UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~March 3031, ~~2005~~2006

COMMISSION FILE NUMBER 1-9838

NS GROUP, INC.

(Exact name of registrant as specified in its charter)

Kentucky		61-0985936
(State of incorporation)		(I.R.S. Employer Identification No.)
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

530 West Ninth Street, Newport, Kentucky 41071 (Address, including zip code, of principal executive offices)

Registrant’s telephone number, including area code (859) 292-6809

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. ~~(as~~See ~~defined~~definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). ~~Yes þ No o~~

AtLarge ~~July 29,~~accelerated ~~2005,~~filer ~~there~~þ Accelerated ~~were~~filer ~~22,400,581~~o Non-accelerated ~~shares~~filer ~~outstanding of the Company’s common stock.~~ o

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

At April 28, 2006, there were 22,466,958 shares outstanding of the Company’s common stock.

NS GROUP, INC. Index

	Page No.
			Page
PART I FINANCIAL INFORMATION
PART I	FINANCIAL INFORMATION
Item 1. Financial Statements
Item 1.	Financial Statements
Condensed Consolidated Statements of Operations		3
	Condensed Consolidated Statements of Income			3
~~Condensed Consolidated Balance Sheets~~	Condensed Consolidated Balance Sheets	4		4
~~Condensed Consolidated Statements of Cash Flows~~	Condensed Consolidated Statements of Cash Flows	5		5
~~Notes to Condensed Consolidated Financial Statements~~	Notes to Condensed Consolidated Financial Statements	6		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3. Quantitative and Qualitative Disclosures About Market Risk		24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			21
Item 4. Controls and Procedures		24
Item 4.	Controls and Procedures			21
PART II OTHER INFORMATION
PART II	OTHER INFORMATION
Item 1. Legal Proceedings		25
Item 1.	Legal Proceedings			22
Item 4. Submission of Matters To A Vote of Security Holders		25
Item 1A.	Risk Factors			22
Item 6. Exhibits		25
Item 2(c)	Unregistered Sales of Equity Securities and Use of Proceeds			22
Exhibit 12.1
Item 6.	Exhibits			22
Exhibit 31.1
	Signatures			22
Exhibit 31.2
	Exhibit Index			23
Exhibit 32.1
EX-12.1
Exhibit 32.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I –— FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~INCOME ~~(in thousands, except per share amounts) (Unaudited)~~

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net sales	$	167,823		$	109,433		$	306,847		$	193,950
Cost of products sold		122,027			83,807			232,588			156,609
Gross profit		45,796			25,626			74,259			37,341
Selling, general and administrative expenses		5,763			3,990			11,636			8,344
Restructuring charges		—			—			—			1,897
Operating income		40,033			21,636			62,623			27,100
Investment income		407			19			646			55
Interest expense		(176	)		(353	)		(335	)		(671	)
Other, net		34			20			71			(18	)
Income before income taxes		40,298			21,322			63,005			26,466
Provision for income taxes		3,077			718			6,451			821
Net income	$	37,221		$	20,604		$	56,554		$	25,645
Earnings per common share:
Basic	$	1.67		$	0.98		$	2.55		$	1.23
Diluted	$	1.65		$	0.96		$	2.51		$	1.20
Weighted average shares outstanding:
Basic		22,255			20,941			22,159			20,925
Diluted		22,601			21,463			22,550			21,333

(In thousands, except per share amounts) (Unaudited)

See accompanying notes to the condensed consolidated financial statements.


	Three Months Ended
	March 31,
	2006			2005
Net sales	$	190,458		$	139,024
Cost of products sold		130,669			110,561

Gross profit		59,789			28,463

Selling, general and administrative expenses		5,841			5,873

Operating income		53,948			22,590

Investment income		1,773			239
Interest expense		(145	)		(159	)
Other, net		87			37

Income before income taxes		55,663			22,707
Provision for income taxes		21,150			3,374


Net income	$	34,513		$	19,333


Net income per common share -
Basic	$	1.54		$	0.88
Diluted	$	1.53		$	0.86

Weighted average shares outstanding -
Basic		22,433			22,062
Diluted		22,613			22,529

See accompanying notes to condensed consolidated financial statements.

NS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS ~~(in thousands)~~

	June 30,			December 31,
	2005			2004
	(Unaudited)
ASSETS
Current assets:
Cash and equivalents	$	61,671		$	30,944
Short-term investments		10,353			—
Accounts receivable, less allowances of $1,792 and $1,492, respectively		73,065			54,134
Inventories		113,161			119,817
Operating supplies and prepaid expenses		10,955			9,498
Deferred income taxes		4,625			1,625
Other current assets		2,365			2,379
Total current assets		276,195			218,397
Property, plant and equipment, net		44,043			44,260
Other assets		2,044			2,190
Assets held for sale		1,235			2,055
Total assets	$	323,517		$	266,902
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	31,452		$	41,061
Accrued liabilities and other		22,558			23,998
Accrued income taxes		7,786			1,969
Deferred revenue		13,740			13,641
Current portion of restructuring liabilities		939			896
Current portion of long-term debt		41			41
Total current liabilities		76,516			81,606
Long-term debt		401			421
Deferred income taxes		1,788			1,788
Other long-term liabilities		9,072			8,764
Total liabilities		87,777			92,579
Shareholders’ equity:
Preferred stock, no par value, 2,000 shares authorized, none issued		—			—
Common stock, no par value, 40,000 shares authorized, 25,129 shares in 2005 and 25,111 shares in 2004 issued		289,750			287,897
Treasury stock, at cost, 2,789 shares in 2005 and 3,205 shares in 2004		(23,668	)		(27,085	)
Unearned compensation		(710	)		(307	)
Accumulated other comprehensive income		54			58
Accumulated deficit		(29,686	)		(86,240	)
Shareholders’ equity		235,740			174,323
Total liabilities and shareholders’ equity	$	323,517		$	266,902

(In thousands)

See accompanying notes to the condensed consolidated financial statements.


	March 31,			December 31,
	2006			2005
	(Unaudited)
ASSETS
Current assets:
Cash and equivalents	$	168,999		$	145,124
Accounts receivable, less allowances of $1,789 and $1,563, respectively		78,947			59,658
Inventories		138,197			136,635
Operating supplies and prepaid expenses		12,844			11,534
Deferred income taxes		7,885			7,885

Total current assets		406,872			360,836
Property, plant and equipment, net		51,172			48,515
Other noncurrent assets		4,538			4,611

Total assets	$	462,582		$	413,962


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	42,543		$	41,385
Accrued liabilities and other		20,412			23,973
Accrued income taxes		26,449			10,563
Deferred revenue		17,338			17,407
Current portion of long-term debt		36			36

Total current liabilities		106,778			93,364
Long-term debt		366			375
Deferred income taxes		1,770			1,770
Other noncurrent liabilities		10,791			10,610

Total liabilities		119,705			106,119


Shareholders’ equity:
Preferred stock, no par value, 2,000 shares authorized, none issued		—			—
Common stock, no par value, 40,000 shares authorized, 25,129 shares issued		294,044			293,936
Treasury stock, at cost, 2,670 and 2,709 shares, respectively		(26,030	)		(26,413	)
Unearned compensation		(491	)		(564	)
Accumulated other comprehensive income		26			29
Retained earnings		75,328			40,855

Total shareholders’ equity		342,877			307,843

Total liabilities and shareholders’ equity	$	462,582		$	413,962

See accompanying notes to condensed consolidated financial statements.

NS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ~~(in thousands)(Unaudited)~~

	Six Months Ended
	June 30,
	2005			2004
OPERATING ACTIVITIES
Net income	$	56,554		$	25,645
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization		2,696			2,676
Deferred income taxes		(3,000	)		—
Amortization of deferred finance costs		145			138
Changes in operating assets and liabilities:
Accounts receivable, net		(18,481	)		(16,711	)
Inventories		6,656			(24,335	)
Other current assets		(1,461	)		963
Accounts payable		(9,609	)		6,133
Accrued liabilities		(1,131	)		5,001
Deferred revenue		99			7,329
Income taxes payable		6,017			821
Restructuring liabilities		—			(3,006	)
Other, net		249			374
Net cash flows provided by operating activities		38,734			5,028
INVESTING ACTIVITIES
Purchases of property, plant and equipment		(2,487	)		(822	)
Purchases of short-term investments		(10,353	)		—
Proceeds from sales of assets held for sale		426			6,914
Net cash flows provided (used) by investing activities		(12,414	)		6,092
FINANCING ACTIVITIES
Repayments of long-term debt		(20	)		(20	)
Net repayments under revolving credit facility		—			(12,710	)
Decrease in other notes payable		—			(106	)
Proceeds from option exercises		4,531			315
Additions to cost of treasury shares		(104	)		—
Payment of financing costs		—			(111	)
Net cash flows provided (used) by financing activities		4,407			(12,632	)
Increase (decrease) in cash and equivalents		30,727			(1,512	)
Cash and equivalents at beginning of period		30,944			2,628
Cash and equivalents at end of period	$	61,671		$	1,116
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	5		$	369
Cash paid during the period for income taxes	$	3,125		$	—

(In thousands)(Unaudited)

See accompanying notes to the condensed consolidated financial statements.


	Three Months Ended
	March 31,
	2006			2005
CASH FLOWS — OPERATING ACTIVITIES
Net income	$	34,513		$	19,333
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization		1,457			1,266
Amortization of deferred finance costs		73			72
Changes in operating assets and liabilities:
Accounts receivable, net		(19,289	)		(4,330	)
Inventories		(1,562	)		(2,524	)
Other current assets		(1,310	)		471
Accounts payable		2,218			(2,966	)
Accrued liabilities		(3,380	)		(3,962	)
Accrued income taxes		15,886			2,749
Deferred revenue		(69	)		255
Other, net		116			40

Net cash flows provided by operating activities		28,653			10,404


CASH FLOWS — INVESTING ACTIVITIES
Purchases of property, plant and equipment		(5,175	)		(755	)

Net cash flows used by investing activities		(5,175	)		(755	)


CASH FLOWS — FINANCING ACTIVITIES
Repayments of long-term debt		(9	)		(10	)
Proceeds from stock option exercises		342			3,292
Tax benefit from stock-based compensation		64			—

Net cash flows provided by financing activities		397			3,282


Increase in cash and equivalents		23,875			12,931
Cash and equivalents at beginning of period		145,124			30,944

Cash and equivalents at end of period	$	168,999		$	43,875


Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	3		$	2
Cash paid during the period for income taxes	$	5,200		$	625

See accompanying notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated financial statements include the accounts of NS Group, Inc. and its wholly-owned subsidiaries (collectively referred to as the “Company”). The ~~significant~~ subsidiaries are Koppel Steel Corporation (Koppel), Newport Steel Corporation (“Newport”), ~~and~~Erlanger ~~Koppel~~Tubular ~~Steel~~ Corporation (~~“Koppel”~~Erlanger) and Northern Kentucky Management, Inc. All significant intercompany balances and transactions have been eliminated.

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes for complete financial statements as required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included in the financial statements. Operating results for an interim period are not necessarily indicative of the results that may be expected for a full year. Reference should be made to NSthe ~~Group, Inc.~~Company’s Annual Report on Form 10-K ~~for~~ for the year ended December 31, ~~2004~~2005 for additional footnote disclosure, including a summary of significant accounting policies. ~~Certain reclassifications have been made to prior period balances~~ ~~in order to conform to the current period presentation.~~

Reclassifications

Certain prior-year amounts related to the Company’s 2001 restructuring activities have been reclassified to conform to the current year’s financial statement presentation. The balance at December 31, 2005 of “Current portion of restructuring liabilities” of $0.9 million has been reclassified to “Accrued liabilities and other” in this report.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those recorded estimates.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), using the modified prospective transition method and therefore has not restated results for prior periods. Under this transition method, stock-based compensation expense for the first quarter of fiscal 2006 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of three years. Prior to the adoption of SFAS 123R, the Company recognized stock-based compensation expense in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for public companies. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R. See Note 2 to the Consolidated Condensed Financial Statements for a further discussion of stock-based compensation.

~~Stock-Based~~Recently ~~Compensation~~Issued Accounting Standards

~~The~~There ~~Company~~have ~~accounts~~been ~~for~~no ~~stock-based~~accounting ~~compensation~~standards ~~using~~issued ~~the intrinsic value method~~ in ~~accordance~~ ~~with~~the ~~Accounting~~first ~~Principles~~quarter ~~Board~~of ~~Opinion~~2006 ~~No. 25,~~that ~~“Accounting~~would ~~for~~have ~~Stock Issued to~~a ~~Employees,”~~material ~~and~~effect ~~related~~on ~~interpretations. If~~ the Company’s ~~accounted~~consolidated ~~for~~statements ~~stock-based compensation using the fair value recognition provisions~~ of ~~SFAS No. 123~~income, ~~“Accounting~~financial ~~for~~position ~~Stock-Based Compensation,”~~or ~~net income and diluted earnings per share would have been as follows:~~cash flows.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In thousands, except per share amounts)	2005			2004			2005			2004
Net income — as reported	$	37,221		$	20,604		$	56,554		$	25,645
Add: Stock-based employee compensation included in reported net income, net of related tax effects		50			30			77			61
Less: Stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects		(150	)		(367	)		(346	)		(766	)
Net income - pro forma	$	37,121		$	20,267		$	56,285		$	24,940
Diluted earnings per share — as reported	$	1.65		$	0.96		$	2.51		$	1.20
Effect of stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects		(0.01	)		(0.02	)		(0.01	)		(0.04	)
Diluted earnings per share - pro forma	$	1.64		$	0.94		$	2.50		$	1.16

Note 2: STOCK BASED COMPENSATION

~~During~~At ~~the~~March 31, ~~first six months of 2005 and 2004~~2006, ~~option awards were granted with an exercise price equal to~~ the ~~market~~Company ~~price~~has ofstock-based ~~the~~employee ~~Company’s~~compensation ~~stock~~plans as ofdescribed ~~the date of grant~~below. The A total ofcompensation ~~56,400 and~~expense ~~89,500~~related ~~stock~~to ~~options~~these ~~were~~plans ~~awarded~~was in$44,300 for the ~~first~~three ~~six~~ months ofended ~~2005 and 2004~~March 31, ~~respectively~~2006. ~~The fair~~Prior ~~value~~to ~~of the granted options are determined using the Black-Scholes option pricing model using assumptions that are evaluated and revised~~January 1, ~~as necessary~~2006, tothe ~~reflect~~Company ~~market~~accounted ~~conditions~~for ~~and experience.~~these ~~The~~plans ~~fair~~under ~~value per share of options granted during~~ the ~~first~~recognition ~~six months of 2005~~ and ~~2004~~measurement ~~was~~provisions ~~$17.67~~of ~~and~~APB $825.~~12, respectively.~~

InPrior ~~May~~to January ~~2005~~1, 2006, the Company ~~awarded~~provided ~~17,400~~pro ~~shares~~forma ofdisclosure ~~restricted~~amounts ~~stock~~in toaccordance ~~directors and officers~~with ofSFAS ~~the Company under the 2004 NS Group~~No. 148, ~~Inc.~~“Accounting ~~Amended~~for ~~and Restated Non~~Stock-~~employee~~Based ~~Directors~~Compensation—Transition ~~Equity Plan~~ and ~~the~~Disclosure” NS(SFAS ~~Group~~148), ~~Inc.~~as ~~Equity Plan. The restricted stock vests at the end of three years of~~if ~~continuous service with~~ the ~~Company.~~fair ~~The market~~ value ofmethod ~~the~~defined ~~restricted~~by ~~shares~~SFAS on123 ~~the~~had ~~date~~been ofapplied ~~grant was~~to ~~approximately~~its ~~$494,000 and is being amortized on a straight~~stock-~~line~~based ~~basis to expense over the vesting period~~compensation.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified prospective transition method and therefore has not restated prior periods’ results. Under this transition method, stock-based compensation expense for the first quarter of 2006 included compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Stock-based compensation expense for all share-based payment awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes these compensation costs net of a forfeiture rate and recognizes the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of three years. The Company estimated the forfeiture rate for the first quarter of 2006 based on its historical experience during the preceding four years.

As a result of adopting SFAS 123R, the impact to the condensed consolidated statements of income before income taxes and net income for the three months ended March 31, 2006 was $44,300 and $27,600 lower, respectively, than if the Company had continued to account for stock-based compensation under APB 25. The impact on both basic and diluted earnings per share for the three months ended March 31, 2006 was not significant. In addition, prior to the adoption of SFAS 123R, the Company presented the tax benefit of stock option exercises as operating cash flows. Upon the adoption of SFAS 123R, tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are classified as financing cash flows.

~~Earnings~~ If ~~Per~~the ~~Share~~Company had accounted for stock-based compensation using the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, net income and diluted income per share for the three months ended March 31, 2005, would have been as follows:

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding and dilutive common stock equivalents. The following table reconciles the number of common shares outstanding at the end of each period to the number of weighted average basic common shares outstanding and the number of weighted average diluted common shares outstanding for the purposes of calculating basic and diluted earnings per common share. The table also provides the number of shares of common stock potentially issuable at the end of each period and the number of potentially issuable shares excluded from the diluted earnings per share computation for each period.


	Three Months
	Ended
(In thousands, except per share amounts)	March 31, 2005
Net income — as reported	$	19,333
Add: Stock-based employee compensation included in reported net income, net of related tax effects		27
Less: Stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects		(196	)

Net income — pro forma	$	19,164


Diluted income per share — as reported	$	0.86
Effect of stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects		(0.01	)


Diluted income per share — pro forma	$	0.85

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In thousands)	2005			2004			2005			2004
Number of common shares outstanding at period-end		22,340			20,953			22,340			20,953
Effect of using weighted average common shares outstanding		(85	)		(12	)		(181	)		(28	)
Weighted average basic common shares outstanding		22,255			20,941			22,159			20,925
Dilutive effect of common stock options and restricted stock units		346			522			391			408
Weighted average diluted common shares outstanding		22,601			21,463			22,550			21,333
Potentially issuable shares		468			1,730			478			1,808
Number of potentially issuable shares excluded from diluted common shares outstanding		—			684			—			673

The Company has stock-based compensation plans under which non-employee directors and certain employees may receive incentive and non-qualified stock options and other equity-based awards. Stock options have generally been granted at fair market value on the date of grant, have ten year terms and become exercisable over a three year period beginning one year after the grant date.

~~Note~~ The 2fair values of the options granted in 2005 were determined using the Black-Scholes option pricing model with the following weighted average assumptions: ~~SHORT~~no common stock dividends; expected volatility of 65%; risk-~~TERM~~free ~~INVESTMENTS~~interest rate of 4.0%; and an expected life of 6 years.

Short-term investments primarily consist of commercial paper, corporate notes and United States government agency notes with original maturities of greater than 90 days but less than one year. Included in this amount at June 30, 2005 is $5.4 million, which is collateral for self-insured workers’ compensation claims.

Note 3: RESTRUCTURING LIABILITIES AND ASSETS HELD FOR SALE

Restructuring Liabilities

During the quarter ended March 31, 2001, the Company implemented restructuring initiatives involving certain operations of its business. One initiative was to purchase hot-rolled coils rather than manufacture them at the Company’s welded tubular operations. As a result, the Company discontinued the production of hot-rolled coils and closed its melt shop and hot strip mill operations at its facilities in Wilder, Kentucky, effective March 31, 2001. In addition, the Company decided to exit the special bar quality business by June 30, 2001, which was operated from its Koppel, Pennsylvania facility.

Consequently, in the first quarter of 2001, the Company recorded $56.2 million of restructuring charges, including $43.4 million resulting primarily from asset impairment losses related to machinery, equipment and related spare parts inventories to be sold. The restructuring charges included a $0.6 million write-down of special bar quality finished goods inventories that was included in cost of products sold.

~~Following~~Presented below is a summary of the ~~accrued~~status ~~restructuring~~of ~~liabilities~~the Company’s stock options and ~~activity~~related transactions ~~for~~as of March 31, 2006 and changes during the ~~period presented~~three months ended March 31, 2006:

(In thousands)	Current			Long-term			Total
							Weighted
December 31, 2004	$	896		$	1,779		$	2,675
							Average
Payments		(59	)					(59	)
							Remaining
Receipts		68						68
				Weighted			Contractual			Aggregate
Reclassifications		34			(34	)		—
				Average			Term			Intrinsic Value
June 30, 2005	$	939		$	1,745		$	2,684
	Shares			Exercise Price			(in years)			(in thousands)
Outstanding, beginning of period		259,241		$	14.44
Granted		—			—
Exercised		(39,218	)		8.72
Expired/Cancelled		(3,167	)		19.82
Outstanding, end of period		216,856			15.39			6.9		$	6,645
Exercisable, end of period		62,678			12.22			6.1			2,119

AtThe ~~June 30,~~aggregate ~~2005,~~intrinsic ~~the~~value ~~current~~in ~~restructuring~~the ~~liabilities~~table ofabove ~~$0.9 million~~represents ~~represent~~ the ~~estimated~~ ~~costs~~total ~~for~~pretax ~~environmental~~intrinsic ~~remediation,~~value (the ~~annual~~difference ~~monitoring~~between ~~costs~~the ofCompany’s aclosing ~~closed~~stock ~~landfill~~price ~~and~~on ~~an operating~~the ~~contract.~~last Intrading ~~addition,~~day ~~Other~~of ~~long-term~~the ~~liabilities~~first quarter ~~includes~~of ~~$1.7 million~~2006 ofand ~~restructuring costs,~~the ofexercise ~~which~~price, ~~$1.4 million~~multiplied ~~represents~~by the ~~estimated~~number ~~costs~~of ~~for post~~in-~~closure~~the-money ~~maintenance~~options) ~~and~~that ~~monitoring~~would ofhave abeen ~~landfill~~received ~~and~~by ~~$0.3 million~~the ~~pertains~~option toholders ~~the~~had ~~estimated~~all ~~costs~~option toholders ~~fulfill~~exercised atheir ~~natural~~options ~~gas~~on ~~transportation~~March 31, ~~contract~~2006. ~~into~~This ~~2009.~~amount Inchanges ~~connection~~based ~~with~~on the ~~Company’s~~fair ~~post-closure~~market ~~maintenance~~value ~~and monitoring obligations~~ of the ~~landfill, at June 30, 2005, the~~ Company’s ~~had $1~~stock.~~6 million~~ ofTotal ~~investments~~intrinsic ~~held~~value inof aoptions ~~restricted~~exercised ~~trust~~for ~~account~~the ~~which~~three ~~are~~months ~~included~~ended inMarch 31, ~~Other~~2006 ~~assets~~was ~~on the consolidated balance sheet~~$1.4 million.

InAs ~~the first quarter~~ of ~~2004~~March 31, ~~the~~2006, ~~Company~~there ~~recorded~~was $10.93 million inof ~~additional~~unrecognized ~~restructuring charges~~compensation ~~primarily~~cost related to non-vested ~~the~~stock ~~settlement~~options ofwhich anis ~~operating~~expected ~~contract~~to be recognized over a weighted-average period of 1.1 years.

~~Assets~~ Cash ~~Held~~received from option exercises for ~~Sale~~the first three months ended March 31, 2006 was $0.3 million. The actual tax benefit realized for the tax deduction from option exercises of the share-based payment awards totaled $0.1 million for the three months ended March 31, 2006.

~~Assets~~At ~~of the closed operations~~March 31, ~~consisting~~2006 ~~of machinery~~ and ~~equipment~~December 31, ~~spare~~2005, ~~parts~~there ~~and~~were ~~supply inventories~~38,400 ~~are~~shares ~~classified as Assets Held for Sale in the Company’s consolidated balance sheet. The assets include the Company’s best estimates~~ of ~~the~~unvested ~~amounts~~restricted ~~expected to be realized on the sale~~stock ~~of the assets less costs to sell~~awards. While the estimates are based on an analysis of the facilities, including valuations by independent appraisers, the amounts the Company will ultimately realize could differ materially from the amounts estimated. The ~~assets~~weighted ~~are~~average ~~being~~grant ~~actively~~date ~~marketed~~fair byvalue ~~an outside broker. During the six months ended June 30, 2005, the Company recognized $0.9 million for sales~~ of these ~~assets.~~awards ~~The net amount realized~~ was ~~treated~~$19.48 asper ~~a reduction of Assets Held for Sale~~share.

~~Note~~ As 4:of ~~SEGMENT~~March 31, ~~AND~~2006, ~~CONCENTRATIONS~~there ~~INFORMATION~~was $0.5 million unrecognized stock-based compensation expense related to nonvested restricted stock awards. That cost is expected to be recognized over a weighted-average period of 1.6 years.

The Company operates in a single reportable segment which consists of (i) welded and seamless tubular goods used primarily in oil and natural gas drilling and production operations (oil country tubular goods, or OCTG); and (ii) line pipe used in the transmission of oil, natural gas and other fluids. The segment reflects the aggregation of two business units which have similar economic characteristics such as products and services, manufacturing processes, customers and distribution channels and is consistent with both internal management reporting and resource and budgetary allocations. Corporate general and administrative expenses are fully absorbed by the segment.

Net sales by product category for the three and six month periods are as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In thousands)	2005		2004		2005		2004
Welded	$	61,144	$	44,544	$	121,016	$	83,953
Seamless		106,679		64,889		185,831		109,997
	$	167,823	$	109,433	$	306,847	$	193,950

For the three months ended March 31, 2006, stock-based compensation expense related to stock options was allocated as follows:


(In thousands)
Cost of sales	$	6.0
Selling, general and administrative		38.3

Stock-based compensation expense before income taxes		44.3
Income tax benefit		(16.7	)

Total stock-based compensation expense after income taxes	$	27.6

Note 3: EARNINGS PER SHARE


	Three Months Ended
	March 31,
(In thousands)	2006			2005
Number of common shares outstanding at period-end		22,459			22,214
Effect of using weighted average common shares outstanding		(26	)		(152	)

Weighted average basic common shares outstanding		22,433			22,062

Dilutive effect of common stock options and restricted stock units		180			467

Weighted average diluted common shares outstanding		22,613			22,529


Potentially issuable shares		238			559

Note 4: SEGMENT AND CONCENTRATIONS INFORMATION

The Company operates in a single reportable segment, which it refers to as Energy Products and consists of (i) seamless and welded tubular goods used primarily in oil and natural gas drilling and production operations (oil country tubular goods, or OCTG); and (ii) line pipe used in the transmission of oil, natural gas and other fluids. Energy Products reflect the aggregation of two business units which have similar economic characteristics and similar characteristics such as products and services, manufacturing processes, customers and distribution channels and is consistent with both internal management reporting and resource and budgetary allocations. Corporate general and administrative expenses are fully absorbed by the segment. Net sales by product category are as follows:


	Three Months Ended
	March 31,
(In thousands)	2006		2005
Seamless products	$	132,455	$	79,152
Welded products		58,003		59,872

	$	190,458	$	139,024

Concentrations

The Company’s operations are conducted principally in the United States. The Company grants trade credit to customers, the most significant of which are distributors serving the oil and natural gas exploration and production industries. Sales to the Company’s two largest customers accounted for 2423% and 14% of net sales for the three months ended ~~June~~March 3031, ~~2005~~2006. Sales to the Company’s two largest customers accounted for 3426% and 12% of net sales for the three months ended ~~June~~March 3031, ~~2004. Sales to the Company’s two largest customers accounted for 25% and 13% of net sales for the six months ended June 30,~~ 2005. ~~Sales to the Company’s three largest customers accounted for 30%, 11%, and 10% of net sales for the six months ended June 30, 2004.~~ The Company’s two largest customers in ~~2005~~2006 accounted for $2328.93 million of the Company’s accounts receivable balances at ~~June~~March 3031, ~~2005~~2006. The Company’s ~~three~~two largest customers in fiscal ~~2004~~2005 accounted for $2820.14 million of the Company’s accounts receivable balances at December 31, ~~2004~~2005.

The Company’s welded operations depend primarily on three suppliers for its steel coils with one supplier accounting for the majority of its purchases. If the Company would suffer the loss of a significant customer or supplier, the effect could result in reduced sales or a delay in manufacturing which could adversely affect operating results.

IfAs of March 31, 2006, approximately 92% of the Company’s ~~would~~1,042 ~~suffer~~hourly employees were represented by the ~~loss~~United Steelworkers of aAmerica ~~significant~~(USW). ~~customer~~The orcollective ~~supplier~~bargaining agreements for Newport and Koppel expire in April 2009 and May 2010, ~~the~~respectively. ~~effect~~Management ~~could~~and representatives ~~result~~of inthe ~~reduced~~USW ~~sales~~are orcurrently negotiating a ~~delay~~new incollective ~~manufacturing~~bargaining ~~which~~agreement ~~could~~covering ~~adversely~~167 ~~affect~~employees at ~~operating~~Erlanger. ~~results~~The contract expires on May 12, 2006.

Approximately 90% of the Company’s 960 hourly employees are represented by the United Steelworkers of America. The collective bargaining agreements for Newport and Koppel expire in 2009 and 2010, respectively. The collective bargaining agreement for one of the Company’s tubular finishing facilities expires in May 2006.

Note 5: INVENTORIES

Inventories consist of the following:


	March 31,		December 31,
(In thousands)	2006		2005
Raw materials	$	30,090	$	33,970
Semi-finished and finished products		108,107		102,665

	$	138,197	$	136,635

	June 30,		December 31,
(In thousands)	2005		2004
Raw materials	$	27,597	$	49,054
Semi-finished and finished products		85,564		70,763
	$	113,161	$	119,817

Note 6: REVOLVING CREDIT FACILITY

The Company has a revolving credit facility that provides up to $50.0 million under a borrowing formula that is based upon eligible inventory and accounts receivable, subject to certain reserves and satisfaction of certain conditions to each draw under the facility. Interest rates on the facility vary according to the amount of loans outstanding and range from the prime rate plus 1.00% to prime plus 1.75% with respect to domestic rate loans, and from the LIBOR rate plus 2.50% to LIBOR plus 3.25% with respect to LIBOR rate loans. The credit agreement contains financial and other covenants, including a minimum level of earnings, as defined in the agreement, and limitations on certain types of transactions, including the ability of the Company’s subsidiaries to declare and pay dividends. The facility is secured by a first priority lien on substantially all of the Company’s inventories, accounts receivable and property, plant and equipment and related intangibles. At June 30, 2005, the Company was in compliance with the covenants of the credit facility. The credit facility expires in March 2007.

At June 30, 2005, the Company had $2.0 million of letters of credit outstanding under the credit facility and approximately $48.0 million in borrowing availability. The letters of credit are issued against the credit facility as collateral for the Company’s self-insured workers compensation program.

Note 6: REVOLVING CREDIT FACILITY

The Company has a revolving credit facility that provides up to $50.0 million under a borrowing formula that is based upon eligible inventory and accounts receivable, subject to certain reserves and satisfaction of certain conditions to each draw under the facility. Interest rates on the facility vary according to the amount of loans outstanding and range from the prime rate plus 1.00% to prime plus 1.75% with respect to domestic rate loans, and from the LIBOR rate plus 2.50% to LIBOR plus 3.25% with respect to LIBOR rate loans. The credit agreement contains financial and other covenants, including a minimum level of earnings, as defined in the agreement, and limitations on certain types of transactions, including the ability of the Company’s subsidiaries to declare and pay dividends. At March 31, 2006, the Company was in compliance with the covenants of the credit facility. The credit facility expires in March 2007.

At March 31, 2006, the Company had $1.9 million of letters of credit outstanding under the credit facility and approximately $48.1 million in borrowing availability. The letters of credit are issued against the credit facility as collateral for the Company’s self-insured workers compensation program. The facility is secured by a first priority lien on substantially all of the Company’s inventories, accounts receivable and property, plant and equipment and related intangibles.

Note 7: COMMITMENTS AND CONTINGENCIES

The Company is subject to various claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to environmental matters, workers’ compensation, health care and product liability coverage (each of which is self-insured to certain levels), as well as commercial and other matters. The Company accrues for the cost of such matters when the incurrence of such costs is probable and can be reasonably estimated. Based upon its evaluation of available information, management does not believe that any such matters will have, individually or in the aggregate, a material adverse effect upon the Company’s consolidated ~~financial~~statements ~~position~~of income, ~~results~~financial ofposition ~~operations~~ or cash flows.

Environmental

The Company is subject to federal, state and local environmental laws and regulations, including, among others, the Resource Conservation and Recovery Act (RCRA), the Clean Air Act, the 1990 Amendments to the Clean Air Act and the Clean Water Act, and all regulations promulgated in connection therewith. Such laws and regulations include those concerning the discharge of contaminants as air emissions or waste water effluents and the disposal of solid and/or hazardous wastes such as electric arc furnace dust. As such, the Company is from time to time involved in administrative and judicial proceedings and administrative inquiries related to environmental matters.

The Company operates a steel mini-mill at its Koppel, Pennsylvania facility that produces dust that contains lead, cadmium and chromium and is classified as a hazardous waste. Dust produced by its electric arc furnace is collected through emission control systems and recycled at EPA-approved facilities.

The Company has a closed hazardous waste landfill on its property in Wilder, Kentucky that is being monitored according to a post-closure permit that was approved by the Kentucky Division of Waste Management. The Company has accrued the estimated costs for the post-closure ~~maintenance~~care ~~and monitoring~~ of the landfill and escrowed the funds.

In late 2001, the U.S. Environmental Protection Agency (EPA) designated Imperial Adhesives, Inc., a former subsidiary of the Company, as one of a number of potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) at an environmental remediation site. The EPA has contended that any company linked to a CERCLA site is potentially liable for costs under the legal doctrine of joint and several liability. This environmental remediation site involves a municipal waste disposal facility owned and operated by an independent operator. A preliminary study of the site is ongoing. ~~Consequently, it is too early to determine the Company’s ultimate liability.~~ The Company believes, however, that the reasonably foreseeable resolution of this matter will not have a material adverse effect on its consolidated ~~financial~~ statements of income, financial position or cash flows.

The Company had accrued liabilities of $3.8 million and $3.7 million at June 30, 2005 and December 31, 2004, respectively, for environmental remediation obligations. Based upon its evaluation of available information, management does not believe that any of the environmental contingency matters discussed above are likely, individually or in the aggregate, to have a material adverse effect upon the Company’s consolidated financial position, results of operations or cash flows. However, the Company cannot predict with certainty that new information or developments with respect to its environmental contingency matters, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Note 8: PENSION AND POSTRETIREMENT HEALTH PLANS

Pension and postretirement health benefit costs are as follows:

	Three Months Ended June 30,
	Pension				Health
(In thousands)	2005		2004		2005		2004
Service cost	$	100	$	88	$	6	$	4
Interest cost		40		32		5		6
Recognized actuarial loss		1		—		—		—
Amortization of transition obligation		—		—		7		7
	$	141	$	120	$	18	$	17

	Six Months Ended June 30,
	Pension				Health
(In thousands)	2005		2004		2005		2004
Service cost	$	199	$	175	$	11	$	9
Interest cost		80		65		10		11
Recognized actuarial loss		2		—		—		—
Amortization of transition obligation		—		—		14		14
	$	281	$	240	$	35	$	34

Note 9: PRODUCT WARRANTIES

The Company’s products are used in applications which are subject to inherent risks, including well failures, performance deficiencies, line pipe leaks, personal injury, property damage, environmental contamination or loss of production. The Company warrants its products to meet certain specifications and actual or claimed deficiencies from these specifications may give rise to claims. The Company maintains reserves for asserted and unasserted product warranty and product liability claims. The product warranty and product liability claims exposure is evaluated using historical claim trends and information available on specifically known claims. The Company considers the extent of insurance coverage in its estimate of the reserve. The incurrence of an unusually large dollar claim or a large number of claims could alter the Company’s exposure and the related reserves.

The following table identifies changes in warranty reserves for the three and six months ended June 30, 2005 and 2004:

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
(In thousands)	2005			2004			2005			2004
Balance, beginning of period	$	2,930		$	3,268		$	2,051		$	3,057
Accruals for warranties during the period		437			(31	)		2,173			367
Settlements made during the period		(202	)		(1,164	)		(1,059	)		(1,351	)
Balance, June 30	$	3,165		$	2,073		$	3,165		$	2,073

Included in the balances at June 30, 2005 and 2004 is $0.5 million of valuation accounts that are reported against accounts receivable balances in the consolidated balance sheets.

~~Note~~ The ~~10:~~Company ~~INCOME~~had ~~TAXES~~accrued liabilities of $5.0 million at March 31, 2006 and December 31, 2005 for environmental remediation obligations. Based upon its evaluation of available information, management does not believe that any of the environmental contingency matters discussed above are likely, individually or in the aggregate, to have a material adverse effect upon the Company’s consolidated statements of income, financial position or cash flows. However, the Company cannot predict with certainty that new information or developments with respect to its environmental contingency matters, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated statements of income, financial position or cash flows.

~~The provision for income taxes consists of federal and state taxes. The Company’s operations~~Other are in various locations in the United States, and accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates. The provisions are based on an annual effective rate, which requires management to make its best estimate of annual pre-tax income. During the year, management regularly updates these estimates. To the extent that actual pretax results in 2005 vary from estimates applied at the end of the most recent interim period, the actual tax provision in 2005 could be materially different from the estimated annual tax provision as of the end of the second quarter.

~~Income~~The ~~tax~~Company ~~expense~~has ~~for~~entered ~~the~~into ~~second quarter and first half of 2005 was computed at~~ a ~~combined federal~~fixed ~~and~~volume ~~state effective tax rate of approximately 15.0%, which reflects management’s estimate of the rate for the full year~~ and ~~the~~base ~~utilization~~price ofcontract ~~all~~with ~~available~~its ~~Federal~~major ~~net~~supplier ~~operating loss carryforwards. In addition, the effective rate was impacted by the reversal in the second quarter~~ of ~~certain tax valuation allowances related to deferred tax assets which reverse in years after~~ ~~December 31,~~steel ~~2005.~~coils ~~The~~for ~~reversal~~2006 ~~of the tax valuation allowances decreased income tax expense by $3.0 million, or $0.13 per diluted share, in the second quarter and first half of 2005. The effective rate~~ for ~~the~~a ~~second~~portion ~~quarter and first half~~ of ~~2004~~its ~~was~~estimated ~~3.4~~raw %material ~~and 3~~requirements.~~1%, respectively.~~

AtNote ~~June 30,~~8: ~~2005,~~EMPLOYEE ~~the~~BENEFIT ~~Company had valuation allowances against certain state net operating~~PLANS ~~loss carryforwards primarily as a result of statutory limitations on their utilization.~~

Pension and post-retirement health benefit costs for the three months ended March 31, 2006 and 2005 are as follows:


	Three Months Ended March 31,
	Pension				Health
(In thousands)	2006		2005		2006		2005
Service cost	$	96	$	99	$	5	$	5
Interest cost		48		40		5		5
Recognized actuarial loss		2		1		—		—
Amortization of transition obligation		—		—		7		7

	$	146	$	140	$	17	$	17

Note 9: PRODUCT WARRANTIES

The Company’s products are used in applications which are subject to inherent risks, including well failures, performance deficiencies, line pipe leaks, personal injury, property damage, environmental contamination or loss of production. The Company warrants its products to meet certain specifications and actual or claimed deficiencies from these specifications may give rise to claims. The Company maintains reserves for asserted and unasserted product warranty and product liability claims. The Company evaluates the product warranty and product liability claims exposure using historical claim trends and information available on specifically known claims. The Company considers the extent of insurance coverage in its estimate of the reserve. The incurrence of an unusually large dollar claim or a large number of claims could alter the Company’s exposure and the related reserves.

The following table identifies changes in warranty reserves for the three months ended March 31, 2006 and 2005:


(In thousands)	2006			2005
Balance, January 1	$	1,833		$	2,051
Accruals for warranties		319			1,736
Warrenty settlements		(320	)		(857	)

Balance, March 31	$	1,832		$	2,930

Included in the balances at March 31, 2006 and 2005 is $0.5 million of valuation accounts that are reported against accounts receivable balances in the consolidated balance sheets.


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

We make forward-looking statements in this report which represent our expectations or beliefs about future events and financial performance. You can identify these statements by forward-looking words such as “expect,” “believe,” “anticipate,” “goal,” “plan,” “intend,” “estimate,” “may,” “will” or similar words. Forward-looking statements are subject to known and unknown risks, uncertainties and assumptions~~, including:~~.

• world-wide and domestic supplies of and demand for natural gas and oil; • fluctuations in industry-wide tubular inventory levels; • domestic competitive pressures; • the level and pricing of imports and the presence or absence of governmentally imposed trade restrictions; • steel coil and steel scrap price volatility; • manufacturing efficiencies; • costs of compliance with environmental regulations; • asserted and unasserted claims; • the ability to maintain an internal control framework compliant with Sarbanes-Oxley Section 404; • general economic conditions; and • other risks and uncertainties described under “Risk Factors” included in Exhibit 99.1 of our annual report on Form 10-K for the year ended December 31, 2004.

In light of these risks, uncertainties and assumptions, the future events discussed in this report might not occur. In addition, actual results could differ materially from those suggested by the forward-looking statements. Accordingly, you should not place undue reliance on the forward-looking statements, which speak only as of the date on which they are made. We may not update these forward-looking statements, even though our situation may change in the future, unless we are obligated under federal securities laws to update and disclose material developments related to previously disclosed information. We qualify all of our forward-looking statements by these cautionary statements.

For a more complete understanding of our business activities and financial results, you should read the analysis of financial condition and results of operations together with the unaudited financial statements included in this report.

OVERVIEW

Our Products and Facilities

We are a domestic producer of seamless and welded tubular steel products serving the energy industry. We conduct our business within a single reportable business segment. Our tubular products, commonly referred to as oil country tubular goods (OCTG), are used primarily in oil and natural gas drilling exploration and production operations. We also manufacture line pipe, which is used as gathering lines for the transmission of petrochemicals and hydrocarbons.

Our products are manufactured and sold under two brands. Our Koppel brand is our seamless tubular product manufactured at our facility located near Koppel, Pennsylvania. Our Newport brand is our welded tubular product manufactured at our tubular facilities located near Newport, Kentucky. The primary geographic market for our products is the southwestern, ~~western~~ and ~~Appalachian~~ Appalachian regions of the United States, as well as western regions of Canada. We also operate ~~tubular~~ tubular finishing facilities in the southwest United States, where we can provide further finishing processes to our ~~products~~product.

Economic and Industry-Wide Factors that Affect our Business

Demand for Our Products

Over 90% of our revenues were derived from the sale of OCTG in the first quarters ~~and~~of ~~six~~2006 ~~months~~and ~~ended June 30,~~ 2005 ~~and 2004, respectively~~. Therefore, our revenue is directly dependent on the demand for OCTG, which is highly cyclical in nature. There are a number of factors that we monitor to assist us in estimating the future demand for our OCTG products. Demand for our OCTG products is dependent on the number and depth of oil and natural gas wells being drilled in the United States and globally. The level of drilling activity is, among other things, dependent on the current and anticipated supply and demand for oil and natural gas. Oil and natural gas prices are volatile and can have a substantial effect upon drilling levels and resulting demand for our energy related products. Shipments by domestic producers of OCTG products may also be positively or negatively affected by the amount of inventory held by producers, distributors and end-users, as well as by imports of OCTG products.

~~The average number of oil and gas drilling rigs operating in the United States (rig count),~~14 ~~domestic shipments of OCTG products (excluding exports), OCTG imports and inventories for the quarters and six months ended June 30, 2005 and 2004 were as follows:~~

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Average natural gas price per mcf	$	6.73	$	5.99	$	6.50	$	5.84
Average U.S. rig count		1,339		1,165		1,311		1,144
Domestic OCTG shipments (millions of tons)		0.7		0.6		1.3		1.3
OCTG imports (millions of tons)		0.5		0.3		0.8		0.5
OCTG inventories (millions of tons at period-end)						1.9		1.6
Inventory tons per rig (at period-end)						1,387		1,331

~~Source:~~The ~~Baker~~average ~~Hughes~~number of oil and gas drilling rigs operating in the United States (rig count), domestic ~~Preston~~shipments ~~Pipe~~of OCTG products (excluding exports), OCTG imports and ~~Tube~~inventories ~~Report~~for the three months ended March 31, 2006 and ~~Company~~2005 ~~estimates~~were as follows:

Economic conditions in the United States resulted in real GDP growth of 4.4% in 2004. Relative economic conditions continued to remain strong in the first half of 2005, thus supporting natural gas demand and prices that have kept rig count at high activity levels. For the six months ended June 30, 2005, rigs drilling for natural gas represented approximately 87% of the 1,311 rigs. Based upon current settlement prices for natural gas futures, economists’ forecasts of real GDP growth in 2005, as well as other factors, we estimate the rig count will average 1,360 in 2005. The rig count as of July 29, 2005 was 1,412.


	Three Months Ended
	March 31,
	2006		2005
Average natural gas price per mcf	$	8.98	$	6.27

Average U.S. rig count		1,521		1,283

Domestic OCTG shipments (millions of tons)		0.7		0.7

OCTG imports (millions of tons)		0.5		0.3

OCTG inventories (millions of tons at period-end)		2.1		1.7

Inventory tons per rig (at period-end)		1,315		1,299

~~The~~Economic ~~amount~~conditions ~~of OCTG inventory~~ in the United States ~~marketplace~~resulted ~~also~~in ~~affects~~real ~~demand~~GDP ~~for~~growth ~~our products.~~of U3.S.5% ~~end-users~~in ~~obtain~~2005. ~~OCTG~~Relative economic ~~from~~conditions ~~domestic~~continued ~~and~~to ~~foreign~~remain ~~tubular~~strong ~~producers~~into ~~and~~the ~~from draw-downs~~first quarter of ~~inventory from the end-user~~2006, ~~distributor~~thus orsupporting natural ~~tubular~~gas ~~producers.~~prices ~~While~~that ~~the~~have ~~estimated absolute~~kept ~~levels~~rig ofcount ~~OCTG inventories~~ at ~~June 30,~~high ~~2005~~activity ~~of 1~~levels.~~9 million~~ ~~tons~~Based ~~exceeded~~upon ~~year~~current ~~ago levels,~~settlement ~~the~~prices ~~amount~~for ofnatural ~~inventory~~gas ~~tons~~futures, ~~per~~economists’ ~~rig~~forecasts ~~has~~of ~~remained~~real atGDP agrowth ~~low~~in ~~level~~2006, ~~relative~~as towell ~~historical~~as ~~levels of~~other ~~inventory per active rig. Therefore~~factors, we ~~believe~~estimate ~~that current OCTG inventory levels in~~ the ~~marketplace~~rig count will ~~not~~average ~~have~~1,580 ain ~~significant~~2006. ~~detrimental~~The ~~effect~~rig oncount ~~our~~as ~~2005~~of ~~shipments~~April 28, ~~assuming~~2006 ~~our~~was ~~estimate of 2005 drilling levels~~1,608.

The amount of OCTG inventory in the United States marketplace also affects demand for our products. U.S. end-users obtain OCTG from domestic and foreign tubular producers and from draw-downs of inventory from the end-user, distributor or tubular producers. While the absolute levels of OCTG inventories at March 31, 2006 increased by 20.1% over 2005, to 2.1 million tons, the amount of inventory tons per rig increased only 1.2% to 1,315, which we believe represents a reasonable level of inventory relative to active rigs. Therefore, we believe that current OCTG inventory levels in the marketplace will not have a detrimental effect on our 2006 shipments assuming our estimate of 2006 drilling levels.

Imports

Imports command a significant portion of the domestic OCTG market. We believe import levels are affected by, among other things:

	•		currency exchange rates;

	•		overall world-wide demand for OCTG;

	•		freight costs;

	•		the trade practices of foreign governments and producers; and

	•		the presence or absence of antidumping, countervailing duty or other U.S. government orders that raise the cost or impose limits on imports.

According to published industry reports, imports of OCTG products in the first ~~half~~quarter of ~~2005~~2006 comprised an estimated 3639% of total domestic market shipments, compared to 2732% in the first ~~half of~~quarter ~~2004~~of 2005.

Since 1995, the U.S. government has been imposing duties on imports of various OCTG products from Argentina, Italy, Japan, Korea and Mexico in response to antidumping and countervailing duty cases filed by several U.S. companies. InThese ~~June 2001,~~duties are subject to sunset reviews beginning in July 2006. We cannot predict the ~~ITC~~U.S. ~~voted~~government’s tofuture ~~continue~~actions ~~these~~regarding duties ~~for~~and tariffs or any ~~five~~other ~~more~~future ~~years~~actions regarding import duties or other trade restrictions on imports of OCTG and line pipe products. We expect to continue to experience high levels of competition from imports.

Under the U.S. Continued Dumping and Subsidy Offset Act (CDSOA), tariffs collected on dumped imports are required to be directed to the industries harmed. These payments are made to cover certain operating expenses and investment in manufacturing facilities. In September 2002, the World Trade Organization (WTO) ruled that such payments violate international trade rules. The U.S. Trade Representative appealed this ruling; however, the WTO upheld the ruling in January 2003.

We cannot predict the U.S. government’s future actions regarding duties and tariffs or any other future actions regarding import duties or other trade restrictions on imports of OCTG and line pipe products. We expect to continue to experience high levels of competition from imports.

Costs of Our Products

As a manufacturer of tubular steel products, the costs of our products include steel raw material costs, direct and indirect labor, energy costs and other direct and indirect manufacturing costs. The primary raw material used in our seamless operations is steel scrap, which in the first ~~half~~quarter of ~~2005~~2006 represented approximately 23% of cost of ~~products~~goods sold for our seamless products. At our welded facility, purchased steel coil is the primary raw material, which represented approximately 8072% of cost of ~~products~~goods sold for our welded products ~~in the first half of 2005~~. As a result, the steel industry, which is highly cyclical and volatile in nature, can affect our costs both positively and negatively. Various factors, most of which are beyond our control, affect the price of steel scrap and coils. These factors include:

	•		supply and demand factors, both domestic and global;

	•		freight costs and transportation availability;

	•		inventory levels of brokers and distributors;

	•		the level of imports and exports; and

	•		general economic conditions.

Our quarterly average cost per net ton of purchased steel scrap, used in our seamless operations, for the comparative periods ~~presented~~was ~~are~~ as follows:

NS Group Purchased Steel Scrap
Average Cost Per Net Ton

The following chart illustrates the average market price of steel coil, which is used in our welded operations, for the comparative periods presented, as reported by American Metal Market. Such prices are illustrative of trends that we have generally experienced with ~~our~~the ~~purchased~~price we pay for our steel ~~coil~~coils.

Average Price Per Ton of Steel Coil

~~Because~~The ~~we value our inventory on a FIFO basis, the~~ steel component of our cost of ~~products~~ goods sold lags steel purchase price changes by four to six months.

Based upon our view of the factors that impact the price of steel scrap and coils, we ~~currently~~ believe our ~~2005~~annual ~~third~~2006 ~~and fourth quarter~~ steel scrap ~~purchase costs will increase sequentially approximately 3%~~ and ~~23% from our 2005 second quarter. In addition, we currently believe our 2005 third quarter steel~~ coil ~~purchase~~ costs will ~~decrease~~approximate ~~approximately~~the ~~17% from~~average ~~our~~of 2005 ~~second quarter, and then increase sequentially by approximately 15% in the fourth quarter~~.

There can be no assurance that raw material supply will be consistently available to meet our customer demand. AAlso, decline in demand for our product may result in lower selling prices which ~~could~~ could result in an inability to fully recover our ~~inventory~~investment ~~cost~~in inventory.

~~RESULTS~~Results OFof ~~OPERATIONS~~Operations — First Quarter 2006 Compared to First Quarter 2005

A summary of our results for the three and six months ended June 30, 2005 and 2004 are included in the following table (dollars in thousands, except for share data and revenue per ton):

	Three Months Ended				Change				Six Months Ended				Change
	June 30,				2005 vs 2004				June 30,				2005 vs 2004
	2005		2004		$		%		2005		2004		$			%
Net sales
Welded products	$	61,144	$	44,544	$	16,600		37.3	$	121,016	$	83,953	$	37,063			44.1
Seamless products		106,679		64,889		41,790		64.4		185,831		109,997		75,834			68.9
	$	167,823	$	109,433	$	58,390		53.4	$	306,847	$	193,950	$	112,897			58.2
Gross profit	$	45,796	$	25,626	$	20,170		78.7	$	74,259	$	37,341	$	36,918			98.9
Selling, general and administrative	$	5,763	$	3,990	$	1,773		44.4	$	11,636	$	8,344	$	3,292			39.5
Operating income (1)	$	40,033	$	21,636	$	18,397		85.0	$	62,623	$	27,100	$	35,523			131.1
Net income	$	37,221	$	20,604	$	16,617		80.6	$	56,554	$	25,645	$	30,909			120.5
Earnings per diluted share	$	1.65	$	0.96	$	0.69		71.9	$	2.51	$	1.20	$	1.31			109.2
Revenue per ton (2)
Welded products	$	1,071	$	862	$	209		24.2	$	1,073	$	693	$	380			54.8
Seamless products	$	1,659	$	1,052	$	607		57.7	$	1,572	$	979	$	593			60.6
Tons shipped (2)
Welded products		57,100		51,700		5,400		10.4		112,800		121,100		(8,300	)		(6.9	)
Seamless products		63,700		61,700		2,000		3.2		116,700		112,400		4,300			3.8
		120,800		113,400		7,400		6.5		229,500		233,500		(4,000	)		(1.7	)
Average rig count		1,339		1,165		174		14.9		1,311		1,144		167			14.6

(1)		Includes restructuring charges of $1.9 million in the first quarter of 2004. See Note 3: Restructuring Charges to the Condensed Consolidated Financial Statements.
(2)		Revenue per ton and shipment data for tubular products only.

Results of Operations – Second Quarter 2005 Compared to Second Quarter 2004

Summary

Net sales for 2005 were $167.8 million compared to $109.4 million in 2004, an increase of $58.4 million, or 53.4%. Operating income for 2005 was $40.0 million compared to 2004 operating income of $21.6 million. Net income for 2005 was $37.2 million, or $1.65 per diluted share, compared to 2004 net income of $20.6 million, or $0.96 per diluted share.

Net Sales

The increase in net sales in 2005 of 53.4% over 2004 was primarily attributable to significant increases in revenue per ton for both our welded and seamless tubular products and a 6.5% increase in shipments. The increase in average revenue per ton was primarily due to price increases resulting from the increase in demand for tubular products as well as the pass through of increased steel costs. The increase in shipments was attributable to the strong demand for our welded and seamless products resulting from the increases in drilling activity.


	Three Months Ended				Change
	March 31,				2006 vs 2005
($ in thousands)	2006		2005		Amount			%
Net sales
Seamless products	$	132,455	$	79,152	$	53,303			67.3
Welded products		58,003		59,872		(1,869	)		(3.1	)

	$	190,458	$	139,024	$	51,434			37.0

Revenue per ton (tubular)
Seamless products	$	1,729	$	1,467	$	262			17.9
Welded products	$	1,045	$	1,075	$	(30	)		(2.8	)

Tubular tons shipped
Seamless products		75,300		53,000		22,300			42.1
Welded products		55,500		55,700		(200	)		(0.4	)

		130,800		108,700		22,100			20.3

Average rig count		1,521		1,283		238			18.6

The increase in net sales in 2006 of 37.0% over 2005 was attributable to significant increases in revenue per ton and tons shipped for our seamless tubular products. The increase in average revenue per ton for seamless tubular products was primarily due to price increases resulting from the increase in demand for alloy grade tubular products as evidenced by the 18.6% increase in the average rig count from 2005 to 2006. The decline in shipments and revenue per ton for our welded tubular products was due to increased imports of carbon grade products compared to the prior year. The majority of our welded tubular product sales are carbon grade.

Gross Profit

Our gross profit for 2005 was $45.8 million, as compared to gross profit for 2004 of $25.6 million, an increase of $20.2 million. Our gross profit percent in 2005 was 27.3% compared to a gross profit percent of 23.4% in 2004. Gross profit improved in 2005 primarily as a result of significant increases in prices partially offset by higher steel raw material costs.


	Three Months Ended				Change
	March 31,				2006 vs 2005
($ in thousands)	2006		2005		Amount		%
Gross profit	$	59,789	$	28,463	$	31,326		110.1

Gross profit %		31.4		20.5		10.9

~~Selling~~ Gross ~~General~~profit improved in 2006 primarily as a result of significant increases in prices partially offset by higher steel raw material costs. Gross profit percentage increased due to increased pricing and ~~Administrative~~a ~~Expenses~~greater mix of shipments of high value-added alloy grade products.

Selling, ~~general~~General and ~~administrative~~Administrative ~~expenses in 2005 were higher by $1.8 million compared to~~Expenses ~~2004, but decreased as a percentage of net sales to 3.4% in 2005 from 3.6% in 2004. The increase primarily related to product liability claims, bonus and incentive compensation and professional fees.~~

Investment Income, Interest Expense, Other, Net


	Three Months Ended				Change
	March 31,				2006 vs 2005
($ in thousands)	2006		2005		Amount			%
Selling, general and administrative	$	5,841	$	5,873	$	(32	)		(0.5	)

~~Our~~Selling, ~~investment~~general ~~income~~and ~~was~~administrative ~~$0.4 million~~expenses in 2006 were relatively flat compared to 2005, but ~~and~~decreased ~~was~~as ~~generated~~a percentage of net sales to 3.1% in 2006 from ~~invested~~4.2% ~~cash~~in ~~balances~~2005.

~~Our 2005 interest expense consists primarily of amortization of deferred financing costs and~~18 unused commitment and letter of credit fees. We had no borrowings under our credit facility in 2005. Our 2004 interest expense represents the aforementioned costs as well as interest expense on outstanding loans under the credit facility.

Income Taxes

Income tax expense for 2005 was computed at a combined federal and state effective tax rate of approximately 15.0% which reflects management’s estimate of the rate for the full year based upon annual pre-tax earnings estimates and the utilization of all available federal net operating loss carryforwards. In addition, the effective rate was reduced to 7.6% as a result of the reversal of certain tax valuation allowances related to deferred tax assets which reverse in years after December 31, 2005. The reversal of the tax valuation allowances decreased income tax expense by $3.0 million, or $0.13 per diluted share. The effective tax rate for 2004 was 3.4%.

~~Results~~Investment ofIncome ~~Operations~~and –Interest ~~First Half 2005 Compared to First Half 2004~~Expense

~~Summary~~ Our investment income was $1.8 million in 2006, compared to income of $0.2 million in 2005. Investment income increased in 2006 over 2005 as a result of increases in average invested cash balances and interest rates.

~~Net~~Interest ~~sales~~expense ~~for 2005 were $306.8 million compared to $194.0 million~~ in ~~2004,~~2006 anconsisted ~~increase~~primarily of ~~$112.8 million,~~ oramortization ~~58.2%. Operating income for 2005 was $62.6 million compared to 2004 operating income~~ of ~~$27.1 million.~~deferred ~~Net~~financing ~~income~~costs ~~for 2005 was $56.6 million, or $2.51 per diluted share,~~and ~~compared~~unused tocommitment ~~2004~~and ~~net~~letter ~~income~~ of ~~$25.6 million,~~credit ~~or $1~~fees.~~20 per diluted share.~~

Net Sales

The increase in net sales in 2005 of 58.2% over 2004 was primarily attributable to significant increases in revenue per ton for both our welded and seamless tubular products despite a slight decrease in shipments. The increase in average revenue per ton was primarily due to price increases resulting from the increase in demand for tubular products as well as the pass through of increased steel costs. The decrease in shipments was primarily attributable to lower shipments of our welded product.

Gross Profit

Our gross profit for 2005 was $74.2 million compared to gross profit for 2004 of $37.3 million, an increase of $36.9 million. Our gross profit percent in 2005 was 24.2% compared to a gross profit percent of 19.3% in 2004. Gross profit improved in 2005 primarily as a result of significant increases in prices partially offset by higher steel raw material costs.

Selling General and Administrative Expenses

Selling, general and administrative expenses in 2005 were higher by $3.3 million compared to 2004, but decreased as a percentage of net sales to 3.8% in 2005 from 4.3% in 2004. The increase primarily related to product liability claims, bonus and incentive compensation and professional fees.

Investment Income, Interest Expense, Other, Net

Our investment income was $0.6 million in 2005 and was generated from invested cash balances.

Interest expense in 2005 consists primarily of amortization of deferred financing costs and unused commitment and letter of credit fees. We had no borrowings under our credit facility in 2005. Our 2004 interest expense included the aforementioned costs as well as interest expense on outstanding loans under the credit facility.

Income Taxes

Income tax expense for ~~2005~~the first quarter of 2006 was computed at a combined federal and state effective tax rate of approximately 1538% compared to a 14.09% ~~which~~rate ~~reflects~~for the first quarter of 2005. The combined effective rates reflect management’s estimate of the rate for the full year ~~based~~and ~~upon~~are based upon annual pre-tax ~~earnings~~earning estimates, ~~and~~including the utilization of ~~all available federal~~ net operating loss carryforwards. ~~In addition, the effective rate was impacted by the reversal of certain tax valuation allowances related to deferred tax assets which reverse~~ in ~~years after December 31,~~ 2005. ~~The reversal of the tax valuation allowances decreased income tax expense by $3.0 million or $0.13 per diluted share. The effective rate for 2004 was 3.1%.~~

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our principal sources of liquidity have historically included cash flow from operating activities, our revolving credit facility and other sources of financing through the capital markets. Our business is highly cyclical in nature and therefore our cash flows from operating activities can vary significantly. We consider working capital items such as accounts receivable, inventory, accounts payable and accrued liabilities as critical components to managing our liquidity. We currently ~~depend~~use onour cash flows from operations ~~and our credit facility~~ to fund our working capital needs.

Based upon our current market outlook, we believe ~~cash~~our ~~flows~~sources ~~from~~of ~~operations~~cash, ~~together~~including ~~with~~amounts ~~our~~currently ~~credit~~on ~~facility and other sources~~hand, will be sufficient to meet our anticipated cash requirements for 2006.

Working Capital

Working capital at ~~June~~March 3031, ~~2005~~2006 was $~~199~~300.71 million, an increase of $6232.96 million from the $~~136~~267.85 million at December 31, ~~2004~~2005, and the ratio of current assets to current liabilities at ~~June~~ 30March 31, ~~2005~~2006 was 3.68 to 1 compared to 23.79 to 1 at December 31, ~~2004~~2005. Increases in our cash and equivalents balances, ~~short-term~~accounts ~~investments~~receivable and ~~accounts~~inventory ~~receivable~~offset by an increase in accrued income taxes accounted for $6028.08 million of the increase in working capital. There were no borrowings on our credit facility at March 31, 2006.

At June 30, 2005 we had cash and equivalents and short-term investments totaling $72.0 million compared to cash and equivalents of $30.9 million at December 31, 2004. There were no borrowings on our credit facility at June 30, 2005.

Operating Cash Flows

Cash provided by operating activities in ~~2005~~2006 was $3828.87 million. We had operating income of $6253.69 million, which included depreciation and amortization charges of $21.75 million ~~and an increase in deferred tax assets of $3~~.~~0 million.~~ Operating cash flows supported a $177.64 million net increase in our operating assets and liabilities. Major components of the changes in our operating assets and liabilities included ana $1819.53 million increase in accounts receivable, a ~~decrease of~~ $91.6 million ~~in accounts payable, an~~ increase in ~~other current assets of $1.5 million~~inventories, and a decrease in ~~accrued~~ accrued liabilities of $13.14 million, partially offset by aan ~~decrease~~increase ~~in inventories~~ of $61.73 million in other current ~~and~~assets, an increase inof ~~income~~$2.2 million ~~taxes~~in accounts payable and an increase of $615.09 million in accrued income taxes. The increase in our accounts receivable balance was primarily the result of increased shipments ~~pricing~~and higher selling prices. Our investment in inventory ~~and~~increased ~~accounts~~because ~~payable~~of ~~decreased~~higher ~~because~~quantities of aour ~~reduction~~welded inproducts ~~steel~~on ~~coil~~hand. ~~inventory~~Accrued liabilities decreased primarily as the result of payments for 2005 profit sharing and ~~purchases~~incentive atplans ~~our~~during ~~welded~~the ~~operation~~first quarter.

Cash provided by operating activities in ~~the~~2005 ~~first six months of 2004~~ was $510.04 million. We had an operating ~~profit~~income of $2722.16 million ~~for the period~~, which included depreciation and amortization charges of $21.73 million. Operating ~~earnings~~cash flows ~~were~~supported ~~used to support~~ a ~~net increase of~~ $2510.3 million ~~for~~ ~~the~~net ~~first~~increase ~~six months of 2004~~ in our operating assets and liabilities. Major components of the changes in our operating assets and liabilities included a $164.73 million increase in accounts receivable, ~~and~~ a $242.35 million increase in inventories, ~~partially~~a decrease ~~offset~~of by$3.0 million ~~increases~~in accounts payable and a decrease in accrued liabilities of $6.1 .2 million, partially offset by increases of $5.0.4 million and $70.3 million in ~~accounts~~other ~~payable,~~current ~~accrued~~assets ~~liabilities~~ and deferred ~~revenues~~revenue, respectively. The increase in our accounts receivable balance was primarily the result of increased pricing~~, as well as an increase in shipment levels~~. Our ~~inventory~~investment ~~balance increased because of higher quantities of our seamless products on hand to meet increased shipment levels as well as an overall increase~~ in ~~the steel raw material costs component of~~ inventory, ~~particularly in our welded operations. Steel raw material costs also contributed to the increase in our accounts payable. Accrued liabilities~~ increased ~~primarily as a result of an increase in accruals for profit~~ sharing and incentive plans of $2.9 million. Deferred revenue increased due to significantly higher selling prices, as well as the higher level of business activity. Our profit sharing and incentive plans are primarily based on annual results, and therefore, are not paid until the first quarter of the following year.

2119

because of higher quantities of our seamless products on hand to meet increased shipment levels anticipated for the second quarter as well as an overall increase in the steel raw material costs component of inventory, particularly in our welded operations. Accrued liabilities decreased as a result of payments for hourly and salaried profit sharing and incentive plans during the first quarter. The increase in deferred revenue resulted primarily from increased selling prices.

Investing Cash Flows

Cash flows used in investing activities were $~~12.~~5.2 million in ~~2005~~2006, which were related to the purchase of ~~equipment~~machinery ofand ~~$2.5 million~~equipment and ~~short-term~~computer ~~investments of $10~~software.~~4 million,~~ ~~net of $0.4 million of proceeds from the sale of assets held for sale.~~ Cash flows ~~provided~~used byin investing ~~activities~~ activities were $60.18 million in ~~2004~~2005, ~~primarily comprised of $6.9 million of proceeds from sales of assets held for sale~~ which were ~~offset~~related byto ~~$0.8 million~~the purchase of equipment ~~purchases~~.

WeOur ~~currently estimate that our~~ capital spending for the year ~~2005~~2006 ~~will~~is beestimated ~~approximately~~to be $1243.0 million,. ~~the~~Our ~~majority~~spending plan for 2006 consists of numerous projects which isshould ~~estimated~~enhance ~~for~~our ~~maintenance~~manufacturing reliability, reduce costs and ~~improvement~~improve ~~projects~~our information and financial reporting systems. ~~Our~~The ~~sources~~ timing of ~~funding~~completion ~~for~~of these capital ~~expenditures~~projects ~~include~~is ~~available~~dependent ~~cash~~upon onour ~~hand,~~ability ~~cash~~to ~~flows~~adequately ~~from~~staff ~~operations~~the projects and the ability of ~~borrowing~~our ~~availability~~suppliers ~~under~~to meet our ~~credit~~timing ~~facility~~requirements. ~~The~~Our ~~amount~~sources ~~ultimately~~of ~~spent~~funding ~~will~~for ~~depend~~capital ~~upon the~~expenditures ~~availability~~include ofavailable ~~these~~cash ~~resources~~on hand and cash flows from operations.

Financing Cash Flows

Cash flows from financing activities provided $40.53 million and $3.3 million from the exercise of stock options in ~~2005.~~2006 Weand ~~made~~2005, ~~net repayments against our revolving credit facility of $12~~respectively.~~7 million in 2004.~~

Contractual Obligations and Other Cash Requirements

We have a $50.0 million revolving credit facility that expires in March 2007. ~~There~~As ~~have~~of ~~been~~March 31, no2006, ~~borrowings~~we ~~under~~had ~~the~~no ~~facility~~loans ~~during~~outstanding ~~2005~~under ~~and~~the ~~there~~credit ~~are~~facility. noWe ~~loans~~had outstanding asletters of ~~June 30,~~credit ~~2005.~~in Wethe ~~had~~amount of $21.09 million, ofreducing ~~letters~~the amount of ~~credit~~funds ~~outstanding~~available under the credit facility ~~and~~to approximately $48.01 million inas ~~borrowing~~of ~~availability at June~~March 3031, ~~2005~~2006. The facility is secured by a first priority lien on substantially all of our inventories, accounts receivable and property, plant and equipment. There have been no material changes to the contractual obligations disclosure contained in our Annual Report on Form 10-K for the year ended December 31, 2005. We did not enter into any material off-balance sheet arrangements during the three months ended March 31, 2006.

We have a fixed volume and base price contract with a supplier for an estimated majority of our steel coil needs for 2005.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations ~~are~~is based upon our condensed consolidated financial statements, which we have ~~been~~ prepared in ~~accordance~~ accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, ~~revenues~~revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

OnAn anaccounting ~~on-going~~policy ~~basis,~~is wedeemed ~~evaluate~~to ~~our~~be ~~estimates,~~critical ~~including~~if ~~those~~it ~~related~~requires an accounting estimate to ~~customer~~be ~~claims,~~made ~~allowance~~based ~~for~~on ~~doubtful~~assumptions ~~accounts,~~about ~~inventories,~~matters ~~long-lived~~that ~~assets,~~are ~~assets~~highly ~~held~~uncertain ~~for~~at ~~sale~~the time the estimate is made, ~~income~~if ~~taxes,~~different ~~product~~estimates ~~liability,~~reasonably ~~workers’~~could ~~compensation~~have ~~claims~~been used, ~~restructuring~~or ~~liabilities,~~if ~~environmental~~changes in the estimate that are ~~contingencies~~reasonably ~~and~~likely ~~litigation~~to occur could materially impact the financial statements. We ~~base~~believe ~~our~~that ~~estimates~~other than onthe ~~historical~~adoption ~~experience~~of ~~and~~Statement onof ~~various~~Financial ~~other~~Accounting Standards (“SFAS”) No. 123 (revised 2004), ~~assumptions~~“Share-Based ~~that~~Payment” we(“SFAS ~~believe~~123R”), ~~are~~there ~~reasonable~~have ~~under~~been no significant changes during the ~~circumstances.~~three ~~Actual~~months ended ~~results~~March 31, ~~may~~2006 ~~differ~~to ~~from~~the items that we disclosed as our critical accounting ~~these~~policies and estimates ~~under~~in ~~different~~Management’s ~~assumptions~~Discussion orand ~~conditions~~Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2005.

2220

~~RECENTLY~~Recently ~~ISSUED~~Issued ~~ACCOUNTING~~Accounting ~~STANDARDS~~Standards

OnThere ~~December 16,~~have ~~2004,~~been ~~the~~no ~~Financial~~accounting ~~Accounting~~standards ~~Standards Board (FASB)~~ issued ~~Statement~~in of Financial Accounting Standard (SFAS) 123(R), “Share-Based Payment,” which is a revision of SFAS 123 and supersedes APB Opinion 25. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the ~~date~~first ofquarter ~~grant, and to be expensed over the applicable vesting period. Pro forma disclosure~~ of ~~the income statement effects of share-based payments is no longer an alternative. SFAS 123(R) is effective for us January 1,~~ 2006. ~~In addition, companies must also recognize compensation expense related to any awards~~ that are not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS 123. We are currently evaluating the requirements of SFAS 123(R) and its transition alternatives. Based upon outstanding stock options at June 30, 2005, we believe the impact of adopting SFAS 123(R) would ~~not be material. However, the adoption of SFAS 123(R) could~~ have a material ~~impact~~effect on our ~~consolidated results~~statements of ~~operations~~income, ~~and~~financial ~~earnings~~position ~~per~~or ~~share~~cash ~~depending on the number and fair value of future awards~~flows.

In November 2004, the FASB issued SFAS 151, “Inventory Costs”, to amend the guidance in Chapter 4, Inventory Pricing, of FASB Accounting Research Bulletin 43, Restatement and Revision of Accounting Research Bulletins, which will become effective for us on January 1, 2006. SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). The statement requires that those items be recognized as current-period charges. Additionally, SFAS 151 requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. We are currently evaluating the effect that the adoption of SFAS 151 will have on our consolidated results of operations and financial condition but do not expect SFAS 151 to have a material effect on our results of operations, cash flows or financial condition.

In December 2004, the FASB issued FASB Staff Position FAS 109-1, “Application of FASB Statement 109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (FSP FAS 109-1), which states that the FASB staff believes that the qualified production activities deduction provided by the American Jobs Creation Act of 2004 (the “Act”) should be accounted for as a special deduction in accordance with FASB Statement 109 (FAS 109.) This FSP was effective upon issuance. The Act provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. Accordingly, the special deduction has no effect on deferred tax assets and liabilities existing as of the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on our tax return. We are currently evaluating the effect that FSP FAS 109-1 will have on our consolidated results of operations and financial condition but do not expect FSP FAS 109-1 to have a material effect on our results of operations, cash flows or financial condition.

In March 2005, the FASB issued Interpretation 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement 143,” (FIN 47) which clarifies the term “conditional asset retirement obligation” used in SFAS 143, “Accounting for Asset Retirement Obligations,” and specifically when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. We are required to adopt FIN 47 no later than December 31, 2005. We are currently evaluating the effect that FIN 47 will have on our consolidated results of operations and financial condition but do not expect FIN 47 to have a material effect on our results of operations, cash flows or financial condition.

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections”. SFAS 154 amends Accounting Principles Board (APB) Opinion 20, concerning the accounting for changes in accounting principles, requiring retrospective application to prior periods’ financial statements of changes in an accounting principle, unless it is impracticable to do so. The effective date of SFAS 154 is for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We will adopt SFAS 154 in fiscal 2006 and do not expect it to have a significant impact on our financial statements.

OTHER MATTERS

You should read Note 7 to the Condensed Consolidated Financial Statements for information pertaining to commitments and contingencies.

InManagement ~~May 2005~~and werepresentatives ~~entered~~of ~~into~~the aUSW ~~new~~are ~~collective~~currently ~~bargaining~~negotiating ~~agreement with our hourly employees at Newport. In April 2005, we entered into~~ a new collective bargaining agreement ~~with~~covering ~~our~~167 ~~hourly~~ employees at ~~Koppel~~Erlanger. The ~~new~~contract ~~agreements~~expires ~~expire~~on ~~in 2009 and 2010~~May 12, ~~respectively~~2006.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have not used derivative financial instruments for any purpose during the periods shown, including trading or speculating on changes in interest rates or commodity prices of materials.

Purchased steel, in the form of hot-rolled coils and steel scrap, represents the largest portion of our cost of goods sold. The price and availability of steel coils and scrap that we use in our manufacturing processes are highly competitive and volatile. Various factors, most of which are beyond our control, affect the supply and price of steel coils and scrap ~~which in turn can significantly impact our earnings~~. In order to ensure a portion of our expected steel coil needs for ~~2005~~2006, we ~~have~~entered into a fixed volume and base price contract with ~~one~~our major supplier for a portion of our estimated material requirements. Changes in steel coil and scrap costs have had a significant impact on our earnings, and we expect that future changes will continue to significantly impact our earnings. Reference is made to “Overview-Economic and Industry-Wide Factors that Affect our Business – Costs of Our Products” included in Item 2 for additional comments regarding steel costs.

We are exposed to market risk for changes in interest rates for borrowings under our revolving credit facility. Borrowings under the credit facility bear interest at variable rates and the fair value of the borrowings are not significantly affected by changes in market interest rates. As of ~~June~~March 3031, ~~2005~~2006, we had no borrowings outstanding under our credit facility.

We purchase natural gas and electricity for our operations and, therefore, have a market risk related to natural gas and electricity purchases in the open market at spot prices. The prices of such purchases and futures positions are subject to wide fluctuations due to unpredictable factors such as weather, government policies and demand for natural gas and competitive fuels. As a result, our earnings could be affected by changes in the price and availability of natural gas and electricity. As market conditions dictate, we will lock in future gas and electricity prices using fixed price contracts.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective for the purpose of ensuring that material information required to be in this quarterly report is made known to them by others on a timely basis and that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Controls. There ~~has~~were ~~been~~ no ~~significant~~changes ~~change~~ in our internal control over financial reporting that occurred during our most recent fiscal quarter ~~that~~covered ~~has~~by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II –— OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are subject to various claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to workers’ compensation, health care and product liability coverage, each of which is self-insured to certain levels, as well as commercial and other matters. Reference is made to “Environmental” in Note 7 to our unaudited ~~consolidated~~condensed consolidated financial statements included in Part I, concerning certain proceedings we are involved in with the EPA. Based upon evaluation of available information, we do not believe that any such matters will have, individually or in the aggregate, a material adverse effect upon our consolidated ~~financial position,~~statements ~~results~~ of ~~operations~~income, financial position or cash flows.

ITEM 41A. ~~SUBMISSION~~RISK ~~OF MATTERS TO A VOTE OF SECURITY HOLDERS~~FACTORS

~~Our~~In ~~2005~~addition ~~Annual~~to ~~Meeting~~the ofother ~~Shareholders~~information ~~was~~set ~~held~~forth onin ~~May~~this report, you should carefully consider the factors discussed in Part 11I, ~~2005~~“Item 1A. ~~The~~Risk ~~following~~Factors” ~~table~~in ~~lists the~~our ~~proposals~~Annual ~~voted~~Report on ~~and~~Form 10-K for the ~~results~~year ended ofDecember 31,2005, ~~that~~which ~~vote:~~could materially affect our business, financial condition or future results.

Proposal	For		Withheld
Election of seven directors:
Clifford R. Borland		18,071,067		2,685,658
David A. B. Brown		18,010,341		2,746,384
J. C. Burton		18,405,219		2,351,506
Patrick J. B. Donnelly		17,947,845		2,808,880
George A. Helland, Jr.		18,404,315		2,352,410
René J. Robichaud		18,107,739		2,648,986
John F. Schwarz		18,460,082		2,296,643

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

	For		Against		Abstain
NS Group, Inc. Amended and Restated Non- Employee Director Equity Plan		12,603,278		4,035,569		34,746
Appointment of Company’s independent auditors		20,299,504		442,041		15,180

(c)

On October 21, 2005, our Board of Directors approved a share repurchase program for up to 2.25 million shares of our common stock. Repurchases may be made by us from time to time in open market purchases or through privately negotiated transactions through December 31, 2006. There were no shares repurchased under this program during the quarter ended March 31, 2006. As of March 31, 2006, the maximum number of shares remaining to be purchased under this program is 2,124,600.

ITEM 6. EXHIBITS

(a) (1) Exhibits — Reference is made to the Index to Exhibits, which is included herein as part of this report

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

	~~NS GROUP, INC.~~	NS GROUP, INC.
Date: August 5, 2005	By: /s/René J. Robichaud
Date: May 4, 2006		By: /s/René J. Robichaud
	René J. Robichaud, President and Chief Executive Officer and Director
		René J. Robichaud, President and Chief
	(Principal Executive Officer)
		Executive Officer and Director
Date: August 5, 2005	By: /s/Thomas J. Depenbrock
		(Principal Executive Officer)
	Thomas J. Depenbrock, Vice President — Finance, Treasurer and Chief Financial Officer
Date: May 4, 2006		By: /s/Thomas J. Depenbrock
	(Principal Financial Officer)
		Thomas J. Depenbrock, Vice President -
Date: August 5, 2005	By: /s/ Gerard J. Brinkman
		Finance, Treasurer and Chief Financial Officer
	Gerard J. Brinkman
		(Principal Financial Officer)
	Corporate Controller
Date: May 4, 2006		By: /s/ Gerard J. Brinkman
	(Principal Accounting Officer)
		Gerard J. Brinkman,
		Corporate Controller
		(Principal Accounting Officer)

2622

INDEX TO EXHIBITS

Number		Description
3.1(a)		Amended and Restated Articles of Incorporation of the Company, filed as Exhibit 3.1 to Amendment No. 1 to the Company’s Form S-1 dated January 17, 1995, File No. 33-56637, and incorporated herein by this reference.
3.1(b)		Articles of Amendment to the Amended and Restated Articles of Incorporation, dated November 4, 1998, filed as Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2001, File No. 1-9838, and incorporated herein by this reference.
3.2		Amended and Restated By-Laws of the Company, dated July 30, 2003, filed as Exhibit 3.2 to the Company’s Form 10-Q for the fiscal quarter ended June 30, 2003, File No. 1-9838, and incorporated herein by this reference.
4.1		Rights Agreement dated November 17, 1998 between the Company and Registrar and Transfer Company, filed as Exhibit 1 to the Company’s Form 8-K dated November 5, 1998, File No. 1-9838, and incorporated herein by this reference.
12.1		Computation of Ratio of Earnings to Fixed Charges, filed herewith.
31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), filed herewith.
31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), filed herewith.
32.1		Certification Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 and Exchange Act Rule 13a-14(b), furnished herewith.
32.2		Certification Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 and Exchange Act Rule 13a-14(b), furnished herewith.

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