<PAGE>

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                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

X        QUARTERLY  REPORT  PURSUANT  TO SECTION 13 OR 15(d) OF THE  SECURITIES
         EXCHANGE  ACT OF 1934 for the  quarterly period ended: June 30, 1999

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

                        Commission File Number 333-41939

                           STELLEX TECHNOLOGIES, INC.

             (Exact name of registrant as specified in its charter)

                     Delaware                            13-3971931
            (State of Incorporation)          (IRS Employer Identification No.)

             680 Fifth Avenue, 8th Floor
                  New York, New York                       10019
       (Address of principal executive office)          (Zip code)

       Registrant's telephone number, including area code: (212) 931-5333

 Stellex Industries, Inc., 1430 Broadway, 13th Floor, New York, New York, 10018
                        (Former name and former address)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X    No __

As of August 1,  1999,  the  number of shares  outstanding  of the  registrant's
Common Stock, no par value, was 1,000 shares. There is no trading market for the
Common Stock.  Accordingly,  the aggregate market value of the Common Stock held
by non-affiliates of the registrant is not determinable.

  -----------------------------------------------------------------------------





                                       1






ITEM 1: Financial Statements
<TABLE>
<CAPTION>

                                       STELLEX TECHNOLOGIES, INC. AND SUBSIDIARIES
                                               CONSOLIDATED BALANCE SHEETS
                                            (in thousands, except share data)


                                                                                 June 30,         December 31,
                                                                                   1999                1998
        ASSETS                                                                  (Unaudited)
        <S>                                                                 <C>                  <C>
        Current assets:
            Cash and cash equivalents                                       $          4,734    $           1,405
            Account receivables, net                                                  31,741               28,452
            Inventories                                                               71,864               58,329
            Prepaid and other assets                                                   4,215                3,200
            Deferred income taxes                                                      3,403                3,318
                                                                               -------------       --------------

            Total current assets                                                     115,957               94,704
        Property, plant and equipment, net                                            89,247               53,871
        Goodwill, net                                                                118,003               60,786
        Other intangible assets, net                                                  50,997               52,552
        Deferred financing costs, net                                                 13,927                9,033
        Other assets                                                                   5,529                2,284
                                                                               -------------       --------------
            Total assets                                                    $        393,660     $        273,230
                                                                            ================     ================

        LIABILITIES & STOCKHOLDERS' EQUITY
        Current liabilities:
           Current portion of long term obligations                         $          8,517   $           5,533
          Accounts payable                                                            10,716              11,639
          Accrued liabilities                                                         20,260              17,797
          Advance billings and customer deposits                                      20,884                 252
                                                                            -----------------    ---------------

          Total current liabilities                                                   60,377              35,221
        9 1/2% senior subordinated notes                                             100,000             100,000
        Long-term obligations, less current portion                                  184,926             106,201
        Deferred employee benefits                                                     2,233               1,952
        Deferred income taxes                                                         21,215              20,029
                                                                            -----------------    ---------------
          Total liabilities                                                          368,751             263,403
                                                                            ----------------     ---------------

        13% Senior Cumulative Redeemable
              Preferred Stock                                                         18,950                   -

        Stockholders' equity:
        Common stock, no par value, 1,000 shares authorized and
             outstanding                                                                  50                  50
        Preferred stock, no par value: 500 shares authorized,
             229 shares issued and outstanding                                        11,450              11,450
        Additional paid-in capital                                                     3,054               3,054
        Accumulated deficit
                                                                                      (8,595)             (4,727)
                                                                            ----------------     ---------------
            Total stockholders' equity                                                 5,959               9,

            Total liabilities and stockholders' equity                      $        393,660     $       273,230
                                                                            ================     ===============


                              See accompanying notes to unaudited consolidated financial statements
</TABLE>

                                       2
<PAGE>


<TABLE>
<CAPTION>

                                       STELLEX TECHNOLOGIES, INC. AND SUBSIDIARIES

                                          CONSOLIDATED STATEMENTS OF OPERATIONS

                                                       (Unaudited)
                                                     (in thousands)


                                                            Three Months Ended                      Six Months Ended
                                                                 June 30,                               June 30,
                                                     1999                 1998                 1999                 1998
                                                     ----                 ----                 ----                 ----


<S>                                           <C>                  <C>                  <C>                 <C>
Sales                                         $         58,721     $         38,450   $        108,334    $           66,349
Cost of sales                                           44,457               27,812             80,879                49,763
Gross profit                                            14,264               10,638             27,455                16,586
Operating expenses:
Selling, general and administrative                                           5,948             12,916               10,076
Research and development                                 2,620                1,209              4,296                2,149
Amortization of intangibles                              1,681                  851              2,974                1,493
                                                         -----                  ---              -----                -----
    Total operating expenses                            11,892                8,008             20,186               13,781
                                                        ------                -----             ------               ------

Income from operations                                   2,372                2,630              7,269                2,868
                                                         -----                -----              -----                -----
Other income (expense):
    Interest income                                         32                   25                84                    58
    Interest expense                                    (6,533)              (3,712)          (11,349)               (6,482)
    Other                                                    1                  (70)               (2)                 (133)
                                                             -                  ----               ---                -----

    Total other expense                                 (6,500)              (3,757)           (11,267)              (6,557)
                                                        -------              -------           --------              -------

Loss before provision for income taxes                  (4,128)              (1,127)            (3,998)              (3,689)
Benefit for income taxes                                (1,390)                (246)            (1,321)              (1,018)
                                                        -------                -----            -------              -------
Net loss                                                (2,738)                (881)            (2,677)              (2,671)
Preferred stock dividends                                  827                  286              1,191                  573
                                                        -------                ----              -----               ------

Loss applicable to common stockholders        $         (3,565)  $           (1,167)  $         (3,868)              (3,244)
                                                        =======              =======            =======              =======
</TABLE>









     See accompanying notes to unaudited consolidated financial statements.




                                       3
<PAGE>



<TABLE>
<CAPTION>

                                       STELLEX TECHNOLOGIES, INC. AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                       (Unaudited)
                                                     (in thousands)

                                                                                       Six Months Ended
                                                                                           June 30,
                                                                                  1999                 1998
                                                                                  ----                 ----

<S>                                                                            <C>                 <C>
Cash Flows from Operating Activities:
Net loss                                                                       $ (2,677)           $  (2,671)
Reconciliation to net cash provided by (used in) operating activities:
   Depreciation and amortization                                                  8,945                4,922
   Amortization of step-up in inventory                                           2,322                1,457
   Gain on sale of property                                                          (6)                  (3)
   Deferred income taxes                                                         (1,294)              (1,027)
   Stock compensation charge                                                          -                1,490
   Changes in  assets  and  liabilities  (net of  acquired  assets  and  assumed
        liabilities):
        Accounts receivable                                                       1,971               (3,010)
        Inventories                                                                (957)              (1,740)
        Prepaid and other assets                                                 (2,165)               2,792
        Accounts payable                                                         (2,531)                 (72)
        Accrued liabilities                                                      (2,349)              (1,919)
        Advance billings and customer deposits                                   17,644                 (935)
                                                                                 ------               -------
     Net cash provided (used) by operating activities                            18,903                 (716)
                                                                                 ------               -------

Cash Flows from Investing Activities:
Additions to fixed assets                                                        (8,128)               (2,212)
Proceeds from sale of fixed assets                                                   16                    24
Net cash used in acquisitions                                                  (102,497)              (90,364)
                                                                               ---------              --------
     Net cash used in investing activities                                     (110,609)              (92,552)
                                                                               ---------              --------

Cash Flows from Financing Activities:
Net borrowings under revolving line of credit                                     1,500                 8,250
Payment of financing costs                                                       (5,634)               (4,242)
Borrowings from Senior Term Loans                                                81,800                90,000
Net proceeds from issuance of Preferred Stock                                    18,950                     -
Mandatory repayments under new Senior Term Loans                                 (1,500)                    -
Repayments under capital lease obligations                                          (48)                  (31)
Repayment of debt and notes payable                                                 (33)                  (31)
    Net cash provided by financing activities
                                                                                 95,035                93,946
                                                                               --------               -------
     Net increase in cash and cash equivalents                                    3,329                   678
Cash and cash equivalents, beginning of period                                    1,405                 3,304
                                                                               --------               -------
Cash and cash equivalents, end of period                                      $   4,734          $      3,982
                                                                               ========               =======

</TABLE>



                                       4
<PAGE>




<TABLE>
<CAPTION>

                                       STELLEX TECHNOLOGIES, INC. AND SUBSIDIARIES

                                    CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                                       (Unaudited)
                                                     (in thousands)




                                                                                           Six Months Ended
                                                                                               June 30,
                                                                                     1999                   1998
                                                                                     ----                   ----

<S>                                                                         <C>                    <C>
Supplemental  disclosure of cash flow  information:
    Cash paid during the period for:
    Interest                                                                $       7,695          $       5,431
    Income taxes                                                                      340                      -
    Supplemental schedule of non-cash investing and financing activities:
      Capital lease agreements for equipment                                            -                     30
      Note issued  to Seller in conjunction with Monitor Acquisition                    -                  5,180

  Assets acquired and liabilities assumed in connection with the Acquisitions:
    Fair value of assets acquired                                           $     117,416          $     130,420
    Fair value of liabilities assumed                                              (7,581)               (34,484)
                                                                                  -------                --------
    Cash paid                                                                     109,835                 95,936
    Less financing fees and expenses                                               (5,634)                (4,165)
    Less cash acquired                                                             (1,704)                (1,407)
                                                                                  -------                --------
    Net cash used for business acquisitions                                 $     102,497          $      90,364
                                                                                  =======                =======
</TABLE>


















      See accompanying notes to unaudited consolidated financial statements







                                       5
<PAGE>





                   STELLEX TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.    Organization and Description of Business

Formation  of  Stellex - On  September  5,  1997,  Stellex  Holdings  Corp.  was
incorporated  as a Delaware  corporation,  which on October 23, 1997 amended its
certificate  of  incorporation  to change its name to Stellex  Industries,  Inc.
Subsequently,  on April 6, 1999, the certificate of incorporation was amended to
change  the  Company's  name to Stellex  Technologies,  Inc.  ("Stellex"  or the
"Company").  On September  12, 1997,  Stellex  issued 1,000 shares of its common
stock to  Greystoke  Capital  Management  Limited LDC in exchange  for (i) 8,010
shares of common and 84 shares of Series A preferred  stock of KII Holding Corp.
("KII  Holding"),  (ii)  $50,000 cash and (iii) the  assumption  of a $4,000,000
promissory   note.  KII  Holding  had  previously  been  formed  to  effect  the
acquisition of Kleinert  Industries  and  subsidiaries  ("Kleinert")  on July 1,
1997,  as described  more fully  below.  As a result of the  September  12, 1997
transaction,  Stellex  acquired an 80.1% interest in KII Holding;  the remaining
equity  interests  were held by certain  members of Kleinert  management,  until
December 1998 when Stellex acquired the remaining equity interests.  On April 6,
1999 the certificate of  incorporation  of KII Holding was amended to change its
name to Stellex Aerospace, Inc.

          Kleinert  Acquisition  - On  July  1,  1997,  KII  Holding  through  a
wholly-owned subsidiary (KII Acquisition Corp., a Delaware corporation) acquired
all of the  outstanding  capital  stock of  Kleinert  from  Kleinert  Industries
Holding AG. The  acquisition  was  accounted  for using the  purchase  method of
accounting,  and,  accordingly,  the net purchase price of  approximately  $26.5
million  (including the assumption of approximately $2.6 million of indebtedness
and the issuance to the seller of a note for $1.75 million) was allocated to the
assets  purchased and the liabilities  assumed based upon the fair values at the
date of acquisition.  There was no excess purchase price over the fair values of
the net  assets  acquired  in  connection  with the  acquisition.  KII  Holdings
corporate name was subsequently  changed to Stellex  Aerospace,  Inc.  ("Stellex
Aerospace").  Kleinert  commenced  operations in 1988,  and provided  management
services  for  its  wholly-owned   subsidiaries  -  Paragon  Precision  Products
("Paragon"),  General Inspection Laboratories,  Inc. ("GIL"),  Scanning Electron
Analysis  Laboratories,   Inc.  ("SEAL"),  and  Bandy  Machining   International
("Bandy").  On April 8, 1999,  KII  Acquisition  Corp.  was merged into  Stellex
Aerospace,  Inc. During April 1999, the articles of incorporation of Paragon and
Bandy were amended to change their names to Stellex Paragon Precision,  Inc. and
Stellex Bandy Machining, Inc., respectively.

Paragon  specializes in the manufacture of precision aerospace  components.  GIL
provides  non-destructive  testing  services for  inspecting  critical parts and
manufactured  components.  SEAL  specializes  in materials  analysis and problem
solving for government and industry.  Bandy manufactures  precision hinges, door
panels and hinge assemblies for both aerospace and industrial applications.

TSMD  Acquisition  - On  October  31,  1997,  Stellex,  through  a  wholly-owned
subsidiary,  TSMD Acquisition  Corp.,  purchased 100% of the outstanding  common
stock of Stellex Microwave Systems, Inc. ("Stellex Microwave"),  which comprised
the operations of the Tactical Subsystems and Microwave Devices Sectors ("TSMD")
of the Watkins-Johnson Company ("Watkins-Johnson"),  for a net purchase price of
approximately  $82.1  million.  The  acquisition  was  accounted  for  using the
purchase  method of accounting  with  estimated fair value being assigned to the
assets acquired and  liabilities  assumed.  The purchase was financed  primarily
with the net proceeds  from an offering of senior  subordinated  notes  totaling
$92.3 million. Stellex Microwave designs, markets and manufactures a broad range
of microwave devices, modular subsystems and electronic equipment operating over
the RF and  microwave  frequency  bands  for sale  primarily  for  military  and
aerospace  applications.  On April 6, 1999, the certificate of  incorporation of
TSMD  Acquisition  Corp. was amended to change its name to Stellex  Electronics,
Inc.

Monitor  Aerospace  Acquisition  - On May 29,  1998,  Stellex  acquired  Monitor
Aerospace Corporation ("Monitor"),  a leading aerospace subcontractor engaged in
the  manufacture  and  assembly  of   precision-machined   structural   aircraft
components  and  assemblies  for  tolerance  critical  applications,  located in
Amityville,  New  York.  Monitor  had  two  wholly-owned  subsidiaries,  Monitor
Aerospace  International  Corporation and Monitor Marine Products, Inc. On April
13, 1999, these wholly-owned  subsidiaries were merged into Monitor,  which then
subsequently  amended its  certificate  of  incorporation  to change its name to
Stellex Monitor Aerospace, Inc.


                                       6
<PAGE>

The purchase  price for Monitor was  approximately  $95.0 million  including the
assumption of approximately $26.5 million of debt and excluding  transaction and
financing  fees  and  expenses  of  approximately  $5.9  million.   The  Monitor
Acquisition  was financed  through (i)  borrowings  of $95.7  million  under the
Company's  senior  secured  credit  facility  and (ii)  Monitor's  issuance of a
promissory note to certain former Monitor  shareholders in the principal  amount
of $5.2  million.  Borrowings  under the senior  secured  credit  facility  were
comprised of term loans in an aggregate  principal  amount of $90.0  million and
revolving  loans of $17.0 million,  of which $11.3 million was used to refinance
the existing Company revolver and supply near term working capital requirements.

Phoenix Acquisition - On March 1, 1999, Stellex, through its subsidiary, Stellex
Microwave,  acquired all of the  outstanding  common stock of Phoenix  Microwave
Corporation  ("Phoenix"),  a leading  supplier of RF and  microwave  components,
based in  Telford,  Pennsylvania.  Subsequently,  on May 27,  1999,  Phoenix was
merged into Stellex  Microwave and operates as a division.  Phoenix,  along with
Stellex Microwave, operate in the RF/microwave component and sub-assembly market
for  commercial,  wireless,  military  and  space  applications.  The  aggregate
purchase  price for the  acquisition  of Phoenix was $14.7  million of cash plus
contingent  purchase price of up to $1.0 million  payable by March 2000 based on
cash  flow  performance  thresholds.   The  acquisition  was  financed  with  an
acquisition  term loan drawn under the Company's  previous senior secured credit
facility.

Precision  Acquisition  - On  April  22,  1999,  the  Company,  through  Stellex
Precision Machining,  Inc.  ("Precision"),  a wholly-owned subsidiary of Stellex
Aerostructures,  Inc.  acquired  the assets of the  aerostructures  business  of
Precision Machining, Inc. and certain related entities for an aggregate purchase
price of approximately $86.0 million, excluding transaction fees and expenses of
approximately  $9.6 million.  Precision,  located in  Wellington,  Kansas,  is a
leading   manufacturer  of  complex   aerostructure   components,   serving  the
commercial,  military and business aviation segments of the aerospace  industry.
Precision  specializes in high speed five-axis  machining of aluminum,  titanium
and other hard alloys. The acquisition was financed through borrowings under the
Company's  current $235 million senior secured credit  facility and the issuance
of $20 million of preferred stock (the "Preferred  Stock").  The current secured
credit facility  provides for a two tranche term loan comprised of a $60 million
Term A facility and a $110 million Term B facility, in addition to a $65 million
revolving loan facility. The Term A facility has a six-year term with escalating
quarterly  principal  payments  bearing  interest at either the base rate plus a
margin rate of up to 2.0% based on a leverage ratio or the Eurodollar  rate plus
a margin rate of up to 3.0% based on a leverage ratio. The Term B facility has a
ninety-month term with escalating  quarterly principal payments bearing interest
at either the base rate plus a margin rate of 2.5% or the Eurodollar rate plus a
margin rate of 3.5%. The revolving  credit  facility has a six-year term bearing
interest  at either  the base rate plus a margin  rate of up to 2.0%  based on a
leverage ratio or the Eurodollar  rate plus a margin rate of up to 3.0% based on
a leverage ratio.

The Preferred Stock provides for cumulative  dividends accruing at a rate of 13%
per annum.  On or prior to August 31,  2004,  Stellex  may, at its  option,  pay
dividends  either in cash or in  additional  shares of  Preferred  Stock.  After
August 31, 2004,  dividends  may be paid only in cash.  The  Preferred  Stock is
mandatorily redeemable on August 31, 2010 at a redemption price equal to 100% of
the  aggregate  liquidation   preference  thereof,  plus,  without  duplication,
accumulated and unpaid dividends to the date of redemption.  Stellex may, at its
option, redeem the outstanding shares of Preferred Stock on or before January 1,
2000 (or March 15, 2000 under certain circumstances) or after August 31, 2004 at
specified  redemption prices together with accumulated and unpaid dividends,  if
any, to the date of redemption.  Under certain  circumstances,  Stellex may also
redeem the Preferred Stock with the proceeds of equity offerings.  In connection
with the issuance of the Preferred  Stock,  Stellex granted warrants to purchase
shares  of  common  stock in an  amount  equal  to 1% of  Stellex's  issued  and
outstanding  shares of common stock on the date of grant.  The warrants  have an
exercise  price of $0.01 per share.  In the event  Stellex is not able to redeem
the  Preferred  Stock on or before  January  1, 2000 (or  March 15,  2000  under
certain circumstances), Stellex will be required to grant additional warrants to
the purchaser of the Preferred Stock  representing up to 5% of Stellex's  issued
and outstanding shares of common stock.

Pro forma  results  of  operations  as if the  Monitor,  Phoenix  and  Precision
acquisitions had occurred as of January 1, 1998 are as follows (in thousands):

                                      Six Months Ended
                                          June 30,

                               1999                      1998
                               ----                      ----

Net sales              $      120,795            $      127,783
Gross profit                   35,990                    35,703
Net income (loss)                 654                       989





                                       7
<PAGE>





2.       Basis of Presentation

Stellex  is  a  holding  company  that  has  no  operations  separate  from  its
investments in its subsidiaries. The consolidated balance sheet at June 30, 1999
and the  consolidated  statements of operations and  consolidated  statements of
cash flows for the periods  ended June 30, 1999  include the accounts of Stellex
Microwave (including the Phoenix Microwave division) and Stellex Aerostructures,
Inc. ("Stellex  Aerostructures")  (formerly known as Stellex Aerospace Holdings,
Inc.).  Stellex  Aerostructures  consists  of three  wholly-owned  subsidiaries,
Monitor,  Precision  and  Stellex  Aerospace.  The  Company is in the process of
completing purchase accounting valuations of the assets acquired and liabilities
assumed in its recent  acquisitions of Phoenix and Precision.  These  valuations
are not yet complete and therefore  the balance  sheets of Phoenix and Precision
as of June 30, 1999 represent management's best estimates.  Phoenix's results of
operations  presented  herein are from the date of acquisition on March 1, 1999,
to June  30,  1999.  Precision's  results  of  operations  are  from the date of
acquisition  on April 22, 1999,  to June 30,  1999.  The  comparative  financial
statements  for the quarter  ended June 30, 1998 include the accounts of Stellex
Aerospace,  Monitor  Aerospace  from the date of  acquisition on May 29, 1998 to
June 30, 1998 and Stellex Microwave. All significant  intercompany  transactions
have been eliminated in consolidation.

The accompanying  unaudited consolidated financial statements have been prepared
in  accordance  with  the  instructions  to Form  10-Q  and do not  include  the
information and footnotes required by generally accepted  accounting  principles
for complete financial statements. In the opinion of management, all adjustments
considered  necessary  for a fair  presentation,  which  were  of a  normal  and
recurring nature, have been included.  The results of operations for any interim
period  are not  necessarily  indicative  of the  results  for the  year.  These
unaudited  consolidated  financial statements should be read in conjunction with
the  consolidated  financial  statements  and  related  notes  included  in  the
Company's  Annual  Report on Form 10-K for the year ended  December 31, 1998 and
the Company's Reports on Form 8-K dated March 1, 1999 and April 22, 1999.

3.     Inventories

         Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>

                                                                          June 30,          December 31,
                                                                            1999                1998
                                                                        (Unaudited)

<S>                                                                  <C>                     <C>
           Raw materials                                             $    21,010             $15,470
           Work-in-process                                                30,793              25,782
           Finished goods                                                 10,458               7,994
           Production tooling                                              9,603               9,083
                                                                          ------              ------
           Total                                                     $    71,864             $58,329
                                                                          ======              ======

3.     Long-Term Obligations

         Long-term obligations consisted of the following (in thousands):
                                                                           June 30,           December 31,
                                                                             1999                1998
                                                                         (Unaudited)

           Term Loan A                                               $    58,750              28,500
           Term Loan B                                                   109,750              59,700
           Revolving line of credit                                       15,000              13,500
           7.785% Mortgage notes payable                                   2,528               2,561
           Sellers notes payable                                           6,930               6,930
           Obligations under capital leases                                  395                 446
           Other long term obligations                                        90                  97
                                                                         -------             -------
                                                                         193,443             111,734
           Less current portion
                                                                           8,517               5,533
                                                                         -------             -------
                             Total                                   $   184,926            $106,201
                                                                         =======             =======
</TABLE>






                                       8
<PAGE>







5.    Commitments and Contingencies

The Company is involved  from time to time in lawsuits  that arise in the normal
course of business.  The Company  actively and vigorously  defends all lawsuits.
Management  believes that there are no lawsuits that will have a material affect
on the Company's financial position.

5.    Stock Options

The Company  accounts for  stock-based  compensation  using the intrinsic  value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and its related  interpretations.  Compensation  cost
for stock options, if any, is measured as the excess of the fair market value of
the  applicable  company's  stock at the date of grant  over the  option  strike
price.  The  following  non-qualified  stock  option  plans have been adopted by
subsidiaries  of the Company  during either the second quarter of 1999 or during
the subsequent period. These option plans are structured such that option strike
prices will be set at or above fair market value on the date of grant.

Stellex Precision Machining, Inc. 1999 Stock Option Plan

On April 22, 1999, Precision adopted the Stellex Precision Machining,  Inc. 1999
Stock Option Plan (the  "Precision  Option  Plan") as an  incentive  program for
employees intended to promote the interests of the Company. The Precision Option
Plan has  allocated  1,300  shares for  issuance  to eligible  employees,  which
includes all employees of Precision.  Effective April 22, 1999, Precision issued
ten-year options (the "Precision Options") to purchase up to an aggregate of 800
shares of common stock of Precision.  One-third of the Precision Options granted
vest on each December 31 beginning 1999 through and including 2001. The exercise
price of the  Precision  Options is $2 per  share,  and such  options  generally
become  exercisable upon the earliest to occur of (i) an initial public offering
by Precision,  Stellex  Technologies,  Inc.  ("Parent")  or a corporation  in an
unbroken chain of  corporations  between Parent and Precision (an  "Intermediate
Corporation"),  (ii) a Corporate  Transaction (which is defined in the Precision
Option Plan to generally mean a change of control of Parent or Precision, a sale
of all or substantially all of the assets of Parent or Precision or the adoption
of a plan of  liquidation  for Parent or  Precision)  or (iii) January 31, 2009.
Upon an initial public  offering by Parent or an Intermediate  Corporation,  the
administrator  of the Precision  Option Plan may convert the  Precision  Options
into  options  to  purchase  common  stock of such  issuer as  described  in the
Precision Option Plan.

Stellex Microwave Systems, Inc. 1998 Stock Option Plan

On May 15, 1999,  Microwave  adopted the Stellex  Microwave  Systems,  Inc. 1999
Stock Option Plan (the  "Microwave  Option  Plan") as an  incentive  program for
employees intended to promote the interests of the Company. The Microwave Option
Plan has allocated  1,000,000 shares for issuance to eligible  employees,  which
includes all employees of Microwave.  Effective May 15, 1999,  Microwave  issued
ten-year  options  (the  "Microwave  Options") to purchase up to an aggregate of
499,700   shares  of  common  stock  of   Microwave   (the   "Microwave   Option
Plan").One-fifth  of the Microwave  Options  vested on the date of grant and the
remainder vest in equal  installments  on each November 1 beginning 1999 through
and including  2002.  The exercise  price of the Microwave  Options is $2.87 per
share, and such options generally become  exercisable upon the earliest to occur
of (i) an initial  public  offering by  Microwave,  Stellex  Technologies,  Inc.
("Parent") or a corporation in an unbroken chain of corporations  between Parent
and  Microwave (an  "Intermediate  Corporation"),  (ii) a Corporate  Transaction
(which is defined in the  Microwave  Option Plan to  generally  mean a change of
control of Parent or Microwave, a sale of all or substantially all of the assets
of Parent or Microwave or the  adoption of a plan of  liquidation  for Parent or
Microwave) or (iii) September 2, 2007. Upon an initial public offering by Parent
or an Intermediate  Corporation,  the administrator of the Microwave Option Plan
may convert the Microwave  Options into options to purchase common stock of such
issuer as described in the Microwave Option Plan.

Stellex Monitor Aerospace, Inc. 1999 Stock Option Plan

On July 26, 1999, Monitor adopted the Stellex Monitor Aerospace, Inc. 1999 Stock
Option Plan (the "Monitor  Option  Plan") as an incentive  program for employees
intended to promote the  interests of the Company.  The Monitor  Option Plan has
allocated  700 shares for  issuance to eligible  employees,  which  includes all
employees of Monitor.  Effective July 26, 1999,  Monitor issued ten-year options
(the  "Monitor  Options") to purchase up to an aggregate of 540 shares of common
stock of Monitor. Generally, thirty-seven percent of the Monitor Options granted
vest on December 31, 1999,  while sixty percent of the Monitor  Options  granted
vest in equal  installments  on each  December  31  beginning  2000  through and
including 2002 and the remainder vest in equal  installments on each December 31
beginning  2003 through and including  2004.  The exercise  price of the Monitor
Options is $10 per share, and such options generally become exercisable upon the
earliest  to  occur  of (i) an  initial  public  offering  by  Monitor,  Stellex
Technologies,  Inc.  ("Parent")  or  a  corporation  in  an  unbroken  chain  of
corporations between Parent and Monitor (an "Intermediate Corporation"),  (ii) a
Corporate  Transaction (which is defined in the Monitor Option Plan to generally
mean a change of control of Parent or  Monitor,  a sale of all or  substantially
all of the assets of Parent or Monitor or the adoption of a plan of  liquidation
for Parent or Monitor) or (iii) March 16, 2009.  Upon an initial public offering
by Parent or an  Intermediate  Corporation,  the  administrator  of the  Monitor
Option  Plan may convert the Monitor  Options  into  options to purchase  common
stock of such issuer as described in the Monitor Option Plan.

                                       9
<PAGE>

7.    Condensed Financial Information of Stellex and its Subsidiaries

The $100 million principal amount 9 1/2% senior  subordinated notes and the term
and revolving loans are fully  guaranteed on a full and  unconditional  basis by
all domestic  subsidiaries  of Stellex,  including  Stellex  Microwave,  Stellex
Aerospace,   Monitor  and  Precision.   There  are  no  significant  contractual
restrictions  on the ability of the Company's  subsidiaries to transfer funds to
the  Company.  Set  forth  below  are  the  condensed   consolidating  financial
information of the guarantor  subsidiaries as of June 30, 1999 and for the three
and six month  periods then ended.  The  separate  financial  statements  of the
guarantor  subsidiaries are not included because the guarantor  subsidiaries are
jointly and  severally  liable under the notes and  management  does not believe
that the separate financial information would be meaningful to investors.

                                          Condensed Consolidating Balance Sheet
                                                     (in thousands)
<TABLE>
<CAPTION>

                                 Stellex        Stellex       Stellex                                  Adjustments &       Stellex
                              (Parent Only)    Microwave      Aerospace      Monitor      Precision     Eliminations    Consolidated
<S>                           <C>             <C>            <C>            <C>           <C>          <C>              <C>
Cash and cash equivalents     $      1,075    $    1,891     $      559     $     522     $     687    $          -     $     4,734
Accounts receivable, net                 -        12,938          5,169        10,129         3,505               -          31,741
Inventories                              -        22,442         15,914        25,299         8,209               -          71,864
Other current assets                 3,993         3,581          1,195         3,119         1,308          (5,578)          7,618
                                     -----         -----          -----         -----         -----          -------          -----
Total current assets                 5,068        40,852         22,837        39,069        13,709          (5,578)        115,957

Property, plant and equipment, net   1,680        20,722         16,290        23,289        27,266               -          89,247
Goodwill and intangibles, net            -        60,731              -        59,766        48,503               -         169,000
Investment in & advances to
  subsidiaries                     308,617             -              -             -             -        (308,617)              -
Other assets                         3,638         7,335          2,246         9,686         5,767          (9,216)         19,456
                                   -------       -------         ------       -------        ------         --------         ------
Total assets                       319,003       129,640         41,373       131,810        95,245        (323,411)        393,660
                                   =======       =======         ======       =======        ======       =========         =======
Current liabilities                  7,490        32,141          6,928         8,416         2,166           3,236          60,377
9 1/2% senior subordinated         100,000             -              -             -             -               -         100,000
  notes
Intercompany notes                   1,689        97,041         21,917        59,972        63,818        (244,437)              -
Term Loans - long term             183,500             -              -             -             -          (6,625)        176,875
Other long-term liabilities              -         4,616          6,378        29,437           152          (9,084)         31,499
Redeemable Preferred Equity         18,950             -              -             -             -               -          18,950
Stockholders' equity
  (deficit)                          7,374        (4,158)         6,150        33,985        29,109         (66,501)          5,959
                                     -----        -------         -----        ------        ------         --------        -------
Total liabilities and
  stockholders' equity             319,003       129,640         41,373       131,810        95,245        (323,411)        393,660
                                   =======       =======         ======       =======        ======        =========        =======
</TABLE>





                                       10
<PAGE>



<TABLE>
<CAPTION>

                     Condensed Financial Information of Stellex and its Subsidiaries (Continued)

             Condensed Consolidating Statement of Operations For The Three Months Ended June 30, 1999
                                                  (in thousands)

                                    Stellex        Stellex       Stellex                                 Adjustments      Stellex
                                 (Parent Only)    Microwave     Aerospace      Monitor      Precision   & Eliminations  Consolidated

<S>                              <C>              <C>           <C>           <C>           <C>           <C>             <C>
Sales                            $         -      $    24,788   $    7,851    $   18,843    $    7,239    $        -      $  58,721
Cost of sales                              -           17,439        5,858        14,405         6,755             -         44,457
Operating expenses                       224            6,088        1,292           967         1,727           (87)        10,211
Amortization of intangibles                -              900           -            593           313          (125)         1,681
                                         ---              ---           --           ---           ---          -----         -----
Income (loss) from operations           (224)             361          701         2,878        (1,556)          212          2,372
Interest expense                      (5,864)          (2,318)        (620)       (1,579)       (1,138)        4,986         (6,533)
Other income (expense)                 4,607               12          (12)            9             4        (4,587)            33
                                       -----               --          ----            -             -        -------            --

Income (loss) before income taxes     (1,481)          (1,945)          69         1,308        (2,690)          611         (4,128)

Provision (benefit) for income taxes    (592)          (1,014)           9           482        (1,019)          744         (1,390)
                                        -----          -------           -           ---        -------          ---         -------
Net income (loss)                       (889)            (931)          60           826        (1,671)         (133)        (2,738)
Preferred stock dividend                 827                -            -             -             -             -            827
Income (loss) applicable to
    common shareholders          $    (1,716)     $      (931)    $     60     $     826        (1,671)         (133)        (3,565)
                                      =======            =====          ==           ===        =======         =====        =======


              Condensed Consolidating Statement of Operations For The Six Months Ended June 30, 1999
                                                  (in thousands)

                                    Stellex        Stellex       Stellex                                 Adjustments &    Stellex
                                 (Parent Only)    Microwave     Aerospace      Monitor      Precision     Eliminations  Consolidated

Sales                            $         -    $      45,079  $    15,123   $    40,893  $      7,239 $            -       108,334
Cost of sales                              -           31,680       11,416        31,028         6,755             -         80,879
Operating expenses                       405           10,393        2,533         2,154         1,727             -         17,212
Amortization of intangibles                -            1,600           -          1,186           313          (125)         2,974
                                           -            -----           --         -----           ---          -----         -----
Income (loss) from operations           (405)           1,406        1,174         6,525        (1,556)          125          7,269
Interest expense                     (10,154)          (4,446)      (1,198)       (3,016)       (1,138)        8,603        (11,349)
Other income (expense)                 8,651               16          (13)           22             4        (8,598)           82
                                       -----               --          ----           --             -        -------           --
Income (loss) before income taxes     (1,908)          (3,024)         (37)        3,531        (2,690)          130         (3,998)

Provision (benefit) for income
    taxes                               (763)          (1,332)         (33)        1,320        (1,019)          506         (1,321)
                                        -----          -------         ----        -----        -------          ---         -------
Net income (loss)                     (1,145)          (1,692)          (4)        2,211        (1,671)         (376)        (2,677)
Preferred stock dividend               1,191                -            -             -             -             -          1,191
                                       -----                -            -             -             -             -          -----
Income (loss) applicable to
    common shareholders               (2,336)          (1,692)          (4)        2,211        (1,671)         (376)        (3,868)
                                      =======          =======          ===        =====        =======         =====        =======

</TABLE>





                                       11
<PAGE>



<TABLE>
<CAPTION>
        Condensed Financial Information of Stellex and its Subsidiaries (Continued)

     Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 1999
                                       (in thousands)

                                Stellex           Stellex       Stellex                                  Adjustments &    Stellex
                                 (Parent         Microwave     Aerospace      Monitor       Precision     Eliminations  Consolidated
                                  Only)
<S>                            <C>               <C>           <C>            <C>           <C>          <C>             <C>
Net income (loss)              $     (1,145)     $  (1,692)    $       (4)    $   2,211     $  (1,671)   $      (376)    $   (2,677)
Depreciation and amortization           405          4,811          1,021         2,336           792          1,902         11,267
Deferred taxes and other                  -              -             (1)         (117)         (298)          (878)        (1,294)
Change in operating assets
  and liabilities                    (1,366)        16,706         (1,336)       (3,818)         (401)         1,822         11,607
                                     -------        ------         -------       -------         -----         -----         ------
Net cash provided by (used           (2,106)        19,825           (320)          612        (1,578)         2,470         18,903
  in) operations

Fixed asset additions                (1,199)        (2,843)        (2,331)       (1,736)          (19)             -         (8,128)
Cash used in acquisitions                 -         (15,198)             -             -       (85,122)        (2,177)     (102,497)
Proceeds from sale of fixed assets        -              -              3            13             -              -             16
                                      -----         ------              -            --             -              -             --
Net cash used in investing           (1,199)       (18,041)        (2,328)       (1,723)      (85,141)        (2,177)      (110,609)
  activities
Mandatory term loan                  (1,500)             -              -             -             -              -         (1,500)
  repayments
Net borrowing under revolver          1,500              -              -             -             -              -         1,500
Borrowings under term loans          81,800              -              -             -             -              -        81,800
Net proceeds from issue of           18,950              -              -             -             -              -        18,950
  preferred stock
Intercompany loans and              (98,858)          (997)         3,016         1,621        91,282          3,936            -
  investments
Other
                                      2,471              -            (81)            -        (3,876)        (4,229)       (5,715)
                                      -----              -            ----            -        -------        -------       -------
Cash provided by (used in)
  financing                           4,363           (997)         2,935         1,621        87,406           (293)       95,035
  activities


Net increase in cash           $               $              $             $             $              $               $
                                      1,058            787            287           510           687              -     3,329


</TABLE>





                                       12
<PAGE>





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

Overview

          Stellex is a holding  company and has no independent  operations.  The
Company, through its two operating segments,  Aerostructures and Electronics, is
a leading  provider  of highly  engineered  subsystems  and  components  for the
aerospace,  defense and space  industries.  The Electronics  segment consists of
Stellex Microwave and its wholly-owned subsidiary, Phoenix. The Company, through
its electronics  segment,  is a worldwide leader in the design,  manufacture and
marketing of fully integrated and proprietary  microwave  electronic  subsystems
for  radar-guided  tactical  missile  systems  and a broad  line  of high  radio
frequency and microwave  frequency single function  modules.  Stellex  Microwave
products are used in the generation, reception and translation of communication,
data and radar signals.  The  Aerostructures  segment  operates  through Stellex
Aerostructures and its three wholly-owned  subsidiaries,  Monitor, Precision and
Stellex Aerospace.  Stellex Aerostructures is a leading full-service supplier of
a broad range of complex  machined  aerostructure  components and subsystems for
both commercial and military and space  applications.  On March 1, 1999, Stellex
acquired Phoenix, which currently operates as a division of Stellex Microwave in
the  Electronics  segment.  On April 22,  1999,  Stellex  acquired the assets of
Precision which operates in the Aerostructures segment.

Results of Operations

Historical - Company

Three Months Ended June 30, 1999 Compared to the Three Months Ended
June 30, 1998

The historical  consolidated  operating  results for the three months ended June
30,  1999  and  1998  give  effect  to  the  Monitor,   Phoenix  and   Precision
acquisitions, whose results are presented from their dates of acquisition on May
29, 1998, March 1, 1999 and April 22, 1999, respectively (in thousands).
<TABLE>
<CAPTION>

                                     Corporate            Aerostructures            Electronics                 Total
                                  1999       1998        1999         1998        1999        1998         1999         1998

<S>                            <C>          <C>        <C>          <C>         <C>         <C>         <C>           <C>
Net sales                      $            $      -   $ 33,933     $ 17,818    $ 24,788    $ 20,632    $  58,721     $ 38,450
                                       -           -
Cost of goods sold                                       27,018       13,210      17,439      14,602       44,457       27,812
                               ----------  ----------  --------    ---------   ---------   ---------    ---------    ---------
                                       -           -
Gross profit                           -           -      6,915        4,608       7,349       6,030       14,264       10,638
Gross margin                           -           -       20.4%        25.9%       29.6%       29.2%        24.3%        27.7%
Selling, general, and
   administrative expenses           137           8      3,986        3,467       3,468       2,473        7,591        5,948
Research & development
   expenses                            -           -          -            -       2,620       1,209        2,620        1,209
Amortization of intangibles         (125)          -        907          210         899         641        1,681          851
                                   ------      ------   -------      --------   ----------  ----------- ------------  -----------

Income (loss) from operations        (12)         (8)     2,022          931         362       1,707        2,372        2,630
Interest expense                                                                                           (6,533)      (3,712)
Other income (expense)
                                                                                                               33          (45)
                                                                                                               --          ----

Net loss before income taxes                                                                               (4,128)       (1,127)
Income tax benefit                                                                                         (1,390)
                                                                                                           -------
                                                                                                                          (246)
Net loss
                                                                                                           (2,738)        (881)
</TABLE>

         Net  Sales.  Net sales for  Stellex  totaled  $58.7  million  and $38.5
million for the three  months  ended June 30, 1999 and 1998,  respectively.  Net
sales for the  Electronics  segment  totaled $24.8 million and $20.6 million for
the three months ended June 30, 1999 and 1998, respectively. The increase in net
sales for the  Electronics  segment  was  primarily  due to the  acquisition  of
Phoenix on March 1, 1999,  partially offset by lower commercial sales at Stellex
Microwave  resulting primarily from the completion during the three months ended
June 30, 1998 of the "catch up" in delinquent commercial component order backlog
built up during 1997  relating to the  start-up of the new  production  planning
software at that time. Net sales for Phoenix for the three months ended June 30,
1999  totaled  $4.9  million.  Tactical  subsystem  sales for Stellex  Microwave
increased  slightly  compared to the prior  year,  as new  programs  such as the
Longbow program ramped to full rate production levels.

                                       13
<PAGE>

         Net sales for the  Aerostructures  segment  totaled  $33.9  million and
$17.8  million for the three months ended June 30, 1999 and 1998,  respectively.
The  primary  reason for the  increase in sales was due to the  acquisitions  of
Monitor on May 29,  1998 and  Precision  on April 22, 1999  partially  offset by
reduced sales at Stellex  Aerospace.  Net sales for Monitor for the three months
ended June 30, 1999  totaled  $18.8  million  compared  to $7.9  million for the
period from  acquisition  May 29, 1998 to June 30, 1998. Net sales for Precision
from the date of  acquisition  on April 22, 1999 to June 30, 1999  totaled  $7.2
million.  The  decrease  in net sales at  Stellex  Aerospace  during  the second
quarter of 1999 of $2.0 million,  or 20.6%  compared to the same period in 1998,
resulted from weak demand from OEMs in the commercial  aviation market resulting
primarily from Boeing-related  inventory  management issues and decreased demand
from  Asian  markets.  As a result of  continuing  customer  directed  delays in
previously  scheduled  orders,  particularly at Monitor,  we expect net sales to
continue  to be  negatively  impacted  in  comparison  to the  prior  year.  The
significance  of any further  delays is  difficult to predict.  However,  recent
order activity at Boeing as well as an increase in proposal  activity at Stellex
Aerostructures suggest that the situation is beginning to stabilize.

         Gross  Margins.  Gross  margin for  Stellex was 24.3% and 27.7% for the
three  months ended June 30, 1999 and 1998,  respectively.  Gross margin for the
Electronics segment was 29.6% and 29.2% for the three months ended June 30, 1999
and 1998, respectively. The increase in gross margin for the Electronics segment
was primarily due to productivity  improvements at Stellex Microwave offset by a
non-recurring  acquisition charge at Phoenix relating to the amortization of the
purchase  accounting  adjustment  for profits in  inventory  which  totaled $0.8
million.

         Gross margin for the Aerostructures segment was 20.4% and 25.9% for the
three months ended June 30, 1999 and 1998,  respectively.  The decrease in gross
margin was partially attributable to the impact of the newly acquired operations
of Precision as of April 22,  1999,  which  delivered a gross margin of 6.7% for
the period of  ownership.  The low gross margin at Precision was the result of a
non-recurring  acquisition  charge relating to the  amortization of the purchase
accounting  adjustment for profits in inventory  totaling $1.3 million and a one
time  non-recurring  employee  retention  bonus award of $1.0  million.  Stellex
Aerospace's gross margin totaled 25.4% for the quarter,  which was significantly
lower  compared  to the prior year as a result of lower  volume and higher  than
normal start-up costs on new programs. Gross margin at Monitor was 23.6% for the
quarter  compared to 18.3% for the comparable  period in 1998.  This increase in
gross margin was due to a  nonrecurring  acquisition  charge which  impacted the
second  quarter  of 1998  coupled  with  productivity  improvements  on  certain
programs and a more favorable product mix. The  non-recurring  charge at Monitor
during 1998 related to the  amortization of the purchase  accounting  adjustment
for profits in inventory totaled $0.4 million.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative  expenses for Stellex  totaled $7.6 million and $5.9 million,  or
12.9% and 15.5% stated as a percentage of net sales,  for the three months ended
June 30, 1999 and 1998,  respectively.  The  increase  in  selling,  general and
administrative  expenses  over the prior year  period was due  primarily  to the
acquisitions  of  Monitor,   Phoenix  and  Precision,   increases  in  corporate
administrative  overhead costs and  additional  marketing  spending  directed at
strategic customers,  offset by the elimination of a non-cash stock compensation
charge  relating  to the  valuation  of  management  ownership  puts at  Stellex
Aerospace  of $0.8  million.  As a result of the  acquisitions  of  Monitor  and
Precision,  selling general and administrative expenses in the second quarter of
1999  include  non-recurring  charges of $1.3  million  for  Precision  and $1.0
million  for  Monitor  in the  comparable  quarter  of 1998 for  investment  and
financial advisory fees paid to Mentmore Holdings  Corporation,  an affiliate of
Stellex.

         Research and Development  Expenses.  Research and development  expenses
for Stellex  totaled  $2.6  million and $1.2  million for the three months ended
June 30, 1999 and 1998,  respectively.  The increase in research and development
expenses  resulted from the  expansion of  engineering  capabilities  at Stellex
Microwave  relating to new product  development  in the commercial and broadband
wireless markets,  in addition to incremental  spending resulting from the newly
acquired Phoenix operations.

         Amortization of Intangibles.  Amortization of intangible assets for the
three months ended June 30, 1999, increased $0.8 million, or 97.6%,  compared to
1998 due to significant increases in goodwill and other identifiable  intangible
assets,  such as customer lists,  tradenames,  and assembled workforce resulting
from  purchase  accounting  allocations  made in  connection  with the  Monitor,
Precision and Phoenix Acquisitions.  Other intangible assets are being amortized
over their estimated useful lives ranging from one to thirty years.  Goodwill is
being amortized over fifteen to thirty years.

         Interest  Expense.  Interest expense for the Company  increased to $6.5
million for the three months ended June 30, 1999 compared to $3.7 million during
the same period in 1998.  The increase in interest  expense  resulted  primarily
from the  incurrence  of  indebtedness  to finance the  Monitor,  Precision  and
Phoenix acquisitions.  The borrowings under the senior secured credit facilities
generally  bear interest at an interest rate based on the  Eurodollar  rate. The
average  interest rate on such borrowings for the three months June 30, 1999 was
approximately 8.3%.

         Income Tax Provision (Benefit). The effective tax rates for the Company
for  the  three  months  ended  June  30,  1999  were   impacted   primarily  by
non-deductible goodwill amortization at Monitor and Phoenix.

                                       14
<PAGE>

Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998

The historical  consolidated operating results for the six months ended June 30,
1999 and 1998 give effect to the Monitor,  Phoenix and  Precision  Acquisitions,
whose results are  presented  from their dates of  acquisition  on May 29, 1998,
March 1, 1999 and April 22, 1999, respectively (in thousands).
<TABLE>
<CAPTION>

                                     Corporate            Aerostructures             Electronics                  Total
                                  1999       1998        1999        1998         1999         1998         1999         1998

<S>                            <C>         <C>         <C>         <C>         <C>           <C>          <C>          <C>
Net sales                      $           $           $ 63,255    $ 26,089    $ 45,079      $ 40,260     $ 108,334    $ 66,349
                                       -           -
Cost of goods sold                                       49,199      19,086      31,680        30,677         80,879     49,763
                               ---------   ----------    ------   ---------   ---------     ---------    -----------  ---------
                                       -           -
Gross profit                           -           -     14,056       7,003      13,399         9,583        27,455      16,586
Gross margin                           -           -       22.2%       26.8%       29.7%         23.8%         25.3%       25.0%
Selling, general, and
   administrative expenses           405          30      6,415       5,380       6,096         4,666        12,916      10,076
Research & development
   expenses                            -           -          -           -       4,296         2,149         4,296       2,149
Amortization of intangibles         (125)          -      1,500         210       1,599         1,283         2,974       1,493
                                 -------     -------   ---------    --------   ---------        -----       -------     -------
Income (loss) from operations       (280)        (30)     6,141       1,413       1,408         1,485         7,269       2,868
Interest expense                                                                                            (11,349)     (6,482)
Other income (expense)
                                                                                                                 82         (75)

Net loss before income taxes                                                                                  (3,998)    (3,689)
Income tax benefit                                                                                           (1,321)     (1,018)
                                                                                                             -------  ----------
Net loss
                                                                                                            $(2,677)     (2,671)
</TABLE>

         Net Sales.  Net sales for  Stellex  totaled  $108.3  million  and $66.3
million for the six months ended June 30, 1999 and 1998, respectively. Net sales
for the Electronics  segment totaled $45.1 million and $40.3 million for the six
months ended June 30, 1999 and 1998, respectively. The increase in net sales for
the Electronics segment was primarily due to the acquisition of Phoenix on March
1, 1999,  partially offset by lower commercial sector sales at Stellex Microwave
resulting  primarily  from the  completion  during the six months ended June 30,
1998 of the "catch up" in delinquent commercial component order backlog built up
during 1997 relating to the start-up of the new production  planning software at
that time. Net sales for Phoenix from the date of  acquisition  March 1, 1999 to
June 30,  1999  totaled  $6.6  million.  Tactical  subsystem  sales for  Stellex
Microwave increased slightly compared to the prior year, as new programs such as
Longbow program ramped to full rate production levels.

          Net sales for the  Aerostructures  segment  totaled  $63.3 million and
$26.1 million for the six months ended June 30, 1999 and 1998, respectively. The
primary reason for the increase in sales was due to the  acquisitions of Monitor
on May 29,  1998 and  Precision  on April 22, 1999  partially  offset by reduced
sales at Stellex Aerospace.  Net sales for Monitor for the six months ended June
30, 1999 totaled $40.9 million  compared to $7.9 million for the period from its
acquisition  on May 29, 1998 to June 30, 1998.  Net sales for Precision from its
date of acquisition on April 22, 1999 to June 30, 1999 totaled $7.2 million. The
decrease in net sales at Stellex Aerospace during the first half of 1999 of $3.0
million,  or 16.7% as compared to the same  period in 1998,  resulted  from weak
demand from OEMs in the  commercial  aviation  market  resulting  primarily from
Boeing-related  inventory  management  issues and  decreased  demand  from Asian
markets.  As a result of  continuing  customer  directed  delays  in  previously
scheduled orders, particularly at Monitor, we expect net sales to continue to be
negatively   impacted   during  1999  in  comparison  to  the  prior  year.  The
significance  of any further  delays is  difficult to predict.  However,  recent
order activity at Boeing as well as an increase in proposal  activity at Stellex
Aerostructures suggest that the situation is beginning to stabilize.

         Gross Margins. Gross margin for Stellex was 25.3% and 25.0% for the six
months  ended  June 30,  1999  and  1998,  respectively.  Gross  margin  for the
Electronics  segment was 29.7% and 23.8% for the six months  ended June 30, 1999
and 1998,  respectively.  Gross  margin  for the first half of 1999 and 1998 was
impacted by a $1.0 million and $1.1 million purchase  accounting  adjustment for
Phoenix and Stellex Microwave,  respectively. These non-cash charges represent a
non-recurring  acquisition  charge relating to the  amortization of the purchase
accounting adjustment for profits in inventory.  In excluding this non-recurring
adjustment,  the  Electronics  segment would have had a recasted gross margin of
32.3%  for the six  months  ended  June  30,  1999  compared  to  28.2%  for the
comparable  period in 1998.  This  increase in gross margin for the  Electronics
segment was primarily due to productivity  improvements at Stellex Microwave and
a favorable product mix at Stellex Microwave, including the Phoenix division.

                                       15
<PAGE>

          Gross  margin for the  Aerostructures  segment was 22.2% and 26.8% for
the six months ended June 30, 1999 and 1998, respectively. The decrease in gross
margin was partially attributable to the impact of the newly acquired operations
of  Precision,  which  delivered  a gross  margin  of 6.7%  for  the  period  of
ownership.  The low gross  margin at Precision  was impacted by a  non-recurring
acquisition  charge  relating to the  amortization  of the  purchase  accounting
adjustment  for  profits  in  inventory  totaling  $1.3  million  and a one time
non-recurring   employee   retention  bonus  award  of  $1.0  million.   Stellex
Aerospace's  gross margin  totaled  22.2% for the first half of 1999,  which was
significantly  lower  compared to the  comparable  period of 1998 as a result of
lower volume and higher than normal start-up costs on new programs. Gross margin
at  Monitor  was  24.1%  for the first  half of 1999  compared  to 18.3% for the
comparable  period  in  1998.  This  increase  in  gross  margin  was  due  to a
nonrecurring  acquisition charge, which impacted the first half of 1998 coupled,
with productivity  improvements on certain programs and a more favorable product
mix during  the six months  ended June 30,  1999.  The  non-recurring  charge at
Monitor  during 1998  related to the  amortization  of the  purchase  accounting
adjustment for profits in inventory totaling $0.4 million.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative  expenses for Stellex totaled $12.9 million and $10.1 million, or
11.9% and 15.2%  stated as a percentage  of net sales,  for the six months ended
June 30, 1999 and 1998,  respectively.  The  increase  in  selling,  general and
administrative  expenses  over the prior year  period was due  primarily  to the
acquisitions  of  Monitor,   Precision  and  Phoenix,   increases  in  corporate
administrative  overhead costs and  additional  marketing  spending  directed at
strategic customers,  offset by the elimination of a non-cash stock compensation
charge  relating  to the  valuation  of  management  ownership  puts at  Stellex
Aerospace of $1.5 million.  As a result of the acquisitions of Monitor,  Phoenix
and Precision, selling general and administrative expenses for the first half of
1999  include  non-recurring  charges of $1.3  million  for  Precision  and $0.2
million  for Phoenix and $1.0  million for Monitor in the  comparable  period of
1998 for  investment  and  financial  advisory  fees paid to  Mentmore  Holdings
Corporation, an affiliate of Stellex.

         Research and Development  Expenses.  Research and development  expenses
for Stellex  totaled $4.3 million and $2.1 million for the six months ended June
30,  1999 and 1998,  respectively.  The  increase in  research  and  development
expenses  resulted from the  expansion of  engineering  capabilities  at Stellex
Microwave relating to new product development in the commercial and broadband
wireless  markets in addition to incremental  spending  resulting from the newly
acquired Phoenix operations.

         Amortization of Intangibles.  Amortization of intangible assets for the
six months ended June 30, 1999,  increased $2.1 million, or 100.0%,  compared to
1998 due to significant increases in goodwill and other identifiable  intangible
assets,  such as customer lists,  tradenames,  and assembled workforce resulting
from  purchase  accounting  allocations  made in  connection  with the  Monitor,
Precision and Phoenix Acquisitions.  Other intangible assets are being amortized
over their estimated useful lives ranging from one to thirty years.  Goodwill is
being amortized over fifteen to thirty years.

         Interest  Expense.  Interest expense for the Company increased to $11.3
million for the six months ended June 30, 1999  compared to $6.5 million  during
the same period in 1998.  The increase in interest  expense  resulted  primarily
from the  incurrence  of  indebtedness  to finance the  Monitor,  Precision  and
Phoenix Acquisitions.  The borrowings under the senior secured credit facilities
generally  bear interest at an interest rate based on the  Eurodollar  rate. The
average  interest rate on such  borrowings  for the six months June 30, 1999 was
approximately 8.1%.

         Income Tax Provision (Benefit).  The effective tax rate for the Company
for the six months ended June 30, 1999 was impacted  primarily by non-deductible
goodwill amortization at Monitor and Phoenix.

Pro forma results of the Company for the three and six months ended
June 30, 1999 and 1998

          The unaudited  pro forma  results of operations  for the three and six
months ended June 30, 1999 and 1998 give effect to the  acquisitions of Monitor,
Phoenix and Precision (the "Acquisitions") which were completed on May 29, 1998,
March 1, 1999 and April 22,  1999,  respectively.  For purposes of the pro forma
results of  operations,  the  Acquisitions  are  reflected  as if they  occurred
simultaneously  on January  1,  1998.  Certain  non-recurring  charges  relating
directly to the  Acquisitions and which effect expenses within the twelve months
following the transactions, such as investment banking fees to Mentmore Holdings
Corporation,  a one time  non-recurring  retention  bonus at  Precision  and the
amortization of the acquired  profits in inventory,  some of which resulted from
purchase  accounting,  have  been  excluded  from  the pro  forma  results.  The
unaudited  pro forma  information  set forth  below is included  herein  because
management  believes it may be meaningful to  investors.  However,  it should be
read  in  conjunction  with  the  Company's  historical  consolidated  financial
statements  and the  other  information  included  herein  and  included  in the
Company's  Annual Report on Form 10-K for the year ended  December 31, 1998. The
unaudited pro forma consolidated results have been prepared by management of the
Company and do not necessarily represent the results of the Company's operations
which would have occurred if the  Acquisitions  had actually  taken place on the
date indicated, and may not be indicative of the results of operations which may
be obtainable in the future. The pro forma results are presented in thousands of
dollars.

                                       16
<PAGE>

Table 1: Pro forma Results for the Three Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>

                                 Corporate            Aerostructures             Electronics                Total
                              1999       1998        1999        1998         1999         1998        1999        1998
<S>                        <C>         <C>          <C>         <C>          <C>          <C>         <C>         <C>
Net sales                  $           $         - $ 35,190    $ 42,599     $ 24,788     $ 23,977    $ 59,978    $66,576
                                   -
Cost of goods sold                                   25,124      30,479       16,598       16,664      41,722     47,143
                           ----------  ----------- ---------   ---------    ---------    ---------   ---------   --------
                                   -          -
Gross profit                       -          -      10,066      12,120        8,190        7,313      18,256     19,433
Gross margin                       -          -        28.6%       28.5%        33.0%        30.5%       30.4%      29.2%
Selling, general, and
  administrative expenses        137          -       2,900       3,758        3,468        3,011       6,505      6,769
Research & development
  expenses                         -          -           -           -        2,620        1,547       2,620      1,547
Amortization of intangibles     (125)         -       1,077       1,152          940        1,892       1,898
                               -----       --------  -------    ----------  ---------       -----       -----
Income (loss) from
   operations                    (12)         -       6,089       7,210        1,162        2,009       7,239      9,219
Interest expense                                                                                       (6,876)    (6,961)
Other income (expense)                                                                                     40          (44)
                                                                                                    ----------  ---------
Income before taxes                                                                                       403      2,214
Provision for taxes                                                                                       300      1,108
Net income                                                                                          $      103    $1,106
                                                                                                    ==========    ======

Table 2: Pro forma Results for the Six Months Ended June 30, 1999 and 1998

                                 Corporate            Aerostructures             Electronics                  Total
                              1999       1998        1999        1998         1999         1998        1999         1998
Net sales                  $       -    $     -    $  72,962    $ 80,489     $ 47,833     $ 47,294    $120,795   $127,783
Cost of goods sold                 -          -       52,411      58,116       32,394       33,964      84,805     92,080
                           ----------   ----------- ----------   ---------    ---------    ---------   ------   --------
Gross profit                       -          -       20,551      22,373       15,439       13,330      35,990     35,703
Gross margin                       -          -        28.2%       27.8%        32.3%        28.2%       29.8%       27.9%
Selling, general, and
  administrative expenses        405          -        5,926       7,298        6,236        5,802      12,567      13,100
Research & development
  expenses                         -          -           -           -        4,493        2,859       4,493        2,859
Amortization of intangibles    (125)          -        2,182       2,306       1,751        1,494       3,808        3,800
                               -----    --------      -------    ----------   ----------   ---------   ----------  ----------
Income (loss) from
   operations                   (280)         -       12,443      12,769       2,959        3,175      15,122      15,944
Interest expense                                                                                      (13,689)   (13,922)
Other income (expense)                                                                                     127       (60)
                                                                                                    ----------  ---------
Income before taxes
                                                                                                        1,560       1,962
Provision for taxes                                                                                                   973
                                                                                                          906
Net income                                                                                          $      654  $     989
                                                                                                    ==========  =========

</TABLE>




                                       17
<PAGE>





       Net Sales.  Pro Forma net sales for Stellex were $60.0 million and $120.8
million  for the  three  and six  months  ended  June  30,  1999,  respectively,
representing a 9.9% and a 5.5% decrease over the comparable periods in 1998. Net
sales for the Electronics  segment,  which is comprised of Stellex Microwave and
Phoenix,  totaled  $24.8  million and $47.8 million for the three and six months
ended June 30, 1999, respectively,  representing a 3.4% and a 1.1% increase over
the comparable periods in 1998. The increase in sales at the Electronics segment
resulted  primarily  from  increased  sales  due to the  ramp up of a new  $13.0
million  military  program with Raytheon at Phoenix and the Longbow program ramp
up at Stellex Microwave,  offset by lower commercial  component sales at Stellex
Microwave. The second quarter of 1998 was the final quarter at Stellex Microwave
impacted by the  "catch-up" of delinquent  commercial  component  orders arising
from  production   planning  problems  associated  with  poor  turnover  of  the
production planning software during 1996 and 1997 which resulted in higher sales
during the first two quarters of 1998.

          Pro Forma net sales for the Aerostructures segment, which is comprised
of Stellex  Aerospace,  Monitor and  Precision,  totaled $35.2 million and $73.0
million  for the  three  and six  months  ended  June  30,  1999,  respectively,
representing  a 17.4% and a 9.4% decrease over the  comparable  periods in 1998.
The  decrease  in sales is due to  weaker  demand  from  OEMs in the  commercial
aviation market resulting  primarily from  Boeing-related  inventory  management
issues  compounded by decreased  demand from Asian markets.  The significance of
any further  delays is difficult to predict.  However,  recent order activity at
Boeing as well as an increase in proposal  activity  suggests that the situation
is beginning to stabilize.

         Gross  Margin.  Gross  Margin for  Stellex  was 30.4% and 29.8% for the
three and six months  ended June 30,  1999,  respectively,  compared  to a gross
margin of 29.2% and 27.9% for the comparable  periods in 1998.  Gross margin for
the  Electronics  segment was 33.0% and 32.3% for the three and six months ended
June 30, 1999,  respectively,  compared to a gross margin of 30.5% and 28.2% for
the comparable  periods in 1998. The increase in gross margin in the Electronics
segment was due  primarily  to  productivity  improvements  on certain  programs
coupled with a more favorable product mix.

       Gross margin for the  Aerostructures  segment was 28.6% and 28.2% for the
three and six months  ended June 30,  1999,  respectively,  compared  to a gross
margin of 28.5% and 27.8% for the comparable periods in 1998. The Aerostructures
segment was  successful in supporting  its gross margin levels in spite of lower
volume,  higher than normal  start-up  costs on certain new jobs and  scheduling
inefficiencies  resulting from sporadic  program  deceleration  directives  from
customers.  Management made proactive  adjustments to overall production manning
levels,  while continuing to refine overhead  spending.  Certain pricing actions
recently negotiated with Boeing will put pressure on future gross margin levels.
However,  management  feels that,  based on current  pricing  data,  the overall
impact to the  Aerostructures  business  should not be  significant  considering
continuous  improvement efforts in engineering and tooling as well as the impact
of machining efficiencies resulting from new equipment installations,  primarily
at Precision.

         Selling,  General  and  Administrative  Expense.  Selling,  general and
administrative  expenses for Stellex totaled $6.5 million and $12.6 million,  or
10.8%  and 10.4%  stated as a  percentage  of net  sales,  for the three and six
months ended June 30, 1999,  respectively.  When adjusted for the elimination of
non-cash  compensation expense relating to the valuation of management ownership
puts at Stellex  Aerospace  during  1998,  selling,  general and  administration
expense would have been $6.0 million and $11.6 million,  or 9.0% and 9.1% stated
as a percentage of net sales,  for the three and six months ended June 30, 1998,
respectively.  The  increase is due  primarily  to  additional  marketing  spend
directed at strategic  customers in existing  markets and the expansion into the
broadband wireless and CATV markets.

         Research and Development  Expenses.  Research and development  expenses
for Stellex  totaled  $2.6 million and $4.5 million for the three and six months
ended June 30, 1999, respectively, compared to $1.5 million and $2.9 million for
the comparable  periods in 1998. The increase in research and development  costs
resulted from the expansion of  engineering  capabilities  at Stellex  Microwave
relating to new product  development in the commercial and broadband  wireless
markets.

Liquidity and Capital Resources

         The Company provided (used) cash flows from operations of $18.9 million
and  $(0.8)   million  for  the  six  months  ended  June  30,  1999  and  1998,
respectively.  The  increase in cash flows was  primarily  due to a  significant
customer advance received in January 1999 at Stellex Microwave.

                                       18
<PAGE>

          The Company used cash flows for  investing  activities  totaling  $8.1
million and $ 2.1  million,  excluding  cash flows used in  connection  with the
Phoenix and Precision  acquisitions in 1999 and the Monitor acquisition in 1998,
for the  six  months  ended  June  30,  1999  and  1998,  respectively.  Capital
investments during 1999 were primarily  comprised of expenditures  totaling $2.8
million  for the  Electronics  segment and $4.1  million for the  Aerostructures
segment. The Electronics segment expenditures have related almost exclusively to
the  development  activities in commercial and broadband  product  applications.
Aerostructures  segment expenditures  represent upgrading activities relating to
CNC equipment and tooling design activities as well as various machine equipment
investments  directly relating to significant contract awards such as the Boeing
C-17 program and other strategic  initiatives.  Approximately  $15.2 million and
$87.3  million of cash  proceeds were used to  consummate  the  acquisitions  of
Phoenix and Precision in March and April 1999,  respectively  and  approximately
$90.4 million of cash was used to consummate  the  acquisition of Monitor in May
1998.

         The Company used cash flows from  financing  activities  totaling $95.0
million  and $93.9  million  for the six months  ended  June 30,  1999 and 1998,
respectively.  Cash proceeds were used to fund the  acquisitions  of Phoenix and
Precision  in 1999 and of Monitor  in 1998.  During  1999,  the  acquisition  of
Phoenix was funded by a $16.0 million  draw-down  under the  Company's  previous
senior credit facilities.  As a result of the Precision acquisition,  the senior
credit  facility was amended and restated to provide the  necessary  incremental
debt financing  totaling  approximately  $76.0 million coupled with net proceeds
totaling  approximately  $19.0  million  from the  issuance of $20.0  million of
Preferred Stock at closing.

         The current senior secured credit  facility  provides for a two tranche
term loan  comprised  of a $60 million Term A facility and a $110 million Term B
facility,  in addition  to a $65 million  revolving  loan  facility.  The Term A
facility  has a  six-year  term with  escalating  quarterly  principal  payments
bearing  interest at either the base rate plus a margin rate of up to 2.0% based
on a  leverage  ratio or the  Eurodollar  rate plus a margin  rate of up to 3.0%
based on a leverage  ratio.  The Term B facility  has a  ninety-month  term with
escalating quarterly principal payments bearing interest at either the base rate
plus a margin  rate of 2.5% or the  Eurodollar  rate plus a margin rate of 3.5%.
The revolving credit facility has a six-year term bearing interest at either the
base  rate plus a margin  rate of up to 2.0%  based on a  leverage  ratio or the
Eurodollar  rate plus a margin rate of up to 3.0% based on a leverage  ratio. As
of June 30, 1999,  approximately $183.5 million was outstanding under the senior
secured  credit  facility,  including  $15.0 million  under the  revolving  loan
facility.

         The Preferred  Stock  provides for cumulative  dividends  accruing at a
rate of 13% per  annum.  On or prior to August 31,  2004,  Stellex  may,  at its
option, pay dividends either in cash or in additional shares of Preferred Stock.
After August 31, 2004,  dividends may be paid only in cash. The Preferred  Stock
is mandatorily redeemable on August 31, 2010 at a redemption price equal to 100%
of the aggregate  liquidation  preference  thereof,  plus, without  duplication,
accumulated and unpaid dividends to the date of redemption.  Stellex may, at its
option, redeem the outstanding shares of Preferred Stock on or before January 1,
2000 (or March 15, 2000 under certain circumstances) or after August 31, 2004 at
specified  redemption prices together with accumulated and unpaid dividends,  if
any, to the date of redemption.  Under certain  circumstances,  Stellex may also
redeem the Preferred Stock with the proceeds of equity offerings.  In connection
with the issuance of the Preferred  Stock,  Stellex granted warrants to purchase
shares  of  common  stock in an  amount  equal  to 1% of  Stellex's  issued  and
outstanding  shares of common stock on the date of grant.  The warrants  have an
exercise  price of $0.01 per share.  In the event  Stellex is not able to redeem
the  Preferred  Stock on or before  January  1, 2000 (or  March 15,  2000  under
certain circumstances), Stellex will be required to grant additional warrants to
the purchaser of the Preferred Stock  representing up to 5% of Stellex's  issued
and outstanding shares of common stock.

         The   Company's   primary   liquidity   demands  will  be  for  capital
expenditures  and working  capital  needs.  During the remaining  second half of
1999, based on the Company's existing  operations,  the Company expects to spend
approximately $4.0 million on equipment upgrades and maintenance  capital spend.
The Company enjoys a reputation as a high quality  supplier and will continue to
support that reputation  through  appropriate levels of capital spend as well as
maintenance of its various  continuous  improvement  programs.  Based on further
positive progress on the commercial and broadband wireless program opportunities
now in development at the Electronics  segment,  the Company anticipates a level
of capital  spending during the first half of 2000 totaling  approximately  $3.0
million. Further to the Company's efforts in developing new market opportunities
for the  Electronics  segment,  consistent  levels of research  and  development
spending are anticipated through 2000.  Management has worked collectively to be
proactive in seeking  development  activities which have a high probability of a
profitable outcome with reasonable payback on development cost payback.  Stellex
Microwave has a planned facilities  relocation in the fall of 2000 from the Palo
Alto  facilities  to a  location  in  San  Jose  which  will  require  leasehold
improvements  totaling  approximately $4.5 million.  These leasehold improvement
expenditures  are  expected to be realized  ratably  throughout  calendar  2000.
Future capital  spending for the  Aerostructures  segment is not predicted to be
significant,  beyond normal maintenance related spending, based on excess levels
of machine  capacity  existing  particularly at the Company's  large  structural
machining operations.

         The Company's  management  believes that, based on its current level of
operations and anticipated growth, its anticipated cash flow from operations and
available  borrowings  under the senior  secured credit  facility,  its level of
liquidity  will be adequate  to meet its  anticipated  requirements  for working
capital,  capital  expenditures,  interest payments and any scheduled  principal
payments in the foreseeable future.


                                       19
<PAGE>


The Year 2000 Issue

         The Year 2000 issue  concerns the inability of  information  systems to
recognize  properly and process  date-sensitive  information  beyond  January 1,
2000.  The  critical  areas for the  Company  are viewed as: (1)  compliance  of
products  manufactured  by  the  Company  (primarily  Stellex  Microwave),   (2)
readiness of internal information and business systems, and (3) readiness of key
suppliers of products and services.

          State of  readiness:  During 1997 and 1998,  the Company  initiated an
assessment of the impact of the Year 2000 issue on its internal  operations  and
began  the  development  of a plan to bring  all of its  computer  systems  into
compliance.  This focus has been on all systems potentially impacted by the Year
2000 issue,  including information technology ("IT") systems and non-IT systems,
such as those with embedded  chips and factory  floor  systems.  Each  operating
company has responsibility for its own assessment and correction activities with
teams in place at each operating unit. These  activities have been  periodically
monitored by both local and corporate management. At the present time all of the
Company's  subsidiaries,  including newly acquired  Phoenix and Precision,  have
substantially  completed  their internal IT and non-IT systems  reviews for Year
2000 compliance.  The remaining  procedures in each company's  assessment of the
Year 2000 issue on its operations involve the completion of compliance  testing.
Significant  vendors  and  customers  have been  contacted  and queried and have
substantially  responded  on  their  current  status  favorably.  The  Company's
subsidiaries will continue to pursue other vendors and customers who have yet to
respond.

         Based on a review  of the  content  of  various  Company  products, it
has been determined that there exists no embedded calendar dependent data.

         Year 2000  compliance  assessments  have been completed on the recently
acquired Phoenix Microwave and Precision  Machining  businesses.  Assessments of
internal IT and non-IT systems  indicate that no significant  system hardware or
software  upgrades are required.  At present all  subsidiaries  are carrying out
compliance  testing  which will  continue  through the remainder of the year and
even into the Year 2000.

         Costs to address Year 2000 issues:  To date, costs to implement and the
timeframe  contemplated  by  management  to be Year 2000  compliant are based on
management's  best estimates.  The types of expenditures made and expected to be
made include hardware and software  upgrades,  conversion  costs, and compliance
assessment reviews.  Costs incurred to date are approximately $1.5 million,  and
are expected to total approximately $0.1million for the remainder of the year.

         Risks  associated with Year 2000 issue:  The Company  believes there is
low risk of any internal  critical system,  embedded  system,  or other critical
asset not being Year  2000-ready  by the end of 1999.  The Company  continues to
assess  its risk  exposure  attributable  to  external  factors,  suppliers  and
customers.  With respect to outside  parties who have  responded to requests for
information  concerning their state of readiness for Year 2000 compliance,  they
have indicated  that their  hardware,  software,  and related non-IT systems are
currently  or will  be Year  2000  compliant  within  the  1999  calendar  year.
Evaluation  of these issues is  continuing  and there can be no  assurance  that
additional issues, not presently known to the Company,  will be discovered which
could present a material risk of  disruption to the Company's  operations.  Such
disruptions could result in delays in the delivery or sale of products.

         Contingency plans: A complete contingency plan for suppliers, customers
and mission critical systems impacted by Year 2000 issues has been developed and
is being  re-evaluated  in light of  worst-case  scenarios.  One of the greatest
areas of exposure is considered to be the ability for vendors to supply critical
materials and services.  The  contingency  plan addresses  this concern  through
means such as double and triple sourcing certain critical  products and services
and evaluation of stockpiling  of critical  inventory  prior to the year 2000 to
assure uninterrupted manufacturing.

Impact of Recently Issued Accounting Standards

         In June 1998, the Financial  Accounting Standards Board ("FASB") issued
Statement of Financial  Accounting  Standards ("SFAS") No. 133,  "Accounting for
Derivative  Instruments  and Hedging  Activities,"  which  defines  derivatives,
requires that all  derivatives be carried at fair value and provides for hedging
accounting when certain conditions are met. This statement will be effective for
the year  ended  December  31,  2000.  Management  has not  fully  assessed  the
implications of this new statement, but believes adoption of this statement will
not have a material  impact on the Company's  consolidated  financial  position,
results of operations or cash flows.

Forward Looking Statements

         Certain statements in this report contain "forward-looking  statements"
within the  meaning of the  Private  Securities  Litigation  Reform Act of 1995.
Investors  are  cautioned  that  any   forward-looking   statements,   including
statements regarding the intent,  belief, or current expectations of the Company
or its  management,  are not  guarantees of future  performance  as they involve
known and unknown risks and uncertainties.  Actual results may differ materially
from those in the  forward-looking  statements  as a result of  various  factors
including, but not limited to: changes in the competitive  marketplace,  changes
in the overall pricing environment,  changes in global economic conditions,  the
risks  associated  with the Company's  dependence  on a limited  number of large
customers,  the risk of loss of certain significant military programs, Year 2000
issues,  and the risks  associated with the  consolidation,  restructuring,  and
changes in ownership in the defense and aerospace industry.



                                       20
<PAGE>

ITEM 3.  Quantitative and Qualitative Disclosures About Marketing Risk

The  Company's  primary  market  risk  exposure  is that of  interest  rate risk
associated with its various debt  instruments.  The Company has not entered into
any derivative financial instruments to manage its interest rate risks to date.

At June 30, 1999, the Company's  total  outstanding  debt was comprised of fixed
interest rate obligations of $109,458,000 and variable interest rate obligations
of $183,985,000.

The table  below  provides  information  (in  thousands  of  dollars)  about the
Company's  maturity  schedule and fair values of its outstanding debt as of June
30, 1999:
<TABLE>
<CAPTION>

                                          Variable Rate Debt                                 Fixed Rate Debt
                                          ------------------                                 ---------------
                                                                                    Senior
Year ending               Term Loan A    Term Loan    Revolving                  Subordinated     Sellers
December 31,                   A              B      Loan Facility    Other         Notes         Notes        Other
------------              -----------   ----------   -------------    -----      ------------     -------       -----

<S>                       <C>           <C>             <C>           <C>         <C>            <C>          <C>
1999                      $ 2,500       $   500         $     -       $156        $       -      $ 1,750      $     -
2000                        6,875         1,000               -        116                -            -            -
2001                        9,375         1,000               -        107                -        5,180            -
2002                       10,000         1,000               -         97                -            -      $ 2,528
2003                       11,875         1,000               -          9                -            -            -
2004                       14,375         1,000               -          -                -            -            -
Thereafter                  3,750       104,250         $15,000                   $100,000
                        ---------      --------         -------      -------      --------
                                                                         -                             -            -
Total                     $58,750      $109,750         $15,000       $485        $100,000        $6,930       $2,528
                          =======      ========         =======       ====        ========        ======       ======
Fair Market Value         $58,750      $109,750         $15,000       $485        $  88,250       $6,930       $2,528
                          =======      ========         =======       ====        =========       ======       ======
</TABLE>

Based upon the  Company's  current level of variable rate debt, a 1% increase or
decrease in interest rates will cause an approximate  $1.84 million  increase or
decrease in annual interest expense.

The Company incurred an increase of approximately $75.7 million of variable debt
as a result of the  Precision  Acquisition  on April 22, 1999 (See Note 1 to the
Notes to the Unaudited Consolidated Financial Statements).







                                       21
<PAGE>





PART II - OTHER INFORMATION

ITEM 1:  Legal Proceedings

The Company is involved in various legal action  arising in the normal course of
business.  While it is not possible to determine  with  certainty the outcome of
these  matters,  in the opinion of  management,  the eventual  resolution of the
claims and action  outstanding  will not have a material  adverse  effect on the
Company's financial position or operating results.

ITEM 2:  Changes in Securities and Use of Proceeds

None

ITEM 3:  Defaults Upon Senior Securities

None

ITEM 4:  Submission of Matters to a Vote of Security Holders

None

ITEM 5:  Other Information

None

ITEM 6   Exhibits and Reports on Form 8-K

(a) Exhibits


Exhibit No.                Description of Exhibit

10.1                       First  Amendment  to Gallium  Arsenide  and Thin Film
                           Supply  and  Services  Agreement  dated as of May 17,
                           1999 by and among  Watkins-Johnson  Company,  Stellex
                           Microwave Systems, Inc. and Stellex Electronics, Inc.

27                         Financial Data Schedule.

         (a)  Reports  on  Form  8-K:  A Form  8-K  was  filed  on May 7,  1999,
              describing  the details of the  Precision  Acquisition,  providing
              historical  financial  information  for  Precision  and pro  forma
              financial  information for Stellex,  inclusive of results for both
              Phoenix and Precision.





                                       22
<PAGE>





         (b)   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended,  the  Registrant has duly caused the Report to
be signed on its behalf by the undersigned,  thereunto duly  authorized,  in the
City of New York, State of New York, as of August 16, 1999.



                            STELLEX TECHNOLOGIES, INC
                            By:   /s/ William L. Remley
                            William L. Remley,
                            President and Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended,  this Report has been signed by the following persons in the capacities
and as of dates indicated.
<TABLE>
<CAPTION>

               Signature                                     Title                                 Date
               ---------                                     -----                                 ----
<S>                                       <C>                                                 <C>

/s/    William L. Remley                  Vice Chairman, President, Chief Executive           August 16, 1999
------------------------
       William L. Remley                  Officer, Treasurer and Director of Stellex
                                          Technologies, Inc.

/s/    P. Roger Byer                      Chief Financial Officer of Stellex                  August 16, 1999
--------------------
       P. Roger Byer                      Technologies, Inc. (principal financial
                                          and accounting officer)


</TABLE>
                                       23
<PAGE>


Exhibit 10.1

                               FIRST AMENDMENT TO
                         GALLIUM ARSENIDE AND THIN FILM
                          SUPPLY AND SERVICES AGREEMENT


                  THIS FIRST  AMENDMENT  ("Amendment")  is dated effective as of
May 17, 1999, and amends the GALLIUM  ARSENIDE AND THIN FILM SUPPLY AND SERVICES
AGREEMENT   ("Agreement"),   dated  as  of  October  31,  1997,   by  and  among
WATKINS-JOHNSON COMPANY, a California Corporation  ("Watkins-Johnson");  STELLEX
MICROWAVE  SYSTEMS,  INC.,  formerly  known  as  W-J  TSMD  Inc.,  a  California
corporation ("W-J TSMD"); and STELLEX ELECTRONICS,  INC., formerly known as TSMD
Acquisition Corp. a Delaware corporation ("TSMD Acquisition").

1.        Amendment to Section 3.6

                  Section 3.6 of the Agreement is hereby deleted and is replaced
 with the following:

                  3.6     W-J TSMD Employees.

                                    W-J   TSMD   may    assign,    subject    to
                  Watkins-Johnson's  reasonable approval, one or two individuals
                  to  work  with  Watkins-Johnson  employees  in the  Thin  Film
                  facility on research and development  projects  described in a
                  SOW. The individuals  designated by W-J TSMD shall have access
                  to the facility  during  normal  business  hours for three (3)
                  days during each workweek upon seven (7) days' notice from W-J
                  TSMD.  Salary and benefits for these  individuals will be paid
                  by W-J  TSMD,  but they  shall  work  under the  direction  of
                  Watkins-Johnson  management.  The parties  shall  cooperate to
                  establish any reasonably required agreements or procedures for
                  such W-J TSMD employees.

2.        Amendment to Section 6.2

                  Section 6.2 of the  Agreement is hereby  amended by adding the
following paragraph:

                                    (iii)  Notwithstanding  any other provisions
                  of this Section  6.2,  the parties  agree that TSMD's Share of
                  Process Costs shall be (a) $1,210,000 for the six month period
                  beginning on January 1, 1999; (b) $1,240,250 for the six month
                  period  beginning  July 1,  1999;  and (c)  $2,572,762.50  for
                  calendar year 2000.

3. No other changes.

                  Except as  expressly  set forth  herein,  the  parties  do not
intend to modify any  provision  of the  Agreement.  The  Agreement,  as amended
hereby, shall remain in full force and effect.

                  IN WITNESS WHEREOF,  the parties have caused this Amendment to
be executed as of __________________, 1999.


WATKINS-JOHNSON COMPANY

By:      /s/_____________________________

Name:    ________________________________

Title:   ________________________________


STELLEX MICROWAVE SYSTEMS, INC.

By:      /s/_____________________________

Name:    ________________________________

Title:   ________________________________







                                       24
<PAGE>





STELLEX ELECTRONICS, INC.

By:      ________________________________

Name:    ________________________________

Title:   ________________________________





                                       25
<PAGE>