U.S. Securities and Exchange Commission
                             Washington, D.C.  20549

                               Form 10-KSB/A No. 1

                     Amending Items 1, 2, 3, 6, 7, 11 and 12
    

(Mark One)
           [x/]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1996

             [ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
            For the transition period from                       to

                         Commission file number 0-27510

                             TMCI Electronics, Inc.
                 (Name of small business issuer in its charter)

           Delaware                                 77-0413814
  (State or other jurisdiction of      (I.R.S. Employer Identification No.)
  incorporation or organization

                       1875  Dobbin  Drive,  San  Jose,  CA  95133  (Address  of
                  principal executive offices)(Zip Code)

                   Issuer's telephone number    (408) 272-5700

         Securities registered under Section 12(b) of the Exchange Act:

                                      None

         Securities registered under Section 12(g) of the Exchange Act:

                    Common Stock, par value $.001 per share
                                (Title of Class)

                               Class A Warrants
                                (Title of class)

Check  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 |X|* No

*The registrant has been unable to file the financial  statements required to be
with the registrant's Current Report on Form 8-K dated November 27, 1996.

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure  will be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB.

State issuer's revenues for its most recent fiscal year.  $26,139,828

State the  aggregate  market  value of the voting  stock held by  non-affiliates
computed  by such  reference  to the price at which  the stock was sold,  or the
average bid and asked  prices of such stock,  as of a specified  date within the
past 60 days.  (See  definition of affiliate in Rule 12b-2 of the Exchange Act):
$15,675,428 as of March 20, 1997

State the  number of  shares  outstanding  of each  issuer's  classes  of common
equity, as of the latest practicable date. 3,596,332 as of March 20, 1997.

Transitional Small Business Disclosure Format (check one):

                                Yes |_|  No |X|


<PAGE>
   



                                     PART I

      Certain   information   set   forth  in  this   Form   10-KSB/A   includes
"Forward-Looking Statements" within the meaning of the Private Securities Reform
Act of 1995 and is subject to certain risks and  uncertainties,  including those
identified under the caption "Risk Factors."  Readers are cautioned not to place
undue influence on these statements which speak only as of the date hereof.  The
Company  undertakes  no  obligation  to release  publicly any revisions to these
forward-looking  statements to reflect  events or  circumstances  after the date
hereof or to reflect unanticipated events or developments.

Item 1.  Business

Overview

      TMCI  Electronics,  Inc. (the "Company") was  incorporated in the State of
Delaware  on December 7, 1995 for the purpose of  acquiring  the  businesses  of
Touche Manufacturing,  Inc. ("Touche") and Touche Electronics, Inc. ("TEI"). The
principal  executive  offices of the Company,  Touche and TEI are located in San
Jose,  California.  Touche and TEI were principally  owned by Rolando Loera, the
President and Chief Executive  Officer of the Company.  The Company acquired all
of the issued and outstanding  shares of common stock of Touche and TEI on March
5, 1996 from Mr.  Loera and all of the minority  shareholders  of Touche and TEI
pursuant to the terms of certain Stock  Purchase  Agreements  dated December 28,
1995 (the "Stock Purchase  Agreements").  Following the exchange of common stock
of Touche and TEI contemplated by the Stock Purchase  Agreements,  the Company's
business became that of Touche and TEI.

      On  January  24,  1997,  the  Company  acquired  all  of  the  issued  and
outstanding  shares of common stock of Enterprise  Industries,  Inc. ("EII"),  a
metal stamping manufacturing  business. (See Item 6. Management's Discussion and
Analysis and Plan of Operations).  The Company now derives its revenues from the
operation of its wholly owned subsidiaries, including Touche, TEI and EII.

      The  Company  provides  custom  manufacturing  and  value-added  services,
respectively,  to original equipment  manufacturers  ("OEMs"). Its customers are
concentrated  into four (4)  different  segments of the  Information  Technology
Industry  and  include  manufacturers  of mini,  mainframe,  micro and  personal
computers,   telecommunications  equipment,   semiconductor  manufacturing  test
equipment  and medical  test  equipment.  The Company  does not  manufacture  or
produce any products  that are sold to customers  from  inventory;  all of their
products  are  manufactured  to  customer  specifications  and  all  value-added
services are performed to the specifications of the customer.
    

      The Company purchased the net assets of the San Jose,  California Division
of Pen  Interconnect,  Inc., Salt Lake City, Utah, a manufacturer of wire cable,
pursuant to the terms of the Asset  Purchase  Agreement  dated  November 1, 1996
(the "Asset  Purchase  Agreement").  Following the acquisition of the net assets
contemplated  by the Asset  Purchase  Agreement,  the San Jose  Division  of Pen
Interconnect,  Inc.  became  an  operating  division  of  TEI,  a  wholly  owned
subsidiary of the Company (See Item 3. Legal Proceedings).

      TEI's  new  operating  cable  division  provides  the  Company  with  more
diversity and cost-effective  production  capabilities which enables the Company
to be more  competitive in the manufacture,  assembly,  and delivery of products
and services to OEM customers.





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Touche Manufacturing Company, Inc.

      Touche   manufactures   custom  designed   fabricated  metal  cabinets  or
enclosures  for  OEMs  that  produce  computers,  telecommunications  equipment,
semiconductor  manufacturing  test equipment and medical test  equipment.  These
products are used by the OEMs to house various  types of electronic  components.
Touche is a full  service  manufacturing  facility for such  products.  As such,
Touche's  engineering  and design  personnel  work closely with each customer to
design and build an initial  prototype of the  specified  cabinet or  enclosure.
Based upon the actual production of the prototype, its design and specifications
are reviewed and a cost effective manufacturing process is developed. All of the
various manufacturing processes, which include metal shearing, punching, bending
and welding, as well as machining,  detailing,  zinc plating, painting and final
assembly  are  provided  in-house by Touche.  All of the raw  materials  used to
manufacture  these  products are readily  available  from numerous  suppliers at
competitive prices. By controlling the various manufacturing processes in-house,
Touche is able to provide its customers with custom  manufactured metal cabinets
or enclosures in a timely, efficient and cost-effective manner. The full service
manufacturing  capability enables Touche to derive a competitive  advantage over
manufacturers  that  have  to  sub-contract  for  one or  more  of  the  various
manufacturing  processes.  All of Touche's products are manufactured to specific
customer  requirements  pursuant  to  contracts  or  purchase  orders  with  the
respective customers.  Approximately 75% of Touche's  manufacturing is performed
on a mass production basis for metal cabinets or enclosures, while the remaining
25% is in developing prototype products for future development by its customers.

Touche Electronics, Inc.

      In late 1992,  a number of  Touche's  customers  expressed  an interest in
identifying  methods of reducing their own manufacturing  costs. This desire led
the management of Touche to examine its existing manufacturing  capabilities and
to consider  other types of services  that could be offered to its  customers in
conjunction with the manufacture of custom designed fabricated metal cabinets or
enclosures.  Accordingly,  in early 1993 TEI was  formed as a sister  company to
Touche.  TEI  provides  value-added  turnkey  services to many of  Touche's  OEM
customers.  Today,  these services are primarily the  installation  of cable and
harness  assemblies  into the  products  manufactured  by  Touche  and also into
enclosure products  manufactured by other local enclosure  manufacturers that do
not  have  the  in-house  capability  to  provide  such  services.  All of TEI's
value-added  turnkey  services  are  provided  pursuant to contracts or purchase
orders with its customers.

      Since its formation in early 1993, TEI has provided  installation of cable
and harness  assembly  service to OEM  customers.  In an effort to obtain better
prices for the wire cable and harness materials being assembled,  on November 1,
1996, TEI acquired the net assets  (accounts  receivable,  inventory and capital
equipment) of Pen  Interconnect,  Inc.'s ("PII") San  Jose-based  wire cable and
harness manufacturing  division.  The acquired division produces different types
of cable  and  harnesses  that are used by TEI and other  subcontractors  in the
production of original equipment products.  TEI intends to continue the business
as one of its divisions.

      The consideration  paid for the acquisition  consisted of (a) $2.0 million
in cash;  (b) two  promissory  notes in the  principal  amounts of $500,000  and
$400,000,  respectively,  and (c ) 134,172 shares of the Company's Common Stock.
The notes bear  interest at the prime rate plus .5% and are payable over periods
of 48 and 24 months, respectively.  TMCI may also be obligated to issue up to an
additional  13,417  shares of common  stock in the event  that  certain  overdue
accounts  receivable  are  collected.  By bringing the wire cable  manufacturing
capability  in-house,  combined  with  the  installation  of cable  and  harness
assembly  services  (value-added  turnkey  services),  TEI is  placed  in a much
stronger  position  to  compete  more  effectively  in the  marketplace  against
competitive  companies.  With  the  addition  of the  wire  cable  manufacturing
capability, TEI now believes that it has the capacity and competitive edge over

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<PAGE>



its rivals, and a step up with its customers in delivering products and services
in a very cost-conscious and price sensitive industry.

      The  asset  purchase  and  integration  of the  wire  cable  manufacturing
business  into TEI is  treated as an  operating  division.  Therefore,  TEI will
continue operating with two separate divisions:

      Turnkey  DivisionProvider  of cable and harness  assembly and installation
      services  Cable  Division:  Manufacturer  of  wire  cable  that is used to
      produce cable and harness for
                      installation.

      The  contract   manufacturing  of  custom-fabricated   metal  cabinets  or
enclosures,  combined with the capability to  manufacture  wire cable and to use
and provide this same cable and harness  assembly  services,  enables Touche and
TEI to attract and retain  customer  business that they would not have otherwise
obtained,  thereby  enhancing  their  competitive  position in the  marketplace.
Subsequent  to the  purchase  of the  assets  of the San  Jose  Division  of Pen
Interconnect, Inc., a dispute developed over the valuation of inventory which is
currently scheduled to be resolved by Arbitration Proceedings (See Item 3. Legal
Proceedings).
   

      On January 24, 1997, the Company acquired all of the outstanding shares of
capital  stock of Enterprise  Industries,  Inc., a North  Hollywood,  California
based metal stamping  manufacturing  business.  The purchase price  consisted of
$1,000,000  in cash,  taken from the proceeds of the March 1996 offering and the
issuance of 96,560 shares of the Company's Common Stock pursuant to the terms of
a certain Stock Purchase  Agreement  dated January 1, 1997. EII provides a broad
array of metal stamping manufacturing service capabilities. EII will continue to
operate  under its present  name as a  wholly-owned  subsidiary  of the Company,
providing   services  in  its  existing  market  as  well  as  augmenting  those
manufacturing  and turnkey  services that are currently  being offered by Touche
and TEI to their  respective  customers.  The President of EII has signed a five
(5) year employment contract with the Company to manage EII's operations.

Customer Product Services

      The Company works with its customers in designing and engineering products
and in  helping  to  develop  prototypes  for such  products  before  production
manufacturing. The following processes are involved in providing these services:
shearing,  bending, sheet metal, welding,  machining,  detailing,  zinc plating,
painting and assembly.  These services are currently provided to a wide range of
computer manufacturing  companies,  telecommunications  equipment  manufacturing
companies, semiconductor test equipment manufacturing companies and medical test
equipment manufacturing companies throughout the Silicon Valley area.

      The business of the Company,  in providing  customers with custom designed
and manufactured products or services, relates to four major market areas:

      Computer  Systems.  The Company's  manufacturing  and assembly  businesses
provide a full complement of  manufacturing  capabilities for mini and mainframe
computers,  microcomputers and personal  computers.  Even though this segment of
the information technology industry is being reshaped by evolutionary changes in
semiconductor  design and memory  capacity,  the Company intends to increase its
marketing efforts in these areas.  However,  the Company's  principal focus will
remain in commercial markets.
    

      Telecommunications Equipment. The changes in the basic structure of the 
telecommunications segment of the information technology industry are reflected
 in the recently adopted legislation that

                                        3

<PAGE>


   

allows  for  wireless  communications  and cable  operators  to offer  telephone
service over coaxial  connections to the home. The  information  superhighway is
expected  to provide  new avenues  into the home.  The use of coaxial  cable and
fiber optics will give companies the bandwidth  necessary to deliver hundreds of
channels of voice,  data, and video services.  Based on the changing  conditions
within the  industry,  telecommunications  equipment  is forecast to continue to
grow at an above  average  annual  rate.  The Company  believes  that,  with its
present and future manufacturing and service capabilities, it is well positioned
to take on the competitive  challenges of this growing industry.  Penetration of
this  market  segment  is  considered  a more long  term  goal for the  Company.
Marketing  activities  in this segment are  directly in line with the  Company's
current  development of manufacturing  facilities for the production of specific
types of wire and cable  that is used in the  computer  systems  segment  of the
information technology industry.

      Test Equipment.  The Company  intends to market its product  manufacturing
and service  capabilities in test equipment  market areas.  The Company's target
customers are principally large and medium-sized corporations that specialize in
the design and development of scientific measurement and production devices that
may be used by major  producers  in the  semiconductor  industry  who design and
manufacture  wafers that produce  computer  chips and the like. The Company will
continue to explore and expand new opportunities with its customer base and look
to refine the  diversification  of its production  capabilities in designing and
manufacturing products within this market segment as well as others.

      Medical  Equipment.  The  Company  intends  to  continue  marketing  their
manufacturing and cable harness assembly services, respectively, to existing and
prospective OEMs of medical equipment. The Company targets customers with strong
track records in the design, development and production of sophisticated medical
diagnostic  and  analysis  equipment,  such as MRI  equipment,  which is used in
hospital and medical  clinics by medical doctors to assist in their diagnoses of
otherwise very serious and  complicated  patient medical  problems.  The Company
believes  that this segment of the  information  technology  industry will grow,
offering  increased  opportunities  to  companies  like Touche and TEI which are
positioned  to provide  cost-effective  manufacturing  services  at  competitive
prices.


Pen Interconnect Inc.

      On November 12, 1996,  TEI acquired the net assets  (accounts  receivable,
inventory and capital  equipment) of the San  Jose-based  wire cable and harness
manufacturing division of Pen Interconnect Inc.
("PII").

      The  acquired  division is a wire cable  harness  manufacturer,  producing
different  types  of  cable  and  harnesses  that  are  used  by TEI  and  other
subcontractors in the production of original equipment products.
TEI intends to continue such business by operating it as a division.

      The consideration  paid for the acquisition  consisted of (a) $2.0 million
in cash, taken from the proceeds of the March 1996 offering;  (b) two promissory
notes in the principal amounts of $500,000 and $400,000,  respectively;  and (c)
134,172  shares of the Company's  Common  Stock.  The notes bear interest at the
prime  rate  plus  .5%  and  are  payable  over  periods  of 48 and  24  months,
respectively.  TMCI may also be  obligated to issue up to an  additional  13,417
shares of Common Stock in the event  certain  overdue  accounts  receivable  are
collected.


      Subsequent  to the closing of the foregoing  acquisition,  a dispute arose
concerning various aspects of the transaction.  On February 14, 1997, TMCI filed
a Demand for Arbitration against PII, seeking a

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<PAGE>



substantial purchase price reduction or, in the alternative, other remedies and 
damages as provided by law (For a more detailed discussion of the pending
 arbitration, see Item 3. "Legal Proceedings").

      The principal  executive offices of the Company are located at 1875 Dobbin
Drive, San Jose, California 95133 and its telephone number is (408) 272-5700.

Major Customers

      The Company's  customers include various  information  technology industry
related companies,  such as Hewlett Packard Company,  Lam Research  Corporation,
Tandem  Computers  Incorporated,   Applied  Materials,   Inc.,  KLA  Instruments
Corporation,  and Varian Associates,  Inc, and Teradyne, Inc. For the year ended
December  31,  1996,   revenues  derived  from  three  customers  (Lam  Research
Corporation, Tandem Computers Incorporated and Hewlett Packard Company) amounted
to approximately  28%, 24% and 13%,  respectively,  of total revenue,  excluding
intercompany  sales.  For the year ended  December 31, 1995,  revenue from three
customers  amounted  to 33%,  18%  and  19%,  respectively,  of  total  revenue,
excluding intercompany sales. For the year ended December 31, 1994, revenue from
these  three  customers  amounted  to  approximately  29%,  26% and 13% of total
revenue,  excluding  intercompany  sales. As the sales  arrangements  with these
customers are terminable upon short notice, the loss of any of them would have a
material  adverse  impact  on the  Company's  revenues  and  profits,  given the
significant  percentage of revenues  derived from these  customers.  The Company
continues to believe,  however,  that the expansion of services offered to these
customers  through the Company's  vertical  expansion will contribute toward the
on-going relationship with these customers.

Manufacturing

      The  Company's  engineering,  production,  and  assembly  facilities  have
adequate   space  for  its  current   operations,   and  also  for  the  planned
implementation  of clean room  assembly,  wire cable harness  manufacturing  and
metal  stamping,  and are  capable  of  fabricating  and  assembling  computers,
telecommunications  equipment,  semiconductor  manufacturing  test equipment and
medical test equipment.  The Company  maintains a  comprehensive  manufacturing,
assembly and quality control inspection program to ensure that all products meet
exacting customer  requirements for performance and quality workmanship prior to
delivery.  The Company is in the business of fabricating  custom-designed  metal
enclosures. This product and service cannot be homogenized into one operation or
manufacturing  approach for its entire  production  line. With each custom order
received  from  a  customer   comes  a  different  list  of   requirements   for
manufacturing  design,  process  and  finish.  In  addition,  the  manufacturing
environment  allows for the  manufacture of both prototype and production of the
various types of customer products.  To support its operations,  the Company has
purchased  a  wide  variety  of  sophisticated   automated  machinery  and  shop
equipment,   components,   tools  and  supplies  from  proven  outside  vendors,
distributors and service organizations.

Marketing and Sales

      The  Company's  marketing  strategy  continue to be focused on  developing
long-term   relationships   with  producers  of  computers,   telecommunications
equipment,   semiconductor   manufacturing  test  equipment,  and  medical  test
equipment.  The Company's  customer base consists of manufacturers of computers,
medical  equipment and test equipment  markets and the Company intends to expand
over the next few years  this  customer  base to  include  a  greater  number of
manufacturers  of  telecommunications  equipment.  Telecommunications  equipment
sales is an area in which  little has been done to  penetrate  the market on the
local  level.  However,  the  Company  continues  to make  great  strides in the
telecommunications  area,  and it is expected  that its  marketing  efforts will
continue to reflect the  evolution  of the  principal  industry  segments of the
information technology industry.

                                        5
    

<PAGE>

   



      The Company  will  continue  to focus and  concentrate  on major  existing
customers and to pursue new business from other potential  customers in evolving
segments of the information  technology industry.  The ability of the Company to
maintain its  relationships  with its major  existing  customers  shall remain a
significant factor in determining the future growth of the Company.  The Company
intends to achieve growth through competitive  pricing strategies,  expansion of
existing  turnkey  capabilities and more aggressive  direct sales efforts.  As a
result of the limited and focused target market, the Company's marketing efforts
will continue to rely  primarily on its direct sales efforts,  which  emphasizes
the Company's design-engineering and quality control manufacturing capabilities.

      The Company's sales activities  continue to be handled by a combination of
direct sales personnel and limited use of independent sales representatives, who
may also sell products of the Company's  competitors.  Because of the complexity
and analysis involved in the customer's design and purchase decision, management
emphasizes  active  interaction  between the direct sales staff, its independent
sales representatives and the buyer or engineer throughout the selling process.

Sources of Supply, Major Suppliers and Backlog

      The largest supplier of the Company is Lassen Electronics,  Inc. Purchases
from this vendor accounted for approximately  8.8% of the combined  purchases of
Touche and TEI in fiscal 1996.

      The raw materials,  such as sheet metal, metal frames and other electrical
wire  or  cable  components  used  in the  development  and  manufacture  of the
Company's customer products,  are generally available from domestic suppliers at
competitive prices; fabrication of certain major components may be subcontracted
for on an as-needed  basis.  With the exception of other material  requirements,
sheet  metal  may  be  purchased  on an  as-needed  basis  under  a  consignment
arrangement  with suppliers.  Touche and TEI do not have any long term contracts
for new materials.  Touche,  TEI and EII have not  experienced  any  significant
difficulty  in obtaining  adequate  supplies to perform  under their  respective
contracts.

      Touche,  TEI and EII have established  operating policies that require the
development and  maintenance of a second vendor source for purchasing  materials
and supplies that are needed to perform under contract for their customers. This
purchasing  requirement  focuses on the  prevention  of potential  problems that
might otherwise  originate from a single supplier's  financial  condition.  Such
policies allow greater  flexibility in keeping purchasing costs down and greater
assurance that raw material is available in order to meet customer  contract and
delivery requirements.

      At December 31, 1996,  Touche and TEI's combined backlog was approximately
$10 million.  Touche and TEI do not believe that their combined  rolling backlog
at any  particular  time is necessarily  indicative of their future  business or
performance.

Customer Service and Support

      Touche,  TEI and EII  handle all  customer  service-related  inquiries  or
complaints  through the sales staff who have been  assigned to handle and manage
account  relationships,  along with an inside sales  support staff that provides
daily support  services to the sales staff. The inside sales support staff works
directly  with sales  staff by handling  customer  complaints  and  coordinating
timely  delivery of  materials,  and  ensuring a timely  delivery of products to
customers.  This  support  requirement  allows the  salesperson  to monitor  and
control the quality of production during the entire manufacturing process, which
is designed  to help  prevent  production  problems  before  shipment is made to
customers.  Such  efforts are  supported  by Touche,  TEI and EII's  engineering
departments  which are  directly  involved  in the  development  process  of the
products.

                                        6
    

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      To ensure that adequate  support is given to customers,  each  salesperson
has formal sales training augmented by direct participation in the manufacturing
process at Touche , TEI and EII' s facilities and also in the  installation  and
acceptance tests at the customer's facility.

Patent, Trademark, Copyright and Proprietary Rights

      The Company  does not have any patent or copyright  applications  pending,
because the Company does not offer or provide any  original  design work that is
not otherwise proprietary to the product  design-engineering of their customers.
The Company  owns common law  trademark  rights to its  "Touche"  trademark  and
service mark.

Competition

      The  information   technology  industry   (computers,   telecommunications
equipment,   semiconductor   manufacturing  test  equipment,  and  medical  test
equipment)   remains  highly   competitive,   and  continues  to  involve  rapid
technological  change  and is  characterized  by  substantial  competition.  The
Company's  competitors  range from small  firms to  mid-sized  local  companies.
Competition is generally based on several  factors,  including  quality of work,
reputation,  price and marketing  approach.  The Company is  established  in the
industry and maintains a strong competitive presence by delivering  high-quality
work in a timely fashion within the customer's budget constraints.

      The Company offers full-service facility capabilities to customers,  which
include  the  capability  of  taking  the   development  of  an  enclosure  from
conception,  to  design,  to  prototype,  to full  fabrication  of the  finished
product.  This process offers better control over quality,  turnaround  time and
delivery.  This process also enables the Company to price its products  based on
marketing its services as a full-service  facility  compared to competitors  who
may  offer  the  same  services,  but at  different  locations  that may be less
efficient and less cost-effective to a customer.

      Because  of  the  continuing   change  by  OEMs  from   manufacturers   to
design-engineering and marketing  organizations,  companies like Touche, TEI and
EII are  receiving a much  larger  share of the  overall  manufacturing  task of
products  that are  designed for  manufacture  by their  customers.  The process
itself removes more and more of the  subcontracting and replaces it with a prime
contractor   status   gradually   eliminating  the  need  for  submitting  joint
subcontracting   work  proposals.   By  the  Company   reducing  the  number  of
subcontractors,  the customers benefit from the reduction in the turnaround time
and the  maintenance  of more  efficient  and quality based  manufacturers.  The
creation and  maintenance  of a "one-stop  shop"  manufacturing  environment  is
believed to be advantageous to the Company's success as an effective  competitor
in the industry.

New Product Service Lines of Business

      To continue to respond to their  customers'  needs and to  strengthen  and
diversify its competitive  position in the  marketplace,  the Company intends to
introduce the additional  service listed below.  The Company has not derived any
revenues  to date from this  service,  and other  services to be provided by the
recent acquisitions.
    

      Clean Room Assembly.  This new service is designed to generate  additional
business  from  existing  customers  that have asked TEI to  provide  clean room
assembly capabilities for certain specialized products.  These customers include
OEMs as well as other local enclosure manufacturers that are currently customers
of TEI. This service is directly  linked to the value-added  services  currently
provided by TEI.  The  implementation  of this  service is not  expected to be a
significant cost to TEI and is being

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funded out of its current cash flow.  Additional  space will not be required for
this service and TEI expects that it will hire one or two  additional  employees
that are experienced in clean room assembly.
   

Government Regulation

      Substantial  environmental laws have been enacted in the United States and
California in response to public concern over environmental deterioration. These
laws and the  implementing  regulations  affect  nearly  every  activity  of the
Company.  The  principal  federal  and  state  legislation  which  has the  most
significant  effect  on the  Company's  business  includes  the  following:  The
Comprehensive  Environmental  Response,  Compensation  and  Liability  Act;  The
Resource  Conservation  and Recovery  Act; The Clean Air Act; The Safe  Drinking
Water Act; The  Emergency  Planning and Community  Right-to-Know  Act; The Clean
Water Act; and The Toxic Substance Control Act. Failure by the Company,  Touche,
TEI  and  EII  to  comply  with  applicable  federal  and  state   environmental
regulations  could  result  in  the  Company  incurring  substantial  fines  and
penalties and/or having restraining orders issued against it.

Employees

      As of December 31, 1996, the Company employed  approximately  283 persons,
including the officers of the Company,  all of whom are full-time  employees and
none of whom are subject to collective bargaining agreements. Of these full-time
employees,  35 are engaged in administration and finance,  230 in manufacturing,
engineering  and  production,  7 in marketing and sales and 11 in operations and
development.  Many of the Company's employees have overlapping  responsibilities
in these job descriptions.

      The Company believes that its combined future success will depend in large
measure upon the continued ability of Touche,  TEI and EII to recruit and retain
technical   personnel.   Competition  for  qualified   technical   personnel  is
significant,  particularly in the geographic area in which the Company,  Touche,
TEI and EII are  located.  Touche,  TEI and EII have  never  experienced  a work
stoppage. The Company, Touche, TEI and EII believe that their relationships with
their employees are good.

Risk Factors

New Company with Limited Operating History

      TMCI  Electronics,  Inc.  (the  "Company"),  incorporated  in the State of
Delaware on December 7, 1995, is a recently organized  corporation that acquired
in March 1996 all of the issued and  outstanding  stock of Touche  Manufacturing
Company,  Inc.  ("Touche")  and  Touche  Electronics,  Inc.  ("TEI"),  San Jose,
California,  in an exchange of  securities,  whereby each  corporation  became a
wholly-owned  subsidiary of the Company.  The Company's only operations prior to
March 1996  consisted of entering into  agreements to acquire Touche and TEI and
taking steps  preparatory to the March 1996  Offering.  On January 24, 1997, the
Company  acquired  all of the issued and  outstanding  shares of Common Stock of
Enterprise  Industries,  Inc. ("EII"). The Company now derives its revenues from
the operation of its wholly owned  subsidiaries,  including Touche, TEI and EII.
Therefore,  the  performance  of the parent  company is  measured by and depends
entirely  upon the  activities  of its  subsidiaries.  The  Company  can make no
assurances  that the  combination of these companies will prove as successful as
the subsidiaries were independently.  See "Management's  Discussion and Analysis
and Plan of Operations" and "Business."





                                        8

<PAGE>



No Assurance of Future Profitability

      Although  Touche and TEI had a combined  rolling  backlog at December  31,
1996 of  approximately  $10 million,  no assurance  can be given that the future
operations of the Company or its subsidiaries will be profitable.

No Assurance of Payment of Dividends

      No assurance  can be made that should the  operation of the Company or its
subsidiaries  be profitable the Company will pay dividends.  Even if the Company
or its subsidiaries do remain  profitable,  it is likely that the Company or its
subsidiaries would retain much or all of the earnings in order to finance future
growth and expansion.  Therefore,  the Company does not presently  intend to pay
dividends.

Dependence Upon Major Customers

      The  largest  customers  of Touche and TEI are Lam  Research  Corporation,
Tandem  Computers  Incorporated  and  Hewlett-Packard  Company.  Sales  to these
customers accounted for 28%, 24% and 13%, respectively, of the combined revenues
of Touche and TEI for the year ended December 31, 1996.
See "Business."

      The contracts relating to these sales are terminable upon short notice and
none of these  customers  is  obligated to continue to use Touche or TEI product
services at all or at existing prices. In addition, these customers could demand
price  concessions  from Touche and/or TEI which could adversely  affect profits
and profit margins.  The  termination by these  customers of their  relationship
with  Touche  and/or  TEI or a  substantial  decrease  in  prices  paid by these
customers  would have a material  adverse effect upon the business,  properties,
financial condition, results of operations and prospects of the Company.

      The dependence on major  customers  subjects Touche and TEI to significant
financial  risk in the  operation  of their  business  should  a major  customer
terminate, for any reason, its business relationship with Touche or TEI. In such
an event, the financial  condition of the Company may be adversely  affected and
the Company may be required to obtain additional financing, of which there is no
assurance.

      The  continuing  ability  of Touche  and TEI to  maintain  these  customer
relationships and to build new  relationships is dependent,  among other things,
upon their  ability to maintain  the high  quality  standards  demanded by their
customers.

Dependence Upon the Semiconductor Manufacturing Market

      The Company's business depends  exclusively upon contracts and orders from
original equipment  manufacturers  ("OEMs").  These OEMs manufacture  computers,
telecommunications equipment and test and medical equipment. The OEMs sell their
products to semiconductor  manufacturers  for use during product testing and for
use in  semiconductor  related  products  that  are  produced  for  sale  on the
wholesale  and  retail  levels.   Accordingly,   any  material   change  in  the
semiconductor manufacturing market could have a material effect on the Company's
results.  See "Management's  Discussion and Analysis and Plan of Operations" and
"Business."

Risk of Inventory Obsolescence

      The products  manufactured by the original equipment  manufacturers (OEMs)
which  are  serviced  by the  Company  are  being  upgraded  and  enhanced  on a
continuous  basis by these  OEMs.  As a result of this  process,  the  inventory
maintained by the Company may become obsolescent. Such obsolescence may

                                        9

<PAGE>



cause the Company to have excess supplies of unusable inventory which could have
 a material adverse effect on the Company.  
See "Management's Discussion and Analysis and Plan of Operations" and
"Business."

Dispute Relating to Pen Acquisition

      Subsequent to the closing of the  acquisition  of the San Jose Division of
Pen Interconnect Inc. ("PII"), a dispute arose concerning various aspects of the
transaction.  On February 14, 1997, TMCI filed a Demand for Arbitration  against
PII,  seeking a substantial  purchase  price  reduction or, in the  alternative,
other remedies and damages as provided by law (For a more detailed discussion of
the pending arbitration, see Item 3. "Legal Proceedings").

Company's Failure to Comply With Certain Covenants on its Debt

      In March  1996,  the Company  entered  into a line of credit and term loan
facility with a financial  institution.  The facility contains certain covenants
which require the Company,  among other things,  to maintain  minimum  levels of
earnings,  minimum  tangible  net  worth and  certain  financial  ratios.  As of
December  31,  1996,  the Company was not in  compliance  with  certain of these
covenants but obtained a waiver from the financial  institution  of the required
minimum level of earnings,  tangible net worth and debt service  coverage ratio.
In the event that the  Company is not in  compliance  with such  covenants,  the
financial  institution  will be able to declare  the  Company in default  and to
exercise  its  rights as a  secured  party.  See  "Management's  Discussion  and
Analysis and Plan of Operations" and "Capital Resources and Liquidity."

      In  addition,   the  line  of  credit  also  contains  negative  covenants
requiring,  among other  provisions,  the consent for the disposition of assets,
acquisition or merger of any business,  guaranty of any third party obligations,
capital restructure,  and any other distributions or payment of any dividends in
cash or in stock.

      There  can be no  assurance  that  the  Company  will be able to  maintain
compliance  with  applicable  covenants  under the line of credit  and term loan
facility in the future.

Possible Need for Additional Financing

      The Company intends to fund its operations and other capital needs for the
next twelve  (12)  months  substantially  from  operations,  but there can be no
assurance that such funds will be sufficient for these purposes. The Company may
require  substantial  amounts  for its  future  expansion,  operating  costs and
working  capital.  There  can  be no  assurance  that  such  financing  will  be
available, or that it will be available on acceptable terms.

Dependence on Management

      The Company's business is principally  dependent on certain key management
personnel for the operation of its business.  In  particular,  Rolando Loera has
played the primary role in the  promotion,  development  and  management  of the
Company.  The Company  entered into an  employment  agreement  with Mr. Loera on
March 5, 1996 for a period of five years,  with an automatic five year extension
in the absence of notice to the contrary  from either  party.  In addition,  the
Company entered into an employment agreement with Anthony Magnone, the President
of Enterprise Industries, Inc. on January 1, 1997 for a period of five years. If
the employment by the Company of either Mr. Loera or Mr. Magnone terminates,  or
if either Mr. Loera or Mr.  Magnone  becomes  unable to perform his duties,  the
Company  may be  adversely  affected.  The  Company has  obtained  key-man  life
insurance on Mr. Loera in the

                                       10

<PAGE>



amount of $1 million.  The Company will be the owner and beneficiary of the 
insurance policy.  See "Business."

Substantial Competition

      The Company encounters substantial competition from domestic businesses. 
 Nearly all of such entities have substantially greater financial resources,
 technical expertise and managerial capabilities than the Company and,
 consequently, the Company may be at a substantial competitive disadvantage in
 the conduct of its business.  See "Business -- Competition."

No Assurances that Recent Acquisitions Will be Profitable

      The Company has recently  acquired a wire cable and harness  manufacturing
business and a metal  stamping  business.  No assurances can be made that either
combination will be successful.  In addition,  a dispute has arisen with respect
to the  valuation  of certain  assets  acquired  in the wire  cable and  harness
manufacturing  business  acquisition  and no  assurance  can be  given as to the
outcome of such dispute. See "Business" and Item 3. "Legal Proceedings".

Possible Future Acquisitions

      In the event that additional  capital and liquidity is raised, the Company
may use the bulk of any such  proceeds  for  future  acquisitions;  however,  no
assurances  can be made that such  funds will  enable the  Company to expand its
base or realize profitable consolidated  operations.  The Company is considering
acquiring two companies,  a distributor of electronic  parts and a manufacturing
and assembling  company.  Should such funds not be utilized in its  acquisitions
activities,  the Company  intends to utilize any  proceeds  for working  capital
purposes. See "Business."

Substantial Environmental Regulation

      Substantial  environmental laws have been enacted in the United States and
California in response to public concern over environmental deterioration. These
laws and the  implementing  regulations  affect  nearly  every  activity  of the
Company. The principal federal legislation which has the most significant effect
on  the  Company's   business   includes  the   following:   The   Comprehensive
Environmental   Response,   Compensation   and   Liability   Act;  The  Resource
Conservation  and Recovery Act; The Clean Air Act; The Safe Drinking  Water Act;
The Emergency Planning and Community  Right-to-Know Act; The Clean Water Act and
The  Toxic  Substance  Control  Act.  Failure  by the  Company  to  comply  with
applicable  federal  and state  environmental  regulations  could  result in the
Company  incurring  substantial  fines and penalties  and/or having  restraining
orders issued against it.

Limitation on Director Liability

      As permitted  by the  Delaware  General  Corporation  Law,  the  Company's
Certificate of Incorporation limits the liability of directors to the Company or
its stockholders for monetary damages for breach of a director's fiduciary duty,
except for liability in four specific instances. These are for (i) any breach of
the director's duty of loyalty to the Company or its stockholders,  (ii) acts or
omissions not in good faith or which involve  intentional  misconduct or knowing
violation  of law,  (iii)  unlawful  payments of  dividends  or  unlawful  stock
purchases  or  redemptions  as provided in Section 174 of the  Delaware  General
Corporation  Law, or (iv) any  transaction  from which the  director  derived an
improper  personal  benefit.  As a result of the Company's charter provision and
Delaware  law,  stockholders  may have more  limited  rights to recover  against
directors for breach of fiduciary  duty than as existing  prior to the enactment
of the laws.

                                       11

<PAGE>



"Penny Stock" Regulations May Impose Certain Restrictions on Marketability of
 Securities

      The  Securities  and  Exchange   Commission   ("Commission")  has  adopted
regulations  which generally define "penny stock" to be any equity security that
has a market price (as defined)  less than $5.00 per share or an exercise  price
of less than $5.00 per  share,  subject to  certain  exceptions.  The  Company's
securities are currently  exempt from the definition of "penny stock" based upon
their being listed on the Nasdaq SmallCap  Market.  If the Company's  securities
are removed from listing on Nasdaq at any time they may become  subject to rules
that impose additional sales practice  requirements on  broker-dealers  who sell
such  securities to persons  other than  established  customers  and  accredited
investors  (generally,  those  persons  with assets in excess of  $1,000,000  or
annual income exceeding $200,000,  or $300,000 together with their spouse).  For
transactions  covered  by these  rules,  the  broker-dealer  must make a special
suitability  determination for the purchase of such securities and have received
the  purchaser's  written  consent  to the  transaction  prior to the  purchase.
Additionally,  for any transaction  involving a penny stock,  unless exempt, the
rules  require the  delivery,  prior to the  transaction,  of a risk  disclosure
document  mandated by the  Commission  relating to the penny stock  market.  The
broker-dealer   also  must  disclose  the   commissions   payable  to  both  the
broker-dealer  and the  registered  representative,  current  quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must  disclose  this  fact and the  broker-dealer's  presumed  control  over the
market.  Finally,  monthly  statements  must be  sent  disclosing  recent  price
information  for the penny  stock held in the  account  and  information  on the
limited  market in penny  stocks.  Consequently,  the  "penny  stock"  rules may
restrict the ability of broker-dealers to sell the Company's  securities and may
affect  the  ability  of  purchasers  in this  offering  to sell  the  Company's
securities in the secondary market.

Potential Conflicts of Interest on the Part of Certain Executive Officers of the
Company

      In addition to acting as Chairman,  President and Chief Executive  Officer
of the Company, Rolando Loera is also the sole owner of Touche Properties,  Inc.
("TPI"),  a real estate company which owns and leases the real property  located
at 1881-1899 Dobbin Drive (the  "Property") to TEI and Touche,  two wholly-owned
subsidiaries  of the Company.  The rent  payments  made by TEI and Touche to TPI
amounted to  approximately  $576,144,  $477,640 and  $479,307 in 1996,  1995 and
1994,  respectively.  In addition, TPI has a loan in the amount of $1,000,000 on
the  Property,  and TEI and Touche have  guaranteed  the  satisfaction  of TPI's
obligations   under  this  loan.   See   "Certain   Relationships   and  Related
Transactions."
    

Item 2.  Description of Property
   

      Touche leases approximately  145,000 square feet of factory  manufacturing
space in two adjacent buildings which are equipped with  state-of-the-art  metal
fabrication  equipment.  Touche leases approximately 123,000 square feet at 1875
Dobbin Drive, San Jose,  California 95133, which consists of 113,000 square feet
in manufacturing space and approximately 10,000 square feet of office space. The
1875 Dobbin Drive lease term  commenced on January 1, 1993 and ends on April 20,
2013. In addition,  TEI leases approximately 78,000 square feet of manufacturing
space at  1881-1899  Dobbin  Drive,  San  Jose,  California  95133  from  Touche
Properties,  Inc., a company wholly owned by Rolando Loera, Chairman,  President
and Chief  Executive  Officer of the Company.  The 1881-1899  Dobbin Drive lease
term commenced on November 1, 1993 and ends on November 30, 2013.  Touche leases
approximately  22,000 square feet of manufacturing  space at 1565-C Mabury Road,
San Jose,  California 95133. The 1565-C Mabury Road lease term commenced on July
1, 1995 and expires on August 31, 1998.  All of the foregoing  lease  agreements
are on a triple net basis with  landlords (See Note 17 in the Notes to Financial
Statements).  EII leases approximately 21,600 square feet of combined office and
manufacturing  space in three separate  adjacent light  industrial  buildings in
North Hollywood, California. Two of the

                                       12

<PAGE>



three buildings are leased on a month-to-month basis.  The lease for the third
 building expires on April 5, 2001.

Item 3.  Legal Proceedings

      Subsequent to the closing of the  acquisition  of the San Jose Division of
Pen  Interconnect  ("PII"),  a dispute arose  concerning  various aspects of the
transaction.  On February 14, 1997, TMCI filed a Demand for Arbitration  against
PII,  seeking a substantial  purchase  price  reduction or, in the  alternative,
other  remedies and damages as provided by law.  Management  has  suspended  all
payments to PII, including payments due under the promissory notes,  aggregating
$900,000. Pen has sought to accelerate the promissory notes.  Management , after
consultation  with legal counsel,  believes that it will prevail in all material
aspects of the  dispute.  Accordingly,  at December  31,  1996,  the Company has
classified  the  promissory  notes as maturing under the original terms provided
therein [See Note 11]. An  arbitrator  has been  selected and agreed upon by all
parties to the arbitration proceedings.

      None of the  Company,  Touche or TEI is a party to any  other  significant
legal proceedings and, to the best of the Company's  information,  knowledge and
belief, none is contemplated or has been threatened.

Item 6.  Management's Discussion and Analysis and Plan of Operations

      On March 5, 1996, the Company  acquired Touche and TEI pursuant to certain
Stock Purchase Agreements executed on December 28, 1995. Prior to that time, the
Company's  operations  consisted  of  forming  the  Company,  preparing  for the
acquisition  of Touche and TEI,  as well as  preparing  for the  initial  public
offering of its securities discussed below.

      In the first  quarter  ended March 31,  1996,  the Company  made a limited
investment to start two new  divisions at TEI: the Wire and Cable  Manufacturing
division and the Clean Room  Assembly  division.  These  divisions  will produce
basic cable  products  and will provide  clean-room  assembly  capabilities  for
specialized products for their customers,  respectively.  The Company's strategy
has been to expand its core and value added  business by increasing  its product
offerings  to satisfy its  customers'  needs and their  growing  demand for more
outsourcing of contract  manufacturing  services. In November 1996, TEI acquired
the wire cable and harness manufacturing  division of Pen Interconnect,  Inc. In
January 1997, the Company acquired Enterprise Industries,  Inc. a metal stamping
business. See "Business."
    

Plan of Operations

      The Company  intends to continue  the  operation  of Touche and TEI and to
introduce new competitive products and services for its existing and prospective
customers. These products and services, which include Clean Room Assembly, Metal
Stamping, and Wire Cable and Harness Assemblies Manufacturing, will be developed
in-house or through the acquisition of an existing company or companies.

       In the first  quarter  ended March 31,  1996,  the Company made a limited
investment to start two new  divisions at TEI: the Wire and Cable  manufacturing
division and the Clean Room  Assembly  division.  These  divisions  will produce
basic cable  products  and will provide  clean room  assembly  capabilities  for
specialized products for their customers,  respectively.  The Company's strategy
has been to expand its core and value added  business by increasing  its product
offerings  to satisfy its  customers'  needs and their  growing  demand for more
outsourcing of contract  manufacturing  services. In November 1996, TEI acquired
the net assets (accounts receivable, inventory and capital equipment) of the San
Jose based wire

                                       13

<PAGE>



and cable harness  manufacturing  division of Pen Interconnect,  Inc. In January
1997,  the  Company  acquired  Enterprise  Industries,  Inc.,  a metal  stamping
business.

Results of Operations

      The Results of Operations  discussion utilizes the consolidated results in
1996 compared to the combined  results in 1995 from the  operating  subsidiaries
(Touche  and  TEI)  prior  to  their  acquisition  by  the  Company  eliminating
inter-company transactions.  The Capital Resources and Liquidity section and the
Inflation section relates to the Company with its wholly-owned subsidiaries.

      The following table sets forth the statements of operations of the Company
for the periods indicated:


                                   Years Ended
                                  December 31,
                                 1 9 9 6 1 9 9 5
                                            Consolidated   Combined

Sales                                     $ 26,139,828   $28,089,919
Cost of goods sold                          17,092,231   19,991,649
                                          ------------   ----------
Gross Profit                                 9,047,597    8,107,270
Operating expenses                           8,522,647    6,384,946
                                          ------------   ----------

Income from Operations                         524,950    1,722,324
                                          ------------   ----------

Other Income                                   189,704       40,394
Interest Income                                 69,742        9,726
Interest Income - Related Party                 29,276       29,276
Interest Expense                              (323,679)    (615,881)
Non-Cash Finance Charge                       (462,122)    (287,878)
Gain on Sale of Equipment                      139,465      109,655
                                          ------------   ----------
  Total Other Expense                         (357,614)    (714,708)
                                          ------------   ----------

Income Before Provision for
  Income Taxes                                 167,336    1,007,616
Provision for Income Taxes                      18,669      534,200
                                          ------------   ----------

  Net Income                              $    148,377   $  473,416
                                          ============   ==========



Fiscal 1996 Compared to Fiscal 1995

      Revenue  decreased  approximately  $1,950,100  or 7% to  $26,139,828  from
$28,089,919  for the fiscal year ended  December 31, 1996,  as compared with the
fiscal year ended December 31, 1995. The decline in revenue was due primarily to
significant  order  cancellations  and  rescheduling  of  orders  by  one of the
Company's  major  customers,  which  resulted  from (1) a change in local market
conditions,  and  (2) a  general  slowdown  in the  semiconductor  manufacturing
marketplace  which also impacted the industry as a whole.  The Company  believes
that while current market trends are showing signs of  significant  improvement,
through increased backlog orders, new contracts,  and new customers there can be
no

                                       14

<PAGE>


   

future  assurance  that the economy and industry  will  continue to be strong or
that  OEMs  will  continue   increasing   their   outsourcing   to   contracting
manufacturers such as the Company.

      The information  technology industry continues to place greater demands on
the products  produced by Touche's and TEI's  customers.  In turn, these demands
have placed greater demands on enclosure  manufacturing,  value-added  assembly,
and cable and harness  manufacturing  and installation  services provided by the
Company. Furthermore, diversity in the manufacturing processes, through vertical
integration into value-added  assembly and cable and harness  manufacturing  and
installation elements of the business, continues to provide the Company with the
ability to grow and to  capitalize on new business  opportunities  that were not
previously available.

      Inasmuch  as  the  Company's   three  largest   customers   accounted  for
approximately  65% of revenues for the fiscal year ended December 31, 1996, with
the largest  accounting for 28% of such revenues,  the disruption or loss of any
one or a  significant  amount  of their  business  as a  customer  could  have a
material adverse impact on the total revenues of the Company.

      Gross profit  increased  approximately  $940,327 or 12% to $9,047,597 from
$8,107,270  for the fiscal  year ended  December  31,  1996,  as compared to the
fiscal year ended  December 31, 1995.  As a  percentage  of sales,  gross profit
increased  approximately  6% to 35% from 29% for the fiscal year ended  December
31, 1996, as compared to the fiscal year ended  December 31, 1995.  The increase
is primarily due to adjustments in operations and efficiencies which continue to
play a major role in the Company's growth and general  operation.  However,  the
Company's gross profit margin may be materially impacted by the diversity of its
operations  which are constantly  modified in order to meet the changing  growth
demands of the  competitive  market bidding  processes  with its  customers.  In
addition,  the Company  believes that its expansion into the manufacture of wire
cable and harness  assemblies  will enable it to lower its  production  costs to
more competitive and acceptable industry levels. The Company's further expansion
into metal  stamping is also  expected to reduce costs.  However,  the Company's
gross profit  margins may also be materially  impacted by the pricing of product
services  which is directly  affected by  increases in direct labor and material
cost.

      Operating expenses increased approximately $2,137,701 or 33% to $8,522,647
from  $6,384,946 for the fiscal year ended December 31, 1996, as compared to the
fiscal year ended December 31, 1995.
 This  increase  was  primarily  due  to  two  factors:  (1)  an  investment  in
infrastructure to support planned growth, including two new operating divisions,
plus the acquisition of the San Jose Division of Pen  Interconnect,  Inc., which
included (2) additional personnel,  building rent costs,  repairs,  professional
fees,  promotions of certain engineers to management positions and other related
items.

      Interest expense decreased  approximately $292,200 or 47% to $323,679 from
$615,881 for the fiscal year ended  December 31, 1996, as compared to the fiscal
year ended December 31, 1995.  Interest expense decreased during the fiscal year
ended December 31, 1996 due to a substantial  reduction in outstanding long term
debt,  capital lease obligations,  and bank borrowings,  as compared to December
31, 1995.

      Income tax  expense  declined  primarily  due to the  decrease  in taxable
income as well as the  utilization  of net operating  loss carry  forwards.  Pro
forma  income tax expense for the year ended  December  31, 1996 gives effect to
the loss of the S corporation on a combined basis prior to March 5, 1996.

      Income  before  income taxes  decreased  approximately  $840,300 or 83% to
$167,336  from  $1,007,616  for the fiscal  year ended  December  31,  1996,  as
compared  with the fiscal year ended  December 31,  1995.  The decline in income
before taxes was primarily due to a substantial increase in

                                       15

<PAGE>



the Company's  operating  expenses (as discussed  above) which increased 33% for
the fiscal year ended December 31, 1996 over the prior fiscal year.
    

      Net Income  after  taxes  decreased  by  approximately  $325,100 or 69% to
$148,337 from $473,416 for the fiscal year ended  December 31, 1996, as compared
to the fiscal year ended  December 31, 1995.  The decrease was  primarily due to
two factors:  (1) an increase in financing charges of $174,244 on certain bridge
loans that were made by the  Company in the fourth  quarter of 1995 to help fund
its initial public offering,  and (2) increased  operating  expenses incurred to
fund two new  divisions  which  produced  nominal  income during the fiscal year
ended December 31, 1996.

Capital Resources and Liquidity
   

      The Company has a long-term  revolving  line of credit with  Manufacturers
Bank  ("Mfrs."),  which as of December 31, 1996,  had an interest rate of Mfrs.'
base rate plus 1/2% and permitted  the Company to borrow up to $4,000,000  based
on a stipulated  percentage of  contractually  defined  eligible  trade accounts
receivable. The Company had $585,000 in outstanding borrowings under the line of
credit;  the unused  portion of the line of credit was $3,415,000 as of December
31, 1996.  The Company was in default of certain  covenants at December 31, 1996
in which it received a waiver  from its bank (See Note 10 in Notes to  Financial
Statements).  The loan  agreement  was  renewed  on May 1,  1997 and  Management
renegotiated  the agreement and its  underlying  covenants to the benefit of the
Company. In addition, the Company and Mfrs. have agreed to a term facility of up
to  $2,500,000  available for  equipment  purchase,  which will bear interest at
Mfrs.'  base  rate  plus 1%.  There was  approximately  $1,691,700  in term debt
outstanding at December 31, 1996.

      On March 11, 1996, the Company  closed an Initial  Public  Offering of its
securities  resulting in new proceeds of approximately $5.7 million. The Company
used the proceeds of the offering to repay  certain  bridge notes and other debt
and applied the  remaining  proceeds  to working  capital and the  purchase of a
business.

      The Company's  working capital  increased by  approximately  $2,916,600 or
260% from  $1,119,957 to $4,036,532 for the fiscal year ended December 31, 1996,
as compared to the fiscal year ended December 31, 1995.  This increase  resulted
primarily from an increase in inventory of approximately  $1,991,300, a decrease
in accounts payable of approximately  $1,885,700,  and a decrease in the line of
credit draw down of approximately $1,059,600.

      The Company  required cash to fund operating  activities of  approximately
$724,200 in the fiscal year ended  December 31, 1996,  as compared to generating
cash from operating  activities of  approximately  $1,285,000 in the fiscal year
ended  December 31,  1995.  Additional  cash was  required to pay for  inventory
buildup,  a reduction in accounts payable,  and an increase in prepaid expenses.
Required  cash in the  amount of  approximately  $555,800  was  provided  by net
operating,  investing,  and financing activities,  which included cash generated
from  normal  operations,  sale  and  purchase  of  equipment,  debt  reduction,
acquisition of a business,  and proceeds from the initial public offering in the
fiscal year ended December 31, 1996, as compared to cash generated in the amount
of approximately $685,800 for the fiscal year ended December 31, 1995.

      During the fiscal year ended  December 31, 1996,  the Company's  property,
plant, and equipment  increased by approximately  $1,533,000.  During the fiscal
year ended December 31, 1996, the Company spent approximately $1,115,000 of cash
to purchase capital equipment.  The remainder of the 1996 expenditures have been
financed through bank borrowings.


                                       16

<PAGE>



      In  addition,  the Company  spent  $2,000,000  in cash to purchase the net
assets  of  the  San  Jose  Division  of  Pen  Interconnect,  see  "Business-Pen
Interconnect  Inc.," which was utilized  from the net proceeds of the  Company's
March 1996 initial public  offering.  Use of such funds depleted  available cash
proceeds, however, the Company feels that its existing balances are adequate and
that the increase in cash  generated as a result of this new division as well as
from its core business will compensate for the usage of such funds.

      The Company's  inventory  increased by  approximately  $1,275,000  for the
fiscal  year ended  December  31,  1996,  as  compared  to the fiscal year ended
December 31, 1995.  The increase in inventory was due primarily to the Company's
need to revise  its  forecast  downward  to reflect a general  slow-down  of the
overall industry coupled with a revised sales forecast.
    

      The Company's accounts  receivable  decreased by approximately  $1,992,000
for the fiscal  year ended  December  31,  1996,  as compared to the fiscal year
ended December 31, 1995.  The decrease in accounts  receivable was primarily due
to a  significant  increase  in  collections  coupled  with a decline in related
sales.  Such decline was not the result of  significant  changes with respect to
credit terms, collection efforts or credit utilization.

      Management  feels  that its  current  financial  position,  together  with
available  increased  borrowings under the Company's  various credit  facilities
will be sufficient to meet the Company's anticipated needs and projected capital
assets purchase requirements for the next twelve months.

      Certain  statements made above relating to plans,  objectives and economic
performance go beyond  historical  information  and may provide an indication of
future results.  To such extent,  they are forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and 21E of the
Securities Exchange Act of 1934, as amended, and each is subject to factors that
could  cause  actual  results  to  differ  from  those  in the  forward  looking
statement.  Such factors include but are not limited to, the assumption that not
material changes in general market conditions will occur and the assumption that
the Company does not incur any unanticipated expenditures.

Inflation

           Touche and TEI have  continued  to  experience  the benefits of a low
inflation economy locally,  regionally and nationally.  However,  Touche and TEI
enter into mostly  short-term fixed price contracts and a large portion of these
contracts is labor  intensive.  Accordingly,  the short-term  contracts are less
susceptible  to  inflationary  pressures  and may have  less of an impact on the
eventual profitability of the contracts.

Item 7.    Financial Statements

           The  financial  statements  required  under this item are attached to
this report.



                                       17

<PAGE>



                                    PART III

Item 11.   Security Ownership of Certain Beneficial Owners and Management

      The following table sets forth certain information regarding the Company's
Common  Stock owned on the date of  February  28, 1997 by (i) each person who is
known by the  Company to own  beneficially  more than five  percent  (5%) of the
Company's common stock; (ii) each of the Company's  officers and directors;  and
(iii)  all  officers  and  directors  as  a  group.  The  percentage  of  shares
calculations  have been based on there being  3,596,332  shares  outstanding  on
February 28, 1997.


Name and                     Position                        Number  Percentage
Address(1)                 With Company                    Of SharesOf Shares(2)

Rolando Loera          Chairman, President and Chief Executive
                       Officer; Director                    667,600(2)    18.56%
Frank Ramirez, III     Vice President--Engineering          149,360        4.15%
Livino D. Ribaya, Jr.  Vice President--Manufacturing         74,680        2.08%
Charles E. Shaw        Vice President--Chief Financial Officer;
                       Director                                 -0-          -0-
Robert Loera           Controller and Secretary; Director       -0-          -0-
Dominic A. Polimeni    Director                              37,340        1.04%
c/o Gulfstream Financial
Group, Inc.
6400 Congress Avenue
Suite 200
Boca Raton, FL 33487

Thomas S. Chaffin
Rosenblum, Parish and Isaacs
1600 W. Santa Clara Street.
San Jose, CA 95113                                              -0-          -0-

Rolando Loera          Trustee for Touche Employee Stock
                       Ownership Plan                        27,280          --%
All Officers and Directors
as a Group (7 persons)                                      956,260       26.59%

 *  Less than 1%

(1) Unless otherwise noted, c/o TMCI  Electronics,  Inc., 1875 Dobbin Drive, San
Jose, CA 95133. 
(2) Mr. Loera shares  investment power with respect to 21,000 of
these shares. Does not include
 options to  purchase  100,000  shares of Common  Stock  granted to Rolando
 Loera which vest on December 21, 1997.


                                       18

<PAGE>

   


Item 12.  Certain Relationships and Related Transactions

      The Company was incorporated in the State of Delaware on December 7, 1995,
under the name TMCI Electronics, Inc. A predecessor of the Company was organized
under the laws of the State of California  ("TMCI  California") on September 26,
1995 and was merged into the Company on December 28, 1995.

      Mr. Loera was originally issued 600,000 shares of TMCI California's common
stock for $1,000. Upon the merger of TMCI California into the Company, Mr. Loera
was issued  600,000  shares of the  Company's  Common  Stock in exchange for his
shares of TMCI California.

      On March 16, 1994,  $50,000 and on April 1, 1994,  $25,000 was advanced to
Touche by Frank Ramirez III and Livino Ribaya, Jr., employees of Touche and TEI,
in exchange for  convertible  promissory  notes  bearing  interest at 7.382% and
6.75%  per  annum  and  payable  in  monthly  installments  of  $920  and  $979,
respectively,  through 2009.  Identical loans were made to TEI on the same dates
by the same employees.  In June 1995, $25,000 was advanced to each of Touche and
TEI by Jose  Antonio  Agredano in exchange  for a  convertible  promissory  note
bearing  interest at 10% per annum and payable in monthly  installments of $950.
All of these  notes were  converted  into  shares of Touche and TEI  immediately
prior to the Effective Date of the Stock Purchase Agreements described below.

      On December 30, 1996,  the Company made loans in the principal  amounts of
$95,986,  $34,479,  and $32,761,  respectively  to Frank  Ramirez  III,  Jose A.
Agredano  and  Livino  Ribaya,  Jr.  Such loans  shall be repaid  over ten years
bearing interest at 10% per annum.

      The Company  entered into Stock Purchase  Agreements  dated as of December
28,  1995 (the  "Stock  Purchase  Agreements")  with  Rolando  Loera,  Chairman,
President  and Chief  Executive  Officer of the  Company,  and Rolando  Loera as
Trustee  for the Touche  Employee  Stock  Ownership  Plan  pursuant to which the
Company has acquired all of the issued and  outstanding  stock of Touche and TEI
in exchange for the issuance of 893,600  shares of the  Company's  Common Stock.
Immediately  prior to the close as of the  public  offering  on March 11,  1996,
Messrs.  Jose  Antonio  Agredano,  Frank  Ramirez  III and  Livino  Ribaya,  Jr.
exercised  their right to acquire  shares of Touche and TEI which they converted
into  74,680,  149,360  and  74,680  shares of the  Company,  respectively.  The
remaining 594,880 shares were issued to Rolando Loera and to the Touche Employee
Stock Ownership Plan.

      TEI leases  approximately 78,000 square feet of space located at 1881-1899
Dobbin Drive,  San Jose,  California from Touche  Properties,  Inc.  ("TPI"),  a
company wholly owned by Rolando Loera,  Chairman,  President and Chief Executive
Officer of the Company, pursuant to a lease agreement dated November 1, 1993. In
addition, TEI leases space to subtenants. Touche is one subtenant. The other two
subtenants  are  unaffiliated  with  the  Company.   Rent  expense  amounted  to
approximately  $576,144  in 1996.  Such  amounts  represent  payments by TEI and
Touche to TPI, exclusive of any subtenant payments.

      In  connection  with  its  acquisition  of  1881-1899  Dobbin  Drive  (the
"Property"),  TPI borrowed  $1,000,000  from the Small Business  Administration.
This loan bears interest at 6.359% per annum,  matures on January 1, 1994 and is
secured by a first mortgage on the Property.  Touche and TEI,  inter alia,  have
guaranteed the satisfaction of TPI's obligations under this loan.

      TPI also  borrowed  $303,325 from TEI in December,  1993.  This loan bears
interest  at 10% per annum,  and  principal  and  interest  are payable in equal
monthly  installments  until  satisfied.  The  principal  balance  on  the  loan
increased  as a result of  certain  expenses  of TPI  advanced  by  Touche.  The
outstanding balance of the loan as of December 31, 1996 was $473,952.

                                       19

<PAGE>



      In  addition,  in 1993  Touche  made  loans to Rolando  Loera  aggregating
$87,190.39.  Such loans bear interest at 10% per annum and is payable in monthly
installments of $1,000.  Certain  additions were made to the principal amount of
the loan in fiscal 1996 to account for payments of certain personal  expenses of
Rolando Loera by Touche.  Accordingly,  the outstanding principal balance on the
loan was $238,166 at December 31, 1996.

      In 1995,  Touche  owed  Textron  Financial  approximately  $401,700  which
Antonio Zertuche,  Touche's  landlord,  agreed to repay in exchange for Touche's
promissory note to make monthly installments of approximately $6,322,  including
interest  at 11.5% per annum,  maturing  December  1996.  In January  1996,  the
Company  refinanced the note, and issued a new note for  approximately  $291,000
which  is  the  difference  between  the  Company's  original  note  payable  of
approximately  $401,700 and its  cancellation of an outstanding  note receivable
from the landlord of approximately  $99,000,  plus approximately  $11,600 in the
overpayment of property taxes on leased  property  located at 1875 Dobbin Drive,
San Jose, California. The new note payable was satisfied in March 1996, from the
proceeds of the initial public offering (IPO).
    

Item  13. Exhibits and Reports on Form 8-K.

(a)   Financial Statements and Exhibits.

      1.  The financial statements listed on the accompanying index to financial
          statements are filed as part of this annual report.

      2.  3.0  Certificate of Incorporation, filed with Delaware Secretary of
          State on December 7,  1995. (c)
          3.1  By-laws.(c)
          3.2  Agreement of Merger between TMCI Electronics, Inc., a California
               corporation, and
               TMCI Electronics, Inc., a Delaware corporation. (c)
          3.3  Certificate of Merger.(c)
          4.0  Specimen Copy of Common Stock Certificate.(c)
          4.1  Form of Class A Warrant Certificate.(c)
          4.2  [Intentionally Omitted.]
          4.3 Form of Underwriters'  Purchase option,  as amended.( b ) 4.4 Form
          of  Warrant  Agreement,  as  amended.(b)  10.0  Employment  Agreement,
          Rolando Loera, dated December 28, 1995.(c) 10.1 Bridge Loan Agreements
          and  Promissory  Notes.(c) 10.2  Subscription  Paper dated November 6,
          1995.(c)  10.3 Stock  Purchase  Agreement,  dated  December  28,  1995
          relating to Touche
               Manufacturing Company, Inc.(c)
          10.4 Stock Purchase Agreement, dated December 28, 1995 relating to 
               Touche Electronics,
               Inc.(c)
          10.5 Small Business Loan Agreement dated October 26, 1993 with related
               Guarantees of  Touche Manufacturing Company, Inc., Touche
               Electronics, Inc. and Rolando
               Loera.(c)
          10.6 Lease  Agreement  dated  January 1, 1993  relating to 1875 Dobbin
               Drive, San Jose, CA.(c)
          10.7 Lease  Agreement  dated  October 25, 1993 relating to 1881 - 1899
               Dobbin Drive, San Jose, CA.(c)
          10.8 Lease  Agreement  dated June 21, 1995  relating to 1565-C  Mabury
               Road, San Jose, CA.(c)
          10.9 1995 Stock Option Plan.(c)

                                       20

<PAGE>



          10.10Touche Manufacturing Company, Inc. Employee Stock Option Plan.(c)
          10.11Convertible Promissory Notes, as amended, and Stock Purchase
               Option Agreements, as amended, of Touche Manufacturing Company, 
               Inc. and Touche Electronics, Inc.(b)
          21.0 Subsidiaries of the Registrant.(d)
          27.0 Financial Data Schedule.
          (a)  Incorporated by reference to Amendment No. 2 to the  Registration
               Statement, ad filed with the SEC on March 4, 1996.
          (b)  Incorporated by reference to Amendment No. 1 to the  Registration
               Statement, as filed with the SEC on February 14, 1996.
          (c)  Incorporated  by  reference  to  the  Registrant's   Registration
               Statement on Form SB-2 (No.  33-80973) as  originally  filed with
               the  Securities and Exchange  Commission  (the "SEC") on December
               29, 1995 (the "Registration Statement").
          (d)  Incorporated  by reference to  Post-Effective  Amendment No. 1 to
               the  Registration  Statement,  as filed with the SEC on March 21,
               1997.
          (e)  Asset Purchase  Agreement dated November 1, 1996 by and among Pen
               Interconnect,   Inc.,   Touche   Electronics,   Inc.   and   TMCI
               Electronics,  Inc.,  incorporated  by reference to Exhibit 1.0 to
               the Registrant's  Form 8-K filed with the Securities and Exchange
               Commission on November 27, 1996.
          (f)  Stock Purchase Agreement dated effective as of January 1, 1997 by
               and  among  TMCI  Electronics,   Inc.  and  the  Shareholders  of
               Enterprise  Industries,  Inc.,  incorporated by reference Exhibit
               2.0 the  Registrant's  Form 8-K  filed  with the  Securities  and
               Exchange Commission on February 7, 1997.





                                       21

<PAGE>



                                 SIGNATURE PAGE

      In  accordance  with  Section  13(a)  or 15(d) of the  Exchange  Act,  the
registrant  has caused this  amendment to this report to be signed on its behalf
by the undersigned, thereunto duly authorized.


                                             TMCI Electronics, Inc.


                                             By:/s/Rolando Loera
                                                ROLANDO LOERA
                                          Chairman, President and
                                          Chief Executive Officer

                                             Date:     November 24, 1997



                                       22

<PAGE>



                                  EXHIBIT INDEX

          3.0  Certificate of Incorporation, filed with Delaware Secretary of
               State on December 7,
               1995. (c)
          3.1  By-laws.(c)
          3.2  Agreement of Merger between TMCI Electronics, Inc., a 
               California corporation, and
               TMCI Electronics, Inc., a Delaware corporation. (c)
          3.3  Certificate of Merger.(c)
          4.0  Specimen Copy of Common Stock Certificate.(c)
          4.1  Form of Class A Warrant Certificate.(c)
          4.2  [Intentionally Omitted.]
          4.3 Form of Underwriters'  Purchase option,  as amended.( b ) 4.4 Form
          of  Warrant  Agreement,  as  amended.(b)  10.0  Employment  Agreement,
          Rolando Loera, dated December 28, 1995.(c) 10.1 Bridge Loan Agreements
          and  Promissory  Notes.(c) 10.2  Subscription  Paper dated November 6,
          1995.(c)  10.3 Stock  Purchase  Agreement,  dated  December  28,  1995
          relating to Touche
               Manufacturing Company, Inc.(c)
          10.4 Stock Purchase Agreement, dated December 28, 1995 relating to
               Touche Electronics, Inc.(c)
          10.5 Small Business Loan Agreement dated October 26, 1993 with related
               Guarantees of Touche Manufacturing Company, Inc., Touche 
               Electronics, Inc. and Rolando Loera.(c)
          10.6 Lease  Agreement  dated  January 1, 1993  relating to 1875 Dobbin
               Drive, San Jose, CA.(c)
          10.7 Lease  Agreement  dated  October 25, 1993 relating to 1881 - 1899
               Dobbin Drive, San Jose, CA.(c)
          10.8 Lease  Agreement  dated June 21, 1995  relating to 1565-C  Mabury
               Road, San Jose, CA.(c)
          10.9 1995 Stock Option Plan.(c)
         10.10 Touche Manufacturing Company, Inc. Employee Stock Option Plan.(c)
          10.11   Convertible Promissory Notes, as amended, and Stock Purchase
                  Option Agreements, as amended, of Touche Manufacturing Company
                  , Inc. and Touche
                  Electronics, Inc.(b)
          21.0 Subsidiaries of the Registrant.(d)
          27.0 Financial Data Schedule.
          (a)  Incorporated by reference to Amendment No. 2 to the  Registration
               Statement, ad filed with the SEC on March 4, 1996.
          (b)  Incorporated by reference to Amendment No. 1 to the  Registration
               Statement, as filed with the SEC on February 14, 1996.
          (c)  Incorporated  by  reference  to  the  Registrant's   Registration
               Statement on Form SB-2 (No.  33-80973) as  originally  filed with
               the  Securities and Exchange  Commission  (the "SEC") on December
               29, 1995 (the "Registration Statement").
          (d)  Incorporated  by reference to  Post-Effective  Amendment No. 1 to
               the  Registration  Statement,  as filed with the SEC on March 21,
               1997.
          (e)  Asset Purchase  Agreement dated November 1, 1996 by and among Pen
               Interconnect,   Inc.,   Touche   Electronics,   Inc.   and   TMCI
               Electronics,  Inc.,  incorporated  by reference to Exhibit 1.0 to
               the Registrant's  Form 8-K filed with the Securities and Exchange
               Commission on November 27, 1996.
          (f)  Stock Purchase Agreement dated effective as of January 1, 1997 by
               and  among  TMCI  Electronics,   Inc.  and  the  Shareholders  of
               Enterprise  Industries,  Inc.,  incorporated by reference Exhibit
               2.0 the  Registrant's  Form 8-K  filed  with the  Securities  and
               Exchange Commission on February 7, 1997.

                                       23

<PAGE>



TMCI ELECTRONICS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------



Report of Independent Auditors..................................    F-1

Consolidated Balance Sheet as of December 31, 1996..............    F-2 - F-3

Statements of Operations for the years ended December 31, 1996 and  F-4

Statements of Stockholders' Equity..............................    F-5

Statements of Cash Flows for the years ended December 31, 1996 and  F-6 - F-7

Notes to Financial Statements...................................    F-8 - F-19



                    .   .   .   .   .   .   .   .   .   .   .


<PAGE>



                         REPORT OF INDEPENDENT AUDITORS


To the Board of Directors and Stockholders of
  TMCI Electronics, Inc.
  San Jose, California


            We have audited the accompanying  consolidated balance sheet of TMCI
Electronics,  Inc. and its subsidiaries as of December 31, 1996, and the related
statements of operations,  stockholders'  equity, and cash flows for each of the
two years in the period ended December 31, 1996. These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

            In our opinion,  the financial  statements referred to above present
fairly, in all material  respects,  the consolidated  financial position of TMCI
Electronics,  Inc. and its subsidiaries as of December 31, 1996, and the results
of their operations and their cash flows for each of the two years in the period
ended  December 31, 1996,  in  conformity  with  generally  accepted  accounting
principles.








                                          MOORE STEPHENS, P. C.
                                          Certified Public Accountants.

Cranford, New Jersey
March 12, 1997, Except as to
Note 10, for which date is March 27, 1997



                                       F-1

<PAGE>

<TABLE>


TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996.
------------------------------------------------------------------------------


<S>                                                                   <C>  

Assets:
Current Assets:
  Cash                                                                  $   145,845
  Accounts Receivable - Net                                               2,526,816
  Inventory                                                               5,170,661
  Prepaid Expenses and Other Current Assets                                 272,587
  Deferred Income Taxes                                                     187,991
  Other Receivables                                                          63,669
  Notes Receivable - Stockholders                                            10,706
                                                                        -----------

  Total Current Assets                                                    8,378,275

Property and Equipment - Net                                              3,638,300
                                                                        -----------

Other Assets:
  Notes Receivable - Stockholders                                           155,520
  Due from Stockholder                                                      238,167
  Due from Related Party                                                    473,952
  Other Assets                                                               48,152
  Goodwill                                                                2,549,261
                                                                        -----------

  Total Other Assets                                                      3,465,052

  Total Assets                                                          $15,481,627



See Notes to Financial Statements.


                                        F-2

<PAGE>

</TABLE>

<TABLE>

TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996.
------------------------------------------------------------------------------


<S>                                                                  <C> 

Liabilities and Stockholders' Equity:
Current Liabilities:
  Accounts Payable and Accrued Expenses                                 $ 2,929,242
  Due to Affiliate                                                           30,634
  Line of Credit                                                            585,000
  Notes Payable                                                             796,867
                                                                        -----------

  Total Current Liabilities                                               4,341,743

Long-Term Liabilities:
  Notes Payable - Net of Current Portion                                  2,064,273
  Deferred Income Taxes                                                     436,781

  Total Long-Term Liabilities                                             2,501,054

  Total Liabilities                                                       6,842,797

Commitments and Contingencies                                                    --

Stockholders' Equity:
  Common Stock, $.001 Par Value, 25,000,000 Shares
   Authorized, 3,499,772 Issued and Outstanding                               3,500

  Additional Paid-in Capital                                              7,366,659

  Retained Earnings                                                       1,268,671

  Total Stockholders' Equity                                              8,638,830

  Total Liabilities and Stockholders' Equity                            $15,481,627



See Notes to Financial Statements.



                                        F-3
</TABLE>

<PAGE>


<TABLE>

TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------


                                                                   Years ended
                                                                  December 31,
                                                               1 9 9 6     1 9 9 5
                                                               -------     -------
                                                           [Consolidated][Combined]
<S>                                                       <C>            <C>   

Sales - Net                                                 $26,139,828 $28,098,919

Cost of Goods Sold                                           17,092,231  19,991,649
                                                            ----------- -----------

  Gross Profit                                                9,047,597   8,107,270

Operating Expenses                                            8,522,647   6,384,946
                                                            ----------- -----------

  Income from Operations                                        524,950   1,722,324
                                                            ----------- -----------

Other Income [Expense]:
  Other Income                                                  189,704      40,394
  Interest Income                                                69,742       9,726
  Interest Income - Related Party                                29,276      29,276
  Interest Expense                                             (323,679)   (615,881)
  Non-Cash Finance Charge                                      (462,122)   (287,878)
  Gain on Sale of Equipment                                     139,465     109,655
                                                            ----------- -----------

  Total Other [Expense]                                        (357,614)   (714,708)
                                                            ----------- -----------

  Income Before Provision for Income Taxes                      167,336   1,007,616

Provision for Income Taxes                                       18,999     534,200
                                                            ----------- -----------

  Net Income                                                $   148,337 $   473,416
                                                            =========== ===========

Earnings Per Share:
  Net Income Per Share                                      $       .05 $       .25
                                                            =========== ===========

Pro Forma Net Income [See Note 21] [Unaudited]:
  Income Before Provision for Income Taxes                  $   167,336
  Pro Forma Income Taxes                                          6,000
                                                            -----------

  Pro Forma Net Income [Unaudited]                          $   161,336
                                                            ===========

Pro Forma Net Income Per Share [Unaudited]:
  Income Before Provision for Income Tax Per Share          $       .06
  Pro Forma Income Tax Per Share                                     --
                                                            -----------

  Pro Forma Net Income Per Share                            $       .06
                                                            ===========

  Weighted Average Number of Shares                           2,865,445   1,893,600
                                                            =========== ===========




See Notes to Financial Statements.

</TABLE>


                                        F-4

<PAGE>


<TABLE>

TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


STATEMENTS OF STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------




                                         Common Stock    Additional              Total
                                     Number of            Paid-in   Retained  Stockholders'
                                       Shares   Amount    Capital   Earnings    Equity
<S>                                  <C>       <C>      <C>        <C>         <C> 

Balance - December 31, 1994
  [Combined]                           600,000 $    600  $ 279,829 $ 676,610  $ 957,039

  Finance Charge Incurred on Bridge
   Notes Payable                            --       --    750,000        --    750,000

  Net Income for the Year Ended
   December 31, 1995                        --        --         --   473,416    473,416
                                     --------- --------  --------- ---------  ---------

  Balance - December 31, 1995
   [Combined]                          600,000      600  1,029,829 1,150,026  2,180,455

  Issuance of Common Stock in
   Connection with Exchange of
   Shares under Common Control         594,880      595       (595)       --         --

  Issuance of Common Stock to
   Former Convertible Debt Holders     298,720      299    165,927        --    166,226

  Issuance of Common Stock to
   Bridge Lenders                      400,000      400       (400)       --         --

  Transfer of Subchapter S Retained
   Earnings of Acquired Company to
   Additional Paid-in Capital               --       --     29,692   (29,692)        --

  Net Proceeds from Initial Public
   Offering and Issuance of Common
   Stock                             1,472,000    1,472  5,742,340        --   5,743,812

  Issuance of Common Stock in
   Connection with Acquisition         134,172      134    399,866        --    400,000

  Net Income for the Year Ended
   December 31, 1996                        --       --         --   148,337    148,337
                                     --------- --------  --------- ---------  ---------

  Balance - December 31, 1996
   [Consolidated]                    3,499,772 $  3,500  $7,366,659 $1,268,671 $8,638,830
                                     ========= ========  ==================== ==========



See Notes to Financial Statements.

</TABLE>


                                        F-5

<PAGE>

<TABLE>


TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------



                                                                   Years ended
                                                                  December 31,
                                                               1 9 9 6     1 9 9 5
                                                               -------     -------
                                                           [Consolidated][Combined]
<S>                                                        <C>          <C>  

Operating Activities:
  Net Income                                                $   148,337 $   473,416
                                                            ----------- -----------
  Adjustments to Reconcile Net Income to
   Net Cash [Used for] Provided by Operations:
   Depreciation and Amortization                                839,724     702,056
   Deferred Income Taxes                                        (15,465)    201,272
   [Gain] on Sale of Equipment                                 (139,465)         --
   Amortization of Deferred Loan Fees                            28,500     114,000
   Non-Cash Finance Charge                                      462,122     287,878
   Provision for Bad Debts                                       85,000          --

  Changes in Assets and Liabilities:
   [Increase] Decrease in:
     Accounts Receivable                                      1,991,543  (1,855,640)
     Inventory                                               (1,275,095)   (800,439)
     Prepaid Expenses                                          (130,027)   (104,192)
     Other Receivables                                          (63,669)         --

   Increase [Decrease] in:
     Accounts Payable and Accrued Expenses                   (2,397,500)  2,087,105
     Income Taxes Payable                                      (258,168)    179,145
                                                            ----------- -----------

   Total Adjustments                                           (872,500)    811,185
                                                            ----------- -----------

  Net Cash - Operating Activities - Forward                    (724,163)  1,284,601
                                                            ----------- -----------

Investing Activities:
  Advances to Related Party                                     (29,276)         --
  Purchase of Other Assets                                      (18,722)         --
  Advances Note Receivable - Stockholders                      (128,794)   (170,370)
  Advances Due from Stockholder                                  (6,134)         --
  Incorporation Fees                                                 --         354
  Purchase of Equipment                                      (1,114,964)   (343,956)
  Proceeds from Sale of Equipment                               197,650          --
  Acquisition Costs                                             (74,292)         --
  Acquisition of Cable Company                               (2,000,000)         --
  Advance Under Note Receivable                                  98,989       8,698
  Due to Affiliate                                                4,914          --
                                                            ----------- -----------

  Net Cash - Investing Activities - Forward                 $(3,070,629)$  (505,274)





See Notes to Financial Statements.

                                        F-6
</TABLE>

<PAGE>


<TABLE>

TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------

                                                                   Years ended
                                                                  December 31,
                                                               1 9 9 6     1 9 9 5
                                                               -------     -------
                                                           [Consolidated][Combined]
<S>                                                        <C>          <C>  

  Net Cash - Operating Activities - Forwarded               $  (724,163)$ 1,284,601
                                                            ----------- -----------

  Net Cash - Investing Activities - Forwarded                (3,070,629)   (505,274)
                                                            ----------- -----------

Financing Activities:
  Proceeds from Public Offering                               6,036,798          --
  Advances Under Line of Credit                               2,684,742      51,513
  Repayments of Line of Credit                               (3,744,318)         --
  Proceeds of Note Payable                                    2,018,190     137,085
  Repayment of Bridge Loans                                  (1,000,000)         --
  Repayment of Note Payable                                  (2,021,705)   (625,827)
  Repayment of Capital Lease Obligations                       (734,742)   (251,886)
  Payments of Deferred Offering Costs                                --    (292,986)
  Proceeds from Bridge Loans                                         --   1,000,000
  Advance from Affiliates                                            --    (100,182)
  Advances Under Convertible Promissory Notes                        --       6,144
  Repayment of Convertible Promissory Note                           --     (18,432)
  Common Stock Issued                                                --       1,000
                                                            ----------- -----------

  Net Cash - Financing Activities                             3,238,965     (93,571)
                                                            ----------- -----------

  Net [Decrease] Increase in Cash                              (555,827)    685,756

Cash - Beginning of Years                                       701,672      15,916
                                                            ----------- -----------

  Cash - End of Years                                       $   145,845 $   701,672
                                                            =========== ===========

Supplemental Disclosure of Cash Flow Information:
  Cash paid during the years for:
   Interest                                                 $   316,567 $   578,492
   Income Taxes                                             $   468,419 $   156,707
</TABLE>

Supplemental Schedule of Non-Cash Investing and 
Financing Activities:   The  following  table sets  forth 
 property  and  equipment  costs  which were
completely financed through equipment contracts:

December 31,
  1996                                                      $   643,451
  1995                                                      $   124,035

  See Note 4 with respect to acquisition of business.

  See Note 15 for information on related party transactions.

  In November 1995, the Company  incurred a non-cash  finance charge of $750,000
in connection with bridge financing,  of which $462,122 and $287,878 was charged
to operations at December 31, 1996 and 1995, respectively [See Note 13].

  See Note 2 for information about the Stock Purchase  Agreement and exchange of
shares.

See Notes to Financial Statements.

                                        F-7

<PAGE>

   


TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------




[1] Financial Statement Presentation, Organization and Nature of Operations

The financial  statements are presented on a consolidated basis commencing March
5, 1996 and  include  the  results of  operations  of the parent  company,  TMCI
Electronics,   Inc.  ["TMCI"],   and  its  wholly-owned   subsidiaries,   Touche
Manufacturing,   Inc.   ["Touche"],   and  Touche   Electronics,   Inc.  ["TEI"]
[collectively,   the  "Company"].   The  Company's  revenues  are  predominately
generated from the manufacture and sale of  custom-fabricated  metal  enclosures
for  manufacturers  of computers,  telecommunications  equipment,  semiconductor
manufacturing  test  equipment  and medical  test  equipment.  The Company  also
assembles  and installs wire cable  harnesses  used in  custom-fabricated  metal
enclosures for manufacturers of computers, telecommunications test equipment and
medical test equipment.  The Company sells to original  equipment  manufacturers
primarily located in the Silicon Valley, California area.

All significant  intercompany  transactions have been eliminated for all periods
presented.

[2] Basis of Presentation

The Company entered into Stock Purchase  Agreements [the  "Agreements"] with the
stockholders  of Touche and TEI to acquire all of their  issued and  outstanding
stock. The combined financial statements as of and for the period ended December
31, 1995 give retroactive effect to the acquisition by TMCI Electronics, Inc. of
all of the  outstanding  common  stock of TEI [an S  corporation]  and Touche on
March 5, 1996.  The  financial  statements  of the  Company are  presented  on a
consolidated  basis  commencing as of such date. Prior to that date the separate
results of TEI and Touche had been combined on an as-if pooling basis consistent
with that of consolidated  financial statements giving retroactive effect to the
issuance of 27,280 shares of the Company's  common stock to the  stockholders of
TEI, and 567,600  shares of the Company's  common stock to the  stockholders  of
Touche.  Additionally,  the  S  corporation  equity  section  of  TEI  has  been
reclassified  to additional  paid-in  capital.  No adjustment of assets to "fair
value" had been recorded and all  intercompany  balances and  transactions  were
eliminated.  The accompanying combined financial statements for 1995 will become
the historical  financial  statements upon issuance of financial  statements for
the period subsequent to March 5, 1996.

[3] Summary of Significant Accounting Policies

Use of Estimates - The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period.
Actual results could differ from those estimates.

Cash  Equivalents  - Cash  equivalents  are  comprised of certain  highly liquid
investments with a maturity of three months or less when purchased.  At December
31, 1996, there were no cash equivalents.

Inventory - Inventory  is recorded at the lower of cost or market.  Cost,  which
includes  materials,  labor and  overhead,  is  determined  using the  first-in,
first-out basis method.  The Company  reviews  inventory items that have been on
hand for more than 60 days and charges against earnings if it is determined that
such inventory has become obsolete. During the years ended December 31, 1996 and
1995, the Company charged $40,000 and $-0- respectively.

Property and  Equipment and  Depreciation  - Property and equipment is stated at
cost.  Depreciation  is computed  utilizing  the  straight-line  method over the
estimated useful lives of the assets which range from 5 to 7 years.


    

                                       F-8

<PAGE>




TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #2
------------------------------------------------------------------------------



[3] Summary of Significant Accounting Policies [Continued]

Goodwill and  Amortization - Goodwill is amortized  utilizing the  straight-line
method over a period of 15 years. When changes in circumstances  warrant it, the
Company evaluates the carrying value and the periods of amortization of goodwill
based on the  current  and  expected  future  non-discounted  cash  flows of the
entities or assets giving rise to the goodwill.

Deferred Loan Costs - Deferred loan costs have been  amortized  over the term of
the loan using the straight-line method which approximates the interest method.

Earnings Per Share - Earnings per share of common stock is based on the weighted
average number of common shares outstanding for each period presented.  The 1995
weighted average number of shares gives retroactive effect for the shares issued
in the business combination [See Note 2 ]. Common stock equivalents are included
if dilutive.

Advertising  -  The  Company  expenses  advertising  costs  as  incurred.  Total
advertising  costs  charged to expense  amounted  to $18,316 and $11,874 for the
years ended December 31, 1996 and 1995, respectively.

Stock Options - The Company accounts for employee stock-based compensation under
the intrinsic  value based method as prescribed by Accounting  Principles  Board
["APB"]  Opinion No. 25. The Company  applies the  provisions  of  Statement  of
Financial  Accounting  Standards  ["SFAS"] No. 123 to  non-employee  stock-based
compensation  and the pro  forma  disclosure  provisions  of that  statement  to
employee stock-based compensation.

Risk Concentrations - Financial instruments that potentially subject the Company
to  concentrations of credit risk include cash and cash equivalents and accounts
receivable arising from its normal business  activities.  The Company places its
cash and cash  equivalents  with  high  credit  quality  financial  institutions
located in the western United States.

The Company periodically has money in financial  institutions that is subject to
normal credit risk beyond insured  amounts.  This credit risk,  representing the
excess of the bank's deposit  liabilities  reported by the bank over the amounts
that would have been  covered by federal  insurance,  amounted to  approximately
$191,000 at December 31, 1996.

The Company's extension of credit to its customers,  which are primarily located
in the Silicon Valley,  California,  results in accounts receivable arising from
its normal business activities. The Company does not require collateral from its
customers, but routinely assesses the financial strength of its customers. Based
upon factors  surrounding  the credit risk of its  customers  and the  Company's
historical  collection  experience,  an  allowance  for  uncollectible  accounts
amounting  to  $93,279  has been  established.  The  Company  believes  that its
accounts receivable credit risk exposure beyond such allowance is limited.
Such assessment may be subject to change in the near term.

The Company had sales to three  unrelated  customers  in the  computer  industry
approximating  $7,404,000,  $6,285,000 and $3,487,600  representing 28%, 24% and
13%, respectively,  of the Company's total net sales for the year ended December
31, 1996. For the year ended December 31, 1995,  sales to these three  unrelated
customers approximated  $9,273,000,  $5,058,000 and $5,339,000 representing 33%,
18% and 19%, respectively. The loss of one or more of these customers may have a
severe impact on the Company in the near term.





                                       F-9

<PAGE>


   

TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #3
------------------------------------------------------------------------------



[4] Business Acquisition

Effective November 1, 1996, the Company acquired substantially all of the assets
and assumed certain liabilities of Pen Interconnect, Inc.'s San Jose Division [a
manufacturer  of wire cable  harnesses] for a purchase price of $3,300,000.  The
Company  acquired  assets  of  approximately   $1,309,000  and  assumed  certain
liabilities of $372,000. The consideration paid consisted of $2,000,000 in cash,
$900,000 in promissory  notes,  and 134,172  shares of TMCI common stock with an
agreed-upon  guaranteed  value  of  $400,000  at the  date of  acquisition.  The
acquisition  was accounted for utilizing the purchase  method and the operations
of the new division are included in the  Company's  results of  operations  from
November 1, 1996.  Goodwill of approximately  $2,577,000 [of which approximately
$214,000 was for legal and accounting costs directly related to the acquisition]
was  recorded  in  connection  with the  transaction  which  is being  amortized
utilizing  the  straight-line  method  over a period of 15  years.  Amortization
expense of $27,593  was  recorded  for the period  ended  December  31, 1996 and
accumulated  amortization amounted to $27,593 at December 31, 1996. In addition,
the Company entered into  agreements  whereby based on the attainment of certain
earnings  levels the seller can earn additional  proceeds of $700,000.  TMCI may
also be obligated to issue up to an additional  13,417 shares of Common Stock in
the event that certain overdue accounts  receivable are collected.  In the event
any such future payments will take place, the amount will be capitalized as part
of goodwill.  [See Note 20B Subsequent  Events - Arbitration of Pen Interconnect
Acquisition].

The  following  pro forma  unaudited  information  presents  the  results of the
combined  operations of TMCI Electronics,  Inc. and the San Jose Division of Pen
Interconnect,  Inc.,  treating  the  latter as if it was a  division  of Touche'
Electronics,  Inc. for the entire years ended  December 31, 1996 and 1995,  with
pro forma  adjustments  as if the  acquisition  had been  consummated  as of the
beginning of 1995. This pro forma  information does not purport to be indicative
of what would have occurred had the acquisition  been made as of January 1, 1995
or results which may occur in the future.

                                                             Year ended
                                                            December 31,
                                                         1 9 9 6     1 9 9 5
                                                         -------     -------

Total Revenues                                        $31,891,096 $33,228,923
Net Income                                            $   445,153 $   608,922
Net Income Per Share                                  $       .15 $       .31

[5] Inventory

Inventory consisted of the following:
                                                December 31,
                                                   1 9 9 6

Raw Materials                                   $ 3,015,968
Work-in Process                                   1,465,951
Finished Goods                                      688,742
                                                -----------

  Total                                         $ 5,170,661
  -----                                         ===========

[6] Notes Receivable - Stockholders

During 1996,  the Company had advanced  $166,226 to three  stockholders  bearing
interest at 10% with a 10 year amortization period commencing December 1, 1997.



                                      F-10
    

<PAGE>

   


TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #4
------------------------------------------------------------------------------



[7] Property and Equipment and Depreciation and Amortization

Property and equipment is comprised of the following:

                                                December 31,
                                                   1 9 9 6

Machinery and Equipment                         $ 5,036,652
Furniture and Fixtures                              620,838
Transportation Equipment                            223,397
Leasehold Improvements                              117,699
                                                -----------

Total                                             5,998,586
Less:  Accumulated Depreciation and Amortization  2,360,286

  Total                                         $ 3,638,300
  -----                                         ===========

Depreciation and amortization  expense amounted to $812,131 and $702,056 for the
years ended December 31, 1996 and 1995, respectively.

[8] Due from Related Party

The  Company  has  amounts  due  from  an  entity  controlled  by  the  majority
stockholder of the Company with interest to 10% per annum. At December 31, 1996,
the balance  due the Company  amounted  to  $473,952.  Interest  income on these
amounts  approximated  $30,000 for each of the years ended December 31, 1996 and
1995.  In  addition,  the entity  borrowed  $1,000,000  from the Small  Business
Administration. The Company has guaranteed amounts due under the loan.

[9] Due from Stockholder - Noncurrent

The December 31, 1996 balance due from stockholder is comprised of two unsecured
promissory notes due on demand from the Company's  president.  Each of the notes
call for interest payable at 10% per annum. The cumulative  balance  outstanding
of these notes was $238,167 at December 31, 1996.

[10] Line of Credit

In March  1996,  the  Company  entered  into a new line of credit  and term loan
facility with a financial  institution.  The new facilities  bear interest rates
ranging  from prime plus 1.25% to prime  plus .75%,  are  collateralized  by all
corporate  assets  and was used to pay off the  former  line of credit and other
debt  aggregating  approximately  $2,800,000.  The unused portion of the line of
credit was $3,415,000 [based upon eligible accounts  receivable] at December 31,
1996 of which  approximately  $1,000,000  from the line was used to finance  the
acquisition  of Enterprise  Industries,  Inc.  [See Note 20A].  The new facility
requires  the  Company,  among  other  things,  to  maintain  minimum  levels of
earnings,  tangible net worth and certain minimum  financial  ratios.  Effective
December 31, 1996, the Company was not in compliance with certain  covenants and
obtained a waiver from the financial  institution of the required  minimum level
of earnings,  tangible net worth,  and debt service  coverage ratio. The line of
credit also contains negative  covenants among other  provisions,  requiring the
consent for the  disposition  of assets,  acquisition or merger of any business,
guaranty  of  any  third  party  obligations,   capital  restructure,   and  any
distributions  or payment of any  dividends  in cash or in stock.  The  weighted
average  interest  rate on  short-term  borrowings at December 31, 1996 was 11.3
percent.  The line of credit is  personally  guaranteed  by the president of the
Company.  There can be no  assurance  that the Company  will be able to maintain
compliance  with  applicable  covenants  under the line of credit  and term loan
facility in the future.



                                      F-11
    

<PAGE>



TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #5
------------------------------------------------------------------------------


[11] Notes Payable

Notes payable consist of the following:
                                                                  December 31,
                                                                     1 9 9 6
Promissory  notes in the amounts of $500,000 and $400,000  issued in  connection
  with the acquisition of the cable company,  bearing interest at the prime rate
  plus .5% with  monthly  payments  of  $33,276,  maturing  October 31, 1999 and
  November  1,  1998,  respectively,  collateralized  by the assets of the cable
  division and are in default [See Note 20B] $ 900,000

Note payable to  financing  company with  monthly  payments of $6,293  including
  principal and interest at 8.35% per annum; maturing March 2001; collateralized
  by machinery and equipment 269,393

Notes  payable  to  financial  institution  with  monthly  payments  of  $46,906
  including  principal and interest at 1.25% above prime,  maturing May 1, 2001,
  collateralized by all corporate assets 1,691,747

Total                                                               2,861,140
Less: Current Portion                                                 796,867

  Noncurrent Portion                                              $ 2,064,273
  ------------------                                              ===========

The prime rate was 8.25% at December 31, 1996.

Current maturities on long-term debt at December 31, 1996 are as follows:

December 31,
   1997                             $   796,867
   1998                                 828,510
   1999                                 699,116
   2000                                 518,138
   2001                                  18,509
   Thereafter                                --
                                    -----------

   Total                            $ 2,861,140
   -----                            ===========

[12]  Other Liabilities

Pursuant to a purchase agreement with the previous owner of the operating assets
of the business,  consummated in September 1992, the Company assumed, and agreed
to perform and pay when due, all of the liabilities,  obligations, and contracts
of the previous  owner as of August 31,  1992,  and any  additional  liabilities
arising  in  the  ordinary  course  of  business.   Accrued   expenses   include
management's  estimate  of their  liability  under this  purchase  agreement  of
approximately $68,000.



                                      F-12

<PAGE>



TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #6
------------------------------------------------------------------------------



[13] Bridge Notes Payable

In November and December 1995,  the Company  borrowed an aggregate of $1,000,000
in bridge loans, as evidenced by four promissory  notes of $250,000 each bearing
a rate  of  eight  percent  [8%]  simple  interest.  The  loans  matured  on the
consummation of the public offering of the Company's  securities [See Note 18C].
As additional  consideration,  solely for making the loans,  the Company granted
the lenders the right to receive an aggregate of 200,000 units  ["Bridgeholder's
Units"].  Each  Bridgeholder's  Unit consists of (i) two shares of Common Stock,
(ii) two Class A Redeemable  Common Stock Purchase Warrants ["Class A Warrants"]
and  (iii) two Class B  Redeemable  Common  Stock  Purchase  Warrants  ["Class B
Warrants"].  The Lenders may  exercise  the right to receive the  Bridgeholder's
Units by  delivering  the notice  thereof  to the  Company at any time after the
effective  date of the  offering.  The holders of the Bridge Units agreed not to
sell,  pledge,  hypothecate,  encumber or otherwise dispose of any of the Bridge
Units  for a period of  thirteen  months  following  the  effective  date of the
offering.  The  Company  has valued  these  units at $3.75 per unit  taking into
consideration  restrictions imposed on the holders of the Bridge Units as to the
salability of the units issued. The Company has accounted for the $750,000 value
of the  Bridgeholder's  Units as debt issue  costs which were  amortized  by the
straight-line method which approximates the interest method over the life of the
promissory notes. For the year ended December 31, 1996 and 1995, amortization of
$462,122  and  $287,878,  respectively,  of  such  costs  are  reflected  in the
statement of operations.

[14] Income Taxes

Commencing  March  5,  1996,  the  Company  will  file  its  tax  returns  on  a
consolidated  basis with all of its  subsidiaries.  Prior to March 5, 1996, TMCI
and Touche filed separate Subchapter C corporation tax returns and TEI was taxed
under the provisions of Subchapter S of the Internal Revenue Code.

Deferred  income  taxes  reflect  the  tax   consequences  on  future  years  of
differences  between the tax bases of assets and liabilities and their financial
reporting   amounts,   and  consist   primarily   of   depreciation,   inventory
capitalization,  allowance  for  bad  debts,  contribution  deductions,  and the
alternative minimum tax.

The components of the provision for income taxes are as follows:
                                                            December 31,
                                                         1 9 9 6     1 9 9 5
                                                         -------     -------
Current Tax Expense:
  Federal                                             $   126,644 $   354,200
  State                                                    10,120      66,900
                                                      ----------- -----------

  Totals                                                  136,764     421,100
  Less: Benefit of Net Operating Loss Carryforward       (102,300)    (86,100)
                                                      ----------- -----------

  Total Current Provision                                  34,464     335,000
                                                      ----------- -----------

Deferred:
  Federal                                                  40,658     203,800
  State                                                   (56,123)     (4,600)
                                                      ----------- -----------

  Total Deferred Provision                                (15,465)    199,200
                                                      ----------- -----------

  Total Provision for Taxes                           $    18,999 $   534,200
  -------------------------                           =========== ===========



                                      F-13

<PAGE>

   


TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #7
------------------------------------------------------------------------------



[14] Income Taxes [Continued]

The  components  of the  deferred  tax  liability as of December 31, 1996 are as
follows:

Deferred Tax Asset:
  Alternative Minimum Tax Credits                     $    59,717
  Bad Debt Allowance                                       37,441
  Inventory Capitalization                                 21,230
  Unused State Tax Credit                                  69,603
                                                      -----------

  Deferred Tax Asset - Current                            187,991

Deferred Tax Liabilities
  Excess Tax Over Book Accumulated Depreciation -
    Non-Current                                          (436,781)

  Net Deferred Tax Liabilities                        $  (248,790)
  ----------------------------                        ===========

A reconciliation between the Company's effective tax rate and the U.S. statutory
rate follows:

                                             1 9 9 6     1 9 9 5
                                             -------     -------

U.S. Statutory Rate Applied to Pretax Income     34%         34%
State Tax Provision - Net of Federal Tax Benefit  6         6
Effect of S Corporation Operations               13         2
Net Operating Loss Carryforward                 (42)       --
Other                                            --        11

  Total Effective Tax Rate                       11%       53%
  ------------------------                   ======     =====

As of December 31, 1996, the Company  utilized the remaining  balance of its net
operating  loss  carryforward  as an offset to its federal and state  income tax
expense.

[15] Related Party Transactions

In 1995,  Touche owed Textron  Financial  approximately  $401,700  which Antonio
Zertuche, Touche's landlord, agreed to repay in exchange for Touche's promissory
note to make monthly installments of approximately $6,322, including interest at
11.5% per annum, maturing December 1996. In January 1996, the Company refinanced
the  note,  and  issued  a new  note  for  approximately  $291,000  which is the
difference between the Company's original note payable of approximately $401,700
and its  cancellation  of an outstanding  note  receivable  from the landlord of
approximately $99,000, plus approximately $11,600 in the overpayment of property
taxes on leased property located at 1875 Dobbin Drive, San Jose, California. The
new note payable was  satisfied in March 1996,  from the proceeds of the initial
public offering.

In addition to acting as Chairman,  President and Chief Executive Officer of the
Company,  Rolando  Loera is also  the sole  owner  of  Touche  Properties,  Inc.
["TPI"],  a real estate company which owns and leases the real property  located
at 1881-1899 Dobbin Drive [the  "Property"] to TEI and Touche,  two wholly-owned
subsidiaries  of the Company.  The rent  payments  made by TEI and Touche to TPI
amounted to approximately $576,144 and $477,640 in 1996 and 1995,  respectively.
In addition, TPI has a loan in the amount of $1,000,000 on the Property, and TEI
and Touche have  guaranteed the  satisfaction  of TPI's  obligations  under this
loan.



                                      F-14
    

<PAGE>



TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #8
------------------------------------------------------------------------------



[16] Employees' Stock Ownership Plan and Employees' Defined Contribution Plan

TMCI has a Noncontributory Employees' Stock Ownership Plan ["the Plan"] covering
all full-time employees who have met certain service  requirements.  It provides
for  discretionary  contributions  by  Touche  as  determined  annually  by  the
directors  and   stockholders.   As  of  December  31,  1996,   the  Plan  owned
approximately .8% of Touche's outstanding shares.

The Company has a voluntary 401(k) savings plan covering all eligible employees.
The Company matches up to 5% of all  contributions on a discretionary  basis and
each employee vests 100% over 7 years. The Company's 1996 and 1995 contributions
were $5,036 and $1,945, respectively.

[17] Commitments and Contingencies

Operating  Leases  -  The  Company  leases  its  production  and  administrative
facilities.  This obligation extends through April 2003. Annual rental increases
on each  January 1st shall be adjusted  per the average  annual  Consumer  Price
Index - San  Francisco/Oakland/San  Jose Metropolitan Area.  Beginning on May 1,
2003 and continuing  through the remaining lease term, the base rent will be the
prevailing market rate.

A portion of the Company's  production and administrative  facilities are leased
from an affiliate  which is 100% owned by the Company's  sole  stockholder.  The
leases commenced in November 1993 and November 1996 and expire in November 2013.

Minimum lease  payments for the next 5 years and  thereafter  [not including the
CPI increases] are:

                            Related Party  Third Party
                               Leases        Leases

1997                        $   576,144    $   470,160
1998                            576,144        470,160
1999                            576,144        470,160
2000                            576,144        470,160
2001                            576,144        470,160
Thereafter                    6,865,716      5,406,840
                            -----------    -----------

  Total                     $ 9,746,436    $ 7,757,640
  -----                     ===========    ===========

Total rent  expense  amounted to  $1,038,626  and  $730,417  for the years ended
December 31, 1996 and 1995, respectively.

Employment  Agreement - The Company has  entered  into an  employment  agreement
["Agreement]  dated as of  December  28,  1995 with its  president.  The term of
employment commenced on March 5, 1996, the effective date of the public offering
and will expire on the fifth  anniversary  thereof.  The annual salary under the
Agreement is $225,000. The term of employment will be automatically extended for
an additional  five year term in the absence of notice from either  party.  This
salary may be increased to reflect  annual cost of living  increases  and may be
supplemented by discretionary and performance  increases as may be determined by
the Board of Directors  except that during the first three years  following  the
effective date, his salary may not exceed $225,000.  The Agreement provides that
during the initial  three years of the term of  employment,  an annual  bonus of
$100,000 will be awarded to the president.  The 1996 bonus was  relinquished  by
the President. Bonuses during the remainder of the term of employment will be at
the discretion of the Board of Directors.





                                      F-15

<PAGE>


   

TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #9
------------------------------------------------------------------------------


[17] Commitments and Contingencies [Continued]

Employment Agreement  [Continued] - The Agreement provides,  among other things,
for  participation  in an equitable manner in any  profit-sharing  or retirement
plan for  employees  or  executives  and for  participation  in  other  employee
benefits  applicable to employees and  executives of the Company.  The Agreement
further  provides  for  the  use of an  automobile  and  other  fringe  benefits
commensurate with his duties and  responsibilities.  The Agreement also provides
for benefits in the event of disability.

If employment by the Company of Mr. Loera terminates or Mr. Loera becomes unable
to perform his duties, the Company may be adversely affected.

[18] Stockholders' Equity

[A]  Description  of  Securities - The  authorized  capital stock of the Company
consists of 25,000,000  shares of common stock,  $.001 par value per share.  All
shares of common stock are entitled to share  equally in dividends  from sources
legally  available  therefor  when, as and if declared by the Board of Directors
and,  upon  liquidation  or  dissolution  of the Company,  whether  voluntary or
involuntary,  to share  equally  in the  assets  of the  Company  available  for
distribution to stockholders. All outstanding shares of common stock are validly
authorized and issued, fully paid and nonassessable.

[B] Issuance of Common Stock - On November 6, 1995,  the Company  issued 600,000
shares of its common stock to its then sole  stockholder in exchange for $1,000,
which is reflected retroactively in the statement of stockholders' equity.

[C] Public  Offering - On March 11, 1996,  the Company closed the initial public
offering  of  its  securities  resulting  in net  proceeds  to  the  Company  of
approximately  $5,700,000.  The Company sold 1,472,000  Units  consisting of one
share of common stock,  $0.001 par value per share,  and one redeemable  Class A
warrant at a price of $5.00 per Unit.  Each Class A warrant  entitles the holder
to purchase one share of common stock at a price of $5.50 per share for a period
of four  years  beginning  March 5,  1997.  The  Company  may redeem the Class A
warrants any time after March 5, 1997, upon thirty days written  notice,  if the
average  closing  price or bid price of the common  stock,  as  reported  by the
principal  market on which the  common  stock is  quoted  or  traded,  equals or
exceeds $8.75 per share, for any 20 consecutive  trading days ending within five
days prior to the date of the notice of  redemption.  The Company used a portion
of the proceeds  from the  offering to repay the bridge notes  described in Note
13.

Effective  with the  offering,  the Company  sold the  underwriter  an option to
purchase up to an aggregate  of 128,000  units.  Each unit shall be  exercisable
during the  four-year  period  commencing  one year after  March 11,  1996.  The
exercise  price of the units issuable upon exercise of the  underwriter's  units
during the period of exercisability shall be $8.25.

[D] Conversion of Debt-to-Equity - Immediately prior to the public offering, the
holders of the convertible  promissory  notes exercised the conversion  right of
the notes and exchanged them for 298,720 shares of TMCI.

[E] Stock Purchase  Agreements - On December 28, 1995, the Company  entered into
Stock Purchase Agreements [the "Agreements"] with the stockholders of Touche and
TEI to  acquire  all of the  issued  and  outstanding  stock of Touche  and TEI.
Immediately  prior to the public offering,  the Company  exchanged its shares of
Touche and TEI for 567,600 and 27,280 shares, respectively, of TMCI.

[F] Stock Option Plan - The Company has adopted a stock  option plan,  effective
December 22, 1995.  Under such plan, key employees and officers and  consultants
of the  Company  will be granted  options to  purchase  shares of the  Company's
common stock at their fair market value on the date of grant.  The plan provides
for an  aggregate  of 500,000  options.  On December  22,  1995,  the  Company's
president  was granted  options to purchase  100,000  shares of common  stock at
$3.75 per  share.  The  options  vest two years  from the date of grant and will
expire in December 2005. The Plan also permits stock  appreciation  rights to be
granted in tandem with options.

                                      F-16
    

<PAGE>



TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #10
------------------------------------------------------------------------------



[18] Stockholders' Equity [Continued]

[F] Stock Option Plan  [Continued] - A summary of the activity under the plan is
as follows:

                                                           Remaining
                                                          Contractual
                                     Shares      Price     Life   Exercise Price
balance - December 31, 1994                  -- $      --

Granted                                 100,000      3.75  10 Years   $  3.75
Exercised                                    --        --
Forfeited/Expired                            --        --
                                     ---------- ---------

  Outstanding - December 31, 1995       100,000      3.75  10 Years   $  3.75
  -------------------------------

Granted                                      --        --
Exercised                                    --        --
Forfeited/Expired                            --        --
                                     ---------- ---------

  Outstanding - December 31, 1996       100,000 $    3.75  10 Years   $  3.75
  -------------------------------    ========== =========

  Exercisable - December 31, 1996            --        --
  -------------------------------    ========== =========

Had  compensation  cost for the Company's stock options issued to employees been
determined  based upon the fair value at the grant date for stock options issued
under these plans  pursuant to the  methodology  prescribed  under  Statement of
Financial  Accounting  Standards  ["SFAS"] No. 123,  Accounting for  Stock-Based
Compensation,  the  Company's  net income and earnings per share would have been
decreased,  on a pro forma basis, by approximately  $138,500,  or $.05 per share
for the year ended December 31, 1996 which is based upon the amortization of the
1995 fair value.  The effect on 1995 earnings is  immaterial.  The fair value of
stock options  granted to employees used in determining the pro forma amounts is
estimated at $377,000 during 1995 using the Black-Scholes  option-pricing  model
for the pro forma amounts with the following weighted average assumptions:

                                       December 31,
                                    1 9 9 6      1 9 9 5

Risk-free Interest Rate               N/A         5.87%
Expected Life                         N/A        6 Years
Expected Volatility                   N/A        82.07%
Expected Dividends                          None

Net income and net earnings  per share as reported,  and on a pro forma basis as
if compensation  cost had been determined on the basis of fair value pursuant to
SFAS No. 123 is as follows:

                              December 31,
                                 1 9 9 6
Net Income:
  As Reported                 $    148,337
                              ------------
  Pro Forma                   $      9,837
                              ------------

Net Income Per Share:
  As Reported                 $        .05
                              ------------
  Pro Forma                   $         --
                              ------------


                                      F-17

<PAGE>


   

TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #11
------------------------------------------------------------------------------



[19] Fair Value of Financial Instruments

Effective  December  31,  1995,  the  Company  adopted  Statement  of  Financial
Accounting  Standards  No.  107,  "Disclosure  About  Fair  Value  of  Financial
Instruments," which requires disclosing fair value to the extent practicable for
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial  instruments disclosed herein is not necessarily
representative  of the amount that could be  realized  or settled,  nor does the
fair value amount  consider the tax  consequences  of realization or settlement.
The following table summarizes financial instruments by individual balance sheet
classifications as of December 31, 1996:

                                                Carrying      Fair
                                                Amount       Value

Due from Stockholder                          $   238,167 $   238,167
Note Receivable - Stockholders                $   166,226 $   166,226
Due from Related Party                        $   473,952 $   473,952
Notes Payable - Net of Current Portion        $ 2,064,273 $ 2,064,273

In  assessing  the fair value of these  financial  instruments,  the Company was
required to make assumptions, which were based on estimates of market conditions
and risks  existing  at that time.  For  certain  instruments,  including  cash,
accounts receivable, notes receivable, accounts payable, amounts due to and from
related parties and affiliates,  and short-term debt,  management estimates that
the  carrying  amount   approximated  fair  value  for  the  majority  of  these
instruments  because of their short  maturities.  Management  estimates that the
carrying amount of its long-term indebtedness  approximates fair value since the
interest rates  currently  offered to the Company for debt of the same remaining
maturities  approximates  the  average  interest  rates  which  the  Company  is
currently paying. The Company does not believe it is practicable to estimate the
fair value of the guarantee described in Note 8 and does not believe exposure to
loss is likely.

[20] Subsequent Events

[A]  Acquisition  of  Enterprise  Industries,  Inc. - On January 24,  1997,  the
Company  acquired 100% of the outstanding  shares of capital stock of Enterprise
Industries,  Inc.  ["Enterprise"],  a North  Hollywood,  California  based metal
stamping  manufacturing  business  for a total  purchase  price  of  $1,500,000,
consisting  of  $1,000,000  in cash and the  issuance  of  96,560  shares of the
Company's common stock. The Company acquired assets of approximately  $1,088,000
and assumed  liabilities  of  approximately  $323,000  resulting  in goodwill of
approximately  $735,000. At the same time the Company entered into an employment
contract with the President of  Enterprise.  If employment by the Company of the
president  of  Enterprise  terminates  or if he becomes  unable to  perform  his
duties, the Company may be adversely affected.

[B] Arbitration of Pen  Interconnect  Acquisition - Subsequent to the closing of
the  acquisition of the San Jose Division of Pen  Interconnect,  a dispute arose
concerning various aspects of the transaction.  On February 14, 1997, TMCI filed
a Demand for  Arbitration  against Pen,  seeking a  substantial  purchase  price
reduction or, in the alternative, other remedies and damages as provided by law.
Management has suspended all payments to Pen,  including  payments due under the
promissory  notes,  aggregating  $900,000.  Pen has  sought  to  accelerate  the
promissory notes.  Management,  after consultation with legal counsel,  believes
that it will prevail in all material  aspects of the  dispute.  Accordingly,  at
December 31, 1996, the Company has  classified the promissory  notes as maturing
under the original terms provided  therein.  An arbitrator has been selected and
agreed upon by all parties to the arbitration proceedings [See Note 11].



                                      F-18
    

<PAGE>

   

TMCI  ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #12
------------------------------------------------------------------------------



[21] Pro Forma Income Taxes [Unaudited]

The pro forma  income  tax  amounts  presented  in 1996  reflect  the income tax
expense that would have been recorded if the Company had been combined as of the
beginning  of  the  year  and  had  been  taxed  as if  all  companies  were a C
corporation.

[22] New Authoritative Accounting Pronouncements

The Financial  Accounting  Standards Board ["FASB"] has also issued Statement of
Financial  Accounting  Standards ["SFAS"] No. 125, "Accounting for Transfers and
Servicing of Financial Assets and  Extinguishment of Liabilities."  SFAS No. 125
is effective for transfers and servicing of financial assets and  extinguishment
of liabilities  occurring  after December 31, 1996.  Earlier  application is not
allowed.  The  provisions  of  SFAS  No.  125  must  be  applied  prospectively;
retroactive  application  is  prohibited.  Adoption  on  January  1, 1997 is not
expected  to have a  material  impact on the  Company.  The FASB  deferred  some
provisions of 125, which are not expected to be relevant to the Company.

The Financial Accounting Standards Board ["FASB"] has issued Statement of 
Financial Accounting Standards ["SFAS"] No. 128, "Earnings per Share," and SFAS 
No. 129, "Disclosure of Information about Capital Structure," in February 1997.

SFAS No. 128 simplifies the earnings per share ["EPS"] calculations  required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the  presentation  of primary EPS with a presentation of basic EPS.
SFAS No. 128  requires  dual  presentation  of basic and diluted EPS by entities
with complex capital structures.  Basic EPS includes no dilution and is computed
by dividing  income  available to common  stockholders  by the  weighted-average
number of common  shares  outstanding  for the period.  Diluted EPS reflects the
potential  dilution of securities that could share in the earnings of an entity,
similar  to the  fully  diluted  EPS of APB  Opinion  No.  15.  SFAS No.  128 is
effective for financial  statements issued for periods ending after December 15,
1997,  including  interim periods;  earlier  application is not permitted.  When
adopted,  SFAS No. 128 will require  restatement  of all  prior-period  EPS data
presented;  however,  the Company has not sufficiently  analyzed SFAS No. 128 to
determine  what effect SFAS No. 128 will have on its  historically  reported EPS
amounts.

SFAS No. 129 does not change any previous  disclosure  requirements,  but rather
consolidates existing disclosure requirements for ease of retrieval.





                .   .   .   .   .   .   .   .   .   .   .   .   .

                                      F-19