10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarter ended September 30, 2007 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 Incorporation or organization)	(IRS Employer Identification No.)

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

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

Indicate by check mark:

Whether the Registrant (1) has filed all reports required to be filed by 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 S  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 S.

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

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 S  No £.

Number of shares of common stock outstanding on November 13, 2007: 10,000,000

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

INDEX

Part I.      FINANCIAL INFORMATION	Page
Item 1.      Financial Statements
Condensed Consolidated Balance Sheets –   December 31, 2006; September 30, 2007 (unaudited)	3
Condensed Consolidated Statements of Operations (unaudited) -   Three months and nine months ended September 30, 2006 (as adjusted);   Three months and nine months ended September 30, 2007	5
Condensed Consolidated Statements of Cash Flows (unaudited)–   Nine months ended September 30, 2006 (as adjusted);   Nine months ended September 30, 2007	6
Condensed Consolidated Statement of Stockholders' Equity   and Comprehensive Income -  Nine months ended September 30, 2007   (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	37
Item 4.      Controls and Procedures	37
PART II.  OTHER INFORMATION
Item 1.      Legal Proceedings	38
Item 1A.  Risk Factors	38
Item 6.     Exhibits	38
Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.

- 2 -

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS	December 31,  2006		September 30,  2007
			(unaudited)
Current assets:
Accounts receivable, net	$	31,661	$	45,767
Inventories, net		61,343		60,375
Restricted investments		1,067		1,111
Deferred income taxes		12,571		12,571
Prepaid expenses and other		3,516		2,595
Total current assets		110,158		122,419
Property, plant and equipment:
Land		1,193		1,272
Buildings and improvements		56,953		58,887
Machinery and equipment		300,301		316,548
Construction in progress		12,563		3,760
		371,010		380,467
Less accumulated depreciation		282,315		287,206
Net property, plant and equipment		88,695		93,261
Other assets:
Restricted investments		6,079		2,226
Pension asset		557,279		607,610
Other, net		1,725		1,619
Total other assets		565,083		611,455
Total assets	$	763,936	$	827,135

- 3 -

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

LIABILITIES AND STOCKHOLDERS' EQUITY	December 31,  2006		September 30,  2007
			(unaudited)
Current liabilities:
Notes payable and current maturities of long-term debt	$	43,699	$	61,830
Accounts payable		9,947		9,412
Accrued other postretirement benefit (OPEB) cost		4,157		4,157
Other accrued liabilities		20,579		18,594
Total current liabilities		78,382		93,993
Noncurrent liabilities:
Long-term debt		32,749		31,357
Accrued OPEB cost		31,005		29,829
Deferred income taxes		197,712		221,526
Other		6,414		7,111
Total noncurrent liabilities		267,880		289,823
Liabilities subject to compromise		14,012		-
Stockholders' equity:
Common stock		100		100
Additional paid-in capital		75,423		75,423
Accumulated other comprehensive income		278,399		266,545
Retained earnings		49,740		101,251
Total stockholders' equity		403,662		443,319
Total liabilities and stockholders’ equity	$	763,936	$	827,135

Commitments and contingencies (Notes 7 and 11).

              See accompanying Notes to Condensed Consolidated Financial Statements.                        

- 4 -

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Three months ended  September 30,						Nine months ended  September 30,
	2006			2007			2006			2007
	(as adjusted)						(as adjusted)
	(unaudited)						(unaudited)
Net sales	$	105,212		$	103,358		$	353,422		$	339,121
Cost of goods sold		96,875			96,923			322,211			319,651
Gross margin		8,337			6,435			31,211			19,470
Other operating income (expense):
Selling expense		(1,680	)		(1,601	)		(5,158	)		(5,032	)
General and administrative expense		(3,489	)		(3,532	)		(8,875	)		(10,253	)
Defined benefit pension credit		12,161			20,379			36,487			61,136
OPEB credit		2,100			2,201			6,300			6,602
Gain on legal settlement		-			-			-			5,400
Total other operating income		9,092			17,447			28,754			57,853
Operating income		17,429			23,882			59,965			77,323
Nonoperating income (expense):
Interest expense		(1,189	)		(1,630	)		(3,728	)		(4,619	)
Interest and other income (expense)		(294	)		447			65			999
Total nonoperating expense		(1,483	)		(1,183	)		(3,663	)		(3,620	)
Income before income taxes and  reorganization items		15,946			22,699			56,302			73,703
Reorganization items:
Reorganization costs		(270	)		(3	)		(606	)		(115	)
Gain on cancellation of debt		-			9,031			-			9,031
Total reorganization items		(270	)		9,028			(606	)		8,916
Income before income taxes		15,676			31,727			55,696			82,619
Provision for income taxes		6,220			11,921			10,587			31,108
Net income	$	9,456		$	19,806		$	45,109		$	51,511
Basic and diluted income per share	$	0.95		$	1.98		$	4.51		$	5.15
Basic and diluted shares outstanding		10,000			10,000			10,000			10,000

              See accompanying Notes to Condensed Consolidated Financial Statements.                        

- 5 -

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine months ended September 30,
	2006			2007
	(as adjusted)
	(unaudited)
Cash flows from operating activities:
Net income	$	45,109		$	51,511
Depreciation and amortization		11,354			11,591
Deferred income taxes		9,372			30,990
Defined benefit pension credit		(36,487	)		(61,136	)
OPEB credit		(6,300	)		(6,602	)
OPEB payments		(2,920	)		(2,799	)
Gain on cancellation of debt		-			(9,031	)
Payment to SWC pre-petition creditors		-			(3,680	)
Reorganization costs accrued		606			115
Reorganization costs paid		(3,484	)		(107	)
Impairment of long-lived assets		529			-
Other, net		928			800
Change in assets and liabilities (net of acquisition):
Accounts receivable		(5,292	)		(14,124	)
Inventories		4,421			3,727
Accounts payable		1,982			(535	)
Other, net		2,246			(1,602	)
Net cash provided by (used in) operating activities		22,064			(882	)
Cash flows from investing activities:
Capital expenditures		(9,645	)		(13,204	)
Acquisition of CaluMetals’ assets		-			(6,240	)
Collection of notes receivable		75			-
Restricted investments, net		(1,272	)		3,809
Other, net		(48	)		781
Net cash used in investing activities		(10,890	)		(14,854	)
Cash flows from financing activities:
Revolving credit facilities, net		(7,309	)		28,066
Other notes payable and long-term debt:
Additions		468			4,065
Principal payments		(4,310	)		(16,173	)
Deferred financing costs paid		(23	)		(222	)
Net cash provided by (used in) financing activities		(11,174	)		15,736
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	$	3,115		$	4,221
Income taxes, net		365			332
Non-cash issuance of debt for acquisition of CaluMetals’ assets		-			781

See accompanying Notes to Condensed Consolidated Financial Statements.

- 6 -

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

AND COMPREHENSIVE INCOME

Nine months ended September 30, 2007

(In thousands)

	Common stock				Additional paid-in		Accumulated other comprehensive			Accumulated other comprehensive			Retained					Comprehensive
	Shares		Amount		capital		income-pension			income-OPEB			earnings		Total			income
							(unaudited)
Balance – December 31, 2006		10,000	$	100	$	75,423	$	222,202		$	56,197		$	49,740	$	403,662
Net income		-		-		-		-			-			51,511		51,511		$	51,511
Amortization of actuarial(gains)   losses, net of tax		-		-		-		(7,304	)		3,121			-		(4,183	)		(4,183	)
Amortization of prior service cost (credit), net of tax		-		-		-		573			(8,244	)		-		(7,671	)		(7,671	)
Balance – September 30, 2007		10,000	$	100	$	75,423	$	215,471		$	51,074		$	101,251	$	443,319
Comprehensive income																		$	39,657

See accompanying Notes to Condensed Consolidated Financial Statements.

- 7 -

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

(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, 2006 that we filed with the Securities and Exchange Commission (“SEC”) on March 28, 2007 (the “2006 Annual Report”), except for the reclassification of corporate expenses to general and administrative expenses as discussed below and the impact of new accounting pronouncements as disclosed in Note 11.  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.  We have condensed the Consolidated Balance Sheet at December 31, 2006 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, 2006) 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, 2007 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 2006 Consolidated Financial Statements contained in our 2006 Annual Report.

At September 30, 2007, Contran Corporation owns 51% of our outstanding common stock.  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. (“KCI”) and its subsidiaries, taken as a whole.

Reclassification of Corporate Expenses.  Historically, we classified corporate expenses as a component of non-operating income or expense. We now classify corporate expenses with general and administrative expenses, a component of operating income.  For comparative purposes, we have reclassified prior period amounts to conform to the new presentation.  See below and Note 4.  The reclassification did not affect our consolidated net income or net income per share, Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Stockholders’ Equity or Condensed Consolidated Statements of Cash Flows.

The prior year’s Condensed Consolidated Financial Statements have also been adjusted to reflect the change in accounting for planned major maintenance and the reclassification of OPEB credit to a separate line item as each disclosed in the 2006 Annual Report.

- 8 -

The impact of the change in accounting and reclassifications on statement of operations line items for the three months and nine months ended September 30, 2006 is included in the following tables.

	Three months ended September 30, 2006
	(In thousands)
	As Previously Reported in 10-Q			OPEB Reclass			Change in Maintenance Accounting			Corporate Expense Reclass			As Currently Reported
				Increase/(Decrease)
Cost of goods sold	$	96,017		$	1,450		$	(592	)	$	-		$	96,875
Gross margin		9,195			(1,450	)		592			-			8,337
Selling expense		1,665			15			-			-			1,680
General and administrative expense		2,645			29			-			815			3,489
OPEB credit		-			2,100			-			-			2,100
Total operating costs		(7,851	)		(2,056	)		-			815			(9,092	)
Operating income		17,046			606			592			(815	)		17,429
Corporate expense		209			606			-			(815	)		-
Total nonoperating  expense		1,692			606			-			(815	)		1,483
Income before income taxes		15,084			-			592			-			15,676
Provision for income  taxes		5,990			-			230			-			6,220
Net income		9,094			-			362			-			9,456

	Nine months ended September 30, 2006
	(In thousands)
	As Previously Reported in 10-Q			OPEB Reclass			Change in Maintenance Accounting			Corporate Expense Reclass			As Currently Reported
				Increase/(Decrease)
Cost of goods sold	$	319,914		$	4,350		$	(2,053	)	$	-		$	322,211
Gross margin		33,508			(4,350	)		2,053			-			31,211
Selling expense		5,113			45			-			-			5,158
General and administrative expense		8,243			87			-			545			8,875
OPEB credit		-			6,300			-			-			6,300
Total operating costs		(23,131	)		(6,168	)		-			545			(28,754	)
Operating income		56,639			1,818			2,053			(545	)		59,965
Corporate expense		(1,273	)		1,818			-			(545	)		-
Total nonoperating expense		2,390			1,818			-			(545	)		3,663
Income before income taxes		53,643			-			2,053			-			55,696
Provision for income taxes		9,790			-			797			-			10,587
Net income		43,853			-			1,256			-			45,109

Certain other reclassifications have been made to conform the prior year’s Condensed Consolidated Financial Statements to the current year’s classifications.

- 9 -

Note 2 - Acquisition

On March 23, 2007, our newly-formed, wholly-owned subsidiary, Keystone-Calumet, Inc. (“Calumet”) acquired substantially all of the operating land, buildings and equipment of CaluMetals, Inc. for $3.5 million cash and a $1.1 million non-interest bearing, unsecured note.  The total consideration for the acquired assets was less than fair value, accordingly the total consideration for the land, buildings and equipment was allocated based on relative appraised values.  We also acquired inventory for a cash payment of $2.7 million, which approximated fair value.  We financed the cash payments of this acquisition through our existing revolving credit facility and term loans.

Through Calumet, we manufacture merchant and special bar quality products and special sections in carbon and alloy steel grades, offering a broad range of value added products for use in agricultural, cold drawn, construction, industrial chain, service centers, and transportation applications.  This new product line consists primarily of angles, flats, channels, rounds and squares.  Calumet’s primary raw material is billets and we expect to provide the majority of Calumet’s billet requirements from our mini-mill, which has sufficient capacity to supply the needed billets.  This acquisition allows us to further enhance our vertical integration strategy by converting more of our current billet production into higher-margin products.

CaluMetals sold approximately 17,000 tons of product during 2006 for $10.9 million.  Our newly formed segment, Keystone-Calumet, includes Calumet’s results of operations from the date of acquisition.

Note 3 – Gain on cancellation of debt:

 As previously reported, we emerged from bankruptcy protection on August 31, 2005.  However, before the bankruptcy can be completely closed, all claims must be adjudicated.  During September 2007, the final pending claim against Sherman Wire Company (“SWC”), one of our pre-petition wholly-owned subsidiaries, was adjudicated.  As a result, on September 28, 2007, we distributed approximately $3.7 million in cash to SWC’s pre-petition unsecured creditors as payment in full for 100% of their allowed claims.  Prior to this distribution, we had recorded approximately $14.0 million of liabilities subject to compromise, of which $12.7 million related to allowed claims and $1.3 million of which relate to liabilities for properties that we continue to own.  As a result of this payment, we recognized an approximate $9.0 million gain on cancellation of debt in the third quarter of 2007 and we reclassified the retained liabilities of $1.3 million from liabilities subject to compromise to other accrued liabilities.

The bankruptcy is still not completely closed, as one claim against KCI continues to be adjudicated.  However, the ultimate aggregate amount we will pay to settle all of the remaining KCI bankruptcy claims (approximately $1 million) is fixed and is included in other current accrued liabilities. Once the final claim is adjudicated, we will determine each creditor’s pro-rata share of the $1 million and make payments accordingly.

- 10 -

Note 4– Business Segment Information:

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

·   Keystone Steel and Wire (“KSW”), located in Peoria, Illinois, operates an electric arc furnace mini-mill and manufactures and sells wire rod, industrial wire, coiled rebar and fabricated wire products to agricultural, industrial, construction, commercial, original equipment manufacturers and retail consumer markets;

·   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

·   Keystone-Calumet (“Calumet”), located in Chicago Heights, Illinois, manufactures and sells merchant and special bar quality products and special sections in carbon and alloy steel grades for use in agricultural, cold drawn, construction, industrial chain, service centers, and transportation applications.  See Note 2.

Previously, Keystone Wire Products (“KWP”), located in Sherman, Texas, was a separate reportable segment.  KWP manufactured and sold industrial wire and fabricated wire products.  Approximately 60% of KWP’s 2006 sales were to KSW and substantially all of KWP’s sales in 2007 were to KSW.  During the third quarter of 2006, in an effort to reduce costs, we decided to relocate KWP’s industrial wire manufacturing operations to KSW.  During the third quarter of 2007, in further efforts to reduce costs, we decided to discontinue all remaining manufacturing operations at KWP.  The majority of KWP’s wire products production equipment will be transferred to KSW or sold.  The former KWP facility is now operated solely as a KSW distribution center.  We do not anticipate any changes in our customer base as a result of this decision, as shipments that are distributed through the former KWP location are now recognized as KSW sales.  Accordingly, KWP is now considered part of our KSW segment.  For comparability purposes we have combined KWP’s prior segment results with KSW’s segment results.

- 11 -

	Three months ended  September 30,						Nine months ended  September 30,
	2006			2007			2006			2007
	(as adjusted)						(as adjusted)
	(In thousands)
Net sales:
KSW	$	98,578		$	96,592		$	332,767		$	323,377
EWP		16,496			14,806			47,229			40,876
Calumet		-			1,646			-			2,961
Elimination of intersegment sales:
KSW		(9,862	)		(9,686	)		(26,574	)		(28,093	)
Total net sales	$	105,212		$	103,358		$	353,422		$	339,121
Operating income (loss):
KSW	$	1,672		$	577		$	10,604		$	3,578
EWP		3,592			2,292			8,086			5,787
Calumet		-			(799	)		-			(1,348	)
Pension credit		12,161			20,379			36,487			61,136
OPEB credit		2,100			2,201			6,300			6,602
Gain on legal settlement		-			-			-			5,400
Other (1)		(2,096	)		(768	)		(1,512	)		(3,832	)
Total operating income		17,429			23,882			59,965			77,323
Nonoperating income (expense):
Interest expense		(1,189	)		(1,630	)		(3,728	)		(4,619	)
Interest and other income (expense)		(294	)		447			65			999
Reorganization costs		(270	)		(3	)		(606	)		(115	)
Gain on cancellation of debt		-			9,031			-			9,031
Income before income taxes	$	15,676		$	31,727		$	55,696		$	82,619

⁽¹⁾ Other items primarily relate to the elimination of intercompany profit or loss on ending inventory balances and general corporate expenses.

- 12 -

The information below provides disclosure of segment information as adjusted for the combination of KWP and KSW, for 2004, 2005 and 2006.

	Years ended December 31,
	2004			2005			2006
	(In thousands)
Net sales:
KSW	$	345,218		$	338,903		$	412,866
EWP		58,982			62,777			58,748
Elimination of intersegment sales:
KSW		(39,914	)		(34,135	)		(31,074	)
Other		49			-			-
Total net sales	$	364,335		$	367,545		$	440,540
Operating income (loss):
KSW	$	34,294		$	8,284		$	6,558
EWP		10,816			9,699			9,464
Defined benefit pension credit		6,752			11,710			55,978
OPEB credit (expense)		(20,909	)		(8,885	)		8,297
Other(1)		(4,751	)		(615	)		(547	)
Total operating income (2)		26,202			20,193			79,750
Nonoperating income (expense):
Interest expense		(3,705	)		(3,992	)		(4,720	)
Interest income		132			266			361
Gain on legal settlement		5,284			-			-
Other income, net		684			993			75
Reorganization costs		(11,158	)		(10,308	)		(679	)
Gain on cancellation of debt		-			32,510			-
Income before income taxes	$	17,439		$	39,662		$	74,787

⁽¹⁾ Other items consist of the elimination of intercompany profit or loss on ending inventory balances, LIFO inventory reserve adjustments and general corporate expenses.

⁽²⁾Operating income reflects the reclassification of corporate expenses to general and administrative expenses as discussed in Note 1 to our Condensed Consolidated Financial Statements.

- 13 -

Substantially all of our assets are located in the United States. Segment assets are comprised of all assets attributable to each reportable operating segment.  Corporate assets consist principally of the pension asset, restricted investments, deferred tax assets and corporate property, plant and equipment.

	December 31,
	2004		2005		2006
	(In thousands)
Total assets:
KSW	$	154,718	$	183,910	$	162,439
EWP		26,708		22,750		19,381
Corporate		141,856		151,704		582,116
Total	$	323,282	$	358,364	$	763,936

	Years ended December 31,
	2004		2005		2006
	(In thousands)
Depreciation and amortization:
KSW	$	14,589	$	14,619	$	13,897
EWP		1,037		1,034		1,040
Corporate		186		92		285
Total	$	15,812	$	15,745	$	15,222
Capital expenditures:
KSW	$	4,804	$	9,571	$	12,290
EWP		274		201		6,388
Corporate		2		-		61
Total	$	5,080	$	9,772	$	18,739

Note 5 – Inventories, net:

	December 31,		September 30,
	2006		2007
	(In thousands)
Raw materials	$	9,735	$	12,519
Work in process		25,391		25,091
Finished products		26,513		23,942
Supplies		18,283		20,901
Inventory at FIFO		79,922		82,453
Less LIFO reserve		18,579		22,078
Total	$	61,343	$	60,375

           We believe our LIFO reserve represents the excess of replacement or current cost over the stated LIFO value of our inventories.

- 14 -

Note 6 - Notes payable and long-term debt:

	December 31,		September 30,
	2006		2007
	(In thousands)
Wachovia revolving credit facility	$	17,734	$	45,801
8% Notes		25,740		17,160
UC Note		5,465		2,748
Term loans:
Wachovia		17,390		17,619
County		10,000		9,000
Other		119		859
Total debt		76,448		93,187
Less current maturities		43,699		61,830
Total long-term debt	$	32,749	$	31,357

During the first quarter of 2007, we amended the Wachovia Facility, increasing the total committed facility amount from $80.0 million to $100.0 million, in part to finance the CaluMetals acquisition.  The acquisition was financed by additional borrowings of $2.2 million on our revolving credit facility and $4.0 million on our Wachovia term loans, as well as a $1.1 million non-interest bearing, unsecured note payable ($781,000 net of imputed interest) to the seller.

In May 2007, we amended the County Term Loan such that the principal payment of $10.0 million that would otherwise have been due on June 1, 2007 was reduced to $1.0 million.  Beginning on June 1, the remaining $9.0 million principal amount bears interest at a rate of 7.5% per annum, and principal and interest will be paid in semi-annual installments of $838,000 through June 1, 2014.  All other significant terms and conditions of the County Term Loan remain unchanged.

Note 7 - Environmental matters and other commitments and contingencies:

We have been named as a defendant, potentially responsible party (“PRP”), or both, for certain sites pursuant to the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) or similar state laws in 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 where we have been named a defendant or PRP is approximately $6.7 million, including the amount currently accrued.  Our estimate of such costs has not been discounted to present value, due to the uncertainty of the timing of the pay out.  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 ($5.4 million at September 30, 2007) for the costs of the sites that we believe are 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 of our payments for these matters may be substantially in the future.  It is possible our actual costs could differ from the amounts we have accrued or the upper end of the range for the sites where we have been named a defendant or PRP.

- 15 -

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.  We classify the remainder of the accrued environmental costs as noncurrent liabilities.

Although we believe our comprehensive general liability insurance policies provide indemnification for certain costs that we incur with respect to our environmental remediation obligations, we do not currently have receivables recorded for such recoveries.

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, 2007 is as follows:

	Nine months ended September 30 ,2007
	(In thousands)
Balance at December 31, 2006	$	13,252
Expense		-
Payments		(3,177	)
Cancellation of debt		(4,682	)
Balance at September 30, 2007	$	5,393
Amounts classified at September 30, 2007 as:
Current accrued environmental cost	$	226
Noncurrent accrued environmental cost		5,167
Total	$	5,393

Sites discharged as a result of bankruptcy proceedings in the third quarter of 2007

Prior to SWC’s 1996 acquisition of Desoto, Inc. (“DeSoto”), DeSoto was notified by the U.S. EPA that it was one of approximately 50 PRPs at the Chemical Recyclers, Inc. (“CRI”) site in Wylie, Texas.  Under a consent order with the U.S. EPA, the PRP group performed a removal action and an investigation of soil and groundwater contamination. Such investigation revealed certain environmental contamination.  CRI filed a claim in SWC’s bankruptcy proceedings.  During September 2007, the CRI claim, which was the only remaining claim in SWC’s bankruptcy proceeding, was adjudicated and, as a result, SWC’s environmental claimants were granted a total of approximately $3.0 million for CRI and other sites.  Such amount was paid by SWC during September 2007 and is part of the $3.7 million amount discussed in Note 3.  SWC had accrued $7.7 million for these sites.  Any further liabilities related to these sites have been discharged.

- 16 -

Open sites at September 30, 2007

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.  We believe we have completed the remediation required by the Closure Plan (as amended).  However, as of September 30, 2007, the IEPA has not approved the work.  Pursuant to agreements with the IEPA and Illinois Attorney General's office (“IAG”), we are required to deposit $75,000 per quarter into a trust fund until such time as the sites are completely remediated in accordance with the Closure Plan and we are permitted to withdraw funds from the trust fund as we incur costs related to the remediation.  During the first nine months of 2007, we paid approximately $65,000 in remediation costs for these sites and did not receive any funds from the trust fund.  At December 31, 2006 and September 30, 2007, the trust fund had a balance of $2.1 million and $2.2 million, respectively, which were included in other noncurrent assets.  As we believe we have completely remediated the sites, we have not been making quarterly deposits into the trust fund since January 2007.

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 September 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 KSW”; and (5) complete by September 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.

- 17 -

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 September 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.

Prior to SWC’s acquisition of 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, we entered into TNRCC's Voluntary Cleanup Program.  Remediation costs are presently estimated to be between $687,000 and $2.0 million.  Investigation activities are on-going including additional soil and groundwater sampling.

Other current litigation

We have been involved in a legal proceeding with one of our former insurance carriers regarding the nature and extent of the carrier’s obligation to us under insurance policies in effect from 1945 to 1985 with respect to environmental remediation expenditures we previously made at certain sites.  In July 2007, the carrier paid us $5.4 million for settlement of this matter.

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.

- 18 -

Note 8 - Other accrued liabilities:

	December 31,		September 30,
	2006		2007
	(In thousands)
Current:
Employee benefits	$	10,714	$	9,880
Self insurance		5,492		3,740
Pre-petition unsecured creditor settlement		985		982
Environmental		250		226
Other		3,138		3,766
Total	$	20,579	$	18,594
Noncurrent:
Environmental	$	4,521	$	5,167
Workers compensation		1,785		1,822
Other		108		122
Total	$	6,414	$	7,111

Note 9 – Employee benefit plans:

The components of our net periodic defined benefit pension credit are presented in the table below.

	Three months ended   September 30,						Nine months ended  September 30,
	2006			2007			2006			2007
	(In thousands)
Service cost	$	959		$	969		$	2,877		$	2,907
Interest cost		5,106			5,267			15,318			15,801
Expected return on plan assets		(16,863	)		(23,013	)		(50,589	)		(69,038	)
Amortization of accumulated other  comprehensive income:
Prior service cost		227			306			681			918
Actuarial gains		(1,590	)		(3,908	)		(4,774	)		(11,724	)
Total	$	(12,161	)	$	(20,379	)	$	(36,487	)	$	(61,136	)

We currently expect our 2007 defined benefit pension credit will approximate $81.5 million and that no cash contributions will be required during 2007.

The components of our net periodic credit related to other postretirement benefits (“OPEB”) are presented in the table below.

	Three months ended  September 30,						Nine months ended  September 30,
	2006			2007			2006			2007
	(In thousands)
Service cost	$	63		$	60		$	189		$	181
Interest cost		495			480			1,485			1,440
Amortization of accumulated other comprehensive income:
Prior service credit		(4,327	)		(4,411	)		(12,981	)		(13,233	)
Actuarial losses		1,669			1,670			5,007			5,010
Total	$	(2,100	)	$	(2,201	)	$	(6,300	)	$	(6,602	)

We currently expect our 2007 OPEB credit will approximate $8.8 million and anticipate contributing $4.2 million of cash to our OPEB plans during 2007.

- 19 -

Note 10 – Provision for income taxes:

	Nine months ended  September 30,
	2006			2007
	(as adjusted)
	(In thousands)
Expected tax provision, at statutory rate	$	19,494		$	28,917
U.S. state income taxes, net		2,044			2,174
Deferred tax asset valuation allowance		(10,675	)		-
Other, net		(276	)		17
Provision for income taxes	$	10,587		$	31,108

Note 11 – Recent Accounting Pronouncements:

Uncertain Tax Positions.  On January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 48, Accounting for Uncertain Tax Positions.  FIN 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 Statement of Financial Accounting Standards (“SFAS”) 109, Accounting for Income Taxes, and enhances the disclosure requirements for our income tax policies and reserves.  Among other things, FIN 48 prohibits us from recognizing the benefits of a tax position unless we believe it is more-likely-than-not our position will prevail with the applicable tax authorities and limits the amount of the benefit to the largest amount for which we believe the likelihood of realization is greater than 50%.  FIN 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 prior income tax accounting policies had already complied with this aspect of the new standard.  We are also required to classify any reserves we have for uncertain tax positions to a separate current or noncurrent liability, depending on the nature of the tax position.

We accrue interest and penalties on uncertain tax positions as a component of our provision for income taxes when required.  We did not accrue any interest and penalties for the first nine months of 2007 and had no accrued interest or penalties at September 30, 2007 for uncertain tax positions.  At January 1, 2007 and September 30, 2007 we had no accrual for uncertain tax positions.

We file income tax returns in various U.S. federal, state and local jurisdictions.  Our income tax returns prior to 2003 are generally considered closed to examination by applicable tax authorities.

Planned Major Maintenance Activities - In September 2006, the FASB issued FSP No. AUG AIR-1, Accounting for Planned Major Maintenance Activities, which we adopted in the fourth quarter of 2006.  Under FSP No. AUG AIR-1 we are no longer permitted to accrue in advance for planned major maintenance.  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 retroactively adjusted our financial statements to reflect the direct expense method of accounting for planned major maintenance expense for prior periods in compliance with the new standard.  The effect of adopting the FSP on our previously reported Consolidated Financial Statements is contained in our 2006 Annual Report.

- 20 -

Fair Value Option. In the first quarter of 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.  SFAS 159 permits companies to choose, at specified election dates, to measure eligible items at fair value, with unrealized gains and losses included in the determination of net income.  The decision to elect the fair value option is generally applied on an instrument-by-instrument basis, is irrevocable unless a new election date occurs, and is applied to the entire instrument as opposed to only specified risks or cash flows or a portion of the instrument.  Items eligible for the fair value option include recognized financial assets and liabilities other than an investment in a consolidated subsidiary, defined benefit pension plans, OPEB plans, leases and financial instruments classified in equity.  An investment accounted for by the equity method is an eligible item.  The specified election dates include the date the company first recognizes the eligible item, the date the company enters into an eligible commitment, the date an investment first becomes eligible to be accounted for by the equity method and the date SFAS No. 159 first becomes effective for the company.  If we elect to measure eligible items at fair value under the standard, we would be required to present certain additional disclosures for each item we elect.  SFAS No. 159 becomes effective for us on January 1, 2008. We have not yet determined which, if any, of our eligible items we will elect to be measured at fair value under the new standard.  Therefore, we are currently unable to determine the impact, if any, this standard will have on our consolidated financial position or results of operations.

Note 12 – Subsequent Event:

On October 2, 2007, we filed a preliminary registration statement on Form S-3 with the SEC in connection with a distribution of non-transferable subscription rights to our common stockholders.  These subscription rights would give our stockholders rights to purchase an aggregate of 2,500,000 shares of common stock for a purchase price of $10.00 per share, or an aggregate price of $25,000,000.  Following the SEC declaring the registration statement effective under the Securities Act of 1933, as amended, we may distribute 0.25 of a subscription right for each share of common stock held on a record date to be determined.  Each whole subscription right will entitle the record holder of common stock to purchase one share of our common stock at a subscription price of $10.00.  We currently expect the subscription rights would be exercisable for a period of approximately 30 days.

Completion of the distribution of the subscription rights is subject to, among other things, various approvals of state security agencies and an amendment to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of our common stock.  Such amendment would be put to a vote of our common stockholders at a special meeting on a date to be determined.  Also, we may decide to cancel or terminate the subscription rights offering at any time before the expiration of the subscription rights offering and for any reason and we may amend or modify the terms of the subscription rights offering (including the maximum number of shares of common stock we may issue in the subscription rights offering or the subscription price per share to be paid to exercise the subscription rights) at any time in our sole discretion.  

We plan to use the net proceeds from the sale of the common stock pursuant to the subscription rights offering to reduce indebtedness under our revolving credit facility ($45.8 million balance outstanding at September 30, 2007), which in turn would create additional availability under that facility that could be used for general corporate purposes, including scheduled debt payments, capital expenditures, potential acquisitions or the liquidity needs of our current operations.

- 21 -

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

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.  Some statements 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 Securities and Exchange Commission (“SEC”) including, but not limited to, the following:

·   Future supply and demand for our products (including cyclicality thereof),

·   Customer inventory levels,

·   Changes in raw material and other operating costs (such as ferrous scrap and energy),

·   The possibility of labor disruptions,

·   General global economic and political conditions,

·   Competitive products (including low-priced imports) and substitute products,

·   Customer and competitor strategies,

·   The impact of pricing and production decisions,

·   Environmental matters (such as those requiring emission and discharge standards for existing and new facilities),

·   Government regulations and possible changes therein,

·   Significant increases in the cost of providing medical coverage to employees,

·   The ultimate resolution of pending litigation,

·   International trade policies of the United States and certain foreign countries,

·   Operating interruptions (including, but not limited to, labor disputes, fires, explosions, unscheduled or unplanned downtime and transportation interruptions),

·   Our ability to renew or refinance credit facilities,

·   Any possible future litigation, and

·   Other risks and uncertainties as discussed in this Quarterly Report and the 2006 Annual Report, including, without limitation, the section referenced above.

Should one or more of these risks materialize, if the consequences worsen, or if 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 changes in information, future events or otherwise.

- 22 -

RESULTS OF OPERATIONS

Business Overview

We are a leading domestic manufacturer of steel fabricated wire products, industrial wire, billets and wire rod.  We also manufacture welded wire reinforcement, coiled rebar and, beginning in March 2007, steel bars and shapes.  Our products are used in the agricultural, industrial, cold drawn, construction, transportation, original equipment manufacturer and retail consumer markets.  We are vertically integrated, converting substantially all of our fabricated wire products, welded wire reinforcement, coiled rebar, industrial wire and steel bars and shapes from billets and wire rod produced in our steel mini-mill.  Historically, our vertical integration has allowed us to benefit from the higher and more stable margins associated with fabricated wire products and welded wire reinforcement as compared to wire rod, as well as from lower production costs of wire rod as compared to wire fabricators that purchase wire rod in the open market.  Moreover, we believe our downstream fabricated wire products, welded wire reinforcement, coiled rebar and industrial wire businesses better insulate us from the effects of wire rod imports as compared to non-integrated wire rod producers.

Recent Developments

On March 23, 2007, our newly-formed, wholly-owned subsidiary, Keystone-Calumet, Inc. (“Calumet”) acquired substantially all of the operating land, buildings, equipment and inventory of CaluMetals, Inc. for $6.2 million cash and a $1.1 million non-interest bearing, unsecured note. See Note 2 to our Condensed Consolidated Financial Statements.

During the first quarter of 2007, our primary credit facility was amended, increasing the total committed facility amount from $80.0 million to $100.0 million, in part to finance the CaluMetals acquisition.  Additionally, in May 2007, we amended the County Term Loan.  See Note 6 to our Condensed Consolidated Financial Statements.

As previously reported, we emerged from bankruptcy protection on August 31, 2005.  However, before the bankruptcy can be completely closed, all claims must be adjudicated.  During September 2007, the final pending claim against Sherman Wire Company (“SWC”), one of our wholly-owned subsidiaries involved in the bankruptcy proceedings, was adjudicated, and we recognized a gain on cancellation of debt of approximately $9.0 million in the third quarter of 2007.  See Note 3 to our Condensed Consolidated Financial Statements.

On October 2, 2007, we filed a preliminary registration statement on Form S-3 with the SEC in connection with a distribution of non-transferable subscription rights to our common stockholders.  These subscription rights would give our stockholders rights to purchase an aggregate of 2,500,000 shares of common stock for a purchase price of $10.00 per share, or an aggregate price of $25,000,000.  See Note 12 to our Condensed Consolidated Financial Statements. We continue to incur substantial costs for both current and retired employees and maintenance of plant and equipment.  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 plan to use the net proceeds from the sale of the common stock pursuant to the subscription rights offering to reduce indebtedness under our revolving credit facility ($45.8 million balance outstanding at September 30, 2007), which in turn would create additional availability under that facility that could be used for general corporate purposes, including scheduled debt payments, capital expenditures, potential acquisitions or the liquidity needs of our current operations.  However, current forecasts, excluding the potential funds from the subscription rights offering, indicate cash flows from operating activities combined with availability under our credit agreement will be sufficient to enable us to meet our cash flow needs.

- 23 -

Results of Operations

Our profitability is primarily dependent on sales volume, per-ton selling prices, per-ton ferrous scrap cost, and energy costs.  Additionally, because pension and OPEB expense or credit, gain on legal settlement, gain on cancellation of debt and reorganization costs are all unrelated to operating activities of our businesses, we measure and evaluate the performance of our businesses using income before income taxes and other items as well as operating income before pension and OPEB credit or expense.  As such, we believe the presentation of income before income taxes and other items and operating income before pension and OPEB credit or expense provides more useful information to investors.  Income before income taxes and other items and operating income before pension and OPEB credit or expense are non-GAAP measures of profitability that are not in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and they should not be considered in isolation or as substitutes for measures prepared in accordance with GAAP.

A reconciliation of income before income taxes to income before income taxes and other items is set forth in the table below.

	Three months ended  September 30,						Nine months ended  September 30,
	2006			2007			2006			2007
	(In thousands)
Income before income taxes	$	15,676		$	31,727		$	55,696		$	82,619
Adjustments:
Defined benefit pension credit		(12,161	)		(20,379	)		(36,487	)		(61,136	)
OPEB credit		(2,100	)		(2,201	)		(6,300	)		(6,602	)
Gain on legal settlement		-			-			-			(5,400	)
Gain on cancellation of debt		-			(9,031	)		-			(9,031	)
Reorganization costs		270			3			606			115
Income before income taxes and other items	$	1,685		$	119		$	13,515		$	565

  A reconciliation of operating income as reported to operating income adjusted for pension and OPEB credits is set forth in the following table.

	Three months ended  September 30,						Nine months ended  September 30,
	2006			2007			2006			2007
	(In thousands)
Operating income as reported(1)	$	17,429		$	23,882		$	59,965		$	77,323
Defined benefit pension credit		(12,161	)		(20,379	)		(36,487	)		(61,136	)
OPEB credit		(2,100	)		(2,201	)		(6,300	)		(6,602	)
Operating income before pension and   OPEB	$	3,168		$	1,302		$	17,178		$	9,585

⁽¹⁾  Operating income for the three and nine months ended September 30, 2006 reflects the change in accounting for planned major maintenance, the reclassification of OPEB credit to a separate line item and the reclassification of corporate expenses to general and administrative expenses as disclosed in Note 1 to our Condensed Consolidated Financial Statements.

- 24 -

The first nine months of 2007 was not as profitable as the same period in prior years primarily due to an increase in ferrous scrap and other operating costs that we were not able to fully recover through price increases and a soft market due to price pressure and inclement weather causing the cancellation of many construction and agricultural projects scheduled for this past spring and summer.  Historically, we have experienced lower sales and profits during the fourth quarter of each year due to the seasonality of the construction and agricultural markets.  For the fourth quarter of 2007, we anticipate the construction and agricultural markets will continue to be softer than prior years.  However, we expect increased demand for wire rod as compared to the fourth quarter of 2006 due to lower quantities of import product available for sale and higher prices for import product.  We do not anticipate a decrease in the cost of ferrous scrap during the fourth quarter of 2007, accordingly, we continue to implement price increases.

Our consolidated sales volume and per-ton selling prices for the third quarter and first nine months of 2006 and 2007 are as follows:

	Three months ended  September 30,						Nine months ended  September 30,
	2006			2007			2006			2007
Sales volume(000 tons):
Fabricated wire products		24			20			90			85
Welded wire reinforcement		19			16			55			45
Nails		3				(1)		15			1
Industrial wire		20			14			59			52
Coiled rebar			(1)		3				(1)		11
Bars and shapes		-			3			-			4
Wire rod		85			91			291			282
Billets		5			-			32				(1)
Total		156			147			542			480
Average per-ton selling prices:
Fabricated wire products	$	1,014		$	1,109		$	1,033		$	1,082
Welded wire reinforcement		880			912			865			901
Nails		714			1,076			706			816
Industrial wire		741			785			722			758
Coiled rebar		589			584			559			561
Bars and shapes		-			621			-			664
Wire rod		523			555			500			546
Billets		307			-			357			132
All products		667			695			647			699

⁽¹⁾ Less than 1,000 tons.

See Note 11 to our Condensed Consolidated Financial Statements for the projected impact of recent accounting pronouncements on our financial position and results of operations.

- 25 -

Segment Operating Results:

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

·   Keystone Steel and Wire (“KSW”), located in Peoria, Illinois, operates an electric arc furnace mini-mill and manufactures and sells wire rod, industrial wire, coiled rebar and fabricated wire products to agricultural, industrial, construction, commercial, original equipment manufacturers and retail consumer markets;

·   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

·   Keystone-Calumet, Inc. (“Calumet”), located in Chicago Heights, Illinois, manufactures and sells merchant and special bar quality products and special sections in carbon and alloy steel grades for use in agricultural, cold drawn, construction, industrial chain, service centers, and transportation applications.  See Note 2 to our Condensed Consolidated Financial Statements.

As discussed in Note 4 to our Condensed Consolidated Financial Statements, Keystone Wire Products (“KWP”) is now considered part of our KSW segment, and for comparability purposes we have combined KWP’s prior segment results with KSW’s segment results.

- 26 -

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

	KSW			EWP			Calumet			Other (1)			Total
	(In thousands)
Three months ended September 30, 2006:
Net sales	$	98,578		$	16,496		$	-		$	(9,862	)	$	105,212
Cost of goods sold		93,576			11,910			-			(8,611	)		96,875
Gross margin		5,002			4,586			-			(1,251	)		8,337
Selling and  administrative expense		(3,330	)		(994	)		-			(845	)		(5,169	)
Operating income before pension/OPEB	$	1,672		$	3,592		$	-		$	(2,096	)	$	3,168
Three months ended September 30, 2007:
Net sales	$	96,592		$	14,806		$	1,646		$	(9,686	)	$	103,358
Cost of goods sold		92,560			11,551			2,330			(9,518	)		96,923
Gross margin		4,032			3,255			(684	)		(168	)		6,435
Selling and administrative expense		(3,455	)		(963	)		(115	)		(600	)		(5,133	)
Operating income before pension/OPEB	$	577		$	2,292		$	(799	)	$	(768	)	$	1,302
Nine months ended September 30, 2006:
Net sales	$	332,767		$	47,229		$	-		$	(26,574	)	$	353,422
Cost of goods sold		311,819			36,043			-			(25,651	)		322,211
Gross margin		20,948			11,186			-			(923	)		31,211
Selling and administrative expense		(10,344	)		(3,100	)		-			(589	)		(14,033	)
Operating income before pension/OPEB	$	10,604		$	8,086		$	-		$	(1,512	)	$	17,178
Nine months ended September 30, 2007:
Net sales	$	323,377		$	40,876		$	2,961		$	(28,093	)	$	339,121
Cost of goods sold		309,093			32,319			4,007			(25,768	)		319,651
Gross margin		14,284			8,557			(1,046	)		(2,325	)		19,470
Selling and administrative expense		(10,706	)		(2,770	)		(302	)		(1,507	)		(15,285	)
Gain on legal settlement		-			-			-			5,400			5,400
Operating income (loss) before pension/OPEB	$	3,578		$	5,787		$	(1,348	)	$	1,568		$	9,585

 

⁽¹⁾   Other items primarily consist of the elimination of intercompany sales, the elimination of intercompany profit or loss on ending inventory balances and general corporate expenses.

- 27 -

Keystone Steel & Wire

	Three months ended September 30,
	2006			% of sales			2007			% of sales
	($ in thousands)
Net sales	$	98,578			100.0	%	$	96,592			100.0	%
Cost of goods sold		93,576			94.9			92,560			95.8
Gross margin		5,002			5.1			4,032			4.2
Selling and administrative expense		(3,330	)		(3.4	)		(3,455	)		(3.6	)
Operating income before  pension/OPEB	$	1,672			1.7	%	$	577			0.6	%

	Nine months ended September 30,
	2006			% of sales			2007			% of sales
	($ in thousands)
Net sales	$	332,767			100.0	%	$	323,377			100.0	%
Cost of goods sold		311,819			93.7			309,093			95.6
Gross margin		20,948			6.3			14,284			4.4
Selling and administrative expense		(10,344	)		(3.1	)		(10,706	)		(3.3	)
Operating income before  pension/OPEB	$	10,604			3.2	%	$	3,578			1.1	%

- 28 -

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

	Three months ended  September 30,						Nine months ended  September 30,
	2006			2007			2006			2007
Sales volume(000 tons):
Fabricated wire products		24			20			90			85
Nails		3				(1)		15			1
Industrial wire		20			14			59			52
Coiled rebar			(1)		3				(1)		11
Wire rod		99			106			341			327
Billets		12			3			39			10
Total		158			146			544			486
(1) Less than 1,000 tons.
Average per-ton selling prices:
Fabricated wire products	$	1,014		$	1,110		$	1,033		$	1,082
Nails		714			1,076			706			816
Industrial wire		741			785			722			758
Coiled rebar		589			584			559			561
Wire rod		517			551			495			542
Billets		375			430			369			452
All products		614			649			606			658
Average per-ton ferrous   scrap purchase cost	$	216		$	233		$	211		$	237
Average electricity   cost per kilowatt hour (2)	$	0.04		$	0.04		$	0.04		$	0.05
Average natural gas   cost per therm (2)	$	0.68		$	0.76		$	0.80		$	0.77

⁽²⁾ Generally, we use 44 million kilowatt hours of electricity and 2 million therms of natural gas per month.

Lower shipment volumes of fabricated wire products during the third quarter and first nine months of 2007 were the result of a softening of the market due to price pressure and weather conditions causing the cancellation of agricultural projects.  Lower shipment volumes of industrial wire during the third quarter and first nine months of 2007 were due, in part, to lower market demand as a result of both increased imported finished products that adversely affected our customers’ sales volumes and our increased selling prices. Lower shipment volumes of billets during the third quarter and first nine months of 2007 were primarily a result of exceptional shipment volumes in 2006 due to competitor production shortfalls resulting from labor disputes and equipment issues and the use of more of our billets internally at Calumet during the 2007 periods.

Lower shipment volumes of nails during the third quarter and first nine months of 2007 were due to the discontinuance of our nail operations.  During the third quarter of 2006, we decided to discontinue our nail operations as lower wage rates and other costs in foreign countries had resulted in market prices that eliminated the profitability of our nail business.

We experienced higher shipment volumes of coiled rebar during the 2007 periods as we continue to obtain coiled rebar production certifications and enter the market.

- 29 -

Lower shipment volumes of wire rod during the first nine months of 2007 as compared to the same period in 2006 were primarily due to unusually cold weather which impeded our ability to ship by barge during the first quarter of 2007 and exceptionally high demand during the 2006 period due to competitor production problems that were resolved during the fourth quarter of 2006, partially offset by lower quantities of import product available for sale and higher prices for import product.  These changes in foreign competition resulted in higher shipment volumes of wire rod during the third quarter of 2007 as compared to the third quarter of 2006.

The higher overall per-ton selling prices during the third quarter and first nine months of 2007 as compared to the same periods of 2006 were due primarily to price increases as we attempt to cover increased operating costs.

Electricity costs were higher for the first nine months of 2007 as compared to the same period during 2006 due to the deregulation of electricity in Illinois on January 1, 2007 following a ten year rate freeze.  Electricity rates charged by our primary electric provider decreased significantly in September of 2007 resulting in a flat cost per kilowatt hour for the third quarters of 2006 and 2007; however, we anticipate electricity costs to return to an approximate $0.05 per kilowatt hour during the fourth quarter of 2007.

Engineered Wire Products

	Three months ended September 30,
	2006			% of sales			2007			% of sales
	($ in thousands)
Net sales	$	16,496			100.0	%	$	14,806			100.0	%
Cost of goods sold		11,910			72.2			11,551			78.0
Gross margin		4,586			27.8			3,255			22.0
Selling and administrative expense		(994	)		(6.0	)		(963	)		(6.5	)
Operating income before  pension/OPEB	$	3,592			21.8	%	$	2,292			15.5	%

	Nine months ended September 30,
	2006			% of sales			2007			% of sales
	($ in thousands)
Net sales	$	47,229			100.0	%	$	40,876			100.0	%
Cost of goods sold		36,043			76.3			32,319			79.1
Gross margin		11,186			23.7			8,557			20.9
Selling and administrative expense		(3,100	)		(6.6	)		(2,770	)		(6.7	)
Operating income before  pension/OPEB	$	8,086			17.1	%	$	5,787			14.2	%

- 30 -

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

	Three months ended  September 30,				Nine months ended  September 30,
	2006		2007		2006		2007
Sales volume (000 tons):
Welded wire reinforcement		19		16		55		45
Average per-ton selling prices:
Welded wire reinforcement	$	880	$	912	$	865	$	901
Average per-ton wire rod purchase cost	$	515	$	560	$	501	$	543

The lower shipment volume during the third quarter and first nine months of 2007 as compared to the same periods during 2006 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 average per-ton selling prices for the third quarter and first nine months of 2007 as compared to the same periods during 2006 were primarily due to price increases implemented to help cover higher costs 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.

Calumet

	Three months ended  September 30,						Nine months ended  September 30,
	2007			% of sales			2007			% of sales
	($ in thousands)
Net sales	$	1,646			100.0	%	$	2,961			100.0	%
Cost of goods sold		2,330			141.5			4,007			135.3
Gross margin		(684	)		(41.5	)		(1,046	)		(35.3	)
Selling and administrative expense		(115	)		(7.0	)		(302	)		(10.2	)
Operating loss before pension/OPEB	$	(799	)		(48.5	)%	$	(1,348	)		(45.5	)%

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

	Three months ended September 30, 2007		Nine months ended September 30, 2007
Sales volume(000 tons):
Bars and shapes		3		4
Average per-ton selling prices:
Bars and shapes	$	621	$	664
Average per-ton billet purchase cost	$	412	$	433

During the third quarter of 2007, we decided to discontinue producing a certain bar product.  Accordingly, Calumet recognized a $240,000 impairment charge on related storeroom inventory items.  This impairment charge is included in cost of goods sold.

- 31 -

We are in the process of communicating with our customer markets to attempt to re-establish Calumet’s mill as a reliable supplier of bar products.  Prior to our acquisition, CaluMetals, Inc. had difficulty meeting customer deadlines due to various production issues including the lack of a steady supply of billets, the operation’s primary raw material.  We now source substantially all of Calumet’s billet requirements from KSW, which has sufficient capacity to supply the needed billets and we have established an inventory of bar products to facilitate expedient deliveries to our customers.  We believe we will ultimately gain customer confidence which should, in turn, lead to increased sales and profitability for this segment.

General and Administrative Expense

During the first nine months of 2007, we recorded general and administrative expense of $10.3 million, as compared to general and administrative expense of $8.9 million recorded during the same period of 2006.  The increase was primarily due to higher corporate expenses related to state franchise taxes and general insurance expense.

Pension Credits

During the third quarter and first nine months of 2007, we recorded a defined benefit pension credit of $20.4 million and $61.1 million, respectively, as compared to recording a defined benefit pension credit in the same periods during 2006 of $12.2 million and $36.5 million, respectively.  The increase in the pension credit in 2007 was primarily the result of the expected rate of return on plan assets, as our plan assets increased by $233 million during 2006.

Gain on Legal Settlement

See Note 7 to our Condensed Consolidated Financial Statements.

Interest Expense

Interest expense during the third quarter and first nine months of 2007 of $1.6 million and $4.6 million, respectively, increased from interest expense during the same periods in 2006 of $1.2 million and $3.7 million, respectively.  The primary drivers of interest expense are as follows:

	Three months ended  September 30,						Nine months ended  September 30,
	2006			2007			2006			2007
	($ in thousands)
Average debt balance	$	87,046		$	98,405		$	93,436		$	98,601
Weighted average interest rates		5.2	%		6.9	%		5.2	%		6.2	%

The increase in the overall weighted average interest rate during the first nine months of 2007 was primarily due to an increase in the prime rate.  Interest rates on our primary credit facility range from the prime rate to the prime rate plus .5%. The increase in the weighted average interest rate during the third quarter of 2007 was primarily related to a significant increase in our primary credit facility balance which incurs interest at a higher rate than all of our other debt.

Gain on Cancellation of Debt

See Note 3 to our Condensed Consolidated Financial Statements.

- 32 -

Provision for Income Taxes

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 10 to our Condensed Consolidated Financial Statements.  Prior to the second quarter of 2006, considering all factors believed to be relevant, we believed our gross deferred tax assets (including net operating loss carryforwards) 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 provision for income taxes during the first quarter of 2006 was 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.  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.  Accordingly, we recorded a provision for income taxes that approximated the statutory rate for the first three quarters of 2007.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital and Borrowing Availability

	December 31,		September 30,
	2006		2007
	(In thousands)
Working capital	$	31,776	$	28,426
Revolving credit facility		17,734		45,801
Borrowing availability		23,697		12,898

During the first quarter of 2007, we completed an amendment to our primary credit facility, increasing the total committed facility amount from $80.0 million to $100.0 million, in part to finance the CaluMetals acquisition.

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 ($5.5 million at September 30, 2007).  The revolving credit facility requires us to use our daily cash receipts to reduce outstanding borrowings, which results in us maintaining zero cash balances when there are balances outstanding under this credit facility.  Accordingly, any outstanding balances under this facility are always classified as a current liability regardless of the maturity date of the facility.

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, 2007.

- 33 -

Historical Cash Flows

Operating Activities

During the first nine months of 2007, net cash used in operations totaled $882,000 as compared to net cash provided by operations of $22.1 million during the first nine months of 2006.  The $22.9 million net decrease in operating cash flows was due primarily to the net effects of:

·   lower operating income before pension/OPEB in 2007 of $7.6 million;

·   lower reorganization costs of $3.4 million paid in 2007;

·   higher net cash used due to relative changes in our accounts receivable in 2007 of $8.8 million primarily due to an abnormally high accounts receivable balance at December 31, 2005 as a result of exceptional demand during the third and fourth quarters of 2005 (the seasonality of our business generally results in lower accounts receivable at the end of each year);

·   payment to SWC’s pre-petition creditors of $3.7 million in 2007; and

·   cash proceeds of $4.0 million in 2006 for an insurance settlement that was recorded as a liability subject to compromise.

Investing Activities

On March 23, 2007, we acquired substantially all of the operating land, buildings, equipment and inventory of CaluMetals, Inc. for $6.2 million cash and a $1.1 million non-interest bearing, unsecured note.  We financed the cash payments of this acquisition through additional borrowings of $2.2 million on our revolving credit facility and $4.0 million on our Wachovia Term Loans.

During the first three quarters of 2006 and 2007, we had capital expenditures of approximately $9.6 million and $13.2 million, respectively.  The increase in capital expenditures was primarily related to a plant expansion at EWP and upgrades of production equipment at KSW.  Capital expenditures for 2007 are expected to be approximately $15 million and are related primarily to upgrades of production equipment at KSW, completion of the EWP plant expansion, and improvements of the acquired assets of CaluMetals, Inc.  We expect to fund capital expenditures using cash flows from operations and borrowing availability under our credit facilities.

During the first nine months of 2006, restricted investments increased due to the $4.0 million received related to an insurance settlement which restricted our use of the funds to the payment of SWC’s pre-petition unsecured claims, partially offset by $2.8 million of reimbursements received from our environmental trust funds.  During September 2007, we distributed approximately $3.7 million to SWC’s pre-petition unsecured creditors as payment in full for 100% of their allowed claims.  In connection with this distribution, the related $4.0 million of restricted funds were released to us.

Financing Activities

As a result of decreased profitability, the acquisition of CaluMetals’ assets, payments on the EWP expansion project and principal payments on our various credit facilities, we increased borrowings on our revolving credit facility by $28.1 million during the first nine months of 2007 as compared to decreasing borrowings on our revolving credit facility by $7.3 million during the first nine months of 2006.  We also borrowed $4.0 million on our Wachovia Term Loans in the first quarter of 2007 in connection with the CaluMetals acquisition.

During the first nine months of 2007, we made principal payments of $8.6 million on our 8% Notes, $2.7 million on our UC Note, $3.8 million on our Wachovia Term Loans and $1.0 million on our County Term Loan.

- 34 -

Commitments and Contingencies

During September 2007, the final pending claim against SWC was adjudicated.  As a result, on September 28, 2007, we distributed approximately $3.7 million in cash to SWC’s pre-petition unsecured creditors as payment in full for 100% of their allowed claims.

There have been no other material changes in our contractual obligations since we filed our 2006 Annual Report, and we refer you to the report for a complete description of these commitments.

We are subject to certain commitments and contingencies, as more fully described in Notes 7 and 11 to the Condensed Consolidated Financial Statements.

Pension and Other Postretirement Obligations

We were not required to make any cash contributions to our defined benefit pension plan during 2006 and we do not expect to be required to make contributions to our defined benefit pension plans during 2007.  However, we contributed $2.9 million and $2.8 million to our other postretirement benefit plans during the first nine months of 2006 and 2007, respectively, and we anticipate contributing $1.4 million for the remainder of 2007.  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.

County Term Loan Amendment

In May 2007, we amended the County Term Loan such that the principal payment of $10.0 million that would otherwise have been due on June 1, 2007 was reduced to $1.0 million.  The remaining $9.0 million principal amount will bear interest at a rate of 7.5% per annum, and principal and interest will be paid in semi-annual installments of $838,000 through June 1, 2014.  All other significant terms and conditions of the County Term Loan remain unchanged.

Income Taxes

Although we expect to record a provision for income taxes throughout 2007 that approximates the statutory rate, we expect our 2007 cash tax payments, exclusive of any refunds, will approximate our gross 2006 cash tax payments.

Off-balance Sheet Financing Arrangements

We do not have any off-balance sheet financing agreements other than the operating leases discussed in our 2006 Annual Report.

- 35 -

Liquidity Outlook

During the fourth quarter of 2007 and the next two years we have significant required principal payments on our various credit facilities.  These payments are expected to be approximately $2.2 million in the fourth quarter of 2007, $16.1 million in 2008 and $16.8 million in 2009. These principal payments are expected to be funded with cash from operations and borrowing availability under our existing credit facilities.  However, an industry-wide softening of demand, coupled with increases in the costs of materials and utilities, has contributed to a decline in our profitability and cash flows during the last twelve months.  Satisfying our future capital commitments using our existing credit facilities could deplete our borrowing availability thereunder and consequently limit our ability to withstand further downturns in our business or invest in additional capital improvements or make acquisitions.

We plan to use the net proceeds from the sale of the common stock pursuant to the subscription rights offering to reduce indebtedness under our revolving credit facility ($45.8 million balance outstanding at September 30, 2007), which in turn would create additional availability under that facility that could be used for general corporate purposes, including scheduled debt payments, capital expenditures, potential acquisitions or the liquidity needs of our current operations.  However, completion of the distribution of the subscription rights is subject to, among other things, an amendment to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of our common stock.  Such amendment would be put to a vote of our common stockholders at a special meeting on a date to be determined.  Also, we may decide to cancel or terminate the subscription rights offering at any time before the expiration of the subscription rights offering and for any reason and we may amend or modify the terms of the subscription rights offering (including the maximum number of shares of common stock we may issue in the subscription rights offering or the subscription price per share to be paid to exercise the subscription rights) at any time in our sole discretion.

We have in the past, and may in the future, seek to raise additional capital, incur additional debt, refinance or restructure existing indebtedness and repurchase existing indebtedness in the market or otherwise.  We continue efforts to recapture a portion of the market we lost due to our Chapter 11 filings.  We will continue to analyze the profitability of our operations and make operating decisions accordingly. Overall, excluding the potential funds from the subscription rights offering, we believe our cash flows from operating activities combined with availability under our existing credit facilities will be sufficient to enable us to meet our cash flow needs.

- 36 -

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a discussion of our critical accounting policies, refer to Part I, Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2006 Annual Report.  There have been no changes in our critical accounting policies during the first nine months of 2007.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Reference is made to the 2006 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 2006 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 the design and operating effectiveness of our disclosure controls and procedures as of September 30, 2007.  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

Beginning with our Annual Report on Form 10-K for the year ending December 31, 2007, we will be required to annually assess the effectiveness of our internal control over financial reporting.  Our independent registered public accounting firm will also be required to annually attest to the effectiveness of our internal control over financial reporting beginning in 2007. While we currently are not an accelerated filer under the rules of the SEC for our 2007 Quarterly Reports, we will become an accelerated filer starting with our 2007 Annual Report.

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, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

- 37 -

PART II.  OTHER INFORMATION

ITEM 1. Legal Proceedings.

Reference is made to disclosure provided under the captions "Sites discharged as a result of bankruptcy proceedings" and "Other current litigation" in Note 7 to our Condensed Consolidated Financial Statements.

ITEM 1A. Risk Factors.

Reference is made to our 2006 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 2006 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 Certification.

31.2 Certification.

32.1 Certification.

- 38 -

SIGNATURES

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

   Keystone Consolidated Industries, Inc.

   (Registrant)

Date:  November 13, 2007   By:/s/ Bert E. Downing, Jr.                                                                                  Bert E. Downing, Jr. Vice President, Chief Financial Officer, Corporate Controller and Treasurer

- 39 -

EX-31.1

Exhibit 31.1

I, David L. Cheek, certify that:

1) I have reviewed this quarterly report on Form 10-Q of Keystone Consolidated Industries, Inc.;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 13, 2007

/s/ David L. Cheek                                                

David L. Cheek

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

I, Bert E. Downing, Jr., certify that:

1) I have reviewed this quarterly report on Form 10-Q of Keystone Consolidated Industries, Inc.;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 13, 2007

/s/ Bert E. Downing, Jr.                                                                               

Bert E. Downing, Jr.

Vice President, Chief Financial Officer,

  Corporate Controller and Treasurer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Keystone Consolidated Industries, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, David L. Cheek, President and Chief Executive Officer of the Company, and Bert E. Downing, Jr., Vice President, Chief Financial Officer, Corporate Controller and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/  David L. Cheek                                    David L. Cheek President and Chief Executive Officer November 13, 2007 /s/  Bert E. Downing, Jr.                                                    Bert E. Downing, Jr. Vice President, Chief Financial Officer, Corporate Controller and Treasurer November 13, 2007

Note:  The certification the registrant furnishes in this exhibit is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section.  Registration Statements or other documents filed with the Securities and Exchange Commission shall not incorporate this exhibit by reference, except as otherwise expressly stated in such filing.