U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

                  For the quarterly period ended June 30, 1998

                         Commission File Number 00-22690

                          CONSOLIDATED STAINLESS, INC.

                        State of Incorporation: Delaware

                 IRS Employer Identification Number: 59-1669166

                             1601 East Amelia Street
                             Orlando, Florida 32803

                                 (407) 896-4000

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                               Title of each class
                               -------------------
                                  Common Stock
                                    Warrants

      Indicate by check mark whether the issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 |_|      NO |X|

      As of August 7, 1998, Consolidated Stainless, Inc. had outstanding
4,610,329 shares of Common Stock, par value $.01 per share.

      Indicate by check mark whether the issuer has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution under a plan confirmed by a
court.

                               YES |_|      NO |X|
<PAGE>

                                TABLE OF CONTENTS

Item                                                                    Page(s)

                                     Part I

                              Financial Information

1. FINANCIAL STATEMENTS

      Balance Sheets ................................................   1  -  2

      Statements of Operations ......................................      3

      Statements of Cash Flows ......................................      4

      Notes to Financial Statements .................................   5  -  7

2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
   CONDITION AND RESULTS OF OPERATIONS ..............................   8  -  12

                                     Part II

                                Other Information


1. LEGAL PROCEEDINGS ................................................  13  -  15

2. OTHER INFORMATION ................................................     15

6. EXHIBITS AND REPORTS ON FORM 8-K .................................     16
<PAGE>

                                     PART I
                              Financial Information

Item 1. Financial Statements

                          CONSOLIDATED STAINLESS, INC.
                             (DEBTOR-IN-POSSESSION)
                                 BALANCE SHEETS
                                   (UNAUDITED)

                                                      6/30/98         12/31/97
                                                   ============================

ASSETS
CURRENT:
  Cash and cash equivalents                        $   208,578      $     5,648
  Accounts receivable:
    Trade, less allowance for possible losses
      of $444,596 and $377,748                       3,123,463        6,074,981
    Other                                               84,792          175,229
  Inventories                                       11,583,115       17,434,164
  Prepaid expenses                                     154,874          326,151
  Deferred financing costs, less accumulated
    amortization of $589,721                                --           79,167
  Notes receivable                                     267,931          254,294
  Deferred income taxes                                398,042          398,042
                                                   ----------------------------
    TOTAL CURRENT ASSETS                            15,820,795       24,747,676

PROPERTY AND EQUIPMENT, less
  accumulated depreciation and amortization         14,322,264       15,123,911

OTHER ASSETS:
  Due from stockholders                                 49,341           48,388
  Other                                                189,592          240,531
                                                   ----------------------------
    TOTAL OTHER ASSETS                                 238,933          288,919
                                                   ----------------------------
    TOTAL ASSETS                                   $30,381,992      $40,160,506
                                                   ============================

             See the accompanying notes to the financial statements.


                                      -1-
<PAGE>

                          CONSOLIDATED STAINLESS, INC.
                             (DEBTOR-IN-POSSESSION)
                                 BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                            6/30/98           12/31/97
                                                         ===============================
<S>                                                      <C>                <C>         
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES:
  Accounts payable                                       $    204,420       $     70,897
  Professional fees payable                                   753,715             47,707
  Book overdrafts                                             105,794             60,844
  Accrued expenses:
    Payroll and related taxes                                 204,912             76,425
    Interest                                                  100,980             79,526
    Other                                                     171,872             20,850
  Notes Payable                                                12,440                 --
                                                         -------------------------------
      TOTAL CURRENT LIABILITIES                             1,554,133            356,249

LIABILITIES SUBJECT TO COMPROMISE                          32,001,755         37,967,664
                                                         -------------------------------
      TOTAL LIABILITIES                                    33,555,888         38,323,913

COMMITMENTS AND CONTIGENCIES                                       --                 --

STOCKHOLDERS' EQUITY (DEFICIT):
  Preferred stock $.01 par - shares authorized
    2,000,000; none issued                                         --                 --
  Common stock $.01 par - shares authorized
    15,000,000; issued and outstanding 4,610,329               46,103             46,103
  Additional paid-in capital                                8,064,636          8,064,636
  Deficit                                                 (11,284,635)        (6,274,146)
                                                         -------------------------------
      TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                 (3,173,896)         1,836,593
                                                         -------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)       $ 30,381,992       $ 40,160,506
                                                         ===============================
</TABLE>

             See the accompanying notes to the financial statements.


                                      -2-
<PAGE>

                          CONSOLIDATED STAINLESS, INC.
                             (DEBTOR-IN-POSSESSION)
                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                        Three Months Ended                     Six Months Ended
                                                      6/30/98          6/30/97             6/30/98            6/30/97   
                                                   ==============================       =============================== 
<S>                                                <C>               <C>                <C>                <C>         
SALES                                              $ 4,880,380       $ 14,005,738       $ 11,073,836       $ 27,377,422

COST OF SALES                                        4,182,415         12,306,658          9,893,529         24,252,266
                                                   ------------------------------       ------------------------------- 
      Gross profit                                     697,965          1,699,080          1,180,307          3,125,156

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES         1,250,647          1,837,178          2,747,350          3,579,277
                                                   ------------------------------       ------------------------------- 
      Loss from operations                            (552,682)          (138,098)        (1,567,043)          (454,121)

OTHER INCOME (EXPENSES):
  Interest                                            (628,652)          (875,533)        (1,341,960)        (1,716,155)
  Other                                                 11,063             45,556             90,117             59,048
                                                   ------------------------------       ------------------------------- 
                                                      (617,589)          (829,977)        (1,251,843)        (1,657,107)
                                                   ------------------------------       ------------------------------- 

      Loss before reorganization costs and
        taxes on income (benefit)                   (1,170,271)          (968,075)        (2,818,886)        (2,111,228)

REORGANIZATION COSTS                                 1,436,161                 --          2,189,414                 -- 
                                                   ------------------------------       ------------------------------- 
      Loss before taxes on income (benefit)         (2,606,432)          (968,075)        (5,008,300)        (2,111,228)

TAXES ON INCOME (BENEFIT)                                2,064           (308,984)             2,189           (675,300)
                                                   ------------------------------       ------------------------------- 
NET LOSS                                           $(2,608,496)      $   (659,091)      $ (5,010,489)      $ (1,435,928)
                                                   ==============================       =============================== 

BASIC LOSS PER SHARE                               $     (0.57)      $      (0.15)      $      (1.09)      $      (0.32)
                                                   ==============================       =============================== 
DILUTED LOSS PER SHARE                             $     (0.57)      $      (0.15)      $      (1.09)      $      (0.32)
                                                   ==============================       =============================== 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
  OUTSTANDING                                        4,610,329          4,473,804          4,610,329          4,469,857
                                                   ==============================       =============================== 
</TABLE>

             See the accompanying notes to the financial statements.


                                      -3-
<PAGE>

                          CONSOLIDATED STAINLESS, INC.
                             (DEBTOR-IN-POSSESSION)
                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                       Six Months Ended
                                                                   6/30/98          6/30/97
                                                                -----------------------------
<S>                                                             <C>               <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                      $(5,010,489)      $(1,435,928)
  Adjustments to reconcile net loss to net cash
    provided by (used for) operating activities:
      Depreciation                                                  801,010           810,690
      Amortization                                                   79,167           191,262
      Loss on disposal of property and equipment                        637            14,525
      Deferred income taxes                                              --          (675,593)
      Cash provided by (used for):
        Accounts receivable                                       3,041,955        (2,447,460)
        Due from stockholders                                          (953)           (9,251)
        Inventories                                               5,851,049          (798,220)
        Refundable income taxes                                          --            27,475
        Prepaid expenses                                            171,277          (323,422)
        Accounts payable                                            435,003         3,763,228
        Interest payable                                            627,304                --
        Accruals                                                    265,555           (61,429)
                                                                -----------------------------
Net cash provided by (used for) operating activities              6,261,515          (944,123)
                                                                -----------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                     --          (483,103)
  Proceeds from the sale of property and equipment                       --           345,298
  Increase in notes receivable                                      (13,637)               --
  Increase in other assets                                           50,939           (86,225)
                                                                -----------------------------
Net cash provided by (used for) investing activities                 37,302          (224,030)
                                                                -----------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Increase (decrease) in book overdrafts                             44,950           (89,284)
  Proceeds from notes payable                                        12,440                --
  Net proceeds (repayments) under revolving line of credit       (6,067,598)        6,435,688
  Repayments of long-term debt                                      (55,216)       (4,185,641)
  Repayments of capital lease obligations                           (30,463)         (430,621)
  Deferred financing costs                                               --          (185,484)
                                                                -----------------------------
Net cash provided by (used for) financing activities             (6,095,887)        1,544,658
                                                                -----------------------------

Net increase in cash and cash equivalents                           202,930           376,505

CASH AND CASH EQUIVALENTS, beginning of period                        5,648           273,914
                                                                -----------------------------
CASH AND CASH EQUIVALENTS, end of period                        $   208,578       $   650,419
                                                                =============================
</TABLE>


             See the accompanying notes to the financial statements.


                                      -4-
<PAGE>

                          CONSOLIDATED STAINLESS, INC.
                             (DEBTOR-IN-POSSESSION)

                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 - REORGANIZATION AND BASIS OF PRESENTATION

The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q, and do not include all of the
information and disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for the year
ended December 31, 1996. Note: A Form 10-K for the year ended December 31, 1997
has not been prepared at the current time, due to the excessive financial burden
it would place on the Company. The accompanying financial statements have not
been examined by an independent accountant in accordance with generally accepted
auditing standards, but in the opinion of management, such financial statements
include all adjustments, consisting only of normal recurring adjustments and
accruals, to fairly report the Company's financial position and results of
operations. The results of operations for the interim periods shown in this
report are not necessarily indicative of results to be expected for the fiscal
year.

On December 15, 1997 (the "Petition Date"), the Company filed a voluntary
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code ("Chapter 11") in the United States Bankruptcy Court for the District of
Delaware. Management determined that filing the Chapter 11 petition would allow
the Company the needed time and flexibility to restructure its operations and
provide the time and protection necessary to restructure the Company's funding
sources.

Since the Petition Date, the Company has continued in possession of its assets
and, as debtor-in-possession, is authorized to operate and manage its business
and enter into all transactions (including obtaining services, inventories and
supplies) that it could have entered into in the ordinary course of business
without approval of the Bankruptcy Court. A statutory Creditors' Committee has
been appointed in the Chapter 11 case.

In a Chapter 11 filing, substantially all liabilities as of the Petition Date
are subject to compromise or other treatment under a plan of reorganization. For
financial reporting purposes, those liabilities and obligations whose
disposition is dependent on the outcome of the Chapter 11 filing have been
segregated and classified as liabilities subject to compromise under
reorganization proceedings in the accompanying balance sheet (Note 2).
Generally, actions to enforce or otherwise effect payment of all pre-Chapter 11
liabilities as well as all pending litigation against the Company are stayed
while the Company continues its business operations as Debtor-in-Possession.
Schedules have been filed by the Company with the Bankruptcy Court setting forth
its assets and liabilities as of the Petition Date as reflected in the Company's
accounting records. Differences between amounts reflected in such schedules and
claims filed by creditors will be investigated and either resolved or
adjudicated before the Bankruptcy Court. The ultimate amount of and settlement
terms for such liabilities are subject to a plan of reorganization and
accordingly are not presently determinable. 


                                      -5-
<PAGE>

Under the Bankruptcy Code, the Company may elect to assume or reject real estate
leases and employment contracts, subject to Bankruptcy Court approval. The
Company will continue to analyze its executory contracts and may assume or
reject additional contracts.

The accompanying financial statements have been prepared in conformity with
principles of accounting applicable to a going concern, which contemplate the
realization of assets and the satisfaction of liabilities in the normal course
of business. As a result of the Chapter 11 filing and circumstances relating to
this event, such realization of assets and satisfaction of liabilities is
subject to uncertainty. A plan of reorganization could materially change the
amounts reported in the accompanying financial statements, which do not give
effect to adjustments to the carrying values of assets and liabilities, which
may be necessary as a consequence of a plan of reorganization. The Company's
ability to continue as a going concern is contingent upon, among other things,
its ability to formulate a plan of reorganization that will be confirmed by the
Bankruptcy Court, to achieve satisfactory levels of profitability and cash flow
from operations, to maintain compliance with the Post-Petition Loan and Security
Agreement, its modifications and extensions (collectively, the "DIP Financing
Agreement") and the ability to obtain sufficient financing sources to meet
future obligations.

NOTE 2 - LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS

Liabilities subject to compromise under reorganization proceedings consist of
the following:

                                           June 30, 1998       December 31, 1997
                                           -------------       -----------------

Priority debt (including interest):         $   721,172           $   707,629
                                            ===========           ===========
                                                                 
Secured liabilities:                                             
     Borrowings under revolving                                  
         credit facility                     11,171,112            17,238,710
                                                                 
     Mortgages, notes payable and                                
         capital lease obligations                               
         (including interest)                                    
                                              9,232,675             9,054,795
                                            -----------           -----------
     Subtotal                                20,403,787            26,293,505
                                            ===========           ===========
                                                                 
Unsecured liabilities:                                           
     Trade and other payables                                    
         (including interest)                 7,875,887             8,125,084
                                                                 
     Convertible subordinated debt                               
         (including interest)                 3,000,909             2,841,446
                                            -----------           -----------
     Subtotal                                10,876,796            10,966,530
                                            ===========           ===========
                                                                 
Total liabilities subject to compromise     $32,001,755           $37,967,664
                                            ===========           ===========


                                      -6-
<PAGE>

Any plan of reorganization ultimately approved by the Company's pre-petition
creditors and shareholders and confirmed by the Bankruptcy Court may materially
change the amounts and terms of these pre-petition liabilities. Such amounts are
estimated as of June 30, 1998 and December 31, 1997, and the Company anticipates
that claims filed with the Bankruptcy Court by the Company's creditors will be
reconciled to the Company's financial records. The additional liability arising
from this reconciliation process, if any, is not subject to reasonable
estimation, and accordingly, no provision has been recorded for these possible
claims. The termination of other contractual obligations and the settlement of
disputed claims may create additional pre-petition liabilities. Such amounts, if
any, will be recognized in the balance sheet as they are identified and become
subject to reasonable estimation.

NOTE 3 - EARNINGS (LOSS) PER COMMON SHARE

The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS 128") as of January 1, 1998. SFAS 128 establishes
new standards for computing and presenting earnings per share ("EPS").
Specifically, SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS, requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share is computed by dividing net income by the sum of the weighted
average number of common shares outstanding for the period plus the assumed
exercise of all dilutive securities. However, in the case of a loss per share,
dilutive securities outstanding would be antidilutive and would therefore be
excluded from the computation of diluted earnings per share.

The weighted average number of shares used to calculate basic earnings per share
was 4,610,329 and 4,473,804 for the three months ended June 30, 1998 and 1997,
respectively, and 4,610,329 and 4,469,857 for the six months ended June 30, 1998
and 1997, respectively. Diluted earnings per share were the same as basic
earnings per share.

NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION

The Company incurred long-term debt and capital lease obligations of $0 and
$66,835 in connection with the purchase of property and equipment during the six
months ended June 30, 1998 and 1997, respectively.


                                      -7-
<PAGE>

                          Consolidated Stainless, Inc.

Item 2.              Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

The statements contained herein that are not historical facts may be forward
looking statements. The forward looking statements are subject to certain risks
and uncertainties, including without limitation those identified below, which
could cause actual results to differ materially from historical results or those
anticipated. Readers are cautioned not to place undue reliance on these forward
looking statements, which speak only as of their dates.

The following factors could cause actual results to differ materially from
historical results or those anticipated: failure to maintain adequate working
capital financing; decisions made in the context of the Company's pending
bankruptcy proceedings which are adverse to the Company; adverse economic
conditions, the impact of competitive products and pricing, product demand and
acceptance risks, raw material and other increased costs, customer delays or
difficulties in the production of products, and other risks detailed from time
to time in Consolidated Stainless, Inc.'s Securities and Exchange Commission
filings.

Proceedings Under Chapter 11

On December 15, 1997, (the "Petition Date"), the Company commenced a
reorganization case by filing a voluntary petition (the "Chapter 11 Petition")
for relief under chapter 11 ("Chapter 11") of title 11 of the United States Code
(as amended from time to time, the "Bankruptcy Code") in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), case
number 97-2593 (JJF). Management determined that filing of the Chapter 11
Petition would allow the needed time and flexibility to restructure the
Company's operations and provide the time and protection necessary to
restructure the Company's funding sources.

Since the Petition Date, the Company has continued in possession of its assets
and, as debtor-in-possession, is authorized to operate and manage its business
and enter into all transactions (including obtaining services, inventories and
supplies) that it could have entered into in the ordinary course of business
without approval of the Bankruptcy Court. A statutory Creditors' Committee has
been appointed in the Chapter 11 case.

Subsequent to the filing of the Chapter 11 Petition, the Company sought and
obtained several orders from the Bankruptcy Court which were intended to
stabilize its business. The most significant of these orders: (1) authorizing
the Company to obtain secured post-petition financing through the Post-Petition
Loan and Security Agreement, its modifications and extensions (collectively, the
"DIP Financing Agreement"); (2) authorized payment of certain pre-petition
liabilities, principally pre-petition wages and employee benefits; (3)
authorizing the Company to reject the employment agreement of the Executive Vice
President and Chief Financial Officer; (4) authorizing the Company to reject the
lease of the non-residential real property located in Houston, Texas, thereby
allowing the Company to reduce its administrative costs, by consolidating its
warehouse needs to its facilities in Florida; (5) authorizing the Company to
reject the lease of the 


                                      -8-
<PAGE>

non-residential real property located in Lombard, Illinois, and enter into a new
lease strictly for a sales office in Addison, Illinois, thereby allowing the
Company to reduce its administrative costs, by consolidating its warehouse needs
to its facilities in Florida; (6) authorizing the appointment of Phoenix
Management Services as the Company's turnaround management consultant and to
assist in the development and the formulation of a Plan of Reorganization.

Due to the Creditors' Committee's dissatisfaction with the Company's initial
business plan and the results of the Company's internal investigation in which
it was discovered that the Company's Chief Executive Officer, on his own behalf,
was involved in organizing two other stainless steel companies subsequent to the
Chapter 11 filing, the United States Trustee and the unsecured creditors'
committee had made separate motions to the Bankruptcy Court for the appointment
of a Chapter 11 trustee. As a result of these motions, a global settlement was
reached whereby an independent examiner would be engaged to perform an
investigation limited to specific areas and a turnaround consultant would be
retained as Co-Chief Executive Officer to assist in the operation and assessment
of the Company's business operations (See Part II - Other Information, Item 1 -
Legal Proceedings). Additionally, as a result of the Company's change in
management, a new business plan is currently under development.

The Company's financial statements have been prepared on a going concern basis,
which contemplates realization of assets and satisfaction of liabilities in the
normal course of business. As a result of the Chapter 11 filing and
circumstances relating to this event, such realization of assets and
satisfaction of liabilities is subject to uncertainty. A plan of reorganization
could materially change the amounts reported in the accompanying financial
statements, which do not give effect to adjustments to the carrying values of
assets and liabilities, which may be necessary as a consequence of a plan of
reorganization. The Company's ability to continue as a going concern is
contingent upon, among other things, its ability to form a plan of
reorganization that will be confirmed by the Bankruptcy Court, to achieve
satisfactory levels of profitability and cash flow from operations, to maintain
compliance with the DIP Financing Agreement and the ability to obtain sufficient
financing sources to meet future obligations.

Results of Operations

Sales for the three months ended June 30, 1998 were $4.9 million, reflecting a
65.2% decrease from the comparable period in 1997. Sales for the six months
ended June 30, 1998 were $11.1 million, resulting in a 59.6% decrease from the
six months of 1997. These decreases can be attributed to the sale of the Flow
Components division effective November 1, 1997, and the Company's announcement
of its December 15, 1997 bankruptcy filing.

Gross profit as a percentage of sales for the second quarter of 1998 increased
to 14.3%, as compared to 12.1% for the second quarter of 1997. However, for the
six months ended June 30, 1998, gross profit as a percentage of sales decreased
to 10.7% from 11.4% in the comparable period in 1997. These mixed results are
primarily due to slight market fluctuations.


                                      -9-
<PAGE>

Selling, general and administrative expenses decreased 31.9% for the three
months ended June 30, 1998 as compared with the same period in 1997 and
decreased 23.2% for the six months ended June 30, 1998 relative to the
comparable period in 1997. These decreases are due primarily to a decline in
payroll and payroll related costs resulting from a cutback in compensation
levels as well as a reduction in the workforce in 1998.

Interest expense decreased 28.2% for the second quarter of 1998 as compared with
the second quarter in 1997. For the six months ended June 30, 1998 interest
expense decreased 21.8% compared with the six months ended June 30, 1997. This
was primarily due to a decrease in the Company's indebtedness as the Company
began downsizing its operations through the sale of its Flow Components division
and reductions in inventory throughout the Company.

Reorganization costs of $1.4 million were incurred in the second quarter of 1998
and $2.2 million for the six months ended June 30, 1998 as the Company attempts
to emerge from bankruptcy. Since the Chapter 11 filing occurred on December 15,
1997, no such costs were incurred for the three months or six months ended June
30, 1997.

As a result of the foregoing factors, the net loss for the three months ended
June 30, 1998 was $2.6 million, as compared with a $0.7 million net loss
generated during the second quarter of 1997. The net loss for the six months
ended June 30, 1998 was $5.0 million as compared to $1.4 million net loss for
the comparable period in 1997. This increased loss can be primarily attributed
to a decline in sales, reorganization costs associated with the Chapter 11
filing, and no income tax benefit for 1998.

Liquidity and Capital Resources

On May 29, 1998, the Company entered into the Extension and Modification to
Post-Petition Loan and Security Agreement (the "Extension") with Mellon Bank,
N.A. ("Mellon"). The maximum borrowing amount was changed by reducing it to
$12.3 million from $13.0 million by June 15, 1998 per the Fifth Modification to
Post-Petition Loan and Security Agreement dated April 16, 1998. The advance rate
percentages for accounts receivable and inventory remain unchanged at 80% of
qualified accounts receivable and 65% of eligible inventory on pre-petition
assets, and 60% of eligible inventory on post-petition assets. In addition to
amending the maximum borrowing amount and maximum advance limits for inventory
and the over-advance, the Extension requires that the Texas and Illinois
distribution locations be closed no later than May 31, 1998, rather than April
22, 1998 and May 8, 1998, respectively. As a result of these closures, the
Company replaced its distribution facility in Illinois with a sales office in
the Chicago area. Additionally, under the Extension, the Company is no longer
required to close down its Georgia distribution facility. The Extension further
stipulates that as of June 14, 1998, rather than the previously set date of May
31, 1998, Mellon shall have no obligations to advance for any operational costs
associated with the manufacturing facilities. Finally, the Extension requires
the Company to hire a crisis manager 


                                      -10-
<PAGE>

acceptable to Mellon to assist in management of the Company (see Part II - Other
Information, Item 5 - Other Events). This Extension expired June 14, 1998.

On June 12, 1998, the Company entered into the Second Extension and Modification
to Post-Petition Loan and Security Agreement (the "Second Extension") with
Mellon Bank, N.A. ("Mellon"). The maximum borrowing amount was changed by
reducing it to $11.8 million from $12.3 million by June 26, 1998. The advance
rate percentages for accounts receivable and inventory remain unchanged. In
addition to amending the maximum borrowing amount and maximum advance limits for
inventory and the over-advance, the Second Extension stipulates that as of June
28, 1998, rather than the previously set date of June 14, 1998, Mellon shall
have no obligations to advance for any operational costs associated with the
manufacturing facilities. Additionally, the Second Extension requires that
Vincent Colistra, of Phoenix Management Services, act as Co-Chief Executive
Officer along with Ronald J. Adams (see Part II - Other Information , Item 5 -
Other Events). Finally, the Second Extension requires if the Company fails to
file a Chapter 11 Plan of Reorganization acceptable to Mellon by July 15, 1998,
Mellon shall be permitted to file and solicit acceptances to its own Chapter 11
Plan. This Second Extension expired June 28, 1998.

On June 26, 1998, the Company entered into the Third Extension and Modification
to Post-Petition Loan and Security Agreement (the "Third Extension") with Mellon
Bank, N.A. ("Mellon"). The maximum borrowing amount was changed by reducing it
to $11.0 million from $11.8 million by August 1, 1998. The advance rate
percentages for accounts receivable and inventory remain unchanged. In addition
to amending the maximum borrowing amount and maximum advance limits for
inventory and the over-advance, the Third Extension stipulates that as of July
15, 1998, rather than the previously set date per the Second Extension of June
28, 1998, Mellon shall have no obligations to advance for any operational costs
associated with the manufacturing facilities. Finally, the Third Extension
requires if the Company fails to file a Chapter 11 Plan of Reorganization
acceptable to Mellon by July 31, 1998, rather than the previously set date of
July 15, 1998, Mellon shall be permitted to file and solicit acceptances to its
own Chapter 11 Plan. This Third Extension expired July 31, 1998.

On July 31, 1998, the Company entered into the Fourth Extension and Modification
to Post-Petition Loan and Security Agreement (the "Fourth Extension") with
Mellon Bank, N.A. ("Mellon"). The maximum borrowing amount was changed by
reducing it to $10.0 million from $11.0 million by August 28, 1998. The advance
rate percentages for accounts receivable and inventory remain unchanged. In
addition to amending the maximum borrowing amount and maximum advance limits for
inventory and the over-advance, the Fourth Extension stipulates that as of
August 31, 1998, rather than the previously set date per the Third Extension of
July 15, 1998, Mellon shall have no obligations to advance for any operational
costs associated with the manufacturing facilities. Finally, the Fourth
Extension requires if the Company fails to file a Chapter 11 Plan of
Reorganization acceptable to Mellon by August 17, 1998, rather than the
previously set date per the Third Extension of July 31, 1998, Mellon shall be
permitted to file and solicit acceptances to its own Chapter 11 Plan. This
Fourth Extension expires August 31, 1998.


                                      -11-
<PAGE>

Upon expiration of this agreement, a new loan agreement will need to be entered
into with Mellon or some other lender. There is no guaranty that the Company
will be able to obtain such renewed financing on terms satisfactory to the
Company, or on any terms.

Maximum advance limits are set, on a declining basis throughout the term of the
DIP Financing Agreement, for inventory and the over-advance. The interest rate
on this revolving line of credit facility is a variable margin over the
fluctuating prime rate of interest. Additionally, the DIP Financing Agreement
contains certain negative covenants to be observed by the Company.

Borrowings under the DIP Financing Agreement are secured by all of the assets of
the Company. Additionally, such borrowings are personally guaranteed up to $3.0
million in the aggregate by Harvey Adams, former Chief Executive Officer, and
Ronald Adams, current Co-Chief Executive Officer.

The Company is in default of certain covenants included in the DIP Financing
Agreement, such as its failure to achieve projected monthly sales. Accordingly,
Mellon may exercise its rights and remedies under this agreement, including but
not limited to, an immediate termination of the line of credit provided by
Mellon, the cessation of any future advances under the line of credit,
acceleration of all indebtedness due under the DIP Financing Agreement and
foreclosure and taking possession of substantially all of the Company's assets.
While Mellon has not at the present time chosen to seek such remedy, there is no
guarantee that no such action will be taken in the future.

On August 7, 1998, approximately $10.3 million was outstanding under the line of
credit owed to Mellon Bank.


                                      -12-
<PAGE>

                          Consolidated Stainless, Inc.
                             (Debtor-in-Possession)
                           Part II: Other Information

Item 1. Legal Proceedings

      Except as set forth below, there are no pending material proceedings of a
material nature (exceeding ten percent of current assets or $1.58 million) in
which the Company is a party, or to which any of its respective properties are
subject, which either individually or in the aggregate may have a material
adverse effect on the results of operations or financial position of the
Company.

      A petition was filed with the Equal Employment Opportunity Commission (the
"EEOC") in Houston, Texas on December 10, 1997 in which Theresa K. Reich, a
former employee of the Company, filed a charge of sexual discrimination. On that
same day, Lynn Medley filed a petition with the EEOC in Houston, Texas in which
Medley, a former employee of the Company, filed a charge of sexual
discrimination. In both lawsuits, The EEOC has issued a no-action letter on the
matter. Both plaintiffs are seeking compensatory and punitive damages with an
unspecified amount of monetary relief.

      SouthTrust Bank, N.A. filed a complaint with the Florida State Court,
State of Florida on December 4, 1997. This was a debt foreclosure action
involving two promissory notes. SouthTrust Bank is seeking $1,699,658, the sum
of both disputed notes, plus interest and legal fees in relief. Another action
was filed by SouthTrust Bank with the 11th Circuit Court in Florida, for another
debt foreclosure action, involving six promissory notes against both the Company
and Ronald J. Adams. Mr. Adams is being sued personally on an alleged guaranty.
The plaintiff is seeking close to $2,000,000, the sum of the six notes in
dispute plus added interest and legal fees in relief. Both actions against the
Company were stayed by operation of the Company's Chapter 11 filing.

      Similarly, on February 17, 1998, SouthTrust Bank, N.A. filed a motion with
the District Court of Delaware for relief from the automatic stay and/or for
adequate protection for the eight promissory notes, discussed above, as well as
two additional promissory notes. The amount at issue is approximately
$4,000,000. A contested hearing was held on June 4, 1998 and was continued on
June 18, 1998. Both parties are awaiting the Court's decision. Should the Court
decide to lift the automatic stay, SouthTrust Bank may be entitled to pursue its
remedies with respect to seeking the repossession of a substantial portion of
the real and personal property used in the Company's manufacturing operations.
This could result in a shut down of such operations and greatly impact the
Company's business plan currently under development.

      A motion was filed for relief from the automatic stay and/or for adequate
protection by SunTrust Bank, Central Florida, N.A. on February 17, 1998. The
amount at issue is approximately $4,785,000. The plaintiff and the debtor have
reached a "standstill" agreement, pursuant to which SunTrust Bank has agreed
inter alia to forbear from pursuing the requested relief until approximately
August 31, 1998, in exchange for adequate protection payments from the debtor.


                                      -13-
<PAGE>

      By motion papers dated April 23, 1998, the United States Trustee (the
"Trustee") moved the Bankruptcy Court for appointment of a trustee to operate
the business of the Company, or, in the alternative, for appointment of an
examiner. The Trustee alleged that certain of the Company's officers, directors
and employees have engaged in a course of conduct that constituted self-dealing
and an usurpation of corporate opportunity, represented a conflict between a
director's fiduciary duty to the shareholders and a director's self-interests
and constituted a breach of duty and loyalty. The Trustee alleged, among other
things, the following factual bases for the foregoing allegations: Harvey Adams
breached his fiduciary duty by (i) forming two companies in apparent direct
competition with the Company, (ii) issuing purchase orders on the Company's
computers for approximately $700,000 of stainless steel products and (iii) using
Company employees, equipment and transport to unload approximately 45,000 pounds
of this product purchased through the newly formed companies at a Florida
warehouse owned by him and thereafter to inspect the product.

      By motion papers dated April 29, 1998, the Official Committee of Unsecured
Creditors (the "Committee") in the Chapter 11 case also moved the Bankruptcy
Court for appointment of a trustee to operate the Company's business. The
Committee alleged two grounds for the motion: mismanagement of the Company and
irregularities and improprieties on the part of Harvey and Ronald Adams,
including alleged self-dealing, establishment of competing businesses,
usurpation of corporate opportunities belonging to the Company, use of the
Company's assets for personal gain and breach of fiduciary duty. The Committee
alleged, among other things, the following factual bases for the foregoing
allegations:

      (a)   Management has made no legitimate progress in seeking a purchaser
            for the Company's manufacturing facilities.

      (b)   The Company has experienced substantial losses since the filing of
            the Chapter 11 Petition, the Company's post-petition sales are
            significantly below projected levels and senior management
            (including Stephen Adams, brother of Harvey and Ronald Adams)
            continues to receive compensation and benefits at excessive levels
            in relation to the size of the Company and despite its financial
            difficulties.

      (c)   The Committee alleged substantially the same improprieties as the
            Trustee regarding Harvey Adams forming two competing stainless steel
            companies and his placing purchase orders for $700,000 of stainless
            steel product.

      In addition, the Committee asserted that previously made reductions in
compensation and benefits for the three Adams brothers in the aggregate of
approximately 26% were inadequate, management's proposed business plan was
unacceptable and that operation of the Company under the plan has shown
continuing and increasing losses.

      As a result of both the Trustee and the Committee motions stated above, a
global settlement was reached which provided, among other things, that (1) an
independent examiner would be engaged to perform an investigation limited to
issues 


                                      -14-
<PAGE>

raised in the internal investigation report, review post-petition date insider
transactions and post-petition date scrap sales, (2) a turnaround consultant
would be retained as Co-Chief Executive Officer to assist in the operation and
assessment of the Company's business operations, and (3) the Trustee and
Committee motions would be dismissed.

Item 5 - Other Information

      On June 10, 1998, Harvey B. Adams ("H. Adams") resigned as Chairman of the
Board, Chief Executive Officer and employee of Consolidated Stainless, Inc. (the
"Company"). H. Adams's resignation was in response to a consensus of the Board
of Directors, after considering among other things the position of the Official
Committee of Unsecured Creditors of the Company (in connection with its pending
bankruptcy proceedings) and Mellon Bank (the lender for the Company's current
debtor-in-possession financing) as a necessary measure to assist the Company in
its reorganization efforts.

      As part of the terms of his severance agreement, H. Adams will receive two
months pay along with related benefits. In consideration for his severance pay,
H. Adams will not compete with the Company for 60 days nor solicit or employ any
of the Company's employees for 120 days from the date of his resignation.

      Prior to H. Adams's resignation, Ronald J. Adams ("R. Adams") held the
positions of President, Chief Operating Officer and Director of the Company. R.
Adams has now become the Chairman of the Board and, along with Vince Colistra
(turnaround consultant with Phoenix Management Services, Inc.), Co-Chief
Executive Officer and Co-President. Additionally, R. Adams remains the Chief
Operating Officer of the Company.

      In accordance with the Consulting Agreement dated June 3, 1998, effective
June 15, 1998, between Phoenix Management Services, Inc. ("Phoenix") and the
Company, Vince Colistra, along with R. Adams, will co-manage the day-to-day
operations and oversee the future direction of the Company, during the interim
period, as the Company attempts to emerge from Bankruptcy. In consideration for
this service, the Company will compensate Phoenix based on hourly rates, but at
a rate of no more than $6,250 per week plus expenses. In addition, the Company
paid a $12,500 retainer, which will be returned at the time the assignment is
complete or offset against any of the then outstanding invoices.

      On June 22, 1998, the Company expanded the scope of its original
engagement with Phoenix to include the development and the formulation of a Plan
of Reorganization. The fee for this additional service will be a total of
$40,000 plus expenses for the work required over an eight week period, and
hourly charges for any work required thereafter. It is anticipated that there
will also be a fee, in an amount to be determined at a later date, payable to
Phoenix if the Company successfully emerges from bankruptcy.


                                      -15-
<PAGE>

Item 6. Exhibits and reports on Form 8-K

(a) Exhibits

      10.1 - Extension and Modification to Post-Petition Loan and Security
             Agreement dated as of May 29, 1998 with Mellon Bank, N.A.

      10.2 - Second Extension and Modification to Post-Petition Loan and
             Security Agreement dated as of June 12, 1998 with Mellon Bank, N.A.

      10.3 - Third Extension and Modification to Post-Petition Loan and
             Security Agreement dated as of June 26, 1998 with Mellon Bank, N.A.

      10.4 - Fourth Extension and Modification to Post-Petition Loan and
             Security Agreement dated as of July 31, 1998 with Mellon Bank, N.A.

      10.5 - Letter of H. Adams's Resignation from Broad and Cassel to
             Proskauer Rose, LLP and Saul, Ewing, Remick & Saul, LLP dated June
             10, 1998.

      10.6 - Consulting Agreement with Phoenix Management Services, Inc. dated
             June 3, 1998, effective June 15, 1998.

      10.7 - Expanded Consulting Agreement with Phoenix Management Services,
             Inc. dated June 22, 1998.

      27   - Financial Data Schedule


(b) Form 8 - K

      A requirement of the Chapter 11 filing is that monthly operating reports
(Monthly Reports) be submitted to the United States Trustee and the Bankruptcy
Court.

(1)   On May 29, 1998, the Company filed those previously submitted Monthly
      Reports (i) for the month ending March 31, 1998, and (ii) for the month
      ending April 30, 1998 on Form 8-K.

(2)   On August 14, 1998, the Company filed those previously submitted Monthly
      Reports (i) for the month ending May 31, 1998, and (ii) for the month
      ending June 30, 1998 on Form 8-K.


                                      -16-
<PAGE>

                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                             CONSOLIDATED STAINLESS, INC.
                                                      (Registrant)


Date:  August 14, 1998                           By:/s/ -Ronald J. Adams
                                                    ------------------
                                                    Ronald J. Adams

                                                    Chairman of the Board
                                                    Co-Chief Executive Officer


                                      -17-