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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                   FORM 10-Q
 
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
   ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
 
                                      OR
 
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
   EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM               TO
 
 
                         COMMISSION FILE NUMBER 1-7726
 
                           REUNION INDUSTRIES, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
               DELAWARE                              06-1439715
    (STATE OR OTHER JURISDICTION OF               (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)              IDENTIFICATION NUMBER)
 
                             62 SOUTHFIELD AVENUE
                        ONE STAMFORD LANDING SUITE 208
                              STAMFORD, CT 06902
                   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
                                (203) 324-8858
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
 
                               Yes  X  No     .
 
  As of July 31, 1998 the Registrant had 3,900,065 shares of common stock, par
value $.01, outstanding.
 
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<PAGE>
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
 <C>     <S>                                                               <C>
 PART I. FINANCIAL INFORMATION
 Item 1. Financial Statements
         Consolidated Balance Sheets--June 30, 1998 (Unaudited) and
          December 31, 1997..............................................    2
         Consolidated Statements of Operations (Unaudited) Three Months
          and Six Months Ended June 30, 1998 and 1997....................    4
         Consolidated Statements of Cash Flows (Unaudited) Six Months
          Ended June 30, 1998 and 1997...................................    5
         Notes to Consolidated Financial Statements (Unaudited)..........    6
 Item 2. Management's Discussion and Analysis of Financial Condition and
          Results of Operations..........................................    9
 PART II. OTHER INFORMATION
 Item 1. Legal Proceedings...............................................   13
 Item 6. Exhibits and Reports on Form 8-K................................   14
 Signature...............................................................   15
</TABLE>
 
                          FORWARD LOOKING STATEMENTS
 
  This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements speak only as of the
date of this Form 10-Q, and the Company expressly disclaims any obligation or
undertaking to publicly release any updates or revisions to any forward-
looking statements contained herein. Although the Company believes that its
expectations are based on reasonable assumptions, it cannot assure that the
expectations contained in such forward-looking statements will be achieved.
Such statements involve risks, uncertainties and assumptions which could cause
actual results to differ materially from those contained in such statements.
The Company's operations are affected by domestic and international economic
conditions which affect the volume and pricing of sales of business and
consumer goods, for which the Company produces components, the cost and
availability of materials, labor and other goods and services used in the
Company's operations and the cost of interest on the Company's debt.
 
                                       1
<PAGE>
 
                         PART I - FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
                            REUNION INDUSTRIES, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                        JUNE 30,   DECEMBER 31,
                                                          1998         1997
                                                       ----------- ------------
                                                       (UNAUDITED)
                        ASSETS
                        ------
<S>                                                    <C>         <C>
CURRENT ASSETS
  Cash and Cash Equivalents...........................   $   314     $ 2,085
  Accounts Receivable, Less Allowance for Doubtful
   Accounts of $323 and $375, respectively............    12,991      12,284
  Inventories.........................................     8,314       7,570
  Customer Tooling-in-Process.........................       618       1,773
  Other Current Assets................................       505         495
                                                         -------     -------
    Total Current Assets..............................    22,742      24,207
                                                         -------     -------
PROPERTY, PLANT AND EQUIPMENT--NET....................    35,777      35,293
                                                         -------     -------
OTHER ASSETS
  Goodwill............................................     8,712       9,060
  Investment in Joint Venture.........................     1,622       1,622
  Other...............................................     2,058       1,877
                                                         -------     -------
                                                          12,392      12,559
                                                         -------     -------
                                                         $70,911     $72,059
                                                         =======     =======
</TABLE>
 
 
 
          See Accompanying Notes to Consolidated Financial Statements
 
                                       2
<PAGE>
 
                            REUNION INDUSTRIES, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                        JUNE 30,   DECEMBER 31,
                                                          1998         1997
                                                       ----------- ------------
                                                       (UNAUDITED)
         LIABILITIES AND SHAREHOLDERS' EQUITY
         ------------------------------------
<S>                                                    <C>         <C>
CURRENT LIABILITIES
  Current Portion of Long-Term Debt...................  $ 12,718     $11,568
  Accounts Payable....................................    10,807       9,328
  Advances From Customers.............................       984       2,484
  Accrued Bargo Judgment..............................     8,825          --
  Other Current Liabilities...........................     5,669       4,654
                                                        --------     -------
    Total Current Liabilities.........................    39,003      28,034
LONG-TERM DEBT........................................     8,719      11,112
LONG-TERM DEBT--RELATED PARTIES.......................     1,494       1,542
OTHER LIABILITIES.....................................     3,635       3,054
                                                        --------     -------
    Total Liabilities.................................    52,851      43,742
                                                        --------     -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
  Common Stock ($.01 par value; 20,000 authorized;
   3,900 and 3855 issued and outstanding,
   respectively)......................................        39          38
  Additional Paid-in Capital..........................    29,332      29,242
  Retained Earnings (Since January 1, 1989)...........   (10,837)       (578)
  Foreign Currency Translation Adjustments............      (474)       (385)
                                                        --------     -------
    Total Shareholders' Equity........................    18,060      28,317
                                                        --------     -------
                                                        $ 70,911     $72,059
                                                        ========     =======
</TABLE>
 
 
          See Accompanying Notes to Consolidated Financial Statements
 
                                       3
<PAGE>
 
                            REUNION INDUSTRIES, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED   SIX MONTHS ENDED
                                             JUNE 30,            JUNE 30,
                                        -------------------- -----------------
                                          1998       1997      1998     1997
                                        ---------  --------- --------  -------
<S>                                     <C>        <C>       <C>       <C>
NET SALES.............................. $  24,704  $ 23,471  $ 51,072  $48,143
COST OF SALES..........................    21,279    20,251    43,635   41,090
                                        ---------  --------  --------  -------
GROSS PROFIT...........................     3,425     3,220     7,437    7,053
SELLING, GENERAL AND ADMINISTRATIVE
 EXPENSES..............................     3,082     2,901     6,034    5,762
                                        ---------  --------  --------  -------
OPERATING INCOME.......................       343       319     1,403    1,291
OTHER INCOME AND (EXPENSE)
  Interest Expense.....................      (758)     (786)   (1,494)  (1,540)
  Provision for Bargo Judgment.........    (8,825)       --    (8,825)      --
  Other, Including Interest Income.....       (67)      133       (65)     262
                                        ---------  --------  --------  -------
                                           (9,650)     (653)  (10,384)  (1,278)
                                        ---------  --------  --------  -------
INCOME (LOSS) FROM CONTINUING
 OPERATIONS BEFORE INCOME TAXES........    (9,307)     (334)   (8,981)      13
  Income Tax Expense...................       (23)      (84)      (75)    (136)
                                        ---------  --------  --------  -------
LOSS FROM CONTINUING OPERATIONS........    (9,330)     (418)   (9,056)    (123)
LOSS FROM DISCONTINUED OPERATIONS......    (1,200)       --    (1,200)      --
NET LOSS...............................   (10,530)     (418)  (10,256)    (123)
  Foreign currency translation
   adjustment..........................        58      (144)      (89)    (218)
                                        ---------  --------  --------  -------
COMPREHENSIVE INCOME (LOSS)............  $(10,472) $   (562) $(10,345) $  (341)
                                        =========  ========  ========  =======
NET LOSS PER SHARE--BASIC AND DILUTED
  Loss from Continuing Operations...... $   (2.41) $  (0.11) $  (2.35) $ (0.03)
  Loss from Discontinued Operations....     (0.31)       --     (0.31)      --
                                        ---------  --------  --------  -------
    Net Loss........................... $   (2.72) $  (0.11) $  (2.66) $ (0.03)
                                        =========  ========  ========  =======
WEIGHTED AVERAGE NUMBER OF COMMON
 SHARES OUTSTANDING
  Basic and diluted....................     3,865     3,855     3,861    3,855
                                        =========  ========  ========  =======
</TABLE>
 
          See Accompanying Notes to Consolidated Financial Statements
 
                                       4
<PAGE>
 
                            REUNION INDUSTRIES, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                              SIX MONTHS ENDED
                                                                  JUNE 30,
                                                              -----------------
                                                                1998     1997
                                                              --------  -------
<S>                                                           <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net Loss..................................................  $(10,256) $  (123)
  Adjustments to Reconcile Net Income to Net Cash Provided
   by Operating Activities
   Depreciation.............................................     1,795    1,439
   Goodwill Amortization....................................       347      347
   Debt Issue Cost Amortization ............................       171      154
   Provision for Bargo Judgment.............................     8,825       --
   Provision for environmental liability....................     1,200       --
                                                              --------  -------
                                                                 2,082    1,817
  Changes in Assets and Liabilities:
   Increase in Accounts Receivable..........................      (707)  (1,178)
   Increase (Decrease) in Inventory.........................      (744)     263
   Decrease in Other Current Assets.........................     1,145      333
   Increase in Accounts Payable.............................     1,479    1,661
   Increase (Decrease) in Other Current Liabilities.........    (1,315)     202
   Other....................................................      (106)    (488)
                                                              --------  -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.........     1,834    2,610
CASH FLOWS FROM INVESTING ACTIVITIES:
  Collection of Note Receivable from Sale of Oil and Gas
   Business.................................................        --    2,200
  Capital Expenditures......................................    (2,274)  (2,590)
                                                              --------  -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.........    (2,274)    (390)
CASH FLOWS FROM FINANCING ACTIVITIES:
  Increase (Decrease) in Revolver Borrowings................        91     (603)
  Proceeds from Issuance of Debt Obligations................        --    1,162
  Payments of Debt Obligations..............................    (1,512)  (1,781)
  Proceeds from exercise of stock options and warrants......        90       --
                                                              --------  -------
NET CASH USED IN FINANCING ACTIVITIES.......................    (1,331)  (1,222)
INCREASE IN CASH AND CASH EQUIVALENTS.......................    (1,771)     998
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............     2,085    1,407
                                                              --------  -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................  $    314  $ 2,405
                                                              ========  =======
</TABLE>
 
          See Accompanying Notes to Consolidated Financial Statements
 
                                       5
<PAGE>
 
                   REUNION INDUSTRIES AND SUBSIDIARIES, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
               (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
 
NOTE 1. CONSOLIDATED FINANCIAL STATEMENTS
 
PRINCIPLES OF CONSOLIDATION
 
  The consolidated financial statements include the accounts of Reunion
Industries, Inc. ("RII") and its majority owned subsidiaries. As used herein,
the term "Company" refers to RII, its predecessors and its subsidiaries,
unless the context indicates otherwise. All intercompany transactions and
accounts are eliminated in consolidation.
 
FINANCIAL STATEMENTS AT JUNE 30, 1998
 
  The Consolidated Balance Sheet at June 30, 1998, and the Consolidated
Statements of Operations and Cash Flows for the three and six months ended
June 30, 1998 and 1997 included herein are unaudited; however, in the opinion
of management of the Company, they reflect all adjustments necessary to
present fairly the results for the interim periods. Such results are not
necessarily indicative of results to be expected for the year. The
Consolidated Balance Sheet at December 31, 1997 has been derived from the
audited financial statements at that date. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
 
EARNINGS PER SHARE
 
  Basic earnings per share is computed based on the weighted average number of
common shares outstanding during the period. Diluted earnings per share gives
effect to all dilutive potential common shares outstanding during this period.
Potential common shares include shares issuable upon exercise of the Company's
stock options and warrants.
 
ACCOUNTING PRONOUNCEMENTS
 
  The Company has adopted FASB Statement No. 130, "Reporting Comprehensive
Income" which establishes standards for reporting and displaying comprehensive
income and its components.
 
  The Financial Accounting Standards Board (FASB) has issued several
accounting pronouncements which the company will be required to adopt in
future periods.
 
  FASB Statement No. 131 "Disclosures about Segments of an Enterprise and
Related Information" requires that a publicly-held company report financial
and descriptive information about its operating segments in financial
statements issued to shareholders for interim and annual periods. Although the
Company operates in only one segment, the Statement also requires additional
disclosures with respect to products and services, geographic areas of
operation, and major customers which have not previously been presented in the
consolidated financial statements and related notes. The company will adopt
Statement No. 131 for 1998 year end reporting purposes.
 
  FASB Statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" revises employers' disclosures about pension and
other postretirement benefit plans. The Statement does not change the
measurement or recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits and eliminates
certain disclosures that are no longer as useful as they previously were. The
Company will adopt Statement No. 132 for 1998 year end reporting purposes.
 
                                       6
<PAGE>
 
                   REUNION INDUSTRIES AND SUBSIDIARIES, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
               (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
 
 
 
NOTE 2. INVENTORIES
 
  Inventories consisted of the following:
 
<TABLE>
<CAPTION>
                                                           JUNE 30, DECEMBER 31,
                                                             1998       1997
                                                           -------- ------------
     <S>                                                   <C>      <C>
     Raw Materials........................................  $4,147     $3,461
     Work-in process......................................   1,317      1,440
     Finished Goods.......................................   2,850      2,669
                                                            ------     ------
       Total..............................................  $8,314     $7,570
                                                            ======     ======
</TABLE>
 
NOTE 3. CONTINGENCIES
 
  On April 24, 1998, a jury in state district court in Harris County, Texas
returned jury verdict findings that Bargo Energy Company had a right to
terminate a November 1995 stock purchase agreement with Reunion and that
Reunion fraudulently induced Bargo into entering into the agreement. The
November 1995 stock purchase agreement concerned the sale of Reunion's
subsidiary, Reunion Energy Company ("REC"), which operated Reunion's
discontinued oil and gas business. The jury recommended that an award of
$5,000 in punitive damages be assessed against Reunion. In July 1998, the
court entered judgment affirming the $5,000 jury verdict and awarding
approximately $3,000 in attorneys' fees and costs. Reunion maintained at trial
and continues to maintain that all requirements to closing under the contract
were met, and that Bargo was required to close the transaction. Reunion also
maintains that no evidence sufficient to support a jury finding of fraud or
the related punitive damages finding was presented at trial. Reunion intends
to continue to vigorously oppose this judgment, including by appeal if
necessary. Once the final activities in the trial court have been concluded,
Reunion will be required to post a bond in the approximate amount of $8,800,
including one year's anticipated interest, in order to appeal. Although
management believes, based on consultation with counsel, that it is more
likely than not that the judgment will be overturned on appeal, Reunion has
recorded an accrual for the amount of the bond with a charge to continuing
operations in the 1998 second quarter in accordance with generally accepted
accounting principles.
 
  In early 1996, the State of California Franchise Tax Board initiated an
audit of the Company's franchise tax returns for the years 1991, 1992 and
1993. In October 1996, the Company received a formal notice of assessment from
the taxing authority in the aggregate amount of $716 plus interest. Of this
amount, $645 results from the auditor's conclusion that income from gains on
sales of certain Canadian assets in 1991 should be reclassified from
nonbusiness to business income. The Company believes its classification of
such income was correct, and has appealed the assessment of tax. If the
Company's positions prevail on this issue, management believes that the
amounts due would not exceed amounts previously paid or provided for. No
additional accruals have been made for any amounts that may be due if the
Company does not prevail because the outcome cannot be determined. The Company
recorded a provision for $85 for certain other proposed adjustments.
 
  In connection with the sale of REC, the Company retained certain oil and gas
properties in Louisiana because of litigation concerning environmental
matters. The Company is in the process of environmental remediation under a
plan approved by the Louisiana Office of Conservation. The Company has
recorded an accrual for its proportionate share of the remaining estimated
costs to remediate the site based on plans and estimates developed by the
environmental consultants hired by the Company. During the quarter ended June
30, 1998 the Company increased this accrual by a charge of $1,200 to
discontinued operations, based on revised estimates of the remaining
remediation costs. At June 30, 1998, the balance accrued for these remediation
costs
 
                                       7
<PAGE>
 
                   REUNION INDUSTRIES AND SUBSIDIARIES, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
               (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
 
 
is approximately $1,600 which is recorded in other current liabilities on the
accompanying balance sheet. Owners of a portion of the property have objected
to the Company's proposed cleanup methodology and have filed suit to require
additional procedures. The Company is contesting this litigation, and believes
its proposed methodology is well within accepted industry practice for
remediation efforts of a similar nature. No accrual has been made for any
costs of any alternative cleanup methodology which might be imposed as a
result of the litigation.
 
  The Company and its directors have been named as defendants in two class
action lawsuits filed in the Delaware Court of Chancery by certain Reunion
stockholders, purportedly on behalf of all public stockholders of Reunion,
seeking to prevent or rescind the merger with Chatwins Group, Inc. and /or
obtain damages from Reunion, Chatwins and the directors of Reunion on account
of the merger. The lawsuit alleges breaches of fiduciary duty by the
defendants in setting the exchange ratio of the merger. Reunion believes the
exchange ratio fixed for the merger fairly reflected the relative values of
Chatwins and Reunion when the merger terms were agreed. Reunion therefore
believes that these lawsuits are without merit and intends to pursue their
dismissal vigorously.
 
                                       8
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
GENERAL
 
  The Company's principal operations are in the plastic products industry. The
Company, through its wholly owned subsidiary Oneida Rostone Corp. ("ORC"),
manufactures high volume, precision plastic products and provides engineered
plastic services. As part of its ongoing growth strategy, the Company
regularly considers additional acquisitions in the plastics industry to
increase its customer base and expand its product offerings and service
capabilities. In addition, the Company may consider acquisitions in other
industries. The Company participates in the wine grape agriculture industry
through its equity investment in the Juliana Preserve joint venture.
 
  The Company and Chatwins Group, Inc., a Delaware corporation that owns 38%
of the issued and outstanding shares of common stock of the Company ("CGI" or
"Chatwins"), have executed a merger agreement providing for a stock-for-stock
merger of CGI with and into the Company. The Company is in the process of
negotiating the terms of a commitment letter from potential lenders to finance
the merger and the ongoing operations of the Company including Chatwins.
Delays in these discussions caused the Company to adjourn, until September 1,
1998, the portion of its August 4 stockholders' meeting that was to vote upon
this merger. The Company anticipates that the necessary financing will be
arranged so that the requisite approval of the stockholders can be sought and
the merger consummated later this year. There can be no assurances that these
transactions will be arranged, approved or consummated.
 
RESULTS OF CONTINUING OPERATIONS
 
 Three months ended June 30, 1998
 
  ORC: Revenues and operating income of ORC were $24.7 million and $1.0
million, respectively, for the three months ended June 30, 1998. This compares
to revenues and operating income of $23.5 million and $0.8 million,
respectively, for the three months ended June 30, 1997.
 
  The 5.1% increase in revenues is attributable to increased sales from new
customer programs at ORC's subsidiary in Ireland, partially offset by lower
sales at certain U.S. operations. Tooling sales for the three months ended
June 30, 1998 were $1.9 million, versus tooling sales of $1.1 million for the
prior year period. During the second quarter of 1997 ORC experienced a one
month strike at its Rostone division. Although the Company used replacement
and temporary workers during the strike, resultant effects of the strike were
such that sales and operating income were approximately $2.0 million and $1.0
million less that expected for the second quarter of 1997. ORC backlog totaled
$21.7 million at June 30, 1998, compared to backlog of $21.9 million at
December 31, 1997 and backlog of $22.1 million at June 30, 1997.
 
  Cost of sales totaled $21.3 million, or 86.2% of net sales, for the three
months ended June 30, 1998 compared to $20.3 million, or 86.4% of net sales
for the three months ended June 30, 1997 . As a result of the increase in
sales, gross margins increased to $3.4 million for the three months ended June
30, 1998 from $3.2 million in the prior year period.
 
  Selling, general and administrative expenses were $2.4 million for the three
months ended June 30, 1998, compared to $2.4 million for the three months
ended June 30, 1997. Operating income was $1.0 million for the three months
ended June 30, 1998 compared to $0.8 million in the comparable 1997 period.
Operating income for the 1997 period was adversely affected by approximately
$1.0 million by the effects of the one month strike as discussed above.
 
                                       9
<PAGE>
 
  CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE: Corporate general and
administrative expenses, consisting primarily of executive and administrative
salaries and benefits, professional fees and other public company costs,
totaled $0.6 million for the three months ended June 30, 1998 compared to $0.5
million for the three months ended June 30, 1997.
 
  OTHER INCOME AND (EXPENSE): Interest expense was $0.8 million for the three
months ended June 30, 1998 compared to $0.8 million for the prior year period.
The Company recorded a charge of $8.8 million during the three months ended
June 30, 1998 to record entry of a judgment in the Company's litigation with
Bargo Energy Company. The Juliana Preserve results are seasonal with the
majority of revenues and expenses realized after harvest in the fourth
quarter. The Company recognized break-even results during the three months
ended June 30, 1998 from its equity interest in the Preserve.
 
  The Company recognized loss from continuing operations of $9.3 million
during the three months ended June 30, 1998 compared to net loss of $0.4
million for the comparable prior year period.
 
SIX MONTHS ENDED JUNE 30, 1998
 
  ORC: Revenues and operating income of ORC were $51.1 million and $2.5
million, respectively, for the six months ended June 30, 1998. This compares
to revenues and operating profit of $48.1 million and $2.2 million,
respectively, for the six months ended June 30, 1997.
 
  The 6.2% increase in revenues is attributable to increased sales from new
customer programs at ORC's subsidiary in Ireland, partially offset by lower
sales at certain U.S. operations. Tooling sales for the six months ended June
30, 1998 were $3.7 million, versus tooling sales of $2.5 million for the prior
year period. During the second quarter of 1997 ORC experienced a one month
strike at its Rostone division. Although the Company used replacement and
temporary workers during the strike, resultant effects of the strike were such
that sales and operating income were approximately $2.0 million and $1.0
million less than expected for the second quarter of 1997. ORC backlog totaled
$21.7 million at June 30, 1998, compared to backlog of $21.9 million at
December 31, 1997 and backlog of $22.1 million at June 30, 1997.
 
  Cost of sales totaled $43.7 million, or 85.5% of net sales, for the six
months ended June 30, 1998 compared to $41.1 million, or 85.3% of net sales
for the six months ended June 30, 1997. As a result of the increase in sales,
gross margins increased to $7.4 million for the six months ended June 30, 1998
from $7.1 million in the prior year period.
 
  Selling, general and administrative expenses were $4.9 million for the six
months ended June 30, 1998, compared to $4.8 million for the six months ended
June 30, 1997. Operating income was $2.5 million for the six months ended June
30, 1998 compared to $2.2 million in the comparable 1997 period. Operating
Income for the 1997 period was adversely effected by approximately $1.0
million by the effects of the one month strike as discussed above.
 
  CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE: Corporate general and
administrative expenses, consisting primarily of executive and administrative
salaries and benefits, professional fees and other public company costs,
totaled $1.1 million for the six months ended June 30, 1998 compared to $1.0
million for the six months ended June 30, 1997.
 
  OTHER INCOME AND (EXPENSE): Interest expense was $1.5 million for the six
months ended June 30, 1998 compared to $1.5 million for the prior year period.
The Company recorded a charge of $8.8 million during the six months ended June
30, 1998 to record entry of a judgment in the Company's litigation with Bargo
Energy Company. The Juliana Preserve results are seasonal with the majority of
revenues and expenses realized after harvest in the fourth quarter. The
Company recognized break-even results during the six months ended June 30,
1998 from its equity interest in the Preserve.
 
  The Company recognized a loss from continuing operations of $9.1 million
during the six months ended June 30, 1998 compared to a loss of $0.1 million
for the comparable prior year period.
 
                                      10
<PAGE>
 
DISCONTINUED OPERATIONS
 
  After the sale of its oil and gas operations in May 1996, the Company
retained certain oil and gas properties in Louisiana because of litigation
concerning environmental matters. The Company is in the process of
environmental remediation of these properties. Based on further testing
requested by the Louisiana Office of Conservation in connection with
consideration of the Company's remediation plan for approval, the Company's
environmental consultants have estimated that the total costs to remediate the
site are approximately $2.0 million. The Company has increased its existing
accrual for its portion of the estimated remaining remediation costs through a
$1.2 million charge to discontinued operations in the 1998 second quarter.
 
LIQUIDITY AND CAPITAL RESOURCES
 
 Summary of 1998 Activities
 
  Cash and cash equivalents totaled $0.3 million at June 30, 1998. During the
six months ended June 30, 1998, cash decreased $1.8 million, with $1.8 million
provided by operations, $2.3 million used in investing activities and $1.3
million used in financing activities.
 
  INVESTING ACTIVITIES: Capital expenditures were $2.3 million in the six
months ended June 30, 1998.
 
  FINANCING ACTIVITIES: Principal payments reduced long-term obligations by
$1.5 million in the six months ended June 30, 1998. Net revolving loan
borrowings in the period totaled $0.1 million. Proceeds from exercise of stock
options and warrants were $0.1 million.
 
 Factors Affecting Future Liquidity
 
  Because of various restrictions included in the Company's loan arrangements,
management must separately consider liquidity and financing for corporate
requirements, ORC and agricultural operations.
 
  CORPORATE: Corporate expenses, including salaries and benefits, professional
fees and other public company costs, are expected to approximate $1.6 million
annually. Legal costs to contest the class action securities litigation
against the Company and to appeal the Bargo litigation and cash required to
collateralize the Bargo appeal bond as described below will add to corporate
requirements. In addition, a significant portion of the $1.6 million accrued
for environmental remediation of the Louisiana properties, described herein,
is expected to be expended during the next twelve months. The Company's source
of funds for these expenses and for future acquisitions, other than from
additional borrowings, are from cash balances and permitted payments by ORC.
The Corporate cash balance at June 30, 1998 was $0.3 million.
 
  ORC's credit facility with Congress Financial Corporation ("Congress")
limits payments to Reunion by ORC. If certain levels of availability (as
defined in the loan agreements) are maintained, ORC is permitted to pay
Reunion annual management fees of up to $0.3 million, dividends on preferred
stock of up to $0.6 million, and tax sharing payments of up to 50% of the tax
savings realized by ORC because of Reunion's net operating loss carryovers.
There can be no assurances that ORC will be able to maintain the required
levels of availability and be permitted to make the management fee and tax
sharing fee payments to Reunion. In any event, the maximum amount of such
payments is not expected to be sufficient for Reunion's corporate operating
and debt service requirements.
 
  Without additional financing, management believes that the Company will not
have sufficient resources to meet its corporate expenses and legal and
environmental costs as they become due over the next twelve months. In the
Company's discussions with potential lenders for new financing arrangements in
connection with the merger with Chatwins, the Company is pursuing financing
terms that will not include restrictions on transfers between it and its
subsidiaries. If the merger with Chatwins and related financing do not
materialize, the Company will consider alternative funding sources. Due to the
delay of the merger financing Reunion is presently investigating temporary
financing alternatives.
 
                                      11
<PAGE>
 
  ORC: ORC borrows for its operating requirements under a credit facility with
Congress. The credit facility as amended provides for maximum borrowings of
$20.0 million under a term loan in the original amount of $7.7 million and
revolving loans based on the eligible balances of accounts receivable and
inventory. Management believes that ORC's cash flow from operations, together
with this credit facility and permitted levels of capital and operating
leases, will be sufficient for ORC's operating requirements, including capital
expenditures and debt service, over the next twelve months. At June 30, 1998
ORC had $1.1 million in revolving credit availability.
 
  AGRICULTURAL OPERATIONS: The Company has agreed in principle with its joint
venture partner, Washington Federal Savings, ("WFS"), for the Company to buy
the WFS 28.3% interest in the Juliana Preserve joint venture for $5.86
million. The Company also plans to undertake a limited wine grape development
effort, which management believes will enhance the value of the property.
Based on projections of farming costs and capital requirements for the 1998
crop year, the Company believes that it will need to obtain outside financing
to fund the purchase of the WFS interests and development effort. The Company
is working with present and prospective lenders to refinance existing
agricultural debt and fund the WFS interest acquisition and development
efforts, but there can be no assurances that such financing will be arranged.
Collateral for any new borrowings is expected to be provided by the underlying
agricultural assets and vineyard acreage. Management expects the combination
of farming revenues plus prospective borrowings to be sufficient to fund the
agricultural operations over the next twelve months.
 
CONTINGENCIES AND UNCERTAINTIES
 
  On April 24, 1998, a jury in state district court in Harris County, Texas
returned jury verdict findings that Bargo Energy Company had a right to
terminate a November 1995 stock purchase agreement with Reunion and that
Reunion fraudulently induced Bargo into entering into the agreement. The
November 1995 stock purchase agreement concerned the sale of Reunion's
subsidiary, REC, which operated Reunion's discontinued oil and gas business.
The jury recommended that an award of $5.0 million in punitive damages be
assessed against Reunion. In July 1998, the court entered judgment affirming
the $5.0 million jury verdict and awarding approximately $3.0 million in
attorneys' fees and costs. Reunion maintained at trial and continues to
maintain that all requirements to closing under the contract were met, and
that Bargo was required to close the transaction. Reunion also maintains that
no evidence sufficient to support a jury finding of fraud or the related
punitive damages finding was presented at trial. Reunion intends to continue
to vigorously oppose this judgment, including by appeal if necessary. Once the
final activities in the trial court have been concluded, Reunion will be
required to post a bond in the approximate amount of $8.8 million, including
one year's anticipated interest, in order to appeal. Although management
believes, based on consultation with counsel, that it is more likely than not
that the judgment will be overturned on appeal, Reunion has recorded an
accrual for the amount of the bond with a charge to continuing operations in
the 1998 second quarter in accordance with generally accepted accounting
principles.
 
  In early 1996, the State of California Franchise Tax Board initiated an
audit of the Company's franchise tax returns for the years 1991, 1992 and
1993. In October 1996, the Company received a formal notice of assessment from
the taxing authority in the aggregate amount of $0.7 million plus interest. Of
this amount, $0.6 million results from the auditor's conclusion that income
from gains on sales of certain Canadian assets in 1991 should be reclassified
from nonbusiness to business income. The Company believes its classification
of such income was correct, and has appealed the assessment of tax. If the
Company's positions prevail on this issue, management believes that the
amounts due would not exceed amounts previously paid or provided for. No
additional accruals have been made for any amounts that may be due if the
Company does not prevail because the outcome cannot be determined. The Company
recorded a provision for $0.1 million for certain other proposed adjustments.
 
  In connection with the sale of REC, the Company retained certain oil and gas
properties in Louisiana because of litigation concerning environmental
matters. The Company is in the process of environmental remediation under a
plan approved by the Louisiana Office of Conservation. The Company has
recorded an
 
                                      12
<PAGE>
 
accrual for its proportionate share of the remaining estimated costs to
remediate the site based on plans and estimates developed by the environmental
consultants hired by the Company. During the quarter ended June 30, 1998 the
Company increased this accrual by a charge of $1.2 million to discontinued
operations, based on revised estimates of the remaining remediation costs. At
June 30, 1998, the balance accrued for these remediation costs is
approximately $1.6 million which is recorded in other current liabilities on
the accompanying balance sheet. Owners of a portion of the property have
objected to the Company's proposed cleanup methodology and have filed suit to
require additional procedures. The Company is contesting this litigation, and
believes its proposed methodology is well within accepted industry practice
for remediation efforts of a similar nature. No accrual has been made for any
costs of any alternative cleanup methodology which might be imposed as a
result of the litigation.
 
  The Company and its directors have been named as defendants in two class
action lawsuits filed in the Delaware Court of Chancery by certain Reunion
stockholders, purportedly on behalf of all public stockholders of Reunion,
seeking to prevent or rescind the merger with Chatwins Group, Inc. and /or
obtain damages from Reunion, Chatwins and the directors of Reunion on account
of the merger. The lawsuit alleges breaches of fiduciary duty by the
defendants in setting the exchange ratio of the merger. Reunion believes that
the exchange ratio fixed for the merger fairly reflected the relative value of
Chatwins and Reunion when the merger terms were agreed. Reunion therefore
believes that these lawsuits are without merit and intends to pursue their
dismissal vigorously.
 
                          PART II--OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
  The Company filed suit in the 125th Judicial District Court of Harris
County, Texas against Bargo and its general partners, Chisos Corporation,
Austin Resources Corporation, Shearwave, Inc., Brazos Oil & Gas Corporation,
and Schroder Oil Financing & Investment Company, on January 16, 1996 for
damages and relief arising out of Bargo's repudiation of its agreement to
purchase all outstanding shares of the capital stock of the Company's
subsidiary, REC. Bargo had agreed to pay the Company $15.1 million for REC's
capital stock, subject to certain potential adjustments in the purchase price
as set forth in the Stock Purchase Agreement between the Company and Bargo and
had deposited $0.5 million with a contractual escrow agent in accordance with
the terms of the stock purchase agreement. The Company alleged in its
complaint that Bargo tortiously interfered with a prospective stock purchase
agreement with another purchaser of REC's stock, and then wrongfully
repudiated its agreement to purchase REC's stock. The Company also asserted
claims against Bargo for breach of contract and breach of duty of good faith
and fair dealing, and sought damages under these theories of liability. Bargo
also filed suit against the Company claiming that the Company, its investment
bankers, and certain individuals fraudulently misrepresented information and
fraudulently induced Bargo into signing the Stock Purchase Agreement. Bargo
also asserted claims for breach of contract and warranty, return of its
escrow, and for unspecified damages under these theories of liability. The
cases were consolidated in the 334th Judicial District Court of Harris County,
Texas, and the consolidated case was realigned with the Company as plaintiff.
 
  On April 24, 1998, after a three week trial, a jury returned jury verdict
findings that Bargo had a right to terminate the stock purchase agreement with
Reunion and that Reunion fraudulently induced Bargo into entering into the
agreement. The jury recommended that an award of $5.0 million in punitive
damages be assessed against Reunion. In July 1998, the court entered judgment
affirming the $5.0 million jury verdict and awarding approximately $3.0
million in attorneys' fees and costs. Reunion maintained at trial and
continues to maintain that all requirements to closing under the contract were
met, and that Bargo was required to close the transaction. Reunion also
maintains that no evidence sufficient to support a jury finding of fraud or
the related punitive damages finding was presented at trial. Reunion intends
to continue to vigorously oppose this judgment, including by appeal if
necessary. Once the final activities in the trial court have been concluded,
Reunion will be required to post a bond in the approximate amount of $8.8
million, including one year's anticipated interest, in
 
                                      13
<PAGE>
 
order to appeal. Management believes, based on consultation with counsel, that
it is more likely than not that any judgment based on a finding of fraud, the
award of attorneys' fees based on a finding of fraud and punitive damages
would be overturned on appeal. If the judgment is not overturned on appeal,
the Company intends to pay its obligations with respect to such judgment out
of the proceeds of the refinancing which is anticipated to be consummated in
connection with the proposed merger with Chatwins. If such merger or
refinancing were not consummated, however, the Company would be obligated to
seek alternative funding sources, including a sale of assets.
 
  The Company and its directors have been named as defendants in two class
action lawsuits filed in the Delaware Court of Chancery by certain Reunion
stockholders, purportedly on behalf of all public stockholders of Reunion,
seeking to prevent or rescind the merger with Chatwins and /or obtain damages
from Reunion, Chatwins and the directors of Reunion on account of the merger.
The lawsuit alleges breaches of fiduciary duty by the defendants in setting
the exchange ratio of the merger. Reunion believes that the exchange ratio
fixed for the merger fairly reflected the relative values of Chatwins and
Reunion when the merger terms were agreed. Reunion therefore believes that
these lawsuits are without merit and intends to pursue their dismissal
vigorously.
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 
  (a) Exhibits
 
<TABLE>
   <C>  <S>
    2.1 --Merger Agreement, dated as of May 31, 1998, between Reunion
         Industries, Inc. and Chatwins Group, Inc. (included as Annex A to the
         Proxy Statement/Prospectus) Incorporated by reference to Registration
         Statement on Form S-4 (No. 333-56153)
    2.2 --1998 Stock Option Plan of Reunion Industries, Inc. (included as Annex
         B to Proxy Statement/Prospectus) Incorporated by reference to
         Registration Statement on Form S-4
         (No. 333-56153)
   11.1 --Computation of Earnings Per Share
   27   --Financial Data Schedule
</TABLE>
 
  (b) Current Reports on Form 8-K
 
  During the quarter ended June 30, 1998, the Company filed no reports on Form
8-K.
 
                                      14
<PAGE>
 
                                   SIGNATURE
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
                                          REUNION INDUSTRIES, INC.
                                          (Registrant)
 
                                          By  /s/ Richard L. Evans
                                            -----------------------------------
                                            Richard L. Evans
                                            Executive Vice President and Chief
                                            Financial Officer (Principal
                                            Financial and Accounting Officer)
 
Date: August 13, 1998
 
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