<PAGE>


                                                             Reinhold
                                                                Industries, Inc.
                                                           1997 Annual Report

Replacing metal
with
advanced
composites

<PAGE>

Picture of the Reinhold Industries Board of Directors
(left to right): Chairman of the Board Lawrence H. Diamond, President and  Chief
Executive Officer Michael T. Furry, and Director Robert B. Steinberg.



                                where
                        light weight,
      corrosion resistance,
                    or complex shapes
                              are required.
<PAGE>

Reinhold Industries, Inc.

<TABLE>
<CAPTION>

SELECTED FINANCIAL DATA
                                                                       1997          1996         1995          1994         1993
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>             <C>          <C>           <C>         <C>
Summary of operations (in thousands)
Net sales                                                          $ 16,232        13,120       11,122        14,824       11,612
Gross profit                                                       $  4,699         3,046        1,728         4,579        4,123
Operating income (loss)                                            $  1,595            17       (1,832)        1,628          904
Interest income, net                                               $    103         1,159        2,202         2,108        6,282
Corporate expenses                                                 $      -             -            -             -        4,686
Reorganization expenses                                            $      -         3,139        9,492        11,230          250
Net income (loss)                                                  $  1,647        (2,198)      (8,983)       (7,792)       2,793

---------------------------------------------------------------------------------------------------------------------------------
Year end position (in thousands)
Cash and marketable securities                                     $  3,169         2,522       34,660        42,833       88,892
Working capital                                                    $  6,314         3,602       39,105        48,682       56,523
Net property and equipment                                         $  4,526         5,158        5,607         6,201        4,447
Total assets                                                       $ 13,215        12,540       64,705        75,321      114,444
Long-term liabilities                                              $  2,438         4,879        4,733         4,259        1,914
Stockholders' equity                                               $  9,340         5,719       41,990        51,251       59,453

---------------------------------------------------------------------------------------------------------------------------------
Per share data
Net income (loss):
   Basic & diluted (note 1)                                        $    0.82        N.M.*        (0.86)        (0.75)       0. 27
Stockholders' equity                                               $    4.67         2.86         4.02          4.91         5.69
Market price range: (note 2)
   High                                                            $   10           4 1/8        N.M.*         N.M.*        N.M.*
   Low                                                             $   2 7/8        3 1/4        N.M.*         N.M.*        N.M.*

---------------------------------------------------------------------------------------------------------------------------------
Other data (in thousands except stockholder & employee data)
Orders on hand                                                     $  5,989         4,935        6,635         3,514        5,400
Average shares outstanding                                            1,999        Note 1       10,442        10,442       10,442
Average number of common stockholders                                 1,951         2,099        2,396         2,434        2,511
Average number of employees                                             124           105          104           119           93
<FN>

                                                                   Note 1: Keene emerged from bankruptcy on July 31, 1996.  Reinhold
                                                                   was merged into and with Keene, with the surviving company  being
                                                                   renamed Reinhold Industries, Inc. The outstanding common stock of
                                                                   Keene  on  July  31, 1996, 10,746,235  shares, was  canceled  and
                                                                   replaced by 978,956 shares of  Class A Common Stock and 1,020,000
                                                                   shares of Class B Common Stock. Therefore, the earnings per share
                                                                   and average shares outstanding information is not meaningful.

                                                                   Note  2:  The historical market value of the old Keene stock (the
                                                                   predecessor company) is not meaningful since the company has been
                                                                   recapitalized as of July 31, 1996.

                                                                   Note  3:  The Company has adopted the provisions of SFAS No.  128
                                                                   "Earnings Per Share" during  the quarterly period  ended December
                                                                   31, 1997.  See Note 2 to the accompanying financial statements.

                                                                   See management analysis  and Note 1 to  the financial  statements
                                                                   for  discussion  of  Chapter  11  bankruptcy  proceeding  and the
                                                                   Effective Date of the Fourth Amended Plan of Reorganization.

                                                                   *N.M. - Not Meaningful

</FN>
</TABLE>
                                       1
<PAGE>
Reinhold  Industries,  Inc.

CompositAir

Picture of CompositAir Products

Composite seatback  structures are enjoying  increasing  acceptance as ergonomic
features are designed  into the tubular  frame.  Light weight and the ability to
form complex cross  sections and shapes make  CompositAir's  products  excellent
replacements  for  metal  structures.   




                                       2
<PAGE>
Reinhold  Industries,  Inc.

TO OUR STOCKHOLDERS

KEENE  CORPORATION'S  PLAN  OF  REORGANIZATION  As  previously  reported,  Keene
Corporation's  Fourth Amended Plan of Reorganization  went effective on July 31,
1996. Under that plan, Reinhold Industries, Inc., Keene's subsidiary, was merged
up and into Keene with the surviving company being re-named Reinhold Industries,
Inc. New stock was issued in Reinhold's name to existing Keene stockholders.

Also under the plan,  a  Creditors'  Trust was  established  for the  benefit of
asbestos-related  claimants  and was  awarded  51% of the  equity  in  Reinhold.
Reinhold,  in turn, received the benefit of a permanent  channeling  injunction,
one feature of which is judicial  protection in the form of indemnification  for
any costs  related to asbestos  matters that occur  subsequent  to the Effective
Date of July 31, 1996.

THE  REINHOLD  MISSION  Reinhold   manufactures   products  made  from  advanced
composites, which are fiber reinforced resin matrices. Our business objective is
to identify or develop  niche  market  opportunities  for  replacing  metal with
advanced  composites  where  complex  shapes at lower  cost,  light  weight,  or
corrosion resistance are required.

Commercial   products   manufactured  by  Reinhold  include  graphite  composite
commercial  aircraft seatback structures and molded composite in-ground lighting
housings.  Our  Aerospace/Defense  Business  Unit  manufactures  ablative  (heat
absorptive)  components such as exit cones,  nozzles,  and motor case insulation
for solid propellant rockets, including the Pegasus satellite launch rocket.

PERFORMANCE Net sales increased 24% from $13.1 in 1996 to $16.2 million in 1997,
reflecting  increased sales of aircraft seatback and aerospace  products.  Gross
profit grew from 23.2% to 28.9% due to greater  absorption of overhead resulting
from the increase in sales.

Selling,  general and administrative  expenses rose to $3.1 million in 1997 from
$3.0 in 1996 due to higher  costs  for  public  compliance  (a full year in 1997
compared to seven months in 1996.) More  significant than the dollar increase is
that these expenses decreased 4% as a percentage of sales, from 23.1% in 1996 to
19.1% in 1997.

Net income was $1.6  million,  or $0.82 per share in 1997,  compared  with a net
loss of $2.2 million in 1996.  (The per share figure for 1996 is not  meaningful
because it would be based on old Keene  shares  through July 31 and new Reinhold
shares beginning August 1.)

During 1997, the Company's  Board of Directors  changed its investment  strategy
related to the  Retirement  Plan  Trust.  As a result,  the market  value of the
portfolio increased significantly, thereby reducing the excess pension liability
by $2.0 million. The Company's net worth was thereby increased, not only by $1.6
million of net income, but also by this $2.0 million.

ACQUISITIONS  We expect a portion of  Reinhold's  future  growth to result  from
acquiring other companies. Our strategy is to identify those that already occupy
a niche in advanced  composites,  or those whose  products  could be improved by
conversion from metal to advanced composites.

During 1997,  evaluation of several  acquisition  candidates was initiated.  The
process continues. Significant progress has been made with at least one company.

OUTLOOK
AEROSPACE:  We had a good year in 1997 for both sales and profit. Sales from the
solid rocket market were as expected.  A substantial  increase from new business
in composite  structures and radomes,  however,  although  welcome,  came from a
"one-time" order and will not repeat.

Essentially all of this Business Unit's sales are derived from military spending
related to solid  rockets,  a sector  that is in annual  decline.  We expect the
trend to continue, so lower sales for this Unit are projected for 1998.

COMMERCIAL:  Neither  sales nor profit were good for this Business Unit in 1997.
There is,  however,  sound  reason for  optimism  in 1998.  This Unit serves the
residential pool filter, outdoor lighting, and other commercial markets.  During
1997, we tooled,  developed,  and began limited production of three new lighting
products for three new customers.  We expect these to account for  approximately
25% of the  Unit's  1998  sales.  With an  expected  increase  in sales of other
products, a significant improvement in sales and profits should result in 1998.

COMPOSITAIR:  Unit  sales  were up 25% and total  revenue  43% in 1997.  The new
European customer that we added in late 1996 contributed  significantly to these
results.

During 1997, we moved laminating  production to a new facility,  streamlined the
assembly operation, and improved quality and on-time delivery significantly.  We
also invested in our technical  support staff,  an investment  that resulted not
only in unit volume and total revenue growth, but in improved margins as well.

Our  investment  in  human  resources,  equipment,  and  facilities  was made in
anticipation  of  continuing  market  growth  of 10% to 15% per year in  airline
seating.  As conversion  from aluminum to composites has  increased,  our market
share  has  grown 2% per  year.  We now  enjoy  an  estimated  25%  share of the
worldwide aircraft seatback market.

OVERALL  Bookings  exceeded  sales  by more  than $1  million  in  1997,  a fact
particularly significant because our biggest commercial customer has implemented
a just-in-time  ordering and shipping policy. This is a positive indicator as we
move from a strong  performance  in 1997 into the new year.  We will continue to
apply  Reinhold's  historical  management  controls and process  improvements to
reduce costs and better respond to our customers' needs.

Modest  improvement in revenues can be expected this year, but profit may soften
as the percentage of Aerospace business will be lower in 1998 than 1997.

Our excellent performance in 1997 was achieved as a result of the loyalty of our
customers and suppliers and the  commitment of Reinhold's  employees.  To all of
you, we express our thanks.




/s/ Michael T. Furry
Michael T. Furry
President and Chief Executive Officer
February 20, 1998
                                       3
<PAGE>


Reinhold Industries, Inc.

Aerospace

Picture of Aerospace Products

The  Aerospace  Business  Unit  currently  manufactures  components  for several
military  programs,  including wings and control surfaces for the AGM-130 "Smart
Bomb," nozzles for the Hellfire and Maverick missiles, props for use on military
torpedos,  polarizing  radomes for fighter  planes,  and rocket  nozzles for the
Pegasus launch vehicle.




                                       4
<PAGE>

Reinhold Industries, Inc.

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

The  following  discussion  should  be read in  conjunction  with the  financial
statements and related notes, along with Form 8-K, which was dated June 14, 1996
and filed with the  Securities  and Exchange  Commission  on June 28,  1996.  It
pertains to the confirmation of Keene's Fourth Amended Plan of Reorganization.

For  purposes  of  Management  Discussion  and  Analysis  and  to  facilitate  a
meaningful  comparison for the year ended  December 31, 1996,  net sales,  gross
profit margin, selling, general and administrative expenses, and interest income
prior and  subsequent to the Effective Date of the Plan of  Reorganization  were
used in the computations of the results for the year ended December 31, 1996.

Reinhold is a manufacturer  of advanced  custom  composite  components and sheet
molding  compounds for a variety of applications  and derives  revenues from the
United States  defense  contract  industry,  the aerospace  industry,  and other
commercial industries.

1997 COMPARED  WITH 1996 Backlog at December 31, 1997 was $6.0  million,  up 21%
from December 31, 1996,  primarily  due to an increase in aircraft  seatback and
aerospace  product orders.  In 1997,  order input increased 47% to $17.3 million
and net  sales  increased  24% to $16.2  million  from  $13.1  million  in 1996,
reflecting higher sales of aircraft  seatbacks and aerospace  products partially
offset by lower commercial product sales.

Gross profit margin increased to 28.9% from 23.2%, reflecting greater absorption
of  overhead  due  to  higher  sales  volume.  In  1997,  selling,  general  and
administrative  expenses were $3.1 million  (19.1% of sales)  compared with $3.0
million  (23.1%  of sales) in 1996 as the  result  of  higher  costs for  public
compliance  partially  offset by lower general  insurance costs.  However,  as a
percentage of sales,  selling,  general and  administrative  expenses  decreased
significantly  in  1997.Operating  income was $1.6 million in 1997 compared with
$0.02 million in 1996.

Interest income declined 91.1% to $0.1 million in 1997 from $1.2 million in 1996
due to the transfer of most of the investment  portfolio to the Creditors' Trust
on the Effective Date of the Plan of Reorganization. The average yield was 5.12%
in 1997 compared with 5.17% in 1996.

During  1996,  $3.1  million was incurred  for  reorganization  expenses,  which
included Chapter  11-related  professional fees of $1.5 million.  Reorganization
expenses in 1996 only  included  expenses  through July 31, 1996.  There were no
reorganization expenses in 1997.

A tax  provision  of $0.05  million  was  recorded  in 1997 for the  alternative
minimum tax for federal and state tax expenses compared with a provision of $0.2
million in 1996. In 1997, the Company had pre-tax income of $1.7 million and was
able to reduce  income  taxes by $0.6  million by a reduction  in the  valuation
allowance related to deferred tax assets.  Deferred tax assets,  net of deferred
tax liabilities, amounted to $14.6 million at December 31, 1997. The Company has
recorded a related  valuation  allowance  of $14.6  million.  In  assessing  the
realizability of deferred tax assets,  management  considers  whether it is more
likely than not that some  portion or all of the deferred tax assets will not be
realized.  The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those  temporary
differences become deductible. Management considers the projected future taxable
income and tax planning  strategies  in making this  assessment.  Based upon the
level of historical  taxable income  (losses) and projections for future taxable
income  over the  periods  in which the  deferred  tax  assets  are  deductible,
management  believes it is more likely than not the Company will not realize the
benefits  of  these  deductible  differences.   See  Note  3  to  the  financial
statements.

Net income totaled $1.6 million,  or $0.82 per share in 1997 compared with a net
loss  of $2.2  million  in  1996.  (The  per  share  computation  in 1996 is not
meaningful  since it would be based on an average of 10,485,427 old Keene shares
through July 31, 1996 and  1,998,956  new Reinhold  shares  beginning  August 1,
1996).

During 1997, the Company's  Board of Directors  changed its investment  strategy
related to the  Retirement  Plan  Trust.  As a result,  the market  value of the
portfolio significantly increased, thereby reducing the excess pension liability
by $2.0 million.

The  Company's  net  worth was  increased  not only by our $1.6  million  of net
income, but also by this $2.0 million. In future periods,  the portfolio results
may be adversely affected by fluctuations in the stock market.

LIQUIDITY  AND CAPITAL  RESOURCES As of December 31, 1997,  working  capital was
$6.3 million,  up $2.7 million from December 31, 1996. Cash and cash equivalents
of $2.4 million held at December 31, 1997 were $0.9 million higher than cash and
cash equivalents held at December 31, 1996, primarily due to $1.6 million of net
income and the maturity of $0.2 million of marketable  securities offset by $0.2
million paid to Furon related to the Reynolds & Taylor acquisition, an inventory
increase of $0.5 million, and $0.4 million paid to the pension trust. Marketable
securities  of $0.8  million  held at December  31, 1997  declined  $0.2 million
compared with those held at December 31, 1996,  primarily due to the maturity of
an investment of $0.2 million.

On the Effective Date, the Creditors'  Trust and Reinhold  entered into a Credit
Facility.  Pursuant to the terms of the Credit Facility, Reinhold shall have the
ability to draw on a $1.5  million  line of credit for up to two years,  and all
obligations incurred thereunder shall be due and payable at the end of the third
year. A copy of the Credit  Facility is annexed as Exhibit F to the Plan,  which
was a part of Form  8-K,  which  was  dated  June 14,  1996 and  filed  with the
Securities and Exchange Commission on June 28, 1996. To date, there have been no
borrowings against this Credit Facility.

During 1997, Reinhold spent approximately $0.4 million on capital  expenditures.
No Year 2000 costs nor any material capital expenditures are planned for 1998.

Management believes that the available cash, cash flows from operations, and the
amount available under the Credit Facility,  described above, will be sufficient
to fund the Company's operating and capital expenditure requirements.

RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 128 "Earnings Per Share," SFAS No. 130
"Reporting Comprehensive Income," and SFAS No. 131 "Disclosure about Segments of
an Enterprise and Related  Information" are discussed in Note 2 to the financial
statements.
                                       5
<PAGE>
Reinhold Industries, Inc.

CompositAir

Picture of CompositAir Products

Composites offer the designer  versatility of shape and feature.  Reinforcements
of graphite,  aramid,  and glass fibers are used to provide  products adapted to
the needs of business, first class, tourist and regional seating requirements.




                                       6
<PAGE>

Reinhold Industries, Inc.

                         INDEPENDENT AUDITORS' REPORTS
The Board of Directors
Reinhold Industries, Inc.

We have audited the  accompanying  balance sheets of Reinhold  Industries,  Inc.
(the  Company) as of December  31, 1997 and 1996 and the related  statements  of
operations,  stockholders' equity and cash flows for the year ended December 31,
1997 and the  period  from  August 1, 1996  through  December  31,  1996.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Reinhold Industries, Inc. as of
December 31, 1997 and 1996 and the results of its  operations and its cash flows
for the year ended  December 31, 1997 and the period from August 1, 1996 through
December 31, 1996 in conformity with generally accepted accounting principles.

As  discussed  in Note 1 to the  financial  statements,  the  Company's  Plan of
Reorganization  was confirmed by the United States  Bankruptcy Court on June 14,
1996 and became effective July 31, 1996. As a result, Reinhold Industries,  Inc.
was merged into and with Keene Corporation (the Predecessor  Company) with Keene
becoming the surviving corporation.  Keene was renamed Reinhold Industries, Inc.
(Reorganized  Company). The Company also adopted fresh-start reporting effective
July 31, 1996, and as a result,  the financial  information for the period after
July 31, 1996 is  presented  on a  different  basis of  accounting  than for the
period before August 1, 1996 and, therefore, is not comparable.


/s/KPMG Peat Marwick LLP
Los Angeles, California
January 30, 1998

The Board of Directors
Reinhold Industries, Inc.

We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders'  equity  and  cash  flows of Keene  Corporation  (the  Predecessor
Company)  and  subsidiary  for the period from  January 1, 1996 through July 31,
1996. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion,  the  consolidated  financial  statements  of Keene  Corporation
referred to above present fairly, in all material respects, the results of their
operations and their cash flows for the period from January 1, 1996 through July
31, 1996 in conformity with generally accepted accounting principles.


/s/KPMG Peat Marwick LLP
Los Angeles, California
January 17, 1997
                                       7
<PAGE>
Reinhold Industries, Inc.

Commercial

Picture of Commercial Products

The Commercial  Business Unit manufactures sheet molding compound (SMC) for sale
and use in compression  molding custom components for swimming pool filter tanks
and  in-ground  lighting  fixtures.  
 




                                      8
<PAGE>
Reinhold Industries, Inc.
<TABLE>

STATEMENTS OF OPERATIONS
(Amounts in thousands, except for per share data)

<CAPTION>

                                                       Reorganized Company                            Predecessor Company
                                                       --------------------------------------------   --------------------------
                                                                                       Period from                   Period from
                                                                Year ended   August 1, 1996 through      January 1, 1996 through
                                                        December 31, 1997         December 31, 1996                July 31, 1996
---------------------------------------------------------------------------------------------------   --------------------------
<S>                                                                <C>                        <C>                          <C>  
Net sales                                                          $16,232                    6,323                        6,797
Cost of sales                                                       11,533                    4,515                        5,559
---------------------------------------------------------------------------------------------------   --------------------------
   Gross profit                                                      4,699                    1,808                        1,238
Selling, general and administrative expenses                         3,104                    1,445                        1,584
---------------------------------------------------------------------------------------------------   --------------------------
   Operating income (loss)                                           1,595                      363                         (346)
Interest income, net                                                   103                       54                        1,105
---------------------------------------------------------------------------------------------------   --------------------------
   Income before reorganization expenses
      and income taxes                                               1,698                      417                          759
Reorganization expenses                                                  -                        -                        3,139
---------------------------------------------------------------------------------------------------   --------------------------
   Income (loss) before income taxes                                 1,698                      417                       (2,380)
Income taxes                                                            51                       16                          219
---------------------------------------------------------------------------------------------------   --------------------------
   Net income (loss)                                                $1,647                      401                       (2,599)
---------------------------------------------------------------------------------------------------   --------------------------


Basic and diluted earnings per share
Net income                                                            $.82                      .20                        N.M.*
---------------------------------------------------------------------------------------------------   --------------------------
Weighted average common shares outstanding                           1,999                    1,999                        N.M.*
---------------------------------------------------------------------------------------------------   --------------------------
<FN>

*N.M. not meaningful - historical per share data for the Predecessor Company
is not meaningful since the Company has been recapitalized and has adopted
fresh-start reporting as of July 31, 1996.

See accompanying notes to financial statements.
</FN>
</TABLE>
                                       9
<PAGE>

Reinhold Industries, Inc.
<TABLE>

BALANCE SHEETS
(Amounts in thousands, except share data)
<CAPTION>
                                                                                     December 31, 1997         December 31, 1996
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>                           <C>
Assets
Current assets:
   Cash and cash equivalents                                                                 $ 2,419                       1,522
   Marketable securities                                                                         750                         250
   Accounts receivable (less allowance for doubtful accounts of $344
      and $501, respectively)                                                                  1,899                       1,823
   Inventories                                                                                 1,975                       1,491
   Prepaid expenses and other current assets                                                     708                         458
--------------------------------------------------------------------------------------------------------------------------------
      Total current assets                                                                     7,751                       5,544
--------------------------------------------------------------------------------------------------------------------------------
Marketable securities                                                                              -                         750

Property and equipment, at cost                                                                7,826                       7,896
   Less accumulated depreciation and amortization                                              3,300                       2,738
--------------------------------------------------------------------------------------------------------------------------------
      Net property and equipment                                                               4,526                       5,158
--------------------------------------------------------------------------------------------------------------------------------

Other assets                                                                                     938                       1,088
--------------------------------------------------------------------------------------------------------------------------------
                                                                                             $13,215                      12,540
--------------------------------------------------------------------------------------------------------------------------------


Liabilities and stockholders' equity
Current liabilities:
   Accounts payable                                                                          $   588                         758
   Accrued expenses                                                                              849                         938
   Amount due to Furon Corp.                                                                       -                         246
--------------------------------------------------------------------------------------------------------------------------------
      Total current liabilities                                                                1,437                       1,942
--------------------------------------------------------------------------------------------------------------------------------

Long-term pension liability                                                                      592                       2,591
Other long-term liabilities                                                                    1,846                       2,288

Stockholders' equity:
   Common stock, $.01 par value:
      Class A - authorized 1,480,000 shares; issued and outstanding 978,956 shares                10                          10
      Class B - authorized 1,020,000 shares; issued and outstanding 1,020,000 shares              10                          10
   Additional paid-in capital                                                                  7,791                       7,791
   Retained earnings                                                                           2,048                         401
   Additional pension liability in excess of unrecognized prior service cost                    (519)                     (2,493)
--------------------------------------------------------------------------------------------------------------------------------
      Net stockholders' equity                                                                 9,340                       5,719

Commitments and contingencies
--------------------------------------------------------------------------------------------------------------------------------
                                                                                             $13,215                      12,540
--------------------------------------------------------------------------------------------------------------------------------
<FN>

See accompanying notes to financial statements.
</FN>
</TABLE>
                                       10
<PAGE>
Reinhold Industries, Inc.
<TABLE>

STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<CAPTION>
                                                            Reorganized Company                           Predecessor Company
                                                            -------------------------------------------   -----------------------
                                                                                            Period from               Period from
                                                                   Year ended    August 1, 1996 through   January 1, 1996 through
                                                            December 31, 1997         December 31, 1996             July 31, 1996
-------------------------------------------------------------------------------------------------------   -----------------------
<S>                                                                    <C>                        <C>                     <C>
Cash flows from operating activities:
   Net income (loss)                                                   $1,647                       401                    (2,599)
   Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
      Depreciation and amortization                                       844                       285                       455
      Obligations subject to Chapter 11 proceedings,
      including reorganization cost                                         -                         -                   (15,131)
      Assets transferred to Creditors' Trust                                -                         -                    42,561
      Charges due to reorganization activities                              -                         -                   (34,118)
      Change in assets and liabilities:
         Accounts receivable, net                                         (76)                     (151)                     (497)
         Inventories                                                     (484)                     (159)                        -
         Other current assets                                            (250)                     (159)                    1,654
         Other assets                                                      26                       (32)                     (155)
         Accounts payable                                                (170)                     (332)                      123
         Accrued expenses                                                 (89)                      358                      (379)
         Other, net                                                      (205)                     (102)                      263
-------------------------------------------------------------------------------------------------------   -----------------------
Net cash provided by (used in) operating activities                     1,243                       109                    (7,823)
-------------------------------------------------------------------------------------------------------   -----------------------

Cash flows used in investing activities:
   Proceeds from sale of marketable securities                            250                       351                    12,457
   Proceeds from sale of equipment                                          -                         -                        10
   Capital expenditures                                                  (350)                     (207)                     (153)
-------------------------------------------------------------------------------------------------------   -----------------------
Net cash (used in) provided by investing activities                      (100)                      144                    12,314
-------------------------------------------------------------------------------------------------------   -----------------------

Cash flows from financing activities:
   Repayment of notes payable                                               -                         -                      (475)
   Cash paid for acquisition of Reynolds and Taylor                      (246)                        -                      (206)
   Cash distributions at date of consummation                               -                         -                   (23,393)
-------------------------------------------------------------------------------------------------------   -----------------------
Net cash used in financing activities                                    (246)                        -                   (24,074)
-------------------------------------------------------------------------------------------------------   -----------------------

Net increase (decrease) in cash and cash equivalents                      897                       253                   (19,583)
-------------------------------------------------------------------------------------------------------   -----------------------

Cash and cash equivalents at beginning of period                        1,522                     1,269                    20,852
-------------------------------------------------------------------------------------------------------   -----------------------

Cash and cash equivalents at end of period                             $2,419                     1,522                     1,269
-------------------------------------------------------------------------------------------------------   -----------------------

Supplementary  disclosures of cash flow  information 
   Cash paid during the period for:
      Income taxes                                                     $   30                        -                        194
      Interest                                                         $    -                        -                         45
-------------------------------------------------------------------------------------------------------   -----------------------
<FN>

See accompanying notes to financial statements.
</FN>
</TABLE>

                                       11
<PAGE>

Reinhold Industries, Inc.
<TABLE>

STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share data)
<CAPTION>
                                                               Common stock                                  Common stock
                                                               $0.01 par value                               $0.0001 par value      
                                                               -------------------------------------------   --------------------
                                                               Shares       Amount      Shares      Amount   Shares        Amount   
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>             <C>  <C>              <C>    <C>                <C>  
Balance, December 31, 1995                                          --         --          --        --      10,441,960        $1   

Net loss for the period January 1, 1996 through July 31, 1996       --         --          --        --              --        --   

Stock options exercised                                             --         --          --        --         304,275        --   
Impact of reorganization:
     Elimination of former equity interests related to
      emergence from bankruptcy                                     --         --          --        --     (10,746,235)       (1)  
     Issuance of new equity interests related to
      from bankruptcy                                          978,956         10   1,020,000        10              --        --   

Net income for the period August 1, 1996 through
    December 31, 1996                                               --         --          --        --              --        --   

Increase in additional pension liability in excess of
    unrecognized prior service cost                                 --         --          --        --              --        --   

---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996                                     978,956         10   1,020,000        10              --        --  

Net income for the year ended December 31, 1997                     --         --          --        --              --        --  

Decrease in additional pension liability in excess of
    unrecognized prior service cost                                 --         --          --        --              --        --  

---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997                                     978,956         10   1,020,000        10              --        --  
---------------------------------------------------------------------------------------------------------------------------------
<FN>

See accompanying notes to financial statements.
</FN>

</TABLE>
                                       12

<PAGE>


<TABLE>
Reinhold Industries, Inc

<CAPTION>
                                                          Additional pension liability
                                   Retained earnings         in excess of unrecognized
Additional paid-in capital     (accumulated deficit)                prior service cost    Net stockholders' equity
------------------------------------------------------------------------------------------------------------------------------------
                  <S>                       <C>                                <C>                         <C>   
                   120,286                  (75,883)                           (2,414)                      41,990

                        --                   (2,599)                               --                       (2,599)

                       124                       --                                --                          124


                  (120,410)                  78,482                                --                      (41,929)

                     7,791                       --                                --                        7,811


                        --                      401                                --                          401


                        --                       --                               (79)                         (79)

---------------------------------------------------------------------------------------------------------------------------
                     7,791                      401                            (2,493)                       5,719

                        --                    1,647                                --                        1,647


                        --                       --                             1,974                        1,974

---------------------------------------------------------------------------------------------------------------------------
                     7,791                    2,048                              (519)                       9,340
---------------------------------------------------------------------------------------------------------------------------


</TABLE>

                                       13
<PAGE>

Reinhold Industries, Inc.

NOTES TO FINANCIAL STATEMENTS
Year ended  December  31, 1997,  period from  January 1, 1996,  through July 31,
1996, and the period from August 1, 1996, through December 31, 1996.

1 ORGANIZATION
DESCRIPTION OF BUSINESS Reinhold Industries, Inc. (Reinhold or the Company) is a
manufacturer of advanced custom composite components and sheet molding compounds
for a variety of applications.  Reinhold derives revenues from the United States
defense  contract  industry,   the  aerospace  industry,  and  other  commercial
industries.

CHAPTER 11 REORGANIZATION  Reinhold was acquired by Keene Corporation (Keene) in
1984 and  operated  as a  division  of  Keene  until  1990,  when  Reinhold  was
incorporated in the state of Delaware as a wholly owned subsidiary of Keene.

On December 3, 1993,  Keene filed a voluntary  petition for relief under Chapter
11 of Title 11 of the United  States  Code (the  Bankruptcy  Code) in the United
States Bankruptcy Court (Bankruptcy Court).  Keene's Chapter 11 filing came as a
direct result of the demands on Keene of thousands of asbestos-related  lawsuits
which named Keene as a party.

On  July  31,  1996  (the  Effective  Date),   Keene  consummated  its  Plan  of
Reorganization under the Bankruptcy Code (the Plan) and emerged from bankruptcy.
On the  Effective  Date,  Reinhold  was merged into and with  Keene,  with Keene
becoming the surviving  corporation.  Pursuant to the merger,  all of the issued
and outstanding capital stock of Reinhold was canceled.  Keene, as the surviving
corporation of the merger, was renamed Reinhold. On the Effective Date, Reinhold
issued  1,998,956  shares of Common Stock,  of which 1,020,000 of Class B Common
Stock was issued to the Trustees of a Creditors'  Trust (the  Creditors'  Trust)
set up to administer  Keene's asbestos claims.  The remaining  978,956 shares of
Class A Common  Stock were issued to Keene's  former  stockholders  as of record
date,  June 30,  1996.  All of Keene's  previous  outstanding  Common  Stock was
canceled.

The payments and  distributions  made to the  Creditors'  Trust  pursuant to the
terms and conditions of the Plan were made in complete satisfaction, release and
discharge  of  all  claims  and  demands  against,  liabilities  of,  liens  on,
obligations of and interest in Reinhold (Reorganized Company).

FRESH-START  REPORTING  Pursuant  to the  guidelines  provided  by the  American
Institute  of  Certified  Public  Accountants  in  Statement  of Position  90-7,
"Financial  Reporting by Entities in  Reorganization  under the Bankruptcy Code"
(SOP  90-7),  the  Company  adopted  fresh-start  reporting  as of the  close of
business on July 31, 1996. The Company  adopted  fresh-start  reporting  because
holders of existing  shares  immediately  before filing and  confirmation of the
Plan received less than 50% of the voting shares of the emerging entity, and the
Company's  reorganized  value is less  than  its  postpetition  liabilities  and
allowed claims. None of the assets or liabilities were revalued at the Effective
Date  because the book value of the assets and  liabilities  approximated  their
fair  value.

2  SUMMARY  OF  SIGNIFICANT   ACCOUNTING  POLICIES  AND  PRACTICES
PRINCIPLES OF CONSOLIDATION The accompanying financial statements as of December
31, 1997 and 1996,  for the year ended December 31, 1997, and for the five-month
period  ended   December  31,  1996  include  the  accounts  of  Reinhold.   The
accompanying financial statements for the seven-month period ended July 31, 1996
include the accounts of Keene Corporation and subsidiary  (Predecessor Company).
All material  intercompany  accounts and  transactions  have been  eliminated in
consolidation.

CASH AND CASH EQUIVALENTS The Company considers cash in banks, commercial paper,
demand notes, and similar  short-term  investments  purchased with maturities of
less than  three  months as cash and cash  equivalents  for the  purpose  of the
statements of cash flows.
<TABLE>

Cash and cash equivalents consist of the following (in thousands):
<CAPTION>
                            December 31, 1997  December 31, 1996
----------------------------------------------------------------
<S>                                    <C>                   <C>
Cash in banks                          $  504                459
Money market funds                      1,915              1,063
----------------------------------------------------------------
Total                                  $2,419              1,522
----------------------------------------------------------------
</TABLE>

INVENTORIES Inventories are stated at the lower of cost or market on a first-in,
first-out (FIFO) basis.  Inventoried  costs relating to long-term  contracts and
programs are stated at the actual production costs,  including factory overhead,
initial tooling,  and other related nonrecurring costs incurred to date, reduced
by amounts related to revenue recognized on units delivered.

ACCOUNTING  FOR  GOVERNMENT   CONTRACTS   Substantially  all  of  the  Company's
government  contracts  are firm  fixed  price.  Sales  and cost of sales on such
contracts  are  recorded on units  delivered.  Estimates of cost to complete are
reviewed and revised periodically  throughout the contract term, and adjustments
to profit resulting from such revisions are recorded in the accounting period in
which the revisions  are made.  Losses on contracts are recorded in full as they
are identified.

Amounts  billed to  contractors  of the U.S.  Government  included  in  accounts
receivable   at  December  31,  1997  and  1996  were   $647,000  and  $887,000,
respectively.
                                       14
<PAGE>
Reinhold Industries, Inc.

NOTES TO FINANCIAL STATEMENTS (CON'T)

MARKETABLE  SECURITIES The Company adopted  provisions of Statement of Financial
Accounting  Standards  (SFAS) No. 115,  "Accounting  for Certain Debt and Equity
Securities" at December 31, 1994.  Under SFAS No. 115, the Company must classify
its debt and marketable equity  securities in one of three categories:  trading,
available-for-sale, or held-to-maturity.

Available-for-sale  securities  are recorded at fair value.  Unrealized  holding
gains and losses,  net of the tax effect, on  available-for-sale  securities are
excluded from earnings and are reported as a separate component of stockholders'
equity  until  realized.  Declines  in the  market  value of  available-for-sale
securities  deemed to be other  than  temporary  result in  charges  to  current
earnings and establishment of a new cost basis.

At December  31, 1997 and 1996,  the  Company's  marketable  securities  consist
principally  of highly  liquid  U.S.  Government  Treasury  notes and bills with
various  maturity  dates through  1998.  The Company has  classified  all of its
marketable  securities  as  available-for-sale.  At December  31, 1997 and 1996,
unrealized holding gains or losses were immaterial.

Proceeds from the sale of marketable securities available for sale were $250,000
during the year ended December 31, 1997,  $351,000  during the five months ended
December 31, 1996, and $12,457,000 during the seven months ended July 31, 1996.
Gross  realized  gains  and  losses  included  in  income  in 1997 and 1996 were
immaterial.

PROPERTY  AND   EQUIPMENT  The  Company   depreciates   property  and  equipment
principally on a straight-line basis based on estimated useful lives.  Leasehold
improvements are amortized  straight-line  over the shorter of the lease term or
estimated useful life of the asset.
<TABLE>

Property and equipment, at cost, consists of the following (in thousands):
<CAPTION>

                                                   Useful life  December 31, 1997    December 31, 1996
------------------------------------------------------------------------------------------------------
<S>                                                <C>                   <C>                     <C>
Undeveloped land                                   -                     $    900                  900
Leasehold improvements                             5-6 years                  836                1,093
Machinery and equipment                            5-25 years               5,553                5,359
Furniture and fixtures                             3-10 years                 523                  404
Construction in process                            -                           14                  140
------------------------------------------------------------------------------------------------------
                                                                            7,826                7,896
Less accumulated depreciation and amortization                              3,300                2,738
------------------------------------------------------------------------------------------------------
                                                                          $ 4,526                5,158
------------------------------------------------------------------------------------------------------
</TABLE>

When property is sold or otherwise  disposed of, the asset cost and accumulated
depreciation  are removed from the accounts  and any  resulting  gain or loss is
included in the statement of operations.

Maintenance  and repairs are expensed as incurred.  Renewals and betterments are
capitalized.

OTHER ASSETS Other assets consist primarily of goodwill. Goodwill represents the
excess  of  purchase  price  over  fair  value of net  assets  acquired,  and is
amortized on a straight-line basis over the expected periods to be benefited, 10
years. Goodwill and related accumulated amortization included in other assets at
December 31, 1997 and 1996 amounted to $1,118,000  and $252,000,  and $1,118,000
and $130, 000, respectively.

On March 2, 1992, the Company acquired Reynolds & Taylor,  Inc. (R&T) from Furon
Company  (Furon).  The  acquisition  was  accounted  for  as  a  purchase.   The
acquisition agreement provided that Reinhold was required to pay additional cash
consideration  over the years ended December 31, 1992 through  December 31, 1996
(inclusive).  The  final  payment  for the  year  ended  December  31,  1996 was
$246,000,  resulting in an increase in goodwill. This amount was paid in January
1997.

INCOME  TAXES  The  Company  accounts  for  income  taxes  under  SFAS No.  109,
"Accounting for Income Taxes." Under the asset and liability  method of SFAS No.
109,  deferred  tax assets and  liabilities  are  recognized  for the future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases.  Deferred tax assets and liabilities are measured using enacted tax rates
expected  to apply to income in the years in which those  temporary  differences
are  expected  to be  recovered  or settled.  Under SFAS No. 109,  the effect on
deferred tax assets and  liabilities  of a change in tax rates is  recognized in
income in the period that includes the enactment date.
                                       15
<PAGE>
Reinhold Industries, Inc.

NOTES TO FINANCIAL STATEMENTS (CON'T)

EARNINGS PER SHARE The Company  adopted the provisions of SFAS No. 128 "Earnings
Per Share" during the quarterly  period ending December 31, 1997. This statement
specifies new standards  designed to improve the earnings per share  information
provided in financial  statements  by  simplifying  the  existing  computational
guidelines, revising the disclosure and increasing the comparability of earnings
per share data on an international basis. Adoption of SFAS No. 128 had no impact
on the current year's calculation or previously reported amounts, as the Company
has no dilutive securities.

STOCK OPTION PLAN Prior to January 1, 1996, the Company  accounted for its stock
option plan in accordance  with the  provisions of Accounting  Principles  Board
(APB) Opinion No. 25,  "Accounting  for Stock Issued to Employees,"  and related
interpretations.  As such, compensation expense would be recorded on the date of
grant only if the current  market  price of the  underlying  stock  exceeded the
exercise  price.  On  January  1,  1996,  the  Company  adopted  SFAS  No.  123,
"Accounting for Stock-Based  Compensation,"  which permits entities to recognize
as expense over the vesting period the fair value of all  stock-based  awards on
the date of grant. Alternatively,  SFAS No. 123 also allows entities to continue
to apply the  provisions  of APB Opinion No. 25 and provide pro forma net income
and pro forma  earnings per share  disclosures  for employee stock option grants
made in 1995 and future years as if the fair-value-based  method defined in SFAS
No. 123 had been  applied.  The  Company  has  elected to  continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123, if  required.  All stock  options  granted by the Company  were
prior to January 1, 1995;  accordingly,  pro forma  disclosures are not required
until such time as the Company  grants  additional  stock  options under the new
stock plan, as described in Note 5 to the financial statements.

PENSION AND OTHER POSTRETIREMENT PLANS The Company has a defined benefit pension
plan  covering  substantially  all of its  employees.  The benefits are based on
years of  service  and the  employee's  compensation  during  the last  years of
service before retirement. The cost of this program is being funded currently.

USE OF ESTIMATES  Management  of the Company has made a number of estimates  and
assumptions  relating to the reporting of assets and  liabilities and income and
expense to prepare  these  financial  statements in  conformity  with  generally
accepted  accounting   principles.   Actual  results  could  differ  from  those
estimates.

IMPAIRMENT  OF  LONG-LIVED  ASSETS AND  LONG-LIVED  ASSETS TO BE DISPOSED OF The
Company  adopted the provisions of SFAS No. 121,  "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January 1,
1996.  SFAS No. 121 requires  that  long-lived  assets and certain  identifiable
intangibles  including  goodwill be reviewed for impairment  whenever  events or
changes in  circumstances  indicate that the carrying amount of an asset may not
be  recoverable.  Recoverability  of assets to be held and used is measured by a
comparison of the carrying  amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired,  the
impairment  to be  recognized  is measured  by the amount by which the  carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value, less costs to
sell.  Adoption of SFAS No. 121 did not have a material  impact on the Company's
financial position, results of operations or liquidity.

RECENT  ACCOUNTING  PRONOUNCEMENTS  The  Company  intends to adopt SFAS No. 130,
"Reporting  Comprehensive  Income," and SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related  Information"  in 1998. Both Standards will require
additional  disclosure,  but will not have any effect on the Company's financial
position  or  results of  operations.  SFAS No. 130  establishes  standards  for
reporting and display of comprehensive income and is expected to be reflected in
the Company's first quarter of 1998 interim financial statements.  Components of
comprehensive  income  include  items such as net income and changes in value of
available-for-sale  securities.  SFAS No. 131 changes the way  companies  report
segment  information  and  requires  segments  to be  determined  based upon how
management measures performance and makes decisions about allocating  resources.
SFAS No. 131 will be reflected in the Company's 1998 Annual Report.

FAIR VALUE OF  FINANCIAL  INSTRUMENTS  The  carrying  amounts  of the  following
financial  instruments  approximate  fair value because of the short maturity of
those instruments: cash and cash equivalents, accounts receivable, other current
assets, other assets, accounts payable, and accrued expenses. The fair values of
marketable  securities  are based on the quoted  market  prices at the reporting
date for those investments.

RECLASSIFICATIONS  Certain amounts in the prior period financial statements have
been reclassified to conform with the current presentation.
                                       16
<PAGE>

Reinhold Industries, Inc.

NOTES TO FINANCIAL STATEMENTS (CONT'D)

3 INCOME TAXES
<TABLE>
The income tax provision consists of (in thousands):
<CAPTION>
                                                        Reorganized Company                            Predecessor Company
                                                        -------------------------------------------    -------------------------
                                                                                        Period from                  Period from
                                                               Year ended    August 1, 1996 through      January 1, 1996 through
                                                        December 31, 1997         December 31, 1996                July 31, 1996
---------------------------------------------------------------------------------------------------    -------------------------
<S>                                                                 <C>                          <C>                         <C>
Federal                                                             $  39                         -                            -
State                                                                  12                        16                          219
Deferred                                                                -                         -                            -
---------------------------------------------------------------------------------------------------    -------------------------
Total                                                               $  51                        16                          219
---------------------------------------------------------------------------------------------------    -------------------------
</TABLE>

<TABLE>

The  income tax  expense  for the years  ended  December  31,  1997 and 1996 was
$51,000 and $235,000,  respectively,  and differed from the amounts  computed by
applying the U.S.  Federal  income tax rate of 35% to pretax  income (loss) as a
result of the following (in thousands):
<CAPTION>
                                                        Reorganized Company                            Predecessor Company
                                                        ------------------------------------    -------------------------
                                                                                        Period from                  Period from
                                                               Year ended    August 1, 1996 through      January 1, 1996 through
                                                        December 31, 1997         December 31, 1996                July 31, 1996
---------------------------------------------------------------------------------------------------    -------------------------
<S>                                                                 <C>                        <C>                       <C>  
Statutory taxes at Federal rate                                     $ 594                       146                         (832)
Federal and State Alternative Minimum Tax                              51                         -                            -
State taxes,  net of Federal tax benefits                               -                        10                          142
Reduction of net operating loss                                         -                         -                       25,027
Change in  valuation  allowance                                      (643)                     (155)                     (24,124)
Other                                                                  49                        15                            6
---------------------------------------------------------------------------------------------------    -------------------------
Total provision for income tax expense                             $   51                        16                          219
---------------------------------------------------------------------------------------------------    -------------------------
</TABLE>

<TABLE>

The significant  components of  deferred income tax  benefit were as follows (in
thousands):
<CAPTION>

                                                        Reorganized Company                            Predecessor Company
                                                        -------------------------------------------    -------------------------
                                                                                        Period from                  Period from
                                                               Year ended    August 1, 1996 through      January 1, 1996 through
                                                        December 31, 1997         December 31, 1996                July 31, 1996
---------------------------------------------------------------------------------------------------    -------------------------
<S>                                                                  <C>                       <C>                       <C>   
Current  deferred tax benefit                                        $643                       155                       24,124
Change in valuation allowance for deferred tax asset                 (643)                     (155)                     (24,124)
---------------------------------------------------------------------------------------------------    -------------------------
Total deferred tax benefit                                           $  -                         -                            -
---------------------------------------------------------------------------------------------------    -------------------------
</TABLE>

<TABLE>

The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets and  deferred tax  liabilities  based on an effective
tax rate of 35% are  presented  below:
<CAPTION>

                                                        December 31, 1997         December 31, 1996
---------------------------------------------------------------------------------------------------
<S>                                                               <C>                       <C>
Deferred  tax  assets:
Adjustments  from  quasi-reorganization                           $   595                     2,404
Net operating  loss  carryforwards                                 13,416                    12,365
Inventory  reserves                                                   363                        49
Other reserves                                                        886                       972
---------------------------------------------------------------------------------------------------
Total gross deferred tax assets                                    15,260                    15,790

   Less valuation allowance                                       (14,593)                  (15,236)
---------------------------------------------------------------------------------------------------
      Net deferred tax assets                                         667                       554
---------------------------------------------------------------------------------------------------

Deferred tax liabilities:
   Pension                                                           (207)                      (76)
   Depreciation                                                      (460)                     (478)
---------------------------------------------------------------------------------------------------
      Total gross deferred tax liabilities                           (667)                     (554)
---------------------------------------------------------------------------------------------------
      Net deferred tax assets                                     $     -                         -
---------------------------------------------------------------------------------------------------
</TABLE>
                                       17
<PAGE>

Reinhold Industries, Inc.

NOTES TO FINANCIAL STATEMENTS (CONT'D)

In assessing  the  realizability  of deferred tax assets,  management  considers
whether it is more likely than not that some  portion or all of the deferred tax
assets will not be realized.  The ultimate realization of deferred tax assets is
dependent  upon the  generation of future  taxable  income during the periods in
which  those  temporary  differences  become  deductible.  Based on the level of
historical  taxable  income and  projections  of future  taxable income over the
periods in which the deferred tax assets are deductible,  management believes it
is more  likely than not the  Company  will not  realize  the  benefits of these
deductible differences at December 31, 1997.

At December 31, 1997 and 1996,  the Company had  generated  net  operating  loss
carryovers  for Federal  income tax purposes of  approximately  $38,331,000  and
$39,976,000, respectively. The Company may utilize these net operating losses by
carrying them forward to offset future Federal taxable income,  if any,  through
2011.

Pursuant to the Plan, Keene (predecessor  company) transferred certain assets on
July 31, 1996 to the  Creditors'  Trust.  Certain assets at the date of transfer
were not capable of being valued until the resolution of pending litigation. The
Company  anticipates a future tax benefit;  however,  since the value of certain
assets is not currently  quantifiable  and the extent of any  potential  benefit
resultant upon the transfer of the assets is not estimable,  the Company has not
disclosed  nor  recorded a deferred  tax benefit in the  accompanying  financial
statements.

4 STOCKHOLDERS' EQUITY 
Common stock consists of 2,500,000  authorized shares, $.01 par value per share,
of which  1,020,000  shares of Class B and  978,956  of Class A were  issued and
outstanding  at December  31, 1997 and 1996.  At such time as the Class B Common
Stock shall represent less than 10% of the aggregate shares of Common Stock then
outstanding, all the shares of the Class B Common Stock shall convert to Class A
Common Stock.

5 STOCK OPTIONS 
Prior to the Effective  Date, the Company had a stock  incentive plan (the Stock
Plan)  that was  established  in 1990.  The number of common  shares  subject to
awards under the Stock Plan could not exceed  1,000,000  shares.  The Stock Plan
permitted  the Board of  Directors of the Company to grant  nonqualified  common
stock  options to key  employees  and directors at not less than either the fair
market value per share or the book value per share on the date of grant. Options
granted expired ten years from date of grant and were exercisable at the rate of
25% per year  commencing  one year after date of grant for employees and 33 1/3%
per year commencing one year after date of grant for directors. All options were
extinguished on the Effective Date.
<TABLE>

Changes in stock  options at  December  31,  1996 were as  follows:
<S>                                                    <C> 

Outstanding options, beginning of year                  639,000
Options  exercised between $.03 and $.25 per share     (304,275)
Options granted between $.03 and $.25 per share               -
Options canceled between $.03 and $1.75 per share      (334,725)
---------------------------------------------------------------
Outstanding options, end of year                              -
---------------------------------------------------------------
</TABLE>

As of the Effective  Date,  the Company  established a new stock  incentive plan
(the New Stock Plan) for key employees.  The New Stock Plan permits the grant of
stock options, stock appreciation rights, and restricted stock. The total number
of shares of stock  subject to issuance  under the New Stock Plan may not exceed
100,000.  The maximum number of shares of stock with respect to which options or
stock  appreciation  rights may be granted to any eligible  employee  during the
term of the New Stock Plan may not  exceed  10,000.  The shares to be  delivered
under the New  Stock  Plan may  consist  of  authorized  but  unissued  stock or
treasury stock not reserved for any other purpose.

The  exercise  price  of the  options  is  established  at the  discretion  of a
Committee of the Board of Directors (the Committee), provided that it may not be
less than the  estimated  fair  value at the time of grant.  The New Stock  Plan
provides that the options are exercisable based on vesting  schedules,  provided
that in no event shall such options vest more rapidly than 33 1/3% annually. The
options expire no later than ten years from the date of grant.

The Committee,  in its discretion,  in connection  with grant of an option,  may
grant to the optionee stock  appreciation  rights (SARs). A SAR will entitle the
holder of the related option,  upon exercise of the stock appreciation right, to
surrender such option and receive payment of an amount determined by multiplying
(i) the  excess  of the  fair  market  value  of a share of stock on the date of
exercise  of such SAR  over the  purchase  price of a share of stock  under  the
related  option,  by (ii) the  number  of  shares as to which the SARs have been
exercised.

The Committee may grant shares of restricted stock to eligible  employees and in
such amounts as it shall determine in its sole discretion.

No options, SARs or restricted stock were granted under the New Stock Plan.
                                       18
<PAGE>

Reinhold Industries, Inc.

NOTES TO FINANCIAL STATEMENTS (CONT'D)

6 PENSION PLAN
The  Company  has a pension  plan  covering  substantially  all  employees.  The
benefits paid under the pension plan generally are based on an employee's  years
of  service  and  compensation  during  the  last  years of  employment.  Annual
contributions  made to the pension plan are  determined in  compliance  with the
minimum funding  requirements of ERISA, using a different  actuarial cost method
and  different  actuarial  assumptions  than are used  for  determining  pension
expense for financial reporting purposes.  Annual  contributions to the plan are
made in amounts  approximately equal to the amounts accrued for pension expense.
Plan assets consist principally of publicly traded equity and debt securities.
<TABLE>

Net pension cost included the following (in thousands):
<CAPTION>
                                                        Reorganized Company                            Predecessor Company
                                                        -------------------------------------------    -------------------------
                                                                                        Period from                  Period from
                                                               Year ended    August 1, 1996 through      January 1, 1996 through
                                                        December 31, 1997         December 31, 1996                July 31, 1996
---------------------------------------------------------------------------------------------------    -------------------------
<S>                                                                <C>                         <C>                          <C>
Service cost                                                         $ 96                        51                           71
Interest cost on benefits earned in prior years                       846                       353                          495
Return on assets:
   Actual gain                                                     (2,989)                     (228)                        (319)
   Deferred gain (loss)                                             2,150                      (108)                        (149)
---------------------------------------------------------------------------------------------------    -------------------------
       Expected return                                               (839)                     (336)                        (468)
---------------------------------------------------------------------------------------------------    -------------------------

Amortization of net obligation at transition                           20                         8                           12
Amortization of net loss                                              112                        52                           71
---------------------------------------------------------------------------------------------------    -------------------------
Net pension cost                                                     $235                       128                          181
---------------------------------------------------------------------------------------------------    -------------------------
</TABLE>

<TABLE>
The funded status of the plan was as follows (in thousands):

Estimated amounts of assets required to provide funds for future
   payment of accumulated benefits based on employment service
   to date and present pay levels:
<CAPTION>
                                                         December 31, 1997          December 31, 1996
-----------------------------------------------------------------------------------------------------
<S>                                                                <C>                         <C>   
      Vested                                                       $11,571                     11,651
      Non-vested                                                        56                         67
-----------------------------------------------------------------------------------------------------
         Accumulated benefit obligation                             11,627                     11,718

Additional amounts related to projected pay increases                  185                        229
-----------------------------------------------------------------------------------------------------
         Projected benefit obligation                               11,812                     11,947

Actual amount of assets available for benefits at fair value        11,432                      9,311
-----------------------------------------------------------------------------------------------------
         Assets (less than) projected benefit obligation              (380)                    (2,636)

Unrecognized prior service cost                                          8                         14
Unrecognized net obligation at transition                               65                         85
Unrecognized net loss                                                  704                      2,722
-----------------------------------------------------------------------------------------------------
         Prepaid pension cost at September 30,                         397                        185

Fourth quarter accruals                                                (59)                       (77)
Fourth quarter contributions                                           139                        174
-----------------------------------------------------------------------------------------------------
         Prepaid pension cost at December 31,                       $  477                        282
-----------------------------------------------------------------------------------------------------
         Additional minimum liability at December 31,               $ (592)                    (2,591)
-----------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>

Assumptions used in accounting for the pension plan were:
<CAPTION>
                                                         December 31, 1997          December 31, 1996
-----------------------------------------------------------------------------------------------------
<S>                                                                    <C>                        <C> 
Discounted rate                                                        7.5%                       7.5%
Rate of increase in compensation levels                                5.0                        5.0
Expected long-term rate of return on assets                            9.0                        9.0
-----------------------------------------------------------------------------------------------------
</TABLE>
                                       19
<PAGE>

Reinhold Industries, Inc.

NOTES TO FINANCIAL STATEMENTS (CONT'D)

The  unrecognized  prior  service cost and the  unrecognized  net loss are being
amortized on a straight-line  basis over the average future service of employees
expected to receive benefits under the plans. The unrecognized net obligation at
transition  is  being  amortized  on a  straight-line  basis  over 15  years.

7 COMMITMENTS AND CONTINGENCIES
LEASES The Company  leases  certain  facilities  and equipment  under  operating
leases  expiring  through 2002.  Total rental  expense on all  operating  leases
approximated $447,000 and $712,000 for 1997 and 1996, respectively.

<TABLE>

Minimum  future  rental  commitments  under  noncancelable  operating  leases at
December 31, 1997 are as follows (in thousands):

<S>                                                    <C>
1998                                                   $  454
1999                                                      449
2000                                                      254
2001                                                      104
2002                                                       44
-------------------------------------------------------------
                                                       $1,305
-------------------------------------------------------------
</TABLE>


LEGAL  PROCEEDINGS  The Company is involved in various  claims and legal actions
arising in the ordinary  course of business.  In the opinion of management,  the
ultimate  disposition  of these  matters will not have a material  effect on the
Company's financial position, results of operations, or liquidity.

8 BUSINESS AND CREDIT CONCENTRATIONS
As the United  States  Government  continues to reduce  budget  allocations  for
defense  expenditures,  sales to  customers  operating  in the defense  contract
industry may be adversely affected. The Company has been successful in replacing
sales  lost  to  customers  in the  defense  contract  industry  with  companies
operating  in the  aerospace  and other  commercial  industries.  Changes in the
marketplace  of any of  the  above-named  industries  may  significantly  affect
management's estimates and the Company's performance.
<TABLE>

The Company's  principal  customers are prime contractors to the U.S. Government
and aircraft seat manufacturers. Sales to each customer that exceed 10% of total
net sales for the periods presented were as follows (in thousands):
<CAPTION>

                                                        Reorganized Company                            Predecessor Company
                                                        -------------------------------------------    -------------------------
                                                                                        Period from                  Period from
                                                                Year ended   August 1, 1996 through      January 1, 1996 through
                                                        December 31, 1997         December 31, 1996                July 31, 1996
---------------------------------------------------------------------------------------------------    -------------------------
<S>                                                               <C>                         <C>                          <C>  
B/E Aerospace                                                     $ 5,736                     2,216                        3,308
Alliant Techsystems                                                 1,929                     1,300                            *
Recaro Aircraft Seating                                             2,173                         *                            *
---------------------------------------------------------------------------------------------------    -------------------------
<FN>

*Sales to these customers were less than 10% of total net sales for the period.
</FN>
</TABLE>


B/E  Aerospace  accounted  for  approximately  25%  of  the  Company's  accounts
receivable  balance  before  any  adjustments  for the  allowance  for  doubtful
accounts,  Recaro Aircraft  Seating  accounted for  approximately  15%,  Alliant
Techsystems  accounted for approximately 14%, and Thiokol Corporation  accounted
for  approximately  12% . No other customer  exceeded 10% of the Company's gross
accounts  receivable  balance.  The Company  estimates an allowance for doubtful
accounts  based on the  creditworthiness  of its  customers  as well as  general
economic  conditions.  Consequently,  an adverse  change in those  factors could
affect the Company's estimate of its bad debts.                          
                                       20
<PAGE>

Reinhold Industries, Inc.
<TABLE>
<CAPTION>
CORPORATE DIRECTORY 
<S>                             <C>                            <C>                             <C>
BOARD OF DIRECTORS              CORPORATE OFFICES              FORM 10-KSB                     STOCK LISTING
Lawrence H. Diamond             12827 East Imperial Hwy        Stockholders may obtain a       Reinhold common stock
Chairman                        Santa Fe Springs, CA 90670     copy of Reinhold's 10-KSB by    is listed on the OTC Bulletin
Consultant                      562 944-3281                   writing to Investor Relations   Board
Ernst & Young LLP                                              Department                      Symbol - RNHDA
                                INVESTOR RELATIONS
Michael T. Furry                Contact Judy Sanson            TRANSFER AGENT
President and CEO               Reinhold Industries, Inc.      Continental Stock Transfer &
Reinhold Industries, Inc.                                      Trust Company
                                REGISTRAR                      2 Broadway
Robert B. Steinberg             Continental Stock Transfer &   New York, New York 10004
Senior Partner                  Trust Company                  212 509-4000
Rose, Klein & Marias            2 Broadway
                                New York, New York 10004       INDEPENDENT AUDITORS
CORPORATE OFFICERS                                             KPMG Peat Marwick LLP
Michael T. Furry                ANNUAL MEETING                 725 South Figueroa Street
President and CEO               The Annual Stockholders'       Los Angeles, CA 90017
                                Meeting will be held at the
Brett R. Meinsen                offices of Reinhold
Vice-President - Finance        Industries, Inc.
Administration, Treasurer and   12827 East Imperial Hwy       ATTORNEYS
Secretary                       Santa Fe Springs, CA          Petillon & Hansen
                                on May 1, 1998 at 10:00 a.m.  1260 Union Bank Tower
                                                              21515 Hawthorne Boulevard
                                                              Torrance, California 90503

                                                              Wapnick & Alvarado
                                                              11268 W. Washington Blvd.
                                                              Suite 200
                                                              Culver City, CA 90230

</TABLE>

STOCKHOLDER INFORMATION
<TABLE>
<CAPTION>

Market Price                                  High        Low
---------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>         <C>
First Quarter ended March 31, 1997             3 1/2      2 7/8
Second Quarter ended June 30, 1997             3 3/4      3
Third Quarter ended September 30, 1997         6 5/8      3 9/16
Fourth Quarter ended December 31, 1997        10          6

The Class A Common  Stock of the  Company  is listed on the OTC  Bulletin  Board
under the ticker symbol RNHDA.  The table above sets forth the high and low sale
prices of the Company's  Class A Common Stock for each of the quarterly  periods
for the year ended December 31, 1997.
</TABLE>


<PAGE>


Reinhold Industries, Inc.
12827 East Imperial Highway
Santa Fe Springs, CA 90670
562 944-3281