                            9,068          3.7             9,851         2.9
                                                    --------        -----          --------       -----
   Operating profit before
     Pension and OPEB                               $  6,200          2.5%         $  8,939         2.7%
                                                    ========        =====          ========       =====
</TABLE>


                                     - 27 -
                                     <PAGE>



     The primary  drivers of sales,  cost of goods sold, and the resulting gross
margin are as follows:
<TABLE>
<CAPTION>
                                                               Three months ended            Nine months ended
                                                                 September 30,                 September 30,
                                                            ---------------------         ---------------------
                                                              2005           2006           2005          2006
                                                              ----           ----           ----          ----
Sales volume(000 tons):
<S>                                                              <C>            <C>           <C>           <C>
 Fabricated wire products                                        19             24            79            90
 Nails                                                            4              4            12            15
 Industrial wire                                                 17             18            45            54
 Coiled rebar                                                     -             (1)            -            (1)
 Wire rod                                                        86            102           222           354
 Billets                                                          5             14            11            41
                                                             ------        -------        ------       -------
 Total sales                                                    131            162           369           554
                                                             ======        =======        ======       =======

(1) - Less than 1,000 tons

Per-ton selling prices:
  Fabricated wire products                                   $1,065        $ 1,014        $1,100       $ 1,033
  Nails                                                         718            714           768           706
  Industrial wire                                               711            746           745           725
  Coiled rebar                                                    -            589             -           559
  Wire rod                                                      463            515           510           493
  Billets                                                       277            376           295           369
  All products                                                  582            608           668           600

Average per-ton ferrous
 scrap purchase cost                                         $  201        $   216        $  225       $   211

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

Average natural gas
 cost per therm                                              $ 0.84        $  0.68        $ 0.74       $  0.80
</TABLE>


     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 first half of 2005, in part due to our
customers'  concerns about our financial stability while we were operating under
Chapter  11  protection.  The higher  per-ton  selling  prices  during the third
quarter of 2006 as compared to the third  quarter of 2005 were due, in part,  to
price increases  implemented during the third quarter of 2006. The lower per-ton
selling  prices  during the nine months ended  September 30, 2006 as compared to
the same period in 2005 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.

     In addition to the items  presented in the table above,  our  profitability
has been adversely impacted by production  interruptions due to operating issues
related to our rod mill reheat  furnace in 2006.  We plan to overhaul the reheat
furnace during the fourth quarter to avoid future production inefficiencies.


                                     - 28 -
                                     <PAGE>
<TABLE>
<CAPTION>
Engineered Wire Products
                                                              Three months ended September 30,
                                                          ------------------------------------
                                                                    % of                      % of
                                                      2005          sales             2006    sales
                                                      ----         -----              ----    -----
                                                                     ($ in thousands)
<S>                                                  <C>            <C>            <C>        <C>
 Net sales                                           $17,986        100.0%         $16,496    100.0%
 Cost of goods sold                                   14,274         79.4           11,910     72.2
                                                     -------        -----          -------    -----
   Gross margin                                        3,712         20.6            4,586     27.8
                                                     -------        -----          -------    -----

 Selling and administrative                            1,205          6.7              994      6.0
                                                     -------        -----          -------    -----
   Operating profit before
    Pension and OPEB                                 $ 2,507         13.9%         $ 3,592     21.8%
                                                     =======        =====          =======    =====
</TABLE>

<TABLE>
<CAPTION>
                                                              Nine months ended September 30,
                                                          -----------------------------------
                                                                    % of                      % of
                                                      2005          sales            2006     sales
                                                      ----          -----            ----     -----
                                                                      ($ in thousands)
<S>                                                  <C>            <C>           <C>        <C>
 Net sales                                           $47,792        100.0%        $47,229    100.0%
 Cost of goods sold                                   37,406         78.3          36,043     76.3
                                                     -------       ------         -------    -----
   Gross margin                                       10,386         21.7          11,186     23.7
                                                     -------       ------         -------    -----

 Selling and administrative                            3,139          6.6           3,100      6.6
                                                     -------       ------         -------    -----
   Operating profit before
    Pension and OPEB                                 $ 7,247         15.1%        $ 8,086     17.1%
                                                     =======       ======         =======     =====
</TABLE>

     The primary  drivers of sales,  cost of goods sold, and the resulting gross
margin are as follows:
<TABLE>
<CAPTION>
                                                Three months ended              Nine months ended
                                                  September 30,                  September 30,
                                               --------------------           --------------------
                                               2005            2006            2005           2006
                                               ----            ----            ----           ----
Sales volume (000 tons) -
<S>                                              <C>            <C>             <C>             <C>
 Welded wire reinforcement                       21             19              54              55

Per-ton selling prices -
  Welded wire reinforcement                    $860           $880            $888            $865

Average per-ton wire rod
 purchase cost                                 $520           $515            $548            $501
</TABLE>

     EWP believes the lower shipment  volume during the third quarter of 2006 as
compared to the third  quarter of 2005 was due to a decline in the  construction
of new homes which results in a decline of related  infrastructure  projects and
consequently,  in a  decrease  in the sales of welded  wire  reinforcement.  The
higher  per-ton  selling  prices during the third quarter of 2006 as compared to
the third  quarter of 2005 were due  primarily  to price  increases  implemented
during the third quarter of 2006. Selling and administrative expenses were lower
in the third quarter of 2006 as compared to the third quarter of 2005  primarily
due to a decline in 2006 personnel related costs.

     The lower per-ton  selling  prices for the nine months ended  September 30,
2006 as compared to the same period 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 we believe  approximate
market.
                                     - 29 -
                                     <PAGE>
Sherman/KWP
<TABLE>
<CAPTION>
                                                             Three months ended September 30,
                                                  -------------------------------------------------
                                                                    % of                       % of
                                                  2005              sales          2006       sales
                                                   ----             -----          ----       -----
                                                                     ($ in thousands)
<S>                                              <C>               <C>            <C>         <C>
 Net sales                                       $ 4,079           100.0%         $3,838      100.0%
 Cost of goods sold                                4,145           101.6           4,112      107.1
                                                 -------           -----          ------      -----
   Gross margin                                      (66)           (1.6)           (274)      (7.1)
                                                 -------           -----          ------      -----

 Selling and administrative                           61             1.5             164        4.3
                                                --------           -----          ------      -----
   Operating loss before
    Pension and OPEB                             $ (127)            (3.1)%        $ (438)     (11.4)%
                                                 =======            =====         ======      =====
</TABLE>

<TABLE>
<CAPTION>
                                                             Nine months ended September 30,
                                                  -------------------------------------------------
                                                                  % of                         % of
                                                   2005          sales           2006         sales
                                                   ----          -----           ----         -----
                                                                     ($ in thousands)
<S>                                              <C>           <C>             <C>            <C>
 Net sales                                       $13,245       100.0%          $ 13,643       100.0%
 Cost of goods sold                               13,490       101.8             13,538        99.2
                                                 -------       -----           --------       -----
   Gross margin                                     (245)       (1.8)               105         0.8
                                                 -------       -----           --------       -----

 Selling and administrative                          595         4.5                492         3.6
                                                 -------       -----           --------       -----
   Operating loss before
    Pension and OPEB                             $  (840)       (6.3)%         $   (387)       (2.8)%
                                                 =======       ======          ========       =====
</TABLE>

     The primary  drivers of sales,  cost of goods sold, and the resulting gross
margin are as follows:
<TABLE>
<CAPTION>
                                                    Three months ended            Nine months ended
                                                      September 30,                September 30,
                                                 ----------------------       ---------------------
                                                   2005         2006              2005         2006
                                                   ----         ----              ----         ----
Sales volume(000 tons):
<S>                                                    <C>         <C>               <C>         <C>
  Fabricated wire products                             2           3                 8           9
  Industrial wire                                      3           2                 6           6
                                                  ------      ------             ------      ------
  Total sales                                          5           5                14          15
                                                  ======      ======             ======      ======

Per-ton selling prices:
  Fabricated wire products                         $ 944      $  957           $ 1,013      $  983
  Industrial wire                                    667         692               708         687

Average per-ton wire rod
 purchase cost                                     $ 398      $  459           $   451      $  443
</TABLE>

     The higher  per-ton  selling  prices  during  the third  quarter of 2006 as
compared  to the third  quarter of 2005 were due  primarily  to price  increases
implemented  during the third quarter of 2006.  Cost of goods sold was higher in
the third quarter of 2006 as compared to the third quarter of 2005 due primarily
to the $172,000  impairment  charge  related to the industrial  wire  production
equipment  that we plan to sell and an increase  in the cost of wire rod,  KWP's
primary raw material. KWP sources substantially all of its wire rod requirements
from KSW at prices that we believe approximate market.

     The lower per-ton  selling  prices for the nine months ended  September 30,
2006 as compared to the same period in 2005, were primarily due to significantly
lower cost for wire rod.
                                     - 30 -
                                     <PAGE>


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

     During the third  quarter  and first  nine  months of 2006,  we  recorded a
defined benefit pension credit of $12.2 million and $36.5 million, respectively,
as compared to recording a defined  benefit  pension  credit in the same periods
during  2005 of $3.2  million  and $9.7  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.  We were not required to
make any cash contributions to the defined benefit pension plans during 2005 and
the first nine months of 2006. 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 the remainder of 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 third quarter and first nine months of 2006, we recorded general
corporate  expense of $209,000  and general  corporate  income of $1.3  million,
respectively, as compared to recording general corporate expense during the same
periods in 2005 of $566,000 and $2.8  million,  respectively.  The  reduction in
general  corporate  expenses  for the third  quarter of 2006 as  compared to the
third quarter of 2005 is primarily due to lower retiree  medical costs partially
offset by  increases  in general  insurance  expense and  consulting  fees.  The
reduction in general corporate  expenses for the nine months ended September 30,
2006 as compared to the same period in 2005 is  primarily  due to lower  retiree
medical costs,  general insurance expense,  and franchise taxes partially offset
by an increase in professional  fees. 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 third quarter
and first nine months of 2006, we recorded a  postretirement  benefit  credit of
approximately  $2.1 million and $6.3 million,  respectively,  (of which $608,000
and $1.8 million,  respectively,  was included in general corporate expenses) as
compared to a $2.2 million and $11.0 million of  postretirement  benefit expense
recorded in the third quarter and first nine months of 2005,  respectively,  (of
which $235,000 and $1.2 million, respectively, was included in general corporate
expenses).

     During  the third  quarter  and first  nine  months  of 2006,  we  incurred
$270,000 and $606,000,  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 third quarter and
first  nine  months  of 2005,  we  incurred  $4.3  million  and  $10.3  million,
respectively, of legal and professional fees relative to these same activities.


                                     - 31 -
                                     <PAGE>


     Interest  expense during the third quarter and first nine months of 2006 of
$1.2 million and $3.7 million,  respectively,  increased  from interest  expense
during the same periods in 2005 of $1.0 million and $2.8 million,  respectively.
The primary drivers of interest expense are as follows:
<TABLE>
<CAPTION>

                                               Three months ended             Nine months ended
                                                 September 30,                 September 30,
                                              --------------------          --------------------
                                              2005            2006           2005           2006
                                              ----            ----           ----           ----
                                                                ($ in thousands)

<S>                                           <C>            <C>            <C>             <C>
Average debt balance                          $88,620        $87,046        $87,147         $93,436

Weighted average interest rate                    4.2%           5.2%           4.0%            5.2%
</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 26, 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
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.  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.

Recent Accounting Pronouncements

         See Note 13 to the Condensed Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

     At September 30, 2006, we had working  capital of $40.4 million,  including
$25.8 million of notes payable and current  maturities of long-term debt as well
as outstanding  borrowings under our revolving credit facility of $28.9 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 September 30, 2006,  unused credit
available for borrowing  under our revolving  credit facility was $29.8 million.
The revolving  credit  facility  requires  daily cash receipts be used to reduce
outstanding borrowings,  which results in us maintaining zero cash balances when

                                     - 32 -
                                     <PAGE>

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.

     Our primary credit  facility  requires  compliance  with certain  financial
covenants  related  to  performance  measures.  We were in  compliance  with all
financial covenants at September 30, 2006.

Historical Cash Flows

     During the first  nine  months of 2006,  net cash  provided  by  operations
totaled  $22.1  million  as  compared  to net cash used in  operations  of $18.3
million during the first nine months of 2005. The  improvement in operating cash
flows  during the first nine months of 2006 as compared to the first nine months
of 2005 was due primarily to:

     o    Higher earnings in 2006,
     o    Lower levels of reorganization costs in 2006,
     o    Relative changes in our accounts  receivable balances primarily due to
          an abnormally low accounts  receivable balance at December 31, 2004 as
          a result of decreased  demand during the fourth quarter of 2004 and an
          abnormally high accounts  receivable balance at December 31, 2005 as a
          result of  increased  demand  during the third and fourth  quarters of
          2005,
     o    Relative   changes  in  our  inventory   levels  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, and
     o    Relative  changes  in our  liabilities  due to an  increase  in  taxes
          payable  during  2006,  the  $4.0  million  liability  related  to the
          insurance settlement during the second quarter of 2006, and a decrease
          in liabilities during 2005 as a result of bankruptcy proceedings.

     During  the first  nine  months of 2006,  we had  capital  expenditures  of
approximately $9.6 million primarily related to upgrades of production equipment
at KSW and a plant expansion at EWP. Capital  expenditures for 2006 are expected
to be  approximately  $23.0  million and are related  primarily to the EWP plant
expansion.  We  expect  to fund  capital  expenditures  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 $7.3 million during the first nine months of 2006
as compared to increasing  our  borrowings on our  revolving  credit  facilities
during the first nine months of 2005.  During the first nine months of 2005,  we
paid off $16.0 million of Debtor-In-Possession  and other financing and obtained
a five-year $80.0 million secured credit facility from Wachovia  Capital Finance
(Central) ("Wachovia"). The Wachovia credit facility includes a term loan in the
amount of up to $25.0 million,  subject to a borrowing base calculation based on
the market  value of our real  property  and  equipment.  To the extent there is
sufficient borrowing base, the term loan portion of the Wachovia Facility can be
reloaded in the amount of $10.0  million.  On August 31, 2005, we obtained $22.5
million related to the Wachovia term loan. During the first nine months of 2006,
we made principal  payments of $4.3 million  related to financing  obtained upon
emergence from bankruptcy.

Environmental Obligations

     At  September  30,  2006,  our  financial   statements   reflected  accrued
liabilities  of $13.3 million ($8.5 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,  we do not know 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  $14.0 million,  including the $13.3
million  currently  accrued.  See Notes 10 and 11 to the Condensed  Consolidated
Financial  Statements  for  discussions  of our  environmental  liabilities  and
current litigation.
                                     - 33 -
                                     <PAGE>

Pension and Other Postretirement Obligations

     We do not expect to make contributions to our defined benefit pension plans
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

     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.

Liquidity Outlook

     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 have significant cash commitments over
the next nine months including:

     o    Scheduled  payment of the $10.0  million  term loan from the County of
          Peoria, Illinois,
     o    Scheduled principal payment of $8.3 million on our 8% Notes,
     o    Scheduled principal payments of $2.1 million on our UC Note,
     o    Scheduled  monthly payments of $4.4 million on our Wachovia Term Loan,
          and
     o    Approximately $8.0 million in capital  expenditures related to the EWP
          plant expansion.

     We may attempt to renegotiate certain of these credit facilities, including
extending  the dates of scheduled  principal  payments.  We continue  efforts to
recapture  a  portion  of  the  market  we  lost  during  the  last  two  years.
Additionally,  in an effort to reduce costs,  we decided in September of 2006 to
relocate  KWP's  industrial  wire  operations  to  KSW  and to  discontinue  the
production of nails at KSW. We will continue to analyze the profitability of our
operations and make operating  decisions  accordingly.  Overall,  we believe our
cash flows from operating activities combined with availability under our credit
agreement  will be  sufficient  to enable us to meet our cash flow needs for the
next twelve months including the cash requirements identified above.


                                     - 34 -
                                     <PAGE>



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 September 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
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 September 30, 2006 that has materially  affected,  or is reasonably likely
to materially affect, our internal control over financial reporting.



                                     - 35 -
                                     <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 Condensed Consolidated Financial Statements.

ITEM 1A. Risk Factors.

     Reference  is made to our  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.



                                     - 36 -
                                     <PAGE>





                                           [GRAPHIC OMITTED]
                                                 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:  November 14, 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)



                                     - 37 -
                                     <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:  November 14, 2006            By ___________________________________
                                          Bert E. Downing, Jr.
                                          Vice President, Chief Financial
                                          Officer, Corporate Controller
                                           and Treasurer
                                          (Principal Financial and
                                          Accounting Officer)



                                     - 38 -