Reinhold Industries, Inc.
2005 Annual Report
<PAGE>

The Board of Directors

(Pictures of Board Members)

Michael T. Furry
President and CEO

Ralph R. Whitney, Jr.
Chairman of the Board

Andrew McNally, IV

Glenn Scolnik

Thomas A. Brand

Richard A. Place

Richard C. Morrison

C. Miles Schmidt, Jr.

Matthew C. Hook

<PAGE>



Reinhold Industries, Inc.

Selected Financial Data

<TABLE>
<CAPTION>

                                                       2005      2004       2003      2002      2001
-------------------------------------------------------------------------------------------------------------
Summary of operations (in thousands) (Note 1)
<S>                                               <C>          <C>        <C>       <C>       <C>

Net sales                                         $  32,559    32,231     30,978    28,665    20,464
Gross profit                                      $  12,249    12,957     11,722    10,288     6,220
Operating income                                  $   4,281     5,621      5,529     4,985     1,906
Interest income, net                              $       -         7          8        21       128
Income from continuing operations                 $   3,077     2,361      3,414     2,921     2,207
Income (loss) from discontinued operations        $  30,256    (1,251)     2,310     1,231    (5,930)
Net income (loss)                                 $  33,333     1,110      5,724     4,152    (3,723)

-------------------------------------------------------------------------------------------------------------
Year-end position (in thousands)

Cash and cash equivalents                         $   8,965     4,015      6,172     3,037     4,105
Working capital                                   $   7,723    12,482     17,855    10,495    10,981
Net property and equipment                        $   5,661     8,171     12,664    11,307    10,564
Total assets                                      $  29,450    39,446     43,790    36,610    33,029
Long-term debt                                    $       -    24,229         30       124     6,280
Long-term liabilities                             $  10,119     6,591      7,297     5,872     4,178
Stockholders' equity (deficit)                    $   7,482    (3,190)    29,066    19,802    15,077

-------------------------------------------------------------------------------------------------------------
Per share data (Note 2) Net income (loss):

Basic - continuing operations                     $    0.94      0.77       1.16      1.00      0.76
Diluted - continuing operations                   $    0.94      0.75       1.09      0.99      0.76

Basic - discontinued operations                   $    9.27     (0.41)      0.79      0.42     (2.03)
Diluted - discontinued operations                 $    9.26     (0.41)      0.74      0.42     (2.03)

Basic                                             $   10.21      0.36       1.95      1.42     (1.27)
Diluted                                           $   10.20      0.35       1.83      1.41     (1.27)

Stockholders' equity (deficit)                    $    2.29     (1.05)      9.91      6.77      5.16


Market price range (Note 3):

High                                              $   30.46     28.71      20.23      8.17      7.14
Low                                               $   15.70     15.46       7.52      4.30      4.27

Cash dividends declared                           $    8.00     12.75          -         -         -

-------------------------------------------------------------------------------------------------------------
Other data (in thousands except stockholder & employee data) (Note 2)

Orders on hand                                    $  11,549    20,452     15,077    24,424    19,494
Average shares outstanding - basic                    3,265     3,048      2,932     2,926     2,923
Average shares outstanding - diluted                  3,269     3,151      3,122     2,948     2,923
Average number of common stockholders                 1,265     1,314      1,414     1,465     1,516
Average number of employees                             130       130        136      134        129

<FN>


Note 1: The summary of operations has been adjusted to reflect the sale of the
        Company's Samuel Bingham Enterprises, Inc. subsidiary  in December 2004
        and NP Aerospace Ltd. in November 2005.

Note 2: All share information presented has been adjusted for the Company's 10%
        stock dividends in 2003, 2002 and 2001. Note 3: Market prices in 2005
        and 2004 have been adjusted for the Company's extraordinary dividends of
        $6.00 per share declared in November 2005 and $11.75 per share declared
        in December 2004.
</FN>
</TABLE>
                                                                             1


<PAGE>

A Message from the President

In our Message last year we reported that 2004 was the most eventful year in the
history of our company. Now, in describing our performance in 2005, I can report
to you that the salutary  effect of those events has been a significant  boon to
long-term  shareholder  values and has presaged an event of even greater  moment
for the stockholders of Reinhold.

On November 21, 2005, on the virtual eve of the strongest sales and earnings
performance in our history, we sold our NP Aerospace subsidiary to The Carlyle
Group. The price was (pound) 28.7 million British Pounds Sterling ($51 million
U.S. Dollars).

The divestiture of any valuable asset, whether it be real property, or stocks,
or bonds, or insurance, or precious metals, can be an ambivalent experience.
There may be families to consider. If it is a company, there will be employees.
There may be stockholders. There may be directors. There will be emotions.
During any transaction, everyone and everything will age and change.

From the day of its acquisition in May of 1998, the management team of NP
Aerospace happily accommodated itself to the philosophy and management structure
of Reinhold. In that relationship, affinity has been a constant.

Perhaps it is the roots. They run deep. It was 1928 when F.E. and L.W. Reinhold
founded Reinhold Engineered Plastics to make products of new, synthetic
materials. Two years earlier, in 1926, thousands of miles away, the progenitor
of NP Aerospace had already begun to make products from synthetic materials
closely akin to those employed by Reinhold.

2

<PAGE>

(FACING PAGE ILLUSTRATION)

<PAGE>

A Message from the President (Continued)

Whether by happenstance or destiny we do not know, but 70 plus years later,
these two companies were drawn together by a common product, significantly
strong, light weight, versatile, and inevitable: composite aircraft seatback
structures. By more than that, however, they seemed drawn by some peculiar
affinity. Indeed, they seemed to be meant for each other. So Reinhold proposed,
and Courtaulds said yes, and Reinhold Industries, Inc. purchased NP Aerospace
from Courtaulds Aerospace, Ltd. in Coventry, West Midlands, England in 1998.

It was the quality and variety of NP Aerospace's defense-oriented product lines
that attracted The Carlyle Group. They divide their diverse holdings into 10
categories, and Aerospace/Defense is number one on that list. Their avowed goal
is to expand NP Aerospace into a player in the worldwide marketplace.

NP Aerospace has been a valuable asset to Reinhold. Our management teams matured
in their collaboration, from the design and production of a new hybrid seatback
to the creation of NP Aerospace Jordan in 2004. That collaboration exemplifies
the maturity to which NP Aerospace management has acceded.

In deciding to sell, your board was influenced by the affirmative response to
this Reinhold criterion, which has long been a touchstone for our decision
making: is this transaction in the best interests of our shareholders? Your
board believes that it was, that the time was right, that its value was optimal,
and that by any standard of measure, this was a good deal.

4

<PAGE>

(FACING PAGE ILLUSTRATION)

<PAGE>

A Message from the President (Continued)

A good deal is one that benefits all parties: the Buyer, The Carlyle Group; the
Seller, Reinhold Industries; and the Employees of NP Aerospace.

Of the $51 million realized from the sale, $25.8 million went to retire the loan
that funded the special dividend of $11.75 per share in the fourth quarter of
2004; $19.5 million funded the special dividend of $6.00 per share on January 3,
2006; and $1.6 million funded the regular dividend of $0.50 per share paid in
the fourth quarter of 2005.

Any taxes owing will be paid by borrowing from our existing credit line.

Anyone who acquired Reinhold stock before September of 2004 and retained it will
have received the special dividend of $11.75 per share, another special dividend
of $6.00 per share, and six quarterly dividends of $0.50 per share, a total of
$20.75, and they will still own their stock.

Now, we part, not sorrowfully, and with no little pride, but gratified to know
that both companies, Reinhold Industries, Inc. and NP Aerospace, have benefited
greatly from our union. Because of it, we are much stronger than we were when
joined seven years ago.

Today, our company is comprised of the nucleus created by the brothers Reinhold
and three acquisitions: Reynolds and Taylor in 1992, CompositAir in 1994, and
Edler Industries in 2001. All of these elements are a seamless part of one
company now, fabricating from fibre-reinforced, thermosetting resin matrices
three distinct lines of products serving three industrial markets:
Aerospace/Defense, Aircraft Seating Products, and Commercial Sheet Molding
Compounds and Molding. That is a powerful bond, symbolically and literally.


6

<PAGE>

(FACING PAGE ILLUSTRATION)

<PAGE>

A Message from the President (Continued)

Net sales for Reinhold Industries for 2005 amounted to $32.6 million, just
slightly ahead of 2004, and pre-tax earnings were $4.3 million, or 13% of sales.
After-tax earnings from continuing operations were $3.1 million.

In our 2005 Statement of Operations, $30.3 million is identified as Income from
discontinued operations. That, combined with $3.1 million after-tax earnings
from continuing operations, accounts for $33.3 million in Net income for the
year.

Income from our Santa Fe Springs Aerospace product line fell short of our record
sales and earnings in 2004, but it was still an excellent year with pre-tax
earnings of $6.3 million on sales of $22.8 million, or 28%.

Minuteman update. ATK Thiokol has informed us that they intend to enter a
warm-line program that will provide for the re-furbishment of small quantities
of motors per year after the current contract expires in 2008. The new contract
is scheduled to run from 2009 through 2015, and Reinhold will produce the same
parts that we now produce.

The Commercial Sheet Molding Compounds and Molding products line earned $0.3
million before taxes on sales of $3.5 million, or 9%. This product line has
never failed to make a profit, and gross sales have risen at a consistent rate
for the past eight years.

Sales and earnings for the Aircraft Seating Products line went into decline in
2001, hitting bottom in 2004 with sales of $4.7 million and a loss of

8

<PAGE>

(FACING PAGE ILLUSTRATION)

<PAGE>

A Message from the President (Continued)

$0.8  million.  Recovery  was  underway  in 2005 but was too  late to have  much
effect.  Sales crept up to $6.2 million,  and the loss declined to $0.7 million.
However, we have won two major contracts that are now in production.  One is for
our largest  customer,  who needed a quick turnaround that we were able to meet,
and the other is from a new customer whose  business we had been  soliciting for
18 years without  success.  In the past, this customer  depended  exclusively on
aluminum   seatbacks  of  their  own   manufacture.   Now,  in  response  to  an
industry-wide  mandate by  aircraft  manufacturers  for a 15%  reduction  in the
weight of interiors  for new aircraft  models,  they are  switching to composite
seatbacks.

We expect the move from aluminum to composites to affect more than seatbacks in
the future. We are working with our principal customers on designs that utilize
composites for seat pans, arms, legs, spreaders, frames, and beams as well. As
recently as 2001, aluminum accounted for 70% and composites 30% of the worldwide
seatback market. Those ratios will not change immediately, but when they do,
they will change to our advantage.

For another beneficent year, we are grateful to our customers, our employees,
and our suppliers.


/s/ Michael T. Furry

Michael T. Furry
President, CEO, and Director


10

<PAGE>

(FACING PAGE ILLUSTRATION)

<PAGE>


Reinhold Industries, Inc.

Management's Discussion and Analysis of Financial Condition and Results of
Operations


Reinhold Industries, Inc. (Reinhold or the Company) is a manufacturer of
advanced custom composite components and sheet molding compounds for a variety
of applications in the United States and Europe. The Company generates revenues
from three operating segments: Aerospace, Seating Products and Commercial.
Management has determined these to be Reinhold's operating segments based upon
the nature of their products. Aerospace produces a variety of products for the
U.S. military and space programs. Seating Products produces components for the
commercial aircraft seating industry. The Commercial segment produces lighting
housings and pool filter tanks. Products are marketed by company sales personnel
and sales representatives in the United States.

Our business, financial condition, results of operations and cash flows may be
affected by known and unknown risks, uncertainties and other factors. Any of
these risks, uncertainties and other factors could cause the Company's future
financial results to differ materially from recent financial results or from
currently anticipated future financial results. In addition to those noted
elsewhere in this report, the Company is subject to the following risks and
uncertainties:

Our markets are cyclical, leading to periodic declines in sales. The markets in
which we sell our products are cyclical and have experienced periodic declines.
Our sales are, therefore, unpredictable and tend to fluctuate based on a number
of factors, including economic conditions and developments affecting the
aerospace industry and the customers served. Although the market for our
products sold for new commercial aircraft production currently appears to be
experiencing a slight improvement, any downturn in commercial aircraft
production could have a negative impact on our business, financial condition and
operating results.

We are dependent on a limited number of customers, which makes us vulnerable to
the continued relationship with and financial health of those customers. Because
a substantial portion of our business has been as a supplier to government
contractors, we depend on a limited number of customers with which we do
significant amounts of business. Our future prospects will depend on the
continued business of such customers and on our continued status as a qualified
supplier to such customers. We cannot guarantee that our current significant
customers will continue to buy products from us at current levels. The loss of a
key customer could have a material adverse effect on us.

We compete with many companies that have greater financial, technical and
operating resources than we do, and with whom we may not be able to compete
successfully. We compete with many companies in the sale of ablative and
structural composite products. The markets we serve are specialized and
competitive. Several of our competitors have greater financial, technical and
operating resources than we do. We cannot assure you that we will be able to
continue to manufacture and sell our products profitably in competitive markets.

Our products and processes are subject to risks from changes in technology. Our
products and processes are subject to risks of obsolescence as a result of
changes in technology. To address this risk, we invest in product design and
development, and in capital expenditures. We cannot guarantee that our product
design and development efforts will be successful, or that the amounts of money
required to be invested for product design and development and capital
expenditures will not increase materially in the future.

Goodwill could be impaired in the future. In accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets," we assess the fair value and
recoverability of our long-lived assets, including goodwill. We make assessments
whenever events and circumstances indicate the carrying value of an asset may
not be recoverable from estimated future cash flows expected to result from the
asset's use and eventual disposition. In doing so, we make assumptions and
estimates regarding future cash flows and other factors to make our
determination. The fair value of our long-lived assets and goodwill is dependent
upon the forecasted performance of our business and the overall economic
environment. When we determine that the carrying value of our

                                                                             13

<PAGE>
Reinhold Industries, Inc.

Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)


long-lived assets and goodwill may not be recoverable, we measure any impairment
based upon a forecasted  discounted cash flow method. If these forecasts are not
met,  we may  have  to  record  additional  impairment  charges  not  previously
recognized.

In assessing the recoverability of our goodwill at December 31, 2005, we were
required to make certain critical estimates and assumptions. These estimates and
assumptions included that during the next several years we would make
improvements in manufacturing efficiency, achieve reductions in operating costs,
and obtain increases in sales and backlog. If any of these or other estimates
and assumptions are not realized in the future, the Company may be required to
record an impairment charge for the goodwill. The goodwill of the Company was
$2,521,000 at December 31, 2005.

Significant consolidation in the aerospace industry could adversely affect our
business and financial results. The aerospace industry is experiencing
significant consolidation, including among our customers, competitors and
suppliers. Consolidation among our customers may result in delays in the award
of new contracts and losses of existing business. Consolidation among our
competitors may result in larger competitors with greater resources and market
share, which could adversely affect our ability to compete successfully.
Consolidation among our suppliers may result in fewer sources of supply and
increased cost to us.

Our manufacturing operations may be adversely affected by the availability and
increases in prices of raw materials and components. The failure of our
suppliers to deliver on a timely basis raw materials and components to us, and
increases in the prices of raw materials, may adversely affect our results of
operations and cash flows. The supply of rayon used to make carbon fiber cloth
typically used in ablative composites is highly dependent upon the qualification
of the rayon supplier by the United States Department of Defense. North American
Rayon has ceased production of the rayon used in our ablative products. This
could have an effect on the rayon supply in the coming years. Also, a European
company has become the world's sole supplier of graphite and carbon used in our
ablative applications. We cannot assure you that these developments will not
have a significant impact on price or supply.

Product liability claims in excess of insurance could adversely affect our
financial results and financial condition. We face potential liability for
personal injury or death as a result of the failure of products designed or
manufactured by us. Although we maintain product liability insurance, any
material product liability not covered by insurance could have a material
adverse effect on our financial condition, results of operations and cash flows.

Damage or destruction of our facilities caused by earthquake or other causes
could adversely affect our financial results and financial condition. Although
we maintain standard property casualty insurance covering our properties, we do
not carry any earthquake insurance because of the cost of such insurance. Our
main property is located in California, an area subject to frequent and
sometimes severe earthquake activity. Even if covered by insurance, any
significant damage or destruction of our facilities could result in the
inability to meet customer delivery schedules and may result in the loss of
customers and significant additional costs to us. As a result, any significant
damage or destruction of our properties could have a material adverse effect on
our business, financial condition or results of operations.

Critical Accounting Policies The Company's consolidated financial statements and
related public financial information are based on the application of U.S.
generally accepted accounting principles ("GAAP"). GAAP requires the use of
estimates, assumptions, judgments and subjective interpretations of accounting
principles that have an impact on the assets, liabilities, revenue and expense
amounts reported. These estimates can also affect supplemental information
contained in the external disclosures of the Company including information
regarding contingencies, risk and financial condition. The Company believes its
use of estimates and underlying accounting assumptions adhere to generally
accepted accounting principles and are consistently and conservatively applied.
Valuations based on estimates are reviewed for reasonableness and conservatism
on a consistent basis throughout the Company. Primary areas where financial
information of the Company is subject to the use of estimates, assumptions and
the application of judgment include revenues, receivables,

14

<PAGE>

Reinhold Industries, Inc.


inventories,  acquisitions,  valuation  of  long-lived  and  intangible  assets,
pension and post-retirement  benefits, the realizability of deferred tax assets,
and foreign exchange translation.  The Company bases its estimates on historical
experience  and on various  other  assumptions  that the Company  believes to be
reasonable under the  circumstances.  Actual results may differ  materially from
these estimates under different assumptions or conditions.

Revenue Recognition and Allowance for Doubtful Accounts The Company recognizes
revenue when persuasive evidence of an arrangement exists, the price is fixed or
determinable, collection is reasonably assured and delivery of products has
occurred or services have been rendered. Allowance for doubtful accounts is
estimated based on estimates of losses related to customer receivable balances.
Estimates are developed by using standard quantitative measures based on
historical losses, adjusting for current economic conditions and, in some cases,
evaluating specific customer accounts for risk of loss. The establishment of
reserves requires the use of judgment and assumptions regarding the potential
for losses on receivable balances. Though the Company considers these balances
adequate and proper, changes in economic conditions in specific markets in which
the Company operates could have a material effect on reserve balances required.

Inventories The Company values its inventories at lower of cost or market. Cost
is determined by the first-in, first-out (FIFO) method, including material,
labor and factory overhead. The Company writes down its inventory for estimated
obsolescence equal to the cost of the inventory. Product obsolescence may be
caused by shelf-life expiration, discontinuance of a product line, replacement
products in the marketplace or other competitive situations.

Fair Value of Assets Acquired and Liabilities Assumed in Purchase Combinations
The purchase combinations carried out by the Company require management to
estimate the fair value of the assets acquired and liabilities assumed in the
combinations. These estimates of fair value are based on our business plan for
the entities acquired including planned redundancies, restructuring, use of
assets acquired and assumptions as to the ultimate resolution of obligations
assumed for which no future benefit will be received. Should actual use of
assets or resolution of obligations differ from our estimates, revisions to the
estimated fair values would be required. If a change in estimate occurs after
one year of the acquisition, the change would be recorded in our statement of
operations.

Pensions and Post-Retirement Benefits The valuation of the Company's pension and
other post-retirement plans requires the use of assumptions and estimates that
are used to develop actuarial valuations of expenses and assets/liabilities.
These assumptions include discount rates, investment returns, projected salary
increases and benefits, and mortality rates. The actuarial assumptions used in
the Company's pension reporting are reviewed annually and compared with external
benchmarks to assure that they accurately account for our future pension
obligations. Changes in assumptions and future investment returns could
potentially have a material impact on the Company's pension expenses and related
funding requirements.

Valuation of Long-lived and Intangible Assets In accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets," the Company assesses the fair
value and recoverability of its long-lived assets, including goodwill, whenever
events and circumstances indicate the carrying value of an asset may not be
recoverable from estimated future cash flows expected to result from its use and
eventual disposition. In doing so, the Company makes assumptions and estimates
regarding future cash flows and other factors to make our determination. The
fair value of the Company's long-lived assets and goodwill is dependent upon the
forecasted performance of its business and the overall economic environment.
When the Company determines that the carrying value of our long-lived assets and
goodwill may not be recoverable, it measures any impairment based upon a
forecasted discounted cash flow method. If these forecasts are not met, the
Company may have to record additional impairment charges not previously
recognized.

                                                                            15

<PAGE>


Reinhold Industries, Inc.

Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)

Discontinued Operations During the three months ended September 30, 2004,
management committed to a plan of action to sell its wholly-owned subsidiary,
Samuel Bingham Enterprises, Inc. The decision to sell was based on continuing
losses from operations and a negative long-term outlook in the marketplaces this
subsidiary serves. On September 30, 2004, management determined that the plan of
sale criteria in FASB No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," had been met. Accordingly, the carrying value of its fixed
assets was adjusted to fair value less costs to sell and goodwill was determined
to be impaired in accordance with the criteria of FASB No 142. Fair value was
determined based on the highest offer received from several potential strategic
suitors. The resulting $5.7 million impairment charge was included in "Loss on
discontinued operations" in the statement of operations.


On December 17, 2004, Samuel Bingham Enterprises, Inc. sold certain assets and
transferred certain liabilities to Finzer Roller, L.L.C. for $3.1 million in
cash, subject to post-closing adjustments. The assets sold included accounts
receivable, inventories, prepaid expenses, equipment, real property, tangible
personal property, intellectual and other intangible property. Liabilities
transferred include accounts payable, accrued expenses and defined benefit
pension plan obligations. The purchase price was reduced by $0.3 million during
the first quarter 2005 to $2.8 million based on the final computation of closing
date working capital. The purchase price adjustment has been reflected in the
December 31, 2004 financial statements. In 2005, an additional $258,000 of costs
associated with the disposal of Samuel Bingham Enterprises, Inc. were incurred.
These costs were primarily related to adjustments of workers compensation
reserves.

On November 21, 2005, the Company sold 100% of the capital stock of its
wholly-owned subsidiary, NP Aerospace Ltd., to The Carlyle Group ("TCG") for
$53.2 million, subject to a post-closing working capital adjustment. TCG
required that NP Aerospace be cash free, free of all debt and delivered with a
normal level of working capital. The purchase price was reduced by $2.3 million
during the first quarter 2006 to $50.9 million based on the final computation of
closing date working capital. The purchase price adjustment has been reflected
in the December 31, 2005 financial statements.

The sales of Samuel Bingham Enterprises, Inc. and NP Aerospace Ltd. meet the
criteria defined in FASB No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" as discontinued operations and are presented herein as such.

Operating results of the discontinued operations for the years ended December
31, 2005, 2004 and 2003 are summarized as follows (in thousands):

                                                2005        2004           2003
--------------------------------------------------------------------------------
Net sales                                   $ 42,458      40,583         36,023
--------------------------------------------------------------------------------
Income from operations                         6,952       3,858          3,560
Impairment loss                                    -      (5,692)             -
Interest expense                              (1,300)          -              -
Additional gain (loss) on sale                43,117        (465)             -
Tax benefit (expense)                        (18,513)      1,048         (1,250)
--------------------------------------------------------------------------------
Income (loss) on discontinued operations     $30,256      (1,251)         2,310


Income Taxes The Company recognizes deferred tax assets and liabilities based on
the differences between the financial statement carrying amounts and the tax
bases of assets and liabilities. The Company regularly reviews its deferred tax
assets for recoverability and establishes a valuation allowance based upon
historical losses, projected future taxable income and the expected timing of
the reversals of existing temporary differences.

Cumulative Foreign Exchange Translation Accounting In preparing our consolidated
financial statements, the Company is required to translate the financial
statements of NP Aerospace from the currency in which it keeps its accounting
records, the British Pound Sterling, into United States dollars. This process
results in exchange gains and losses which are either included within the
statement of operations or as a separate part of net equity under the caption
"foreign currency translation adjustment."

Under the relevant accounting guidance, the treatment of these translation gains
or losses is dependent upon management's determination of the functional
currency of NP Aerospace.

16

<PAGE>

Reinhold Industries, Inc.


Generally,  the  currency  in which the  subsidiary  transacts a majority of its
transactions,  including  billings,  financing,  payroll and other  expenditures
would be considered the functional  currency but any dependency  upon the parent
and the nature of the subsidiary's operations must also be considered.

If any subsidiary's functional currency is deemed to be the local currency, then
any gain or loss associated with the translation of that subsidiary's financial
statements is included in cumulative translation adjustments. However, if the
functional currency is deemed to be the United States dollar then any gain or
loss associated with the translation of these financial statements would be
included within our statement of operations. Based on our assessment of the
factors discussed above, the Company considers NP Aerospace's local currency to
be the functional currency. Accordingly, the Company recorded foreign currency
translation gains of approximately $1,021,000 and $346,000 that were included as
part of "accumulated other comprehensive loss" within its balance sheet at
December 31, 2004 and December 31, 2003, respectively. On November 21, 2005, the
Company sold 100% of the capital stock of NP Aerospace Ltd., to The Carlyle
Group ("TCG"). In conjunction with the sale, foreign currency transactions that
were previously included as part of "accumulated other comprehensive loss" in
the balance sheet were recognized in the income statement as a component of
discontinued operations.

Accounting for Investment in Majority Owned Subsidiary In August 2004, NP
Aerospace Ltd. ("NPA"), the Company's wholly-owned U.K. subsidiary, and King
Abdullah II Design and Development Bureau ("KADDB"), a Jordanian company,
entered into a joint venture agreement to establish a composites manufacturing
facility in the country of Jordan. NP Aerospace Jordan WLL ("NPAJ"), a Jordanian
limited liability company, was created as a result of the agreement. NPAJ is
owned 51% by NPA and 49% by KADDB. In accordance with SFAS 94, " Consolidation
of All Majority-Owned Subsidiaries," the Company is required to consolidate all
majority-owned subsidiaries unless control is temporary or does not rest with
the majority owner. This Statement requires consolidation of a majority-owned
subsidiary even if it has "nonhomogeneous" operations, a large minority
interest, or a foreign location. As of December 31, 2004, the financial
statements of NPAJ were consolidated into the financial statements of NP
Aerospace. On November 21, 2005, NPAJ was sold to TCG as a component of the NPA
sale.

Property and Equipment The Company depreciates property and equipment
principally on a straight-line basis over estimated useful lives. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or estimated useful life of the asset.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. Improvements which
significantly increase the useful life of the asset are capitalized.

Environmental Liabilities With respect to outstanding actions that are in
preliminary procedural stages, as well as any actions that may be filed in the
future, insufficient information exists upon which judgments can be made as to
the validity or ultimate disposition of such actions, thereby making it
difficult to reasonably estimate what, if any, potential liability or costs may
be incurred. Accordingly, no estimate of future liability has been included for
such claims. See note 9 of the accompanying consolidated financial statements
for additional discussion of legal proceedings.

Stock Based Compensation The Company accounts for its stock-based compensation
in accordance with Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" (APB 25), and has adopted the disclosure-only
alternative of SFAS No. 123 "Accounting For Stock-Based Compensation" (SFAS
123), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -
Translation and Disclosure."

2005 Compared with 2004 Backlog at December 31, 2005 was $11.5 million, down 44%
from December 31, 2004, due primarily to a delay in the receipt of new orders
for the Minuteman III Propulsion Replacement Program. In 2005, order input
decreased by $14.0 million to $23.7 million due primarily to the delay of new
orders for the Minuteman III Propulsion Replacement Program and the completion
of a multi year order for composite structures related to the Space Shuttle
program. Total net sales increased by 1% to $32.6 million from $32.2 million in
2004. Sales decreased by $1.4 million (6%) for the Aerospace business

                                                                             17

<PAGE>

Reinhold Industries, Inc.

Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)


unit compared to 2004 due primarily to the completion of a multi year order for
composite structures related to the Space Shuttle program. Sales for the Seating
Products business unit increased by $1.5 million (32%) due to the addition of a
new customer and improving economic conditions in the airline marketplace. Sales
for the Commercial business unit increased by $0.3 million (8%) due primarily to
higher selling prices for all products.

Gross profit margin decreased to 37.6% from 40.2% due primarily to unfavorable
product mix. Gross profit margin from Aerospace decreased to 45.5% from 47.6%
due primarily to the completion of higher margin business related to the Space
Shuttle program in 2004. Gross profit margin from Seating Products increased to
14.4% from 10.3% due to higher sales and the resulting absorption of
manufacturing overhead expenses. Gross profit margin from Commercial decreased
to 27.9% from 28.8% due to unfavorable product mix .

In 2005, selling, general and administrative expenses were $8.0 million (24.3%
of sales) compared with $7.3 million (22.8% of sales) in 2004. The increase is
due to higher costs related to product development, employee recruiting, travel,
marketing brochures and additional sales headcount.

In 2005, net interest income decreased to zero from $7 thousand due to
outstanding indebtedness to LaSalle bank.

Income before income taxes was $4.3 million or 13.1% of sales in 2005 and $5.6
million or 17.4% of sales in 2004. Income before income taxes at the Aerospace
business unit decreased to $6.3 million (27.6% of sales) in 2005 from $7.8
million (32.2% of sales) in 2004 due to lower sales and unfavorable product mix.
A loss before income taxes for Seating Products of $0.7 million (-11.1% of
sales) was realized in 2005 compared to a loss before income taxes of $0.8
million ( -17.5% of sales) in 2004 due to higher sales. Income before income
taxes for the Commercial business unit was flat at $0.3 million, 9.4% of sales
in 2005 and 10.5% of sales in 2004.

A tax provision of $1.2 million was recorded in 2005 compared with a provision
of $3.3 million in 2004 due to a lower effective tax rate. The effective tax
rate in 2005 was 28.1% as compared to 58.0% in 2004 due to the utilization of
foreign tax credits. At December 31, 2005, the Company utilized its entire net
operating loss carryforward for Federal income tax purposes of approximately
$35.4 million primarily to offset the gain associated with the sale of NP
Aerospace. During 2004, the Company deducted a $10.6 million payment on its
federal and state income tax returns associated with the settlement of
bankruptcy related litigation between Bairnco and the Keene Creditors Trust.
However, the federal and state tax benefit of this deduction approximating $4.2
million has not been included in the statement of operations and is accounted
for on the balance sheet under the heading "Other long-term liabilities."

Future domestic taxable income totaling approximately $6.1 million must be
generated in order to realize net deferred tax assets at December 31, 2005.

Net income from continuing operations totaled $3.1 million, or $0.94 per diluted
share in 2005 compared with $2.4 million, or $0.75 per diluted share in 2004.

Liquidity and Capital Resources As of December 31, 2005, working capital was
$7.7 million, down $4.8 million from December 31, 2004. Cash and cash
equivalents of $9.0 million held at December 31, 2005 were $5.0 million higher
than cash and cash equivalents held at December 31, 2004 due primarily to the
proceeds received from the sale of NP Aerospace less dividends paid by the
Company.

Net cash provided by operating activities amounted to $9.2 million in 2005 and
$7.5 million in 2004. Excluding the cash flows from discontinued operations, net
cash provided by operating activities amounted to $17.2 million in 2005 and $4.1
million in 2004. The increase over the prior period relates primarily to the
realization of deferred tax benefits and accrued income taxes on the sale of NP
Aerospace ($11.3 million) and the realization of tax benefits on accumulated
other comprehensive loss items ($1.8 million). Cash flows used in discontinued
operations in 2005 of $8.1 million consist primarily of the gain on sale of NP
Aerospace ($43.1 million) offset by the accrued sales price adjustment ($2.3
million) and operating cash flows through November 21, 2005. Cash flows provided
by discontinued operations in

18

<PAGE>

Reinhold Industries, Inc.


2004 of $3.4  million were  operating  cash flows from  Bingham and NP Aerospace
($2.9 million) and the loss on disposal of Bingham ($0.5 million).

Net cash provided by investing activities totaled $50.5 million in 2005
consisting of capital expenditures of $0.4 million offset by the cash provided
by discontinued operations of $50.9 million. Cash flows provided by discontinued
operations in 2005 consisted of the net proceeds received from the sale of NP
Aerospace of $51.0 million, the write-off of loan fees of $0.6 million offset by
capital expenditures of $0.6 million. Net cash provided by investing activities
in 2004 totaled $1.4 million consisting of capital expenditures of $0.6 million
offset by the cash flows provided by discontinued operations of $2.1 million.
Cash flows provided by discontinued operations in 2004 consisted of the net
proceeds received on the sale of Bingham of $3.1 million offset by loan fees
associated with the LaSalle credit facility totalling $0.6 million and capital
expenditures of $0.4 million.

Net cash used in financing activities in 2005 totaled $54.7 million, consisting
of the proceeds from the exercise of employee stock options ($0.3 million),
dividends paid to shareholders ($26.3 million) and cash flows used in
discontinued operations of $28.7 million. The cash flows used in discontinued
operations in 2005 of $28.7 million consisted of proceeds on long-term debt from
LaSalle Bank ($0.6 million) and the subsequent payoff of the entire outstanding
debt with LaSalle ($29.3 million). Net cash used in financing activities in 2004
totaled $11.1 million, consisting of the proceeds from exercise of employee
stock options ($1.9 million), the payment of dividends to shareholders ($41.5
million) offset by cash flows provided by discontinued operations of $28.5
million. Cash flows provided by discontinued operations in 2004 of $28.5 million
consisted of proceeds on long term debt from LaSalle Bank ($31.5 million) offset
by the repayment of long term debt and capital leases ($3.0 million). The
Company does not have any current significant commitments for capital
expenditures at December 31, 2005.

The Company believes that its current working capital of $7.7 million, the
available line of credit, and anticipated working capital to be generated by
future operations will be sufficient to support the Company's working capital
requirements through at least December 31, 2006. The Company does not have any
material future commitments for capital expenditures, debt service or working
capital requirements that would impair its liquidity on a long-term basis.


Contingent commercial commitments at December 31, 2005 are as follows (in
thousands):

Description            Total amount     Amount Outstanding     Expiration date
-------------------------------------------------------------------------------
Credit facility             $10,000                   $600          12/08/2009
-------------------------------------------------------------------------------



Contractual obligations The following is a summary of contractual obligations at
December 31, 2005 (in thousands):

<TABLE>
<CAPTION>

                                                                               Payments due by period
                                                           -----------------------------------------------------------------
                                                           Less than             1 - 3             3 - 5       More than 5
Contractual obligation                     Total              1 year             Years             Years             Years
-----------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                     <C>             <C>               <C>               <C>
Operating lease obligations              $ 8,493                 791             2,272             2,284             3,146
-----------------------------------------------------------------------------------------------------------------------------
Purchase obligations                       2,030               2,030                 -                 -                 -
-----------------------------------------------------------------------------------------------------------------------------
Pension plan obligation*                   2,537               1,353             1,184                 -                 -
-----------------------------------------------------------------------------------------------------------------------------
Total                                    $13,060               4,174             3,456             2,284             3,146

* = Cash contributions to the plan after 2008 are indeterminable.
</TABLE>


2004 Compared with 2003 Backlog at December 31, 2004 was $20.5 million, up 36%
from December 31, 2003, due primarily to the timing of new orders related to the
Minuteman III Propulsion Replacement Program.. In 2004, order input increased
77% to $37.8 million. Total net sales increased by 4% to $32.2 million from
$31.0 million in 2003. Sales increased by $2.0 million (9%) for the Aerospace
business unit compared to 2003 due primarily to increased shipments of composite
structures related to the Space Shuttle program. Sales for the Seating Products
business unit decreased by $0.5 million (11%) due to economic problems in the
commercial airline industry. Sales for the Commercial business unit decreased by
$0.2 million (6%) due primarily to decreased shipments of pool heater covers.

Gross profit margin increased to 40.2% from 37.8% due primarily to favorable
product mix in the Aerospace business segment. Gross profit margin from
Aerospace increased to 47.3%

                                                                            19

<PAGE>

Reinhold Industries, Inc.

Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)


from 44.8% due  primarily to favorable  product mix related to the Space Shuttle
program. Gross profit margin from Seating Products decreased to 10.3% from 20.5%
due to lower sales and the resulting  underabsorption  of fixed overhead  costs.
Gross profit margin from  Commercial  increased to 28.8% from 19.3% due to lower
manufacturing overhead costs and higher labor efficiencies.

In 2004, selling, general and administrative expenses were $7.3 million (22.8%
of sales) compared with $6.2 million (20.0% of sales) in 2003. The increase is
due to higher pension related expenses,management incentive compensation costs,
additional sales headcount, professional fees related to the potential sale of
the Company and higher costs of public company compliance.

In 2004, net interest income was approximately unchanged from 2003 at $7
thousand.

Income before income taxes was $5.6 million or 17.4% of sales in 2004 and $5.5
million or 17.9% of sales in 2003. Income before income taxes at the Aerospace
business unit increased to $7.8 million (32.2% of sales) in 2004 from $6.9
million (30.1% of sales) in 2003 due to higher sales and favorable product mix.
A loss before income taxes for Seating Products of $0.8 million (-17.5% of
sales) was realized in 2004 compared to a loss before income taxes of $0.3
million in 2003 (-5.5% of sales) due to lower sales, higher manufacturing
overhead costs and higher selling and general and administrative expenses.
Income before income taxes for the Commercial business unit increased to $0.3
million (10.5% of sales) from $0.1 million (2.0% of sales) due to higher average
selling prices and lower overhead expenses

A tax provision of $3.3 million was recorded in 2004 compared with a provision
of $2.1 million in 2003 due to higher income before income taxes and a higher
effective tax rate. The effective tax rate in 2004 was 58.0% as compared to
38.3% in 2003 due to additional federal income taxes recorded on repatriated
U.K. earnings and the inability to utilize foreign tax credits. At December 31,
2004 and 2003, the Company had net operating loss carryforwards for Federal
income tax purposes of approximately $23.9 million and $20.6 million,
respectively. The Company may utilize the federal net operating losses by
carrying them forward to offset future federal taxable income, if any. Benefits
realized from loss carryforwards and deductible temporary differences arising
prior to the reorganization have been recorded directly to additional paid-in
capital. Such benefits amounted to $3.5 million in 2004 and $4.1 million in
2003.

Future domestic taxable income totalling approximately $15.2 million must be
generated in order to realize net deferred tax assets at December 31, 2004.

Net income from continuing operations totaled $2.4 million, or $0.75 per diluted
share in 2004 compared with $3.4 million, or $1.09 per diluted share in 2003.

Liquidity and Capital Resources As of December 31, 2004, working capital was
$12.5 million, down $5.4 million from December 31, 2003. Cash and cash
equivalents of $4.0 million held at December 31, 2004 were $2.2 million lower
than cash and cash equivalents held at December 31, 2003 due primarily due to
the increased dividends paid by the Company.

Net cash provided by operating activities amounted to $7.5 million in 2004 and
$5.9 million in 2003. Excluding the cash flows from discontinued operations, net
cash provided by operating activities amounted to $4.1 million in 2004 and $4.5
million in 2003. The decrease over the prior period relates primarily to lower
net income offset by improved working capital management. Cash flows provided by
discontinued operations in 2004 of $3.4 million were operating cash flows from
Bingham and NP Aerospace ($2.9 million) and the loss on disposal of Bingham
($0.5 million). Cash flows provided by discontinued operations in 2003 of $1.3
million were operating cash flows from Bingham and NP Aerospace.

Net cash provided by investing activities in 2004 totaled $1.4 million
consisting of capital expenditures of $0.6 million offset by the cash flows
provided by discontinued operations of $2.1 million. Cash flows provided by
discontinued operations in 2004 consisted of the net proceeds received on the
sale of Bingham of $3.1 million offset by loan fees associated with the LaSalle
credit facility totalling $0.6 million and capital expenditures of $0.4 million.
Net cash used in investing activities in 2003 totaled $2.6


20


<PAGE>


Reinhold Industries, Inc.


million  consisting of capital  expenditures of $1.9 million and cash flows used
in  discontinued  operations  of $0.7 million.  Cash flows used in  discontinued
operations in 2003 consisted of the net proceeds  received on sales of assets of
$0.5 million offset by capital expenditures of $1.2 million.

Net cash used in financing activities in 2004 totaled $11.1 million, consisting
of the proceeds from exercise of employee stock options ($1.9 million), the
payment of dividends to shareholders ($41.5 million) offset by cash flows
provided by discontinued operations of $28.5 million. Cash flows provided by
discontinued operations in 2004 of $28.5 million consisted of proceeds on long
term debt from LaSalle Bank ($31.5 million) offset by the repayment of long term
debt and capital leases ($3.0 million). Net cash used in financing activities in
2003 totaled $0.1 million consisting primarily of cash flows used in
discontinued operations. Cash flows used in discontinued operations in 2003 of
$0.1 million consisted primarily of the repayment of debt. The Company does not
have any current significant commitments for capital expenditures at December
31, 2004.

The Company believes that its current working capital of $12.5 million, the
available line of credit, and anticipated working capital to be generated by
future operations will be sufficient to support the Company's working capital
requirements through at least December 31, 2005.


Change in Control On May 21, 1999, pursuant to a Stock Purchase Agreement dated
May 18, 1999, between Keene Creditors' Trust, the holder of all of the
outstanding shares of the Class B Common Stock of the Company and Reinhold
Enterprises, Inc., a newly formed Indiana corporation ("REI"), the Creditors'
Trust sold 997,475 shares of Class B Common Stock owned by it to certain
purchasers designated by REI (the "Purchasers"). These shares represented
approximately 49.9% of the outstanding common stock of the Company.

The sale of shares to the Purchasers constitutes an "ownership shift" within the
meaning of Section 382 of the Internal Revenue Code of 1986, as amended. Section
382 limits the utilization of net operating loss carryforwards upon certain
accumulations of stock of corporate issuers. Additional purchases of shares by
the Purchasers prior to May 22, 2002, or purchases of shares by other
shareholders that result in those shareholders owning more than 5% of the
outstanding Common Stock of the Company prior to May 22, 2002, may have resulted
in significant limitations on the Company's ability to utilize its net operating
loss carryforwards to offset its future income for federal income tax purposes.

Between May 21, 1999 and May 22, 2002, no additional purchases of shares were
made by the Purchasers or by other shareholders that resulted in those
shareholders owning more than 5% of the outstanding Common Stock of the Company.


Recent Accounting Pronouncements In December 2003, the FASB revised Statement
No. 132 (FAS 132R), "Employers' Disclosure about Pensions and Other
Postretirement Benefits." FAS 132R expands employers' disclosure requirements
for pension and postretirement benefits to enhance information about plan
assets, obligations, benefit payments, contributions and net benefit cost. FAS
132R does not change the accounting requirements for pensions and other
postretirement benefits. This statement is effective for fiscal years ending
after December 15, 2003, and the Company has included these disclosures in note
7 to its consolidated financial statements.

In November 2004, the FASB revised Statement No. 151 (FAS 151) "Inventory Costs,
an amendment of ARB No. 43, Chapter 4." FAS 151 clarifies that abnormal amounts
of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and requires the
allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. The impact to the Company has determined to
be immaterial.

In December 2004, the FASB revised Statement No. 123 (FAS 123R), "Share-Based
Payment." FAS 123R requires all share-based

                                                                             21


<PAGE>

Reinhold Industries, Inc.

Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)


payments  to  employees,  including  grants of  employee  stock  options,  to be
recognized  in the  income  statement  based on their  fair  values.  Pro  forma
disclosure is no longer an  alternative.  The new standard will be effective for
public  entities  (excluding  small  business  issuers) in the first  interim or
annual reporting period beginning after June 15, 2005. The impact to the Company
has determined to be immaterial.

Legal Proceedings On August 11, 2000, the Environmental Protection Agency
("EPA") notified the Company that it may be a potentially responsible party
("PRP") under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA"), with respect to certain
environmental liabilities arising at a site formerly known as the Casmalia
Resources Hazardous Waste Management Facility, located in Santa Barbara County,
California ("Casmalia Site"). The EPA has designated the Company as a "de
minimis" waste generator at this site, based on the amount of waste at the
Casmalia Site attributed to the Company. The Company is not currently a party to
any litigation concerning the Casmalia Site, and based on currently available
data, the Company believes that the Casmalia Site is not likely to have a
material adverse impact on the Company's consolidated condensed financial
position or results of operations.


The Company is involved in various other 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.

Forward Looking Statements This Annual Report contains statements which, to the
extent that they are not recitations of historical fact, constitute "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act"). The words "estimate," "anticipate,"
"project," "intend," "expect," and similar expressions are intended to identify
forward looking statements. All forward looking statements involve risks and
uncertainties, including, without limitation, statements and assumptions with
respect to future revenues, program performance and cash flow. Readers are
cautioned not to place undue reliance on these forward looking statements which
speak only as of the date of this Annual Report. The Company does not undertake
any obligation to publicly release any revisions to these forward looking
statements to reflect events, circumstances or changes in expectations after the
date of this Annual Report, or to reflect the occurrence of unanticipated
events. The forward looking statements in this document are intended to be
subject to safe harbor protection provided by Sections 27A of the Securities Act
and 21E of the Exchange Act.

22

<PAGE>

Reinhold Industries, Inc.

Consolidated Statements of Operations
(Amounts in thousands, except for per share data)




YEARS ENDED DECEMBER 31,                             2005       2004       2003
--------------------------------------------------------------------------------
Net sales                                         $32,559     32,231     30,978
Cost of sales                                      20,310     19,274     19,256
--------------------------------------------------------------------------------
Gross profit                                       12,249     12,957     11,722
Selling, general and administrative expenses        7,968      7,336      6,193
--------------------------------------------------------------------------------
Operating income                                    4,281      5,621      5,529
Interest income, net                                    -          7          8
--------------------------------------------------------------------------------
Income before income taxes                          4,281      5,628      5,537
Income taxes                                        1,204      3,267      2,123
--------------------------------------------------------------------------------
Income from continuing operations                   3,077      2,361      3,414

Discontinued operations:
Income from operation of discontinued segment       6,952      3,858      3,560
Impairment loss                                         -     (5,692)         -
Interest expense                                   (1,300)         -          -
Gain (loss) on disposition                         43,117       (465)         -
Income tax benefit (expense)                      (18,513)     1,048     (1,250)
--------------------------------------------------------------------------------
Income (loss) on discontinued operations           30,256     (1,251)     2,310
--------------------------------------------------------------------------------
Net income                                        $33,333      1,110      5,724


Earnings (loss) per share:

Basic  - continuing operations                    $  0.94       0.77       1.16
Diluted  - continuing operations                  $  0.94       0.75       1.09

Basic  - discontinued operations                  $  9.27      (0.41)      0.79
Diluted  - discontinued operations                $  9.26      (0.41)      0.74

Basic                                             $ 10.21       0.36       1.95
Diluted                                           $ 10.20       0.35       1.83

--------------------------------------------------------------------------------
Weighted average common shares outstanding:

Basic                                               3,265      3,048      2,932
Diluted                                             3,269      3,151      3,122


Dividends per common share                        $  8.00      12.75          -


See accompanying notes to consolidated financial statements.

                                                                             23

<PAGE>

<TABLE>
<CAPTION>

Reinhold Industries, Inc.
Consolidated Balance Sheets

(Amounts in thousands, except share data)                     December 31, 2005        December 31, 2004
-------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                       <C>

Assets
Current assets:
   Cash and cash equivalents                                            $ 8,965                    4,015
   Accounts receivable (net of allowance for doubtful
       accounts of $15 and $15, respectively)                             4,322                    8,758
   Inventories                                                            3,167                    8,214
   Prepaid pension                                                        2,312                    1,278
   Deferred taxes                                                           411                    1,312
   Other prepaid expenses and current assets                                395                      721
-------------------------------------------------------------------------------------------------------------
      Total current assets                                               19,572                   24,298

Property and equipment, at cost                                          14,803                   18,079
   Less accumulated depreciation and amortization                         9,142                    9,908
-------------------------------------------------------------------------------------------------------------
      Net property and equipment                                          5,661                    8,171

Goodwill                                                                  2,521                    2,521
Deferred taxes                                                            1,671                    3,851
Other assets                                                                 25                      605
-------------------------------------------------------------------------------------------------------------
                                                                        $29,450                   39,446

Liabilities and stockholders' equity (deficit)
 Current liabilities:
   Accounts payable                                                     $ 1,890                    4,030
   Accrued expenses                                                       2,417                    3,091
   Accrued income taxes                                                   5,264                        -
   Accrued sales price adjustment                                         2,278                      261
   Current installments of long term debt                                     -                    4,434
-------------------------------------------------------------------------------------------------------------
      Total current liabilities                                          11,849                   11,816

Long-term debt, less current installments                                     -                   24,229
Long-term pension liability                                               5,797                    5,879
Minority interest                                                             -                      409
Other long-term liabilities                                               4,322                      303

Commitments and contingencies

Stockholders' equity (deficit):
   Preferred stock - Authorized: 250,000 shares
      Issued and outstanding: None                                            -                       -
   Common stock, $0.01 par value:
      Authorized: 4,750,000  shares
      Issued and outstanding:  3,288,867 and
       3,251,222, respectively                                               33                      32
   Additional paid-in capital                                             4,209                   1,371
   Retained earnings                                                      6,998                       -
   Accumulated other comprehensive loss                                  (3,758)                 (4,593)
-------------------------------------------------------------------------------------------------------------
      Net stockholders' equity (deficit)                                  7,482                  (3,190)
-------------------------------------------------------------------------------------------------------------
                                                                        $29,450                  39,446


See accompanying notes to consolidated financial statements.

</TABLE>

24

<PAGE>

<TABLE>
<CAPTION>

Reinhold Industries, Inc.

Consolidated Statements of Cash Flows
(Amounts in thousands)

YEARS ENDED DECEMBER 31,                                                  2005              2004           2003
----------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>               <C>             <C>
Cash flows from operating activities:
   Net income from continuing operations                               $ 3,077             2,361          3,414
   Adjustments to reconcile net income to net cash
   provided by operating activities:
      Depreciation and amortization                                      1,001             1,054            952
      Additions to paid-in capital resulting
          from tax benefits                                              2,394             3,616          4,138
      Reduction in accumulated other comprehensive loss
          resulting from tax benefits                                    1,774                 -              -
      Non-cash compensation                                                160               226             54
      Changes in assets and liabilities:
          Accounts receivable, net                                         427            (1,651)           527
          Inventories                                                     (363)              215           (457)
          Prepaid expenses and other current assets                       (871)              556           (465)
          Accounts payable                                                 923               223         (1,046)
          Accrued income taxes                                           5,264                 -              -
          Accrued expenses                                                 362               174           (316)
          Deferred tax assets                                            3,081            (2,923)        (2,240)
          Other, net                                                       (12)              239            (15)
          Cash flows (used in) provided by discontinued operations      (8,054)            3,387          1,309
----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                9,163             7,477          5,855

Cash flows from investing activities:
   Capital expenditures                                                   (404)             (642)        (1,923)
   Cash flows provided by (used in) discontinued operations             50,905             2,083           (680)
----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities                     50,501             1,441         (2,603)

Cash flows from financing activities:
   Proceeds from exercise of stock options                                 284             1,918             33
   Dividends paid                                                      (26,335)          (41,524)            (9)
   Cash flows (used in) provided by discontinued operations            (28,663)           28,531           (141)
----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities                                  (54,714)          (11,075)          (117)

Net increase (decrease)in cash and cash equivalents                      4,950            (2,157)         3,135
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year                           4,015             6,172          3,037
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                $8,965             4,015          6,172


Supplementary disclosures of cash flow information - Cash paid during the year
   for:
      Income taxes - continuing operations                                $323               300            299
      Income taxes - discontinued operations                             2,061             1,935            837
      Interest - continuing operations                                       -                 -              -
      Interest - discontinued operations                                 1,300                77             41
----------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.

</TABLE>


                                                                             25

<PAGE>

<TABLE>
<CAPTION>

Reinhold Industries, Inc.

Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income
(Amounts in thousands, except share data)
                                                                                        Common stock $0.01 par value
                                                                          Preferred          Class A
                                                                             Shares           Shares        Amount
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>      <C>                 <C>
Balance, December 31, 2002                                                        -        2,659,812           $27

Net income                                                                                         -             -

10% stock dividend                                                                           265,418             2

Shares issued or reserved in conjunction with Director's
 Deferred Stock Plan                                                                           4,248             -

Stock options exercised                                                                        5,723             -

Additions to paid-in capital resulting
  from tax benefits                                                                                -             -

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

Foreign currency translation adjustment                                                            -             -
--------------------------------------------------------------------------------------------------------------------------
Comprehensive income
--------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003                                                        -        2,935,201           $29


Net income                                                                                         -             -

Cash dividends paid and accrued                                                                    -             -

Shares issued or reserved in conjunction with Director's
 Deferred Stock Plan                                                                           4,635             -

Stock options exercised                                                                      311,386             3

Additions to paid-in capital resulting
    from tax benefits                                                                              -             -

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

Foreign currency translation adjustment                                                            -             -
--------------------------------------------------------------------------------------------------------------------------
Comprehensive income
--------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004                                                        -        3,251,222           $32


Net income                                                                                         -             -

Cash dividends paid and accrued                                                                    -             -

Shares issued or reserved in conjunction with Director's
 Deferred Stock Plan                                                                           2,808             -

Stock options exercised                                                                       34,837             1

Additions to paid-in capital resulting
    from tax benefits                                                                              -             -

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

Foreign currency translation adjustment/other                                                      -             -
-------------------------------------------------------------------------------------------------------------------------
Comprehensive income
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005                                                        -        3,288,867           $33

See accompanying notes to consolidated financial statements.

</TABLE>


26

<PAGE>
<TABLE>
<CAPTION>

Reinhold Industries, Inc.

                                   Additional
                                      Paid-in    Retained     Accumulated Other  Total Comprehensive    Net Stockholders'
                                      Capital    Earnings    Comprehensive Loss        Income (Loss)     Equity (Deficit)
-------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>         <C>                   <C>                 <C>                  <C>
                                      $21,213     $ 4,873               $(6,311)                 -               $19,802

                                            -       5,724                     -              5,724                 5,724

                                        2,865      (2,876)                    -                  -                    (9)


                                           54           -                     -                  -                    54

                                           33           -                     -                  -                    33


                                        4,138           -                     -                  -                 4,138


                                            -           -                (1,403)            (1,403)               (1,403)

                                            -           -                   727                727                   727
-------------------------------------------------------------------------------------------------------------------------
                                                                                             5,048
-------------------------------------------------------------------------------------------------------------------------
                                     $28,303      $ 7,721               $(6,987)                 -               $29,066


                                          -         1,110                     -              1,110                 1,110

                                    (32,692)       (8,831)                    -                  -               (41,523)


                                        226             -                     -                  -                   226

                                      1,918             -                     -                  -                 1,921


                                      3,616             -                     -                  -                 3,616


                                          -             -                 1,210              1,210                 1,210

                                          -             -                 1,184              1,184                 1,184
-------------------------------------------------------------------------------------------------------------------------
                                                                                             3,504
-------------------------------------------------------------------------------------------------------------------------
                                     $1,371       $     -               $(4,593)                 -               ($3,190)


                                         -         33,333                     -             33,333                33,333

                                         -        (26,335)                    -                  -               (26,335)


                                       132              -                     -                  -                   132

                                       284              -                     -                  -                   285


                                     2,394              -                     -                  -                 2,394


                                         -              -                 1,856              1,856                 1,856

                                        28              -                (1,021)            (1,021)                 (993)
-------------------------------------------------------------------------------------------------------------------------
                                                                                            34,168
-------------------------------------------------------------------------------------------------------------------------
                                  $  4,209        $ 6,998               $(3,758)                                  $7,482

</TABLE>


                                                                             27

<PAGE>

Reinhold Industries, Inc.

Notes to Consolidated Financial Statements
December 31, 2005


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 in the United States and Europe. Reinhold derives
revenues from the defense, aerospace, 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).

On May 21, 1999, pursuant to a Stock Purchase Agreement, dated May 18, 1999,
between the Creditors' Trust, the holder of all of the outstanding shares of the
Class B Common Stock of the Company and Reinhold Enterprises, Inc., a newly
formed Indiana corporation ("REI"), the Creditors' Trust sold 997,475 shares of
Class B Common Stock owned by it to certain purchasers designated by REI (the
"Purchasers"). These shares represent approximately 49.9% of the outstanding
common stock of the Company.

2 Summary of Significant Accounting Policies and Practices
Critical Accounting Policies The Company's consolidated financial statements and
related public financial information are based on the application of U.S.
generally accepted accounting principles ("GAAP"). GAAP requires the use of
estimates, assumptions, judgments and subjective interpretations of accounting
principles that have an impact on the assets, liabilities, revenue and expense
amounts reported. These estimates can also affect supplemental information
contained in the external disclosures of the Company including information
regarding contingencies, risk and financial condition. The Company believes its
use of estimates and underlying accounting assumptions adhere to generally
accepted accounting principles and are consistently and conservatively applied.
Valuations based on estimates are reviewed for reasonableness and conservatism
on a consistent basis throughout the Company. Primary areas where financial
information of the Company is subject to the use of estimates, assumptions and
the application of judgment include revenues, receivables, inventories,
acquisitions, valuation of long-lived and intangible assets, pension and
post-retirement benefits, the realizability of deferred tax assets, and foreign
exchange translation. The Company bases its estimates on historical experience
and on

28



<PAGE>

Reinhold Industries, Inc.


various other assumptions that the Company believes to be reasonable
under the circumstances. Actual results may differ materially from these
estimates under different assumptions or conditions.

Revenue Recognition and Allowance for Doubtful Accounts The Company recognizes
revenue when persuasive evidence of an arrangement exists, the price is fixed or
determinable, collection is reasonably assured and delivery of products has
occurred or services have been rendered. Allowance for doubtful accounts is
estimated based on estimates of losses related to customer receivable balances.
Estimates are developed by using standard quantitative measures based on
historical losses, adjusting for current economic conditions and, in some cases,
evaluating specific customer accounts for risk of loss. The establishment of
reserves requires the use of judgment and assumptions regarding the potential
for losses on receivable balances. Though the Company considers these balances
adequate and proper, changes in economic conditions in specific markets in which
the Company operates could have a material effect on reserve balances required.

Inventories The Company values its inventories at lower of cost or market. Cost
is determined by the first-in, first-out (FIFO) method, including material,
labor and factory overhead. The Company writes down its inventory for estimated
obsolescence equal to the cost of the inventory. Product obsolescence may be
caused by shelf-life expiration, discontinuance of a product line, replacement
products in the marketplace or other competitive situations.

Fair Value of Assets Acquired and Liabilities Assumed in Purchase Combinations
The purchase combinations carried out by the Company require management to
estimate the fair value of the assets acquired and liabilities assumed in the
combinations. These estimates of fair value are based on our business plan for
the entities acquired including planned redundancies, restructuring, use of
assets acquired and assumptions as to the ultimate resolution of obligations
assumed for which no future benefit will be received. Should actual use of
assets or resolution of obligations differ from our estimates, revisions to the
estimated fair values would be required. If a change in estimate occurs after
one year of the acquisition, the change would be recorded in our statement of
operations.

Pensions and Post-Retirement Benefits The valuation of the Company's pension and
other post-retirement plans requires the use of assumptions and estimates that
are used to develop actuarial valuations of expenses and assets/liabilities.
These assumptions include discount rates, investment returns, projected salary
increases and benefits, and mortality rates. The actuarial assumptions used in
the Company's pension reporting are reviewed annually and compared with external
benchmarks to assure that they accurately account for our future pension
obligations. Changes in assumptions and future investment returns could
potentially have a material impact on the Company's pension expenses and related
funding requirements.

Valuation of Long-lived and Intangible Assets In accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" , the Company assesses the fair
value and recoverability of its long-lived assets, including goodwill, whenever
events and circumstances indicate the carrying value of an asset may not be
recoverable from estimated future cash flows expected to result from its use and
eventual disposition. In doing so, the Company makes assumptions and estimates
regarding future cash flows and other factors to make its determination. The
fair value of its

                                                                             29



<PAGE>

Reinhold Industries, Inc.

Notes to Consolidated Financial Statements (continued)

long-lived  assets and goodwill is dependent upon the forecasted  performance of
the business and the overall economic  environment.  When the Company determines
that the  carrying  value  of its  long-lived  assets  and  goodwill  may not be
recoverable,  it measures any impairment based upon a forecasted discounted cash
flow  method.  If these  forecasts  are not met,  the Company may have to record
additional impairment charges not previously recognized.

Discontinued Operations During the three months ended September 30, 2004,
management committed to a plan of action to sell its wholly-owned subsidiary,
Samuel Bingham Enterprises, Inc. The decision to sell was based on continuing
losses from operations and a negative long-term outlook in the marketplaces this
subsidiary serves. On September 30, 2004, management determined that the plan of
sale criteria in FASB No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," had been met. Accordingly, the carrying value of its fixed
assets was adjusted to its fair value less costs to sell and goodwill was
determined to be impaired in accordance with the criteria of FASB No 142. Fair
value was determined based on the highest offer received from several potential
strategic suitors. The resulting $5.7 million impairment charge was included in
"Loss on discontinued operations" in the statement of operations.


On December 17, 2004, Samuel Bingham Enterprises, Inc. sold certain assets and
transferred certain liabilities to Finzer Roller, L.L.C. for $3.1 million in
cash, subject to post-closing adjustments. The assets sold included accounts
receivable, inventories, prepaid expenses, equipment, real property, tangible
personal property, intellectual and other intangible property. Liabilities
transferred include accounts payable, accrued expenses and defined benefit
pension plan obligations. The purchase price was reduced by $0.3 million during
the first quarter 2005 to $2.8 million based on the final computation of closing
date working capital. The purchase price adjustment has been reflected in the
December 31, 2004 financial statements.

On November 21, 2005, the Company sold 100% of the capital stock of its
wholly-owned subsidiary, NP Aerospace Ltd., to The Carlyle Group ("TCG") for
$53.2 million, subject to a post-closing working capital adjustment. TCG
required that NP Aerospace be cash free, free of all debt and delivered with a
normal level of working capital. The purchase price was reduced by $2.3 million
during the first quarter 2006 to $50.9 million based on the final computation of
closing date working capital. The purchase price adjustment has been reflected
in the December 31, 2005 financial statements.

The sales of Samuel Bingham Enterprises, Inc. and NP Aerospace Ltd. meet the
criteria defined in FASB No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" as discontinued operations and are presented herein as such.

Assets held for sale included in the consolidated balance sheet as of December
31, 2005 and 2004 are as follows:
                                December 31, 2005          December 31, 2004
                                -----------------          -----------------
Accounts receivable                     $       -                      4,009
Inventory                                       -                      5,410
Prepaid expenses                                -                        163
Property, plant and equipment                   -                      1,913
Accounts payable                                -                     (3,063)
Accrued expenses                                -                     (1,297)
Other liabilities                               -                       (165)
Minority interest                               -                       (409)
                              -------------------          ------------------
Net assets held for sale                $       -                      $6,561


30



<PAGE>

Reinhold Industries, Inc.

Operating results of the discontinued operations for the years ended December
31, 2005, 2004 and 2003 are summarized as follows (in thousands):


                                                2005        2004           2003
--------------------------------------------------------------------------------
Net sales                                   $ 42,458      40,583         36,023
--------------------------------------------------------------------------------
Income from operations                         6,952       3,858          3,560
Impairment loss                                    -      (5,692)             -
Interest expense                              (1,300)          -              -
Additional gain (loss) on sale                43,117        (465)             -
Tax benefit (expense)                        (18,513)      1,048         (1,250)
--------------------------------------------------------------------------------
Income (loss) on discontinued operations     $30,256      (1,251)         2,310


Income Taxes The Company recognizes deferred tax assets and liabilities based on
the differences between the financial statement carrying amounts and the tax
bases of assets and liabilities. The Company regularly reviews its deferred tax
assets for recoverability and establishes a valuation allowance based upon
historical losses, projected future taxable income and the expected timing of
the reversals of existing temporary differences.


Cumulative Foreign Exchange Translation Accounting In preparing our consolidated
financial statements, the Company is required to translate the financial
statements of NP Aerospace from the currency in which it keeps its accounting
records, the British Pound Sterling, into United States dollars. This process
results in exchange gains and losses which are either included within the
statement of operations or as a separate part of the Company's net equity under
the caption "foreign currency translation adjustment."

Under the relevant accounting guidance, the treatment of these translation gains
or losses is dependent upon management's determination of the functional
currency of NP Aerospace. Generally, the currency in which the subsidiary
transacts a majority of its transactions, including billings, financing, payroll
and other expenditures would be considered the functional currency but any
dependency upon the parent and the nature of the subsidiary's operations must
also be considered.

If any subsidiary's functional currency is deemed to be the local currency, then
any gain or loss associated with the translation of that subsidiary's financial
statements is included in cumulative translation adjustments. However, if the
functional currency is deemed to be the United States dollar then any gain or
loss associated with the translation of these financial statements would be
included within our statement of operations.


Based on our assessment of the factors discussed above, the Company considers NP
Aerospace's local currency to be the functional currency. Accordingly, the
Company recorded foreign currency translation gains of approximately $1,021,000
and $346,000 that were included as part of "accumulated other comprehensive
loss" within its balance sheet at December 31, 2004 and December 31, 2003,
respectively. On November 21, 2005, the Company sold 100% of the capital stock
of NP Aerospace Ltd., to The Carlyle Group ("TCG"). In conjunction with the
sale, foreign currency transactions that were previously included as part of
"accumulated other comprehensive loss" in the balance sheet were recognized in
the income statement as a component of discontinued operations.

Accounting for Investment in Majority Owned Subsidiary In August 2004, NP
Aerospace Ltd. ("NPA"), the Company's wholly-owned U.K. subsidiary, and King
Abdullah II Design and Development Bureau ("KADDB"), a Jordanian company,
entered into a joint venture agreement to establish a composites manufacturing
facility in the country of Jordan. NP Aerospace Jordan WLL ("NPAJ"), a Jordanian
limited liability company, was created as a result of the agreement. NPAJ is
owned 51% by NPA and 49% by KADDB. In accordance with SFAS 94, " Consolidation
of All Majority-Owned Subsidiaries," the Company is required to consolidate all
majority-owned

                                                                             31




<PAGE>

Reinhold Industries, Inc.

Notes to Consolidated Financial Statements (continued)

subsidiaries  unless  control is  temporary  or does not rest with the  majority
owner. This Statement requires consolidation of a majority-owned subsidiary even
if it has "nonhomogeneous"  operations,  a large minority interest, or a foreign
location.  As of  December  31,  2004,  the  financial  statements  of NPAJ were
consolidated  into the financial  statements  of NP  Aerospace.  On November 21,
2005, NPAJ was sold to TCG as a component of the NPA sale.

Property and Equipment The Company depreciates property and equipment
principally on a straight-line basis over estimated useful lives. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or estimated useful life of the asset.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. Improvements which
significantly increase the useful life of the asset are capitalized.

Environmental Liabilities With respect to outstanding actions that are in
preliminary procedural stages, as well as any actions that may be filed in the
future, insufficient information exists upon which judgments can be made as to
the validity or ultimate disposition of such actions, thereby making it
difficult to reasonably estimate what, if any, potential liability or costs may
be incurred. Accordingly, no estimate of future liability has been included for
such claims. See note 9 of the accompanying consolidated financial statements
for additional discussion of legal proceedings.


Principles of Consolidation The accompanying consolidated financial statements
include the accounts of Reinhold and its wholly-owned subsidiary, NP Aerospace.
The financial statements of NP Aerospace include the accounts of NP Aerospace
Jordan. The 49% interest in NP Aerospace Jordan that is not owned by NP
Aerospace is reflected in the financial statements under the heading "Minority
interest." All material intercompany accounts and transactions have been
eliminated in consolidation. NP Aerospace was sold to The Carlyle Group on
November 21, 2005.



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.

Cash and cash equivalents consist of the following (in thousands):

                                  December 31, 2005           December 31, 2004
-------------------------------------------------------------------------------
Cash in banks                                $3,965                       1,657
Money market funds                            5,000                       2,358
-------------------------------------------------------------------------------
Total                                        $8,965                       4,015

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 non-recurring costs incurred to date, reduced
by amounts related to revenue recognized on units delivered. The components of
inventory are as follows (in thousands):


                                  December 31, 2005           December 31, 2004
--------------------------------------------------------------------------------
Raw material                                 $2,087                       1,583
Work-in-process                                 804                         781
Finished goods                                  276                         440
Assets held for sale                              -                       5,410
--------------------------------------------------------------------------------
       Total                               $  3,167                       8,214


32



<PAGE>


Reinhold Industries, Inc.

Accounting for Government Contracts Amounts billed to contractors of the U.S.
Government included in accounts receivable at December 31, 2005 and 2004 were
$2,192,000 and $3,384,000, respectively.

Property and Equipment The Company depreciates property and equipment
principally on a straight-line basis over estimated useful lives. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or estimated useful life of the asset.

<TABLE>
<CAPTION>

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

                                                      Useful life    December 31, 2005     December 31, 2004
-------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                     <C>                     <C>
Leasehold improvements                                 5-15 years              $ 4,271                 4,179
Machinery and equipment                                5-25 years                9,757                 9,509
Furniture and fixtures                                 3-10 years                  716                   974
Construction in process                                -                            59                    16
Assets held for sale                                                                 -                 3,401
-------------------------------------------------------------------------------------------------------------
Property and equipment, at cost                                                 14,803                18,079
Accumulated depreciation and amortization                                        9,142                 8,420
Accumulated depreciation and amortization on assets held for sale                    -                 1,488
-------------------------------------------------------------------------------------------------------------
                                 Net property and equipment                    $ 5,661                 8,171

</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 earnings.

Maintenance and repairs are expensed as incurred. Improvements which
significantly increase the useful life of the asset are capitalized.


Goodwill Prior to January 1, 2002, costs in excess of fair value of net assets
of acquired companies (goodwill) was amortized on a straight-line basis over 10
- 40 years. The gross amount of goodwill and related accumulated amortization
amounted to $3,313,000 and $792,000 at both December 31, 2005 and 2004,
respectively.

 In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible
Assets." SFAS No. 142, effective for the Company January 1, 2002, addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. Goodwill and other intangible assets with
indefinite lives are no longer amortized but instead subject to impairment tests
at least annually.

In accordance with SFAS No. 142, the Company performed the first part of the
two-step goodwill impairment test. For each of the Company's reporting units for
which goodwill was recorded, the Company determined that the fair value exceeded
the carrying amount at December 31, 2005. As a result, the second step of the
impairment test was not required.

                                                                            33



<PAGE>

Reinhold Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Income Taxes The Company accounts for income taxes under the asset and liability
method whereby 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. 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. As more fully described in note 3 of notes to
consolidated financial statements, income tax benefits realized from temporary
differences and operating loss carryforwards prior to the chapter 11
reorganization described above are recorded directly to additional paid-in
capital.

Earnings per common share The Company presents basic and diluted earnings per
share ("EPS"). Basic EPS includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution from
securities that could share in the earnings of the Company. Basic and diluted
EPS reflect changes in the number of shares resulting from the Company's 10%
stock dividends (see note 5).

The reconciliations of basic and diluted weighted average shares are as follows
(in thousands):
<TABLE>
<CAPTION>


YEARS ENDED DECEMBER 31,                                         2005              2004           2003
-------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                   <C>            <C>
Net income                                                  $  33,333             1,110          5,724
-------------------------------------------------------------------------------------------------------------

Weighted  average shares used in basic computation              3,265             3,048          2,932
Dilutive stock options                                              4               103            190
-------------------------------------------------------------------------------------------------------------
Weighted average shares used for diluted calculation            3,269             3,151          3,122

</TABLE>


Accumulated Other Comprehensive Loss Other comprehensive loss refers to
revenues, expenses, gains and losses that under accounting principles generally
accepted in the United States are included in other comprehensive loss but
excluded from net income (loss) as those amounts are recorded directly as an
adjustment to stockholders' equity, net of tax. The Company's other
comprehensive loss is composed of changes in the additional pension liability in
excess of unrecognized prior service cost and foreign currency translation
adjustments. The accumulated balance of additional pension liability in excess
of unrecognized prior service cost at December 31, 2005 and 2004 is $3,758,000
and $5,614,000, respectively. The accumulated balance of foreign currency
translation gains at December 31, 2005 and 2004 is $0 and $1,021,000,
respectively.

Stock Option Plan The Company accounts for its stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" (APB 25), and has adopted the disclosure-only alternative
of SFAS No. 123 "Accounting For Stock-Based Compensation" (SFAS 123), as amended
by SFAS No. 148, "Accounting for Stock-Based Compensation - Translation and
Disclosure."

34


<PAGE>


Reinhold Industries, Inc.

The following table illustrates the effect on net income and earnings per share
had compensation expense for the employee based plans been recorded based on the
fair value method under SFAS 123 (in thousands, except per share data):
<TABLE>
<CAPTION>


YEARS ENDED DECEMBER 31,                                    2005          2004             2003
-------------------------------------------------------------------------------------------------------------
<S>                                                      <C>             <C>              <C>
Net income as reported                                   $33,333         1,110            5,724

Deduct, Total stock-based employee compensation
  expense determined under fair value based
  method for all awards, net of related tax effects         (106)         (106)            (115)
-------------------------------------------------------------------------------------------------------------
Net income, as adjusted                                  $33,227         1,004            5,609

Earnings per share:

Basic - as reported                                       $10.21          0.36             1.95
Basic - as adjusted                                       $10.18          0.33             1.91

Diluted - as reported                                     $10.20          0.35             1.83
Diluted - as adjusted                                     $10.16          0.32             1.80

</TABLE>



Pension and Other Postretirement Plans In the United States, the Company has one
defined benefit pension plan and a 401(k) retirement and profit sharing plan
covering substantially all of its employees. The Reinhold Industries, Inc.
Retirement Plan benefits are based on years of service and the employee's
compensation during the last years of service before retirement. The cost of
these programs is being funded currently. On December 31, 2004, the Reinhold
Industries, Inc. Retirement Plan was frozen. No additional years of service or
future salary increases will accrue to active employees in determining plan
benefits. There will be no change in benefit levels to terminated vested and
retired employees.


On January 1, 2002, the Company established the Reinhold Industries, Inc. 401(k)
Plan covering all Reinhold employees in the United States who have completed six
months of service and attained 21 years of age. Employees may make contributions
to the Plan up to the maximum limitations prescribed by the Internal Revenue
Service. The Company may, at its sole discretion, contribute and allocate to
each eligible participant, a percentage of the participant's elective deferral.
Matching contributions, if any, shall be determined as of the end of the Plan
year. On January 1, 2005, the Company decided that it would match 50% of the
participant's elective deferral in 2005 up to a maximum of 3%.The matching
contribution vests to the employee immediately. Costs of the matching
contribution in 2005 were approximately $132,000.


Impairment of Long-lived Assets and Long-lived Assets to Be Disposed Of The
Company accounts for long-lived assets and certain intangibles including
goodwill at amortized cost. Goodwill is tested for impairment in accordance with
SFAS 142 and all other long-lived assets are tested for impairment in accordance
with SFAS 144. As part of an ongoing review of the valuation and amortization of
long-lived assets, management assesses the carrying value of such assets, if
facts and circumstances suggest that they may be impaired. 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.


                                                                            35


<PAGE>

Reinhold Industries, Inc.

Notes to Consolidated Financial Statements (continued)


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, prepaid
expenses and other current assets, other assets, accounts payable, accrued
expenses and current installments of long-term debt. The long-term debt bears
interest at a variable market rate, and thus has a carrying amount that
approximates fair value.

Foreign Currency The reporting currency of the Company is the United States
dollar. The functional currency of NP Aerospace is the UK pound sterling. The
functional currency of NP Aerospace Jordan in the Jordanian Dinar. For
consolidation purposes, the assets and liabilities of the Company's subsidiary
are translated at the exchange rate in effect at the balance sheet date. The
consolidated statements of earnings are translated at the average exchange rate
in effect for the years. On November 21, 2005, the Company sold 100% of the
capital stock of NP Aerospace Ltd., to The Carlyle Group ("TCG"). In conjunction
with the sale, foreign currency transactions that were previously included as
part of "accumulated other comprehensive loss" in the balance sheet were
recognized in the income statement as a component of discontinued operations.

Reclassifications Certain amounts in the prior year's consolidated financial
statements have been reclassified to conform with the current year presentation.

Shipping and Handling Costs Shipping and handling costs are included in cost of
sales.

Research and Development Research and development expenditures were
approximately $278,000, $230,000 and $196,000 for the years ended December 31,
2005, 2004 and 2003, respectively.

Labor Subject to Collective Bargaining Agreements As of December 31, 2005, the
Company did not employ any labor subject to collective bargaining agreements.
Reinhold believes its workforce to be relatively stable and considers its
employee relations to be excellent.


Raw Materials and Purchased Components The principal raw materials for composite
fabrication include pre-impregnated fiber cloth (made of carbon, graphite,
aramid or fiberglass fibers which have been heat-treated), molding compounds,
resins (phenolic and epoxy), hardware, adhesives and solvents. No significant
supply problems have been encountered in recent years. Reinhold uses PAN
(polyacrylonitrile) and rayon in the manufacture of composites. However, the
supply of rayon used to make carbon fiber cloth typically used in ablative
composites is highly dependent upon the qualification of the rayon supplier by
the United States Department of Defense. A major supplier has ceased production
of the rayon used in Reinhold's ablative products. This could have an effect on
the rayon supply in the coming years. Also, a European company has become the
world's sole supplier of graphite and carbon, which is used in Reinhold's
ablative applications. At this time, Reinhold cannot determine if there will be
any significant impact on price or supply.



Recent Accounting Pronouncements In December 2003, the FASB revised SFAS No. 132
(SFAS 132R), "Employers' Disclosure about Pensions and Other Postretirement
Benefits." SFAS 132R expands employers' disclosure requirements for pension and
postretirement benefits to enhance information about plan assets, obligations,
benefit payments, contributions and net benefit cost. SFAS 132R does not change
the accounting requirements for pensions and other postretirement benefits. This
statement is effective for fiscal years ending after December 15, 2003, and the
Company has included these disclosures in note 7 to its consolidated financial
statements.


36



<PAGE>

Reinhold Industries, Inc.


In November 2004, the FASB revised SFAS No. 151 (SFAS 151) "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." SFAS 151 clarifies that abnormal amounts of
idle facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges and requires the allocation of
fixed production overheads to inventory based on the normal capacity of the
production facilities. The guidance is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. Earlier application is
permitted for inventory costs incurred during fiscal years beginning after
November 23, 2004. The impact to the Company was determined to be immaterial.

In December 2004, the FASB revised SFAS No. 123 (SFAS 123R), "Share-Based
Payment." SFAS 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. Pro forma disclosure is no longer an alternative. The new
standard will be effective for public entities (excluding small business
issuers) in the first interim or annual reporting period beginning after June
15, 2005. The impact to the Company was determined to be immaterial.

3 Income Taxes
The income tax expense consists of the following (in thousands):

<TABLE>
<CAPTION>


YEARS ENDED DECEMBER 31,                                                  2005              2004           2003
----------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                <C>            <C>
Current:
     Federal                                                           $11,631             3,556          3,796
     State                                                               2,635               189            628
     Foreign                                                             2,369             1,397          1,189
----------------------------------------------------------------------------------------------------------------
        Total current                                                  $16,635             5,142          5,613

Deferred:
     Federal                                                           $ 3,141            (2,617)        (2,240)
     State                                                                 (59)             (306)             -
----------------------------------------------------------------------------------------------------------------
       Total deferred                                                  $ 3,082            (2,923)        (2,240)
----------------------------------------------------------------------------------------------------------------
 Total income tax expense                                              $19,717             2,219          3,373
</TABLE>

<TABLE>
<CAPTION>


The income tax expense (benefit) applicable to continuing operations and
discontinued operations is as follows (in thousands):


YEARS ENDED DECEMBER 31,                                                  2005              2004           2003
---------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                <C>            <C>
Provision (benefit) for income taxes from continuing operations:
     Current                                                           $ 1,735             3,596          4,363
     Deferred                                                             (531)             (329)        (2,240)
----------------------------------------------------------------------------------------------------------------
        Total provision for income taxes from continuing operations      1,204             3,267          2,123
----------------------------------------------------------------------------------------------------------------

Provision (benefit) for income taxes from discontinued operations:
     Current                                                            14,900             1,546          1,250
     Deferred                                                            3,613            (2,594)             -
----------------------------------------------------------------------------------------------------------------
       Total provision (benefit) for income taxes from
          discontinued operations                                       18,513            (1,048)         1,250
----------------------------------------------------------------------------------------------------------------
 Total income tax expense                                              $19,717             2,219          3,373

</TABLE>

                                                                            37



<PAGE>


Reinhold Industries, Inc.

Notes to Consolidated Financial Statements (continued)


A reconciliation of the U.S. statutory federal income tax expense to income tax
expense on income from continuing operations is as follows (in thousands):

<TABLE>
<CAPTION>

YEARS ENDED DECEMBER 31,                                                  2005              2004           2003
---------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                <C>            <C>
Taxes at statutory Federal rate                                         $1,499             1,914          1,883
State taxes, net of Federal tax benefit                                    184               323            233
State deferred tax benefit related to state rate change,
   net of Federal tax benefit                                             (117)                -              -
Federal deferred tax benefit related to rate change                       (304)                -              -
Rate difference on foreign income                                           14                22             33
Foreign dividends                                                        5,920             1,023              -
Foreign tax credits                                                     (5,959)                -              -
Non-deductible expenses                                                    104                40             19
Change in valuation allowance                                             (127)             (118)             -
Other                                                                      (10)               63            (45)
----------------------------------------------------------------------------------------------------------------
Total provision for income taxes from continuing operations             $1,204             3,267          2,123
</TABLE>



The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below (in
thousands):


<TABLE>
<CAPTION>

                                                        December 31, 2005       December 31, 2004
-------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                       <C>
Deferred tax assets:
            Net operating loss carryforwards                     $      -                   8,123
            Tax credits                                                 -                     898
            State taxes                                               893                       1
            Underfunded pension obligation                          2,309                   2,263
            Other reserves                                            606                     329
-------------------------------------------------------------------------------------------------------------
                Total gross deferred tax assets                     3,808                  11,614

            Less valuation allowance                                    -                  (4,229)
-------------------------------------------------------------------------------------------------------------
                Net deferred tax assets                             3,808                   7,385

Deferred tax liabilities:
            Pension                                                  (921)                   (492)
            US income tax on foreign earnings                           -                    (746)
            Goodwill                                                 (252)                   (171)
            Fixed assets                                             (553)                   (599)
            Other                                                       -                    (214)
-------------------------------------------------------------------------------------------------------------
                Total gross deferred tax liabilities               (1,726)                 (2,222)
-------------------------------------------------------------------------------------------------------------
                Net deferred tax assets                          $  2,082                   5,163

</TABLE>

38


<PAGE>

Reinhold Industries, Inc.


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
that it is more likely than not the Company will realize all of these deductible
temporary differences recorded at December 31, 2005. Furthermore, the Company
was able to utilize all its net operating loss carryforwards and tax credits
primarily related to the gain on the sale of NP Aerospace Ltd. As a result, the
Company released its entire valuation allowance of $4.2 million in 2005. The
release of the valuation allowance was accounted for as follows: $2.3 million
was accounted for as an increase in additional paid-in capital related to both
the benefit of pre-reorganization net operating loss and credit carryforwards
($1.6 million) and exercise of employee stock option deductions ($0.7 million),
$1.8 million reduced accumulated other comprehensive loss and $0.1 million was
accounted for as a reduction of income tax expense.

In 2005, the Company also recorded $0.1 million of tax benefit related to the
exercise of employee stock options.

At December 31, 2005, the Company utilized its entire net operating loss
carryforward for Federal income tax purposes of approximately $35.4 million
primarily to offset the gain associated with the sale of NP Aerospace. Benefits
realized from these net operating loss and credit carryforwards and deductible
temporary differences arising prior to the reorganization have been recorded to
additional paid-in capital. Such benefits amounted to $1.6 million in 2005 and
$3.5 million in 2004. In filing its 2004 federal and state income tax returns,
the Company deducted a $10.6 million payment associated with the settlement of
bankruptcy related litigation between Bairnco and the Keene Creditors Trust.
However, the federal and state tax benefit of this deduction approximating $4.2
million has not been included in the statement of operations and is accounted
for on the balance sheet under the heading "Other long-term liabilities."
Furthermore, since the deduction related to the period prior to the
reorganization, when ultimately realized, the benefit will be recorded to
additional paid-in capital.

United States and foreign earnings (losses) from continuing operations before
income taxes are as follows (in thousands):


YEARS ENDED DECEMBER 31,                  2005              2004           2003
-------------------------------------------------------------------------------

United States                           $4,563             6,175          6,366
Foreign                                   (282)             (547)          (829)
-------------------------------------------------------------------------------
Total                                   $4,281             5,628          5,537

Foreign losses for all years represent intercompany fees charged to NP Aerospace
that have been allocated back to continuing operations.


4 Long Term Debt
On March 20, 2002, the Company entered into a revolving credit facility with
LaSalle Bank National Association ("LaSalle"). On December 7, 2004, the Company
amended the existing credit facility with LaSalle. The credit facility consisted
of a five-year term loan in the amount of $24,500,000 and a revolving credit
facility of up to $12,000,000. Prior to December 31, 2004, the Company received
$31,500,000 from LaSalle against this credit facility. The proceeds from the
credit facility and additional cash on hand were used to pay the special cash
dividend of $11.75 per share on December 28, 2004 totaling approximately
$38,200,000. On November 21, 2005, in conjunction with the proceeds received
from the sale of NP Aerospace, the entire outstanding balance with LaSalle
approximating $25,757,000 was repaid.

                                                                           39



<PAGE>

Reinhold Industries, Inc.

Notes to Consolidated Financial Statements (continued)

On November 18, 2005, the Company further amended the credit facility. The
current credit facility consists of a 45 month term commitment in the amount of
$5,500,000 and a revolving credit facility of up to $4,500,000 and is secured by
all of the Company's financial assets. The term loan is payable in equal monthly
principal installments of $122,500 plus accrued interest. Interest is at a rate
which approximates LIBOR plus 2.5%. Borrowings against the revolving credit
facility are not due until 2009, but are voluntarily repayable at any time.
Accrued interest on the revolving credit facility is payable monthly and is at a
rate which approximates LIBOR plus 2.5%. A monthly fee of 0.5% of the unused
revolving credit facility is also payable. Borrowings under the revolving credit
facility are limited to the lower of $4,500,000 or a baseline amount ("borrowing
base") which is computed monthly and includes qualifying accounts receivable and
inventories. If outstanding borrowings under the revolving credit facility
exceed the borrowing base, then a mandatory repayment of the difference would be
required. The borrowing base at December 31, 2005 was approximately $4.5
million. Letters of credit are included in the revolving credit facility and are
subject to a fee of 2.5% of the face amount. Outstanding letters of credit at
December 31, 2005 were $600,000. The amount available under the revolving credit
facility at December 31, 2005 was approximately $3.9 million.

The outstanding balance with LaSalle was zero at December 31, 2005.

The credit facility is subject to various financial covenants to which the
Company must comply. The covenants require the Company to maintain certain
ratios of profitability, total outstanding debt, and limits on cash dividends.
The Company was in compliance with all covenants as of December 31, 2005.


5 Stockholders' Equity
On May 1, 2002, the Board of Directors approved the distribution of a 10% stock
dividend payable to stockholders of record on May 31, 2002, where an additional
240,933 shares were issued on June 21, 2002.

On April 30, 2003, the Board of Directors approved the distribution of a 10%
stock dividend to shareholders of record as of May 16, 2003. As a result, an
additional 265,418 shares were issued on May 29, 2003. All common stock
information and earnings per share computations for all periods presented have
been adjusted for the stock dividend. The number of stock options outstanding
and the exercise price were also adjusted for the impact of the 10% stock
dividend.


The following is a schedule of cash dividends declared and paid in 2005 and 2004
(in thousands, except per share data):
<TABLE>
<CAPTION>


2005
------------------------------------------------------------------------------------------------
Declaration Date     Record Date        Payment Date        Amount per Share    Total Dividend
------------------------------------------------------------------------------------------------
<S>  <C>             <C>             <C>                               <C>             <C>
     February 25        March 10            March 24                   $0.50           $ 1,630
           May 5          May 24             June 10                   $0.50             1,631
       August 11       August 26        September 16                   $0.50             1,631
     November 14      December 2         December 16                   $0.50             1,650
     November 21     December 16     January 3, 2006                   $6.00            19,793
----------------------------------------------------------------------------------------------
            TOTALS                                                     $8.00           $26,335

</TABLE>

40


<PAGE>

Reinhold Industries, Inc.

<TABLE>
<CAPTION>


2004
------------------------------------------------------------------------------------------------
Declaration Date     Record Date        Payment Date        Amount per Share    Total Dividend
------------------------------------------------------------------------------------------------
<S>   <C>            <C>                <C>                           <C>              <C>
       August 12     September 1        September 15                   $0.50           $ 1,596
      October 28     November 12         November 24                   $0.50             1,625
      December 8     December 17         December 28                  $11.75            38,302
------------------------------------------------------------------------------------------------
            TOTALS                                                    $12.75           $41,523
</TABLE>


6 Stock Options
Stock Incentive Plan On July 31, 1996, the Company established the Reinhold
Stock Incentive Plan for key employees. The Reinhold Stock Incentive 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
Reinhold Stock Incentive 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 Reinhold Stock
Incentive Plan may not exceed 10,000. The shares to be delivered under the
Reinhold Stock Incentive Plan may consist of authorized but unissued stock or
treasury stock, not reserved for any other purpose. The 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. During 2005, the Board of
Directors approved the acceleration of 3,667 outstanding options. Compensation
expense recorded on the accelerated options totalled approximately $28,000.


On June 3, 1999, the Board of Directors approved and adopted the Reinhold
Industries, Inc. Stock Option Agreement by and between the Company and Michael
T. Furry, granting Mr. Furry the option, effective June 3, 1999, to acquire up
to 90,000 shares of Class A common stock of the Company at fair market value at
that date ($8.25 per share). Terms of the Agreement are equivalent to those in
the Reinhold Stock Incentive Plan.

The number of stock options outstanding and the exercise price were adjusted for
the impact of the 10% stock dividends.


On September 30, 2002, the Company adopted the Amended and Restated Reinhold
Stock Incentive Plan. This amendment increases the total number of shares of
stock subject to issuance under the Reinhold Stock Incentive Plan from 100,000
to 286,523 (including the impact of the stock dividends declared in 2000, 2001,
2002 and 2003). 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 Reinhold Stock Incentive Plan were increased from 10,000
to 60,000. Vesting occurs ratably over the vesting period. All other terms
remain unchanged. As of December 31, 2004 and December 31, 2005, options granted
under the Amended and Restated Reinhold Stock Incentive Plan totalled 121,000.


The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and the related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS No. 148,
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options approximates the fair value of the underlying
stock on the date of grant, no compensation expense is recognized. Pro forma
information regarding net income and earnings per share is required by SFAS No.
123, as amended, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using the
Black-Scholes Option Pricing

                                                                             41



<PAGE>

Reinhold Industries, Inc.

Notes to Consolidated Financial Statements (continued)


Model with the following weighted-average assumptions:



                                       2005           2004            2003
-------------------------------------------------------------------------------
Risk free interest rate                 6.0%           6.0%            6.0%
-------------------------------------------------------------------------------
Dividend yield                            -              -               -
-------------------------------------------------------------------------------
Volitility factor                        70%            70%             70%
-------------------------------------------------------------------------------
Weighted average life (years)           4.1            4.1             4.1


Using the Black-Scholes Option Pricing Model, the estimated weighted-average
grant date fair value of options granted in 2003 was $4.90. No options were
granted to employees during 2005 or 2004. See note 2 for the Company's
accounting policy for its Employee Stock-Based Plans, as well as the effect on
net income and earnings per share had the Employee Stock-Based Plans been
recorded based on the fair value method under SFAS 123.


The Black-Scholes Option Pricing Model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require highly subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different than those
of traded options, and because changes in the assumptions can materially affect
the fair value estimate, in management's opinion, the existing models may not
necessarily provide a reliable single measure of the fair value of its employee
stock options.


A summary of the status of the option plans as of and for the changes during the
years ended December 31, 2005 and 2004 is presented below:

<TABLE>
<CAPTION>

                                                                                                         Weighted average
                                                  Number of shares             Low           High          exercise price
-------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>               <C>           <C>                      <C>
Outstanding December 31, 2003                              355,389           $5.63         $11.36                   $6.28
-------------------------------------------------------------------------------------------------------------------------
Granted in 2004                                                  -               -              -                       -
Forfeited during 2004                                            -               -              -                       -
Exercised during 2004                                      311,385            5.63          11.36                    6.17
-------------------------------------------------------------------------------------------------------------------------
Outstanding December 31, 2004                               44,004           $7.32         $11.36                   $7.99
-------------------------------------------------------------------------------------------------------------------------
Granted in 2005                                                  -               -              -                       -
Forfeited during 2005                                        9,167            7.32           7.32                    7.32
Exercised during 2005                                       34,837            7.32          11.36                    8.17
-------------------------------------------------------------------------------------------------------------------------
Outstanding December 31, 2005                                    -           $   -         $    -                   $   -
</TABLE>


42



<PAGE>

Reinhold Industries, Inc.



Directors' Deferred Stock Plan On September 30, 2002, the Company established
the Reinhold Industries, Inc. Director's Deferred Stock Plan. The Plan allows
the non-employee Directors of the Company to elect to receive stock in lieu of
cash payment for their services on the Board of Directors. If the Director
elects to receive Company stock, he has the option of receiving the shares
immediately or deferring receipt of those shares to a future date. The value of
the services performed are charged to the statement of operations in the year
incurred. As of December 31, 2005, 10,448 shares have been reserved for future
issuance under this Plan.

On October 28, 2004, the Plan was amended to compensate the Director's on a
quarterly basis in advance rather than in arrears. The Plan also allows those
Director's who defer receipt of their shares to accrue dividends declared.
Dividends accrued at December 31, 2005 on unissued shares under the amended plan
total approximately $182,000.


7 Pension Plans

Annual contributions made to the Reinhold Industries, Inc Retirement 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. Plan
assets consist principally of publicly traded equity and debt securities.


On December 31, 2004, the Reinhold Industries, Inc. Retirement Plan was frozen.
No additional years of service or future salary increases will accrue to active
employees in determining plan benefits. There will be no change in benefit
levels to terminated vested and retired employees.

On December 17, 2004, in conjunction with the sale of Samuel Bingham
Enterprises, Inc., the assets and obligations of two defined benefit pension
plans were transferred to the buyer.

Net pension cost included the following (in thousands):

<TABLE>
<CAPTION>


YEARS ENDED DECEMBER 31,                                          2005           2004               2003
-------------------------------------------------------------------------------------------------------------
<S>                                                              <C>              <C>                <C>
Service cost                                                     $   -            307                232
Interest cost on benefits earned in prior years                    833          1,058                969
Expected return on assets                                         (881)          (942)              (869)
Amortization of net obligation at transition                         -              -                  1
Amortization of net loss                                           427            570                464
Curtailment loss                                                     -             17                  -
-------------------------------------------------------------------------------------------------------------
Net pension cost                                                 $ 379          1,010                797

</TABLE>

The following table sets forth a reconciliation of the pension plans' benefit
obligation at December 31, 2005 and 2004 (in thousands):
<TABLE>
<CAPTION>

                                                                  2005                              2004
-------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                                <C>
Projected benefit obligation at beginning of year              $14,816                            17,254
Service cost                                                         -                               307
Interest cost                                                      833                             1,058
Actuarial loss                                                     757                             1,353
Benefits paid                                                   (1,036)                           (1,235)
Curtailments                                                         -                            (1,200)
Divestiture                                                          -                            (2,721)
-------------------------------------------------------------------------------------------------------------
Projected benefit obligation at end of year                    $15,370                            14,816

</TABLE>

                                                                             43


                                       18
<PAGE>

Reinhold Industries, Inc.

Notes to Consolidated Financial Statements (continued)


The following table discloses the target allocation and actual percentage of the
fair value of total plan assets  represented  by each asset category at December
31, 2005 and 2004:

                                    Target Allocation        2005          2004
--------------------------------------------------------------------------------
Equity securities                            60 - 70%         63%            61%
Debt securities                              30 - 40%         34%            37%
Real estate                                        0%          0%             0%
Other                                              0%          3%             2%
--------------------------------------------------------------------------------
Totals                                                       100%           100%

The projected benefit obligation at December 31, 2005 increased by $554,000 from
December 31, 2004 due primarily to the reduction of the weighted-average
discount rate from 5.75% to 5.44%.

The following table sets forth a reconciliation of the pension plans' assets at
December 31, 2005 and 2004 (in thousands):

                                                           2005            2004
--------------------------------------------------------------------------------
Fair value of plan assets at beginning of year          $10,215          11,586
Actual return on assets                                   1,293           1,222
Employer contributions                                    1,413             453
Benefits paid                                            (1,036)         (1,235)
Divestiture                                                   -          (1,811)
--------------------------------------------------------------------------------
Fair value of plan assets at end of year                $11,885          10,215


The following table sets forth a reconciliation of the pension plans' funded
status at December 31, 2005 and 2004 (in thousands):

                                                           2005            2004
--------------------------------------------------------------------------------
Projected benefit obligation at end of year             $15,370          14,816
Fair value of plan assets at end of year                 11,885          10,215
--------------------------------------------------------------------------------
Funded status                                            (3,485)         (4,601)
Unrecognized net loss                                     5,797           5,879
--------------------------------------------------------------------------------
Prepaid pension cost at end of year                     $ 2,312           1,278


Additional minimum liability at December 31,            $(5,797)         (5,879)
--------------------------------------------------------------------------------
Additional pension liability in excess of
  prior service cost at December 31,                   $ (5,797)         (5,879)


44



<PAGE>

Reinhold Industries, Inc.


Amounts recognized as prepaid benefit costs at December 31, 2005 and 2004
amounted to $2,312 and $1,278, respectively. Amounts recognized as accrued
benefit obligation at December 31, 2005 and 2004 amounted to $0 and $0,
respectively.

Assumptions used in accounting for the pension plan were:

                                           December 31, 2005  December 31, 2004
                                           -----------------  -----------------
Weighted-average discount rate                    5.44%             5.75%
Weighted-average rate of increase in
 compensation levels                               N/A              4.00%
Weighted-average expected long-term rate
 of return on assets                              8.50%             8.50%


The weighted average expected long term rate of return on assets was established
as of January 1 of each year presented and was changed on January 1, 2004 to
8.5%. The long-term rate of return was developed using a financial model which
computes the historical rate of return on the various asset classes (equities,
debt, others) contained in the portfolio and projects the inflation adjusted
real rate of return for the future. Assumptions concerning discount rates and
rates of increase in compensation levels are determined based on the current
economic environment at the end of each respective annual reporting period. The
company evaluates the funded status of each of its retirement plans using these
current assumptions and determines the appropriate funding level considering
applicable regulatory requirements, reporting considerations and other factors.
Recent decreases in long-term interest rates have the effect of increasing plan
liabilities and if expected returns on plan assets are not achieved, future
funding obligations could increase substantially. Assuming no changes in current
assumptions, the company expects to contribute approximately $1,353,000 for the
calendar year 2006.

The following table discloses the amount of benefits expected to be paid in
future years (in thousands):


2006                                                          $  1,135
2007                                                             1,133
2008                                                             1,113
2009                                                             1,088
2010                                                             1,072
2011-2015                                                        5,149
----------------------------------------------------------------------
Totals                                                         $10,690

The pension plan's accumulated benefit obligation was $15,370,000 at December
31, 2005 and $14,816,000 at December 31, 2004. 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. The measurement dates used to determine
pension benefits were December 31, 2005 and 2004.

The company maintains a trust which holds the assets of the plan. The investment
of assets in defined benefit plans is based on the expected long-term capital
market outlook. Asset return assumptions utilizing historical returns and
investment manager forecasts are set forth for each major asset category
including domestic equities and government and corporate market debt. Investment
allocations are determined by the Board of Directors. Long-term allocation
guidelines are set and expressed in terms of a target range allocation for each
asset class to provide portfolio management flexibility. The asset allocation is
diversified to maintain risk at a reasonable

                                                                           45



<PAGE>

Reinhold Industries, Inc.

Notes to Consolidated Financial Statements (continued)


level without  sacrificing  return.  Factors  including the future growth in the
number of plan participants and forecasted  benefit  obligations,  inflation and
the rate of salary increases are also considered in developing asset allocations
and target return assumptions.


8 Operating Segments

The Company reports segment data pursuant to SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." Reinhold is a manufacturer
of advanced custom composite components and sheet molding compounds for a
variety of applications in the United States and Europe. The Company generates
revenues from three operating segments: Aerospace, Seating Products and
Commercial. Management has determined these to be Reinhold's operating segments
based upon the nature of their products. Aerospace produces a variety of
products for the U.S. military and space programs. Seating Products produces
components for the commercial aircraft seating industry. The Commercial segment
produces lighting housings and pool filter tanks.

On November 21, 2005, the Company sold its NP Aerospace subsidiary. On December
17, 2004, the Company sold its Samuel Bingham Enterprises, Inc. subsidiary.
Prior to 2005, both NP Aerospace and Bingham had been reported as separate
business segments. All prior periods have been adjusted to conform with the
current presentation. In addition, the name of the former CompositAir business
unit has been changed to Seating Products.


The information in the following table is derived directly from the segments
internal financial reporting for corporate management purposes (in thousands).
<TABLE>
<CAPTION>


YEARS ENDED DECEMBER 31,                                                  2005              2004           2003
---------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                <C>            <C>
Net sales
     Aerospace                                                         $22,797            24,234         22,255
     Seating Products                                                    6,230             4,716          5,250
     Commercial                                                          3,532             3,281          3,473
---------------------------------------------------------------------------------------------------------------
Total sales                                                            $32,559            32,231         30,978
---------------------------------------------------------------------------------------------------------------

Income before income taxes from continuing operations
     Aerospace                                                         $ 6,298             7,798          6,863
     Seating Products                                                     (696)             (824)          (288)
     Commercial                                                            332               343             71
     Unallocated corporate expenses                                     (1,653)           (1,689)        (1,109)
----------------------------------------------------------------------------------------------------------------
Total income before income taxes from continuing operations            $ 4,281             5,628          5,537
----------------------------------------------------------------------------------------------------------------

Depreciation and amortization
     Aerospace                                                         $   335               340            367
     Seating Products                                                      224               229            216
     Commercial                                                            106               148            129
     Unallocated corporate                                                 336               337            240
---------------------------------------------------------------------------------------------------------------
Total depreciation and amortization                                    $ 1,001             1,054            952
---------------------------------------------------------------------------------------------------------------

Capital expenditures
     Aerospace                                                         $   300               394          1,113
     Seating Products                                                       42                52            214
     Commercial                                                              -                31            358
     Unallocated corporate                                                  62               165            238
---------------------------------------------------------------------------------------------------------------
Total capital expenditures                                             $   404               642          1,923
---------------------------------------------------------------------------------------------------------------
</TABLE>


46

Reinhold Industries, Inc.
<TABLE>
<CAPTION>

YEARS ENDED DECEMBER 31,                                                  2005              2004           2003
---------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                <C>
Total assets
     Aerospace                                                         $11,156            12,266
     Seating Products                                                    3,253             2,564
     Commercial                                                          1,479             1,503
     Assets held for sale                                                    -            13,858
     Unallocated corporate                                              13,562             9,255
--------------------------------------------------------------------------------------------------------------
Total assets                                                           $29,450            39,446

Goodwill
     Aerospace                                                         $ 2,360             2,360
     Seating Products                                                      161               161
-------------------------------------------------------------------------------------------------------------
Total goodwill                                                         $ 2,521             2,521
</TABLE>


The table below presents information related to geographic areas in which
Reinhold's customers were located (in thousands):
<TABLE>
<CAPTION>

YEARS ENDED DECEMBER 31,                                                  2005              2004           2003
---------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                <C>            <C>
Net sales
     North America                                                     $29,663            29,500         27,263
     United Kingdom                                                      2,896             2,731          3,715
---------------------------------------------------------------------------------------------------------------
     Net sales                                                         $32,559            32,231         30,978
</TABLE>



The table below presents information related to geographic areas in which
Reinhold operated (in thousands):

                                           December 31, 2005   December 31, 2004
--------------------------------------------------------------------------------
Total assets
     North America                                   $29,450             25,588
     Assets held for sale - United Kingdom                 -             13,858
--------------------------------------------------------------------------------
     Total assets                                    $29,450             39,446

Long-lived assets
     North America                                  $  9,878             13,235
     Assets held for sale - United Kingdom                 -              1,913
--------------------------------------------------------------------------------
     Long-lived assets                              $  9,878             15,148


9 Commitments and Contingencies

Leases The Company leases certain facilities and equipment under operating
leases expiring through 2014. Certain facility leases are subject to annual
escalations of approximately 1% to 3%. Total rental expense on all operating
leases approximated $971,000, $838,000 and $704,000 for 2005, 2004 and 2003,
respectively.


                                                                            47



<PAGE>

Reinhold Industries, Inc.

Notes to Consolidated Financial Statements (continued)


Minimum future rental commitments under noncancelable operating leases and
aggregate future minimum rentals under noncancelable subleases at December 31,
2005 are as follows (in thousands):


                              Operating lease commitments      Sublease income
--------------------------------------------------------------------------------
2006                                              $   791                   31
2007                                                  766                    -
2008                                                  762                    -
2009                                                  744                    -
2010                                                  753                    -
Thereafter                                          4,677                    -
--------------------------------------------------------------------------------
                                                  $ 8,493                   31

Legal Proceedings On August 11, 2000, the Environmental Protection Agency
("EPA") notified the Company that it may be a potentially responsible party
("PRP") under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA"), with respect to certain
environmental liabilities arising at a site formerly known as the Casmalia
Resources Hazardous Waste Management Facility, located in Santa Barbara County,
California ("Casmalia Site"). The EPA has designated the Company as a "de
minimis" waste generator at this site, based on the amount of waste at the
Casmalia Site attributed to the Company. The Company is not currently a party to
any litigation concerning the Casmalia Site, and based on currently available
data, the Company believes that the Casmalia Site is not likely to have a
material adverse impact on the Company's consolidated condensed financial
position or results of operations.

The Company is involved in various other 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.


Insurance Due to a significant increase in workers' compensation insurance
premiums, on November 1, 2003, the Company changed its insurance for workers'
compensation costs from fully insured to a partially self-insured basis. The
Company is now responsible for payment of all workers' compensation costs to a
maximum of $250,000 per individual claim and $1,250,000 in the aggregate. Claims
paid by the insurance company as well as the estimated future costs to be
incurred are recorded as expenses on a monthly basis. In addition, the Company
was required to provide our insurance company with a irrevocable Letter of
Credit in the amount of $600,000. As of December 31, 2005, $600,000 of the
Letter of Credit was unused.

The policy period extended through October 2004. At that time, claims experience
was reviewed and a determination was made to not continue on a partially
self-insured basis. As of December 31, 2005 and 2004, based on information
provided to us by the insurance company, approximately $180,000 and $118,000,
respectively, was accrued for future losses associated with the expired policy
period.

Purchase commitments Obligations under non-cancellable purchase orders at
December 31, 2005 totalled approximately $2.0 million.


10 Business and Credit Concentrations
The Company's principal customers are prime contractors to the U.S. Government
and aircraft seat manufacturers.

48



<PAGE>

Reinhold Industries, Inc.


Sales to each customer that exceed 10% of total net sales for the periods
presented were as follows (in thousands):


YEARS ENDED DECEMBER 31,               2005              2004              2003
--------------------------------------------------------------------------------
Alliant Techsystems (Aerospace)     $20,201            18,256            19,324
B/E Aerospace (Seating Products)      4,891             3,862             4,434



Alliant Techsystems accounted for approximately 37% of the Company's accounts
receivable balance at December 31, 2005 and 14% at December 31, 2004 before any
adjustments for the allowance for doubtful accounts. Sales of components related
to the Minuteman III Propulsion Replacement Program for 2005, 2004 and 2003
totaled approximately $14.5 million, $12.7 million and $14.5 million,
respectively. Sales related to this program are expected to continue through
2007 and drop significantly in 2008.

B/E Aerospace accounted for approximately 28% of the Company's accounts
receivable balance at December 31, 2005 and 10% at December 31, 2004 before any
adjustments for the allowance for doubtful accounts. Although sales to Weber
Aircraft did not exceed 10% of total net sales for the year ended December 31,
2005, they accounted for approximately 12% of the Company's accounts receivable
balance at December 31, 2005. 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.


11 Related Party Transactions

On June 3, 1999, Reinhold entered into a two year agreement with Hammond,
Kennedy, Whitney and Company ("HKW"), a private equity firm, to provide Reinhold
and its subsidiaries with advice regarding strategic direction and merger and
acquisition activities, including identifying potential acquisition candidates,
for a fee of $20,000 per month. The agreement is automatically renewed
thereafter for successive one year periods, unless termination notification is
provided by either party within 120 days of the renewal date. Mssrs. Ralph R.
Whitney, Jr., Andrew McNally, IV and Glenn Scolnik, all members of the Board of
Directors of Reinhold, are partners of HKW.


12 Quarterly Summary of Information (Unaudited)
Summarized unaudited financial data is as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>


THREE MONTHS ENDED                               March 31,    June 30,    September 30,   December 31,
-------------------------------------------------------------------------------------------------------------
2005
-------------------------------------------------------------------------------------------------------------
<S>                                                <C>          <C>              <C>           <C>
Net sales                                          $7,181       7,496            8,297         9,585
Gross profit                                       $2,811       2,904            3,203         3,331
Income from continuing operations
  before income taxes                              $  832         892              960          1,597
Net income (loss) from continuing operations       $  (54)        (52)            (451)         3,634
Net income (loss)                                  $1,695       1,738              723         29,177

Net earnings (loss) per share:
    Basic - continuing operations                  $(0.02)      (0.02)           (0.14)          1.11
    Diluted - continuing operations                $(0.02)      (0.02)           (0.14)          1.11

    Basic                                          $ 0.52        0.53            0.22            8.93
    Diluted                                        $ 0.52        0.53            0.22            8.93
-------------------------------------------------------------------------------------------------------------
</TABLE>

                                                                             49



<PAGE>

Reinhold Industries, Inc.

Notes to Consolidated Financial Statements (continued)


<TABLE>
<CAPTION>

THREE MONTHS ENDED                               March 31,    June 30,    September 30,   December 31,
-------------------------------------------------------------------------------------------------------------
2004
-------------------------------------------------------------------------------------------------------------
<S>                                                <C>          <C>              <C>            <C>
Net sales                                          $7,216       7,319            7,744          9,952
Gross profit                                       $2,609       2,834            3,037          4,477
Income from continuing operations
  before income taxes                              $1,133         781            1,351          2,363
Net income from continuing operations              $  658         478              828            397
Net income (loss)                                  $1,179       1,686           (2,171)           416

Net earnings (loss) per share:
    Basic - continuing operations                  $ 0.22        0.16             0.27           0.13
    Diluted - continuing operations                $ 0.21        0.15             0.26           0.13

    Basic                                          $ 0.40        0.57            (0.71)          0.14
    Diluted                                        $ 0.37        0.53            (0.71)          0.13
-------------------------------------------------------------------------------------------------------------

</TABLE>

13 Subsequent events
On February 28, 2006, the Company announced that it had engaged TM Capital Corp.
to explore strategic alternatives for the enhancement of shareholder value,
including a possible sale of the Company. The Company cannot give assurance that
it will consummate a sale or other strategic alternative. In conjunction with
the sale of NP Aerospace on November 21, 2005 (the "completion date"), the
Company agreed that in the event of a sale of all or substantially all of the
assets of the Company within 18 months of the completion date, the acquirer
would be responsible for all obligations of the Company defined in the Share
Sale Agreement (the "agreement") dated September 26, 2005. If the acquirer did
not agree to these conditions, the Company would be required to establish an
escrow account to cover any claims made under the agreement. The escrow account
amounts decrease over time from the completion date as follows: 5,000,000 Pounds
Sterling ($8.75 million) from completion date through May 31, 2006; 3,000,000
Pounds Sterling ($5.25 million) from June 1, 2006 through November 30, 2006; and
2,000,000 Pounds Sterling ($3.50 million) from December 1, 2006 through May 31,
2007.

On March 13, 2006, the Company utilized a portion its credit line with LaSalle
Bank by borrowing $3.0 million against the term facility. The proceeds from the
borrowing and cash on hand were used to pay the balance of 2005 estimated
federal and state taxes totalling approximately $5.8 million.


50



<PAGE>





Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders of Reinhold Industries, Inc.

We have audited the accompanying consolidated balance sheets of Reinhold
Industries, Inc. as of December 31, 2005 and 2004, and the related consolidated
statements of operations, shareholders' equity (deficit) and comprehensive
income, and cash flows for each of the three years in the period ended December
31, 2005. 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 audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
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 consolidated financial position of Reinhold
Industries, Inc. at December 31, 2005 and 2004, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles.


/s/ Ernst & Young LLP


Irvine, California
March 16, 2006


                                                                           51




<PAGE>

Reinhold Industries, Inc.

Board Of Directors
Ralph R. Whitney, Jr.
Chairman of The Board
Chairman
Hammond, Kennedy, Whitney & Company

Michael T. Furry
President and CEO
Reinhold Industries, Inc.

Andrew McNally, IV
Managing Director
Hammond, Kennedy, Whitney & Company

Glenn Scolnik
President and CEO
Hammond, Kennedy, Whitney & Company

Thomas A. Brand
Retired
Fiberite Corporation

Richard A. Place
Retired
Ford Motor Company

Richard C. Morrison
Retired
Babson Capital Management, Inc.

C. Miles Schmidt, Jr.
Retired
Halcore Group, Inc.

Matthew C. Hook
Managing Director
Centerfield Capital Partners L.P.

Corporate Officers
Michael T. Furry
President and CEO

David R. Ewing
Chief Operating Officer

Brett R. Meinsen
Vice President - Finance and
Administration, Treasurer
and Secretary

Corporate Offices
12827 East Imperial Highway
Santa Fe Springs, CA 90670
562 944-3281
562 944-7238 (fax)

Investor Relations
Contact Wanda Morrison
Reinhold Industries, Inc.

Registrar
Continental Stock Transfer &
Trust Company
17 Battery Place
New York, New York 10004

Annual Meeting
The Annual Stockholders'
Meeting will be held at the offices of
Reinhold Industries, Inc.
12827 East Imperial Hwy
Santa Fe Springs, CA
On May 4, 2006
at 8:30 a.m.


Form 10-K
Stockholders may obtain a
copy of Reinhold's 10-K without charge by writing to Investor Relations
Department

Transfer Agent
Continental Stock Transfer &
Trust Company
17 Battery Place
New York, New York 10004
(212) 509-4000

Independent Registered Public Accounting Firm
Ernst & Young LLP
18111 Von Karman Avenue
Suite 1000
Irvine, CA 92612

Attorneys
Sommer Barnard Attorneys, PC
One Indiana Square, Suite 3500
Indianapolis, Indiana 46204

Horgan, Rosen, Beckham & Coren, LLP
23975 Park Sorrento
Suite 200
Calabasas, CA 91302

Stock Listing
Reinhold common stock
is listed on the Nasdaq Capital
Market
Symbol - RNHDA


<TABLE>
<CAPTION>

Stockholder Information                     2005               2004          Dividends per Share
-----------------------------------------------------------------------------------------------
Market Price                            High    Low        High    Low            2005    2004
-----------------------------------------------------------------------------------------------
<S>                                    <C>    <C>         <C>    <C>             <C>     <C>
First Quarter ended March 31,          30.46  23.69       23.26  18.70           $0.50   $0.00
Second Quarter ended June 30,          29.50  26.94       20.50  18.60            0.50    0.00
Third Quarter ended September 30,      28.25  19.36       23.20  15.46            0.50    0.50
Fourth Quarter ended December 31,      24.38  15.70       28.71  22.36            6.50   12.25

</TABLE>

The Class A Common Stock of the Company is listed on the Nasdaq Capital Market
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 years ended December 31, 2005 and 2004, adjusted for the effect of the
$6.00 per share special dividend declared in November 2005 and paid in January
2006 and the special dividend of $11.75 per share declared and paid in December
2004. As of March 3, 2006, the approximate number of holders of Class A common
stock (holders of record) were 1,224.

<PAGE>


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