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

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                  FORM 10-Q

X     QUARTERLY  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
      EXCHANGE ACT OF 1934 for the quarterly period ended: June 30, 1998

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

                       Commission File Number 333-41939

                           STELLEX INDUSTRIES, INC.

            (Exact name of registrant as specified in its charter)

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

       1430 Broadway, 13th Floor
       New York, New York 10018                          10018
(Address of principal executive office)               (Zip code)

      Registrant's telephone number, including area code: (212) 391-1392

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,  1998,  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.

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


<PAGE>


                  STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
                              


                         ASSETS                       June 30,     December
                                                        1998       31, 1997
                                                     (Unaudited)
     Current assets:
        Cash and cash equivalents                   $  3,982,200  $  3,304,200
        Account receivables - net of allowances       27,565,300    15,232,200
        Inventories                                   56,113,900    27,884,200
        Prepaid and other assets                       2,645,100     3,753,000
        Deferred income taxes                          3,426,800     2,172,400
                                                    ------------  ------------
        Total current assets                          93,733,300    52,346,000
     Property, plant and equipment, net               61,301,500    31,506,000
     Goodwill, net                                    96,021,300    42,919,700
     Other intangible assets, net                     11,494,600    12,594,800
     Deferred financing costs, net                     9,263,100     5,356,800
     Other assets                                      2,241,400     1,059,100
                                                    ------------  ------------
        Total assets                                $274,055,200  $145,782,400
                                                    ============  ============

           LIABILITIES & SHAREHOLDERS' EQUITY
     Current liabilities:
       Current portion of long term obligations     $  3,715,600  $    139,700
       Accounts payable                               10,017,200     4,637,900
       Accrued liabilities                            20,645,000    12,031,100
       Advance billings and customer deposits          1,307,800     2,678,900
                                                    ------------  ------------
       Total current liabilities                      35,685,600    19,487,600
     9 1/2% senior subordinated notes                100,000,000   100,000,000
     Long-term obligations, less current portion     112,096,500    12,181,800
     Deferred employee benefits                        1,771,500     1,704,000
     Deferred income taxes                            16,292,600     2,446,700
     Minority interest in KII Holding Corp             2,568,400     1,078,100
                                                    ------------  ------------
       Total liabilities and minority interest      $268,414,600  $136,898,200
                                                    ------------  ------------

     Stockholders' equity:
     Common stock, no par value, 1,000 shares            
        authorized and outstanding                        50,000        50,000
     Preferred stock, no par value: 500 shares
        authorized, 229 shares issued
        and outstanding                               11,450,000    11,450,000
     Retained earnings (accumulated deficit)          (5,859,400)   (2,615,800)
        Total stockholders' equity                     5,640,600     8,884,200
                                                    ------------  ------------
        Total liabilities and stockholders' equity  $274,055,200  $145,782,400
                                                    ============  ============


    See accompanying notes to unaudited consolidated financial statements



<PAGE>



ITEM 1:  Financial Statements



                  STELLEX INDUSTRIES, INC. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF OPERATIONS

                                 (Unaudited)


<TABLE>
<CAPTION>

                                         Three Months Ended              Six Months Ended
                                             June 30,                         June 30,
<S>                                   <C>             <C>               <C>            <C> 
                                      1998            1997              1998           1997
                                      ----            ----              ----           ----
                                                  (Predecessor)                    (Predecessor)
Sales .........................   $ 38,449,900    $  7,854,400     $ 66,349,000     $14,296,000
Cost of sales .................     27,812,000       5,491,900       49,763,500      10,139,600
                                  ------------    ------------     ------------    ------------
Gross profit ..................     10,637,900       2,362,500       16,585,500       4,156,400
Operating expenses:
Selling, general and
administrative ................      5,948,000         902,200       10,075,700       1,783,100
Research and development ......      1,209,000            --          2,149,000            --
Amortization of intangibles ...        851,000           7,800        1,493,000          15,600
                                  ------------    ------------     ------------    ------------

   Total operating costs ......      8,008,000         910,000       13,717,700       1,798,700
                                  ------------    ------------     ------------    ------------
Income from operations ........      2,629,900       1,452,500        2,867,800       2,357,700
                                  ------------    ------------     ------------    ------------
Other income (expense):
   Interest income ............         25,000           2,200           57,500           4,500
   Interest expense ...........     (3,712,000)       (194,100)      (6,481,600)       (375,700)
   Other ......................        (69,600)        (89,700)        (132,800)       (102,900)
                                       -------         -------         --------        -------- 

   Total other expense              (3,756,600)       (281,600)      (6,556,900)       (474,100)        
                                    ----------        --------         --------         -------

Income (loss) before
  provision for income taxes ..     (1,126,700)      1,170,900       (3,689,100)      1,883,600
Provision (benefit) for
  income taxes ................       (246,200)        468,300       (1,018,100)        753,400
                                      --------         -------       ----------         -------
Net income (loss) .............       (880,500)        702,600       (2,671,000)      1,130,200
Preferred stock dividends .....       (286,300)           --           (572,600)           --
                                      --------        --------         --------        --------         
Income (loss) applicable to
  common stockholders .........   $ (1,166,800)   $    702,600     $ (3,243,600)   $  1,130,200
                                  ============    ============     ============    ============
</TABLE>
                                  













    See accompanying notes to unaudited consolidated financial statements.




<PAGE>

<TABLE>


                  STELLEX INDUSTRIES, INC. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (Unaudited)

<CAPTION>
                                  Three Months Ended       Six Months Ended
                                       June 30,                June 30,
                                   1998        1997        1998        1997
                                   ----        ----        ----        ----
                                           (Predecessor)           (Predecessor)

<S>                                  <C>        <C>        <C>          <C> 
Cash Flows from Operating
Activities:
Net income (loss)                   $(880,500)  $702,600   $(2,671,000)  $1,130,200
Reconciliation to net cash
  provided by (used in)
  operating activities:
  Depreciation and amortization     2,395,500    444,700     4,584,400      878,200
  Deferred financing cost        
   amortization                       199,700          -       337,800            -
  Amortization of step-up in    
    inventory                         400,000          -     1,457,400            -
  Gain on sale of property                  -     (2,100)       (2,600)      (4,000)
  Deferred income taxes               (97,300)    43,800    (1,027,500)     125,100
  Stock compensation                  774,900          -     1,490,300            -
Changes in assets and
liabilities:
  Accounts receivable                (475,000)  (519,100)   (3,010,100)    (978,200)
  Inventories                      (1,570,800)  (307,100)   (1,740,100)  (1,078,300)
  Prepaid and other assets            226,400      7,400     3,191,600     (105,300)
  Due from parent                           -        100             -       (2,100)
  Other assets                        137,200    (41,300)     (401,200)           -
  Accounts payable                   (901,300)   367,700       (71,900)     559,000
  Accrued and other liabilities    (1,983,000)  (228,000)   (1,918,600)     (42,100)
  Customer deposits                    (7,400)    (3,200)     (934,900)      (3,100)
                                       ------     ------      --------       ------ 
                                   
   Net cash provided by (used                
   in) operating activities        (1,781,600)   465,500      (716,400)     479,400
                                   ----------    -------      --------      -------
                               
Cash Flows from Investing
Activities:
Additions to fixed assets          (1,029,100)  (389,900)   (2,212,200)    (868,500)
Proceeds from sale of fixed      
assets                                      -          -        24,500       33,500
Net cash used in acquisition   
of Monitor                        (90,364,100)         -   (90,364,100)           - 
                                  -----------   --------   -----------     --------         
   Net cash used in investing  
   activities                     (91,393,200)  (389,900)  (92,551,800)    (835,000)
                                  -----------   --------   -----------     -------- 

Cash Flows from Financing
Activities:
Net borrowings(repayments)
   under revolving line of      
   credit                           8,250,000    (50,000)    8,250,000      300,000
Proceeds from Senior Term Loans    90,000,000          -    90,000,000            -
Payment of financing costs         (4,242,100)         -    (4,242,100)           -
Repayments under capital lease  
obligations                           (28,500)         -       (31,000)           -
Repayment of debt and notes                  
payable                               (15,500)   (14,400)      (30,700)     (28,400)
                                      -------    -------       -------      ------- 
   Net cash provided by (used
     in) financing activities      93,963,900    (64,400)   93,946,200      271,600
                                   ----------    -------    ----------      -------
                                     
   Net increase (decrease) in
     cash and cash equivalents        789,100     11,200       678,000      (84,000)
Cash and cash equivalents,       
 beginning of period                3,193,100    310,800     3,304,200      406,000
                                    ---------    -------     ---------      -------

Cash and cash equivalents, end 
  of period                        $3,982,200   $322,000    $3,982,200     $322,000         
                                    =========    =======     =========      =======         
</TABLE>




<PAGE>



<TABLE>
                  STELLEX INDUSTRIES, INC. AND SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                 (Unaudited)


                                                                                    
<CAPTION>
                                           Three Months Ended             Six Months Ended
                                                June 30,                     June 30,    
<S>                                     <C>            <C>             <C>            <C> 
                                        1998           1997            1998           1997
                                        ----           ----            ----           ----
                                                   (Predecessor)                  (Predecessor)
Supplemental disclosure of                 
cash flow information:
   Cash paid during the period
   for:
        
   Interest ..................   $   5,378,610    $     194,678   $   5,431,539    $     377,776
                                 =============    =============   =============    =============
   Income taxes, net .........   $        --      $     577,700   $        --      $     633,000
                                 =============    =============   =============    =============   
Supplemental schedule of
noncash investing and
financing activities:
   Capital lease agreements
   for equipment .............         $30,400          $  --           $30,400          $  --
                                       =======          =======        ========          =======      
   Note issued to Seller in
   conjunction with
   Monitor Acquisition .......      $5,180,000          $  --        $5,180,000          $  --
                                    ==========          =======      ==========          =======     

 Assets acquired and .........           
   liabilities assumed in
   connection with Monitor
   Acquisition:
   Fair value of assets
   acquired ..................   $ 130,420,000          $  --     $ 130,420,000          $  --   
   Liabilities assumed .......     (34,483,800)            --       (34,483,800)            --   
                                   -----------          -------     -----------          -------        
   Cash paid .................      95,936,200             --        95,936,200             --
   Less financing fees and
   expenses ..................      (4,165,100)            --        (4,165,100)            --
   Less cash acquired ........      (1,407,000)            --        (1,407,000)            --
                                    ----------          -------      ----------          -------    

   Net cash used for business
   acquisition  ..............   $  90,364,100          $  --     $  90,364,100          $  --   
                                    ==========          =======      ==========          =======
</TABLE>

















           See accompanying notes to unaudited financial statements



                  STELLEX INDUSTRIES, INC. AND SUBSIDIARIES

             NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.  Organization and Description of Business

Formation of Stellex  Industries,  Inc. - On September 5, 1997, Stellex Holdings
Corp.  was  incorporated  as a Delaware  corporation,  which on October 23, 1997
amended its articles of incorporation to change its name to Stellex  Industries,
Inc.  ("Stellex").  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  Holdings"),  (ii)  $50,000  cash and  (iii)  the  assumption  of a
$4,000,000  promissory  note. KII Holdings 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 Holdings;  the remaining
equity  interests  are held by  certain  members  of  Kleinert  management.  The
transaction  has  been  accounted  for as a  reincorporation  of  KII  Holdings;
accordingly,  the  financial  statements  of Stellex  reflect the results of its
operations commencing with the acquisition of Kleinert in July 1, 1997. Kleinert
is the predecessor of Stellex,  and all references to the "Company" include both
Stellex and its predecessor, Kleinert.

Kleinert  Acquisition  - On July 1, 1997,  KII  Holdings  through a wholly owned
subsidiary  (KII  Acquisition  Corp.,  a Delaware  company)  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.  Kleinert's  corporate name
was subsequently changed to 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").

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.  Stellex's  consolidated  financial  statements  herein
include the results of operations of Stellex  Microwave  during the three months
and six months ended June 30, 1998 only.

Monitor Aerospace  Acquisition - On May 29, 1998, Stellex Industries,  Inc. (the
"Company")  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 has two wholly
owned  subsidiaries,  Monitor  Aerospace  International  Corp and Monitor Marine
Products,  Inc. The Company's acquisition of Monitor (the "Monitor Acquisition")
was effected  pursuant to the Agreement and Plan of Merger dated as of April 28,
1998, by and among Stellex Aerospace Holdings, Inc., a subsidiary of the Company
("Holdings"),  Soze Corp., a wholly-owned  subsidiary of Holdings,  and Monitor.
Simultaneously with the acquisition Soze Corp. merged into Monitor.

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
Amended  and  Restated  Credit  Agreement  dated  as of May  29,  1998  ("Credit
Agreement") and (ii) Monitor's  issuance of a promissory note to Douglas Monitto
and Lawrence Goldberg, jointly as majority shareholders, in the principal amount
of  $5,180,000.  Borrowings  under the Credit  Agreement were comprised of terms
loans in an aggregate  principal  amount of $90.0 million and revolving loans of
$17.3 million, of which $10.3 million was used to refinance the existing Company
revolver.

The Credit  Agreement is comprised of a $115.0  million Term Loan  Facility,  of
which  $25.0  million  remains  undrawn,  and a  $35.0  million  Revolving  Loan
Facility.  The Term Loan Facility  includes  $30.0 million of tranche  financing
having a scheduled  maturity of December 31, 2003,  and $60.0 million of tranche
financing  having a scheduled  maturity of December 31, 2005. The Revolving Loan
Facility has a scheduled maturity of December 31, 2003.

2.    Basis of Presentation

Stellex is a holding  company that has no operations or assets separate from its
investments in its subsidiaries. The consolidated balance sheet at June 30, 1998
and the consolidated  statements of income and  consolidated  statements of cash
flows for the  periods  ended June 30,  1998  include  the  accounts  of Stellex
Microwave and Stellex Aerospace Holdings,  Inc. Stellex Aerospace Holdings, Inc.
consists of Monitor, a wholly-owned subsidiary,  and KII Holdings, its 80% owned
subsidiary.  KII Holdings  consists of Stellex  Aerospace  and its  wholly-owned
subsidiaries  (collectively,  "Stellex  Aerospace").  Due to the  timing  of the
Monitor  Acquisition and the filing of the 10-Q for the period,  the revaluation
of assets on Monitor's  balance sheet as of June 30, 1998 is  management's  best
estimates.  Management  believes  that these  estimates  will not be  materially
different on a going-forward basis after the relevant valuation  appraisals have
been fully completed. The comparative financial statements for the periods ended
June 30,  1997 are of Kleinert  (the  predecessor  of  Stellex)  and include the
accounts of Kleinert  Industries,  Inc. and its wholly owned  subsidiaries.  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 normal and recurring
natures,  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,  1997 and the
Company's  Report on Form 8-K dated June 15,  1998 and the  Company's  Report on
Form 8-K/A dated August 13, 1998.

3.   Comprehensive Income

Effective  January 1998, the Company adopted  Statement of Financial  Accounting
Standards No. 130,  "Reporting  Comprehensive  Income." This statement  requires
that  all  items  recognized   under  accounting   standards  as  components  of
comprehensive  income be  reported  in an  annual  financial  statement  that is
displayed with the same prominence as other annual  financial  statements.  This
Statement  also requires that an entity  classify  items of other  comprehensive
income by their nature in an annual  financial  statement.  For  example,  other
comprehensive  income may  include  foreign  currency  translation  adjustments,
minimum  pension  liability  adjustments,  and  unrealized  gains and  losses on
marketable  securities  classified  as   available-for-sale.   Annual  financial
statements for prior periods will be classified, as required. The Company had no
items of other comprehensive  income or loss for the three and six-month periods
ended June 30, 1998.



<PAGE>



4.   Inventories

      Inventories consisted of the following:
                                                 June 30,     December 31,
                                                   1998           1997
                                               (Unaudited)

        Raw materials                          $13,911,800    $8,088,400
        Work-in-process                         35,249,400    12,957,300
        Finished goods                           6,952,700     6,838,500
                                               -----------    ----------
        Total                                  $56,113,900   $27,884,200
                                               ===========   ===========

5.   Long-Term Obligations

      Long-term obligations consisted of the following:
                                                June 30,       December 31,
                                                  1998             1997
                                               (Unaudited)

        Term Loans                           $ 90,000,000              -
        Revolving  line of credit              15,750,000      $7,500,000
        7.785% Mortgage notes payable           2,593,200       2,624,000
        Sellers Notes Payable                   6,930,000       1,750,000
        Obligations under capital leases          446,900         447,500
        Other long term obligations                92,000              -
                                               ----------        --------
                                              115,812,100      12,321,500
        Less current portion                    3,715,600         139,700
                                                ---------      ----------
                    Total                    $112,096,500     $12,181,800
                                             ============     ===========

6.   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  currently  there  are no  lawsuits  that will have a
material affect on the Company's financial position.



<PAGE>



7.    Condensed Financial Information of Stellex and its Subsidiaries

The $100 million  principal amount of 9 1/2% senior  subordinated  notes and the
term and  revolving  loans are  fully  guaranteed,  on a full and  unconditional
basis,  by all wholly  and  majority  owned  subsidiaries  of Stellex  including
Stellex  Microwave,  Stellex  Aerospace  and Monitor  Aerospace.  The  condensed
consolidating  financial  information set forth below is included herein because
management  has concluded  that separate  financial  statements  relating to the
guarantor  subsidiaries are not material to investors.  There are no significant
contractual  restrictions  on the  ability  of  the  Company's  subsidiaries  to
transfer funds to the Company.  Condensed consolidating financial information as
of June 30, 1998 and the three and six month periods then ended follows:

<TABLE>
<CAPTION>
                     Condensed Consolidated Balance Sheet

<S>                          <C>              <C>              <C>             <C>               <C>             <C>
                                  Stellex           Stellex             KII         Monitor     Adjustments &         Stellex
                              (Parent Only)       Microwave         Holdings      Aerospace      Eliminations      Consolidated
Cash and cash equivalents    $     465,700    $   1,025,600    $     916,900   $   1,574,000             --      $   3,982,200
Accounts receivable, net .            --         12,389,500        6,066,800       9,109,000             --         27,565,300
Inventories ..............            --         14,652,600       13,819,300      27,642,000             --         56,113,900
Other current assets .....       2,764,400        3,674,700          983,400       1,401,300    $  (2,751,900)       6,071,900
                                 ---------        ---------          -------       ---------    -------------        ---------
Total current assets .....       3,230,100       31,742,400       21,786,400      39,726,300       (2,751,900)      93,733,300
Property, plant and        
   equipment, net ........            --         16,530,800       15,076,700      29,694,000             --         61,301,500
Goodwill and             
   intangibles, net ......            --         53,550,200             --        53,965,700             --        107,515,900
Investment in and              
advances to subsidiaries .     216,588,700             --               --              --       (216,588,700)            --
Other assets .............            --          4,219,900        2,087,600        5,197,000      11,504,500
                               -----------        ---------        ---------        ---------      ----------
                             
Total assets .............   $ 219,818,800    $ 106,043,300    $  38,950,700   $ 128,583,000    $(219,340,600)   $ 274,055,200
                             =============    =============    =============   =============    =============    =============
Current liabilities ......   $   6,593,000    $  12,495,400    $   5,098,200   $  14,338,000    $  (2,839,000)   $  35,685,600
9 1/2% senior subordinated     
   notes .................     100,000,000             --               --              --               --        100,000,000
Intercompany notes .......            --         96,479,900       20,200,000      95,936,000     (212,615,900)            --
Term Loans ...............      90,000,000             --               --              --               --         90,000,000
Other long-term 
   liabilities ...........      12,150,100          753,200       10,892,700      18,933,000             --         42,729,000
Stockholders' equity .....      11,075,700       (3,685,200)       2,759,800        (624,000)      (3,885,700)       5,640,600 
                                ----------        ---------        --------       ----------        ---------       ----------
Total liabilities and 
stockholders' equity  ....   $ 219,818,800    $ 106,043,300    $  38,950,700   $ 128,583,000    $(219,340,600)   $ 274,055,200
                             =============    =============    =============   =============    =============    =============
</TABLE>





<TABLE>
<CAPTION>
 Condensed Consolidating Statement of Operations For The Three Months Ended
                               June 30, 1998

<S>                        <C>              <C>            <C>              <C>              <C>           <C>
                            Stellex             Stellex                       Monitor        Adjustments &      Stellex
                           (Parent Only)        Microwave     KII Holding   Aerospace (1)       Eliminations    Consolidated

Sales ...................     $     --      $ 20,632,200    $  9,884,600    $  7,933,100    $       --      $ 38,449,900

Cost of sales ...........           --        14,602,000       6,730,000       6,480,000            --        27,812,000
Operating expenses ......          8,700       3,681,500       2,042,800       1,424,000            --         7,157,000
Amortization of
  intangibles ...........           --           641,000            --           210,000            --           851,000
                                 -------         -------         -------         -------       ---------      ----------
Income (loss) from
  operation .............         (8,700)      1,707,700       1,111,800        (180,900)           --         2,629,900
Interest expense ........     (3,391,800)     (2,369,600)       (626,800)       (851,400)   $  3,527,600      (3,712,000)
Other income (expense) ..      3,541,400           1,900         (65,700)          5,400      (3,527,600)        (44,600)
                               ---------           -----         -------           -----      ----------         ------- 

Income (loss) before
   income taxes .........        140,900        (660,000)        419,300      (1,026,900)           --        (1,126,700)
Provision (benefit) for
   income taxes .........           --          (239,000)        395,800        (403,000)           --          (246,200)
                               ---------        --------         -------        --------        --------       --------- 
Net income (loss) .......        140,900        (421,000)         23,500        (623,900)           --          (880,500)
Preferred stock dividend        (286,300)           --              --              --              --          (286,300)
                                --------        --------         -------        --------        --------       ---------

Income (loss) applicable
   to common shareholders       (145,400)   $   (421,000)   $     23,500    $   (623,900)           --      $ (1,166,800)
                                ========    ============    ============    ============      ==========    ============
</TABLE>
(1)  Monitor's  results  are for the one month  ended  June 30,  1998 which were
impacted by non-recurring charges associated with the acquisition. These charges
include  $400,000  amortization  of step up in value of inventory and $1,000,000
financial advisory fee to Mentmore Holdings Corporation, an affiliate.




 


<PAGE>


7.  Condensed Financial Information of Stellex and its Subsidiaries -
Continued

<TABLE>
<CAPTION>
  Condensed Consolidating Statement of Cash Flows for the Three Months Ended
                                June 30, 1998

<S>                        <C>             <C>             <C>             <C>                             <C>          

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

Net income (loss) ......   $    140,900    $   (421,000)   $     23,500    $   (623,900)           --      $   (880,500)
Depreciation and
  amortization .........           --         1,510,700         446,500       1,038,000            --         2,995,200
Deferred taxes and other           --          (239,000)        874,600          42,000            --           677,600
Change in operating
  assets and liabilities       (437,200)     (4,009,600)         81,900        (209,000)           --        (4,573,900)
                               --------      ----------          ------        --------        -------       ---------- 
Net cash provided by
  (used in) operations .       (296,300)     (3,158,900)      1,426,500         247,100            --        (1,781,600)
                               --------      ----------          ------        --------        -------       ----------
Fixed asset additions ..           --          (266,500)       (682,600)        (80,000)           --        (1,029,100)
Purchase of Monitor
  Aerospace ............    (91,836,000)           --              --              --         1,471,900     (90,364,100)
Proceeds from sale of
  fixed assets .........           --              --              --              --              --              --
Cash used in investing       ----------         -------         -------         -------         -------      ---------- 
  activities ...........    (91,836,000)       (266,500)       (682,600)        (80,000)      1,471,900     (91,393,200)
                            -----------        --------        --------         -------       ---------     ----------- 
Proceeds from borrowings
  under term loans .....     90,000,000            --              --              --              --        90,000,000
Net borrowing under
  revolver .............      5,479,200            --              --              --         2,770,800       8,250,000
Intercompany loans
  (repayments) .........       (743,000)      2,770,800        (743,000)           --        (2,770,800)           --
Other ..................     (4,100,200)        (77,000)        (44,000)           --           (64,900)     (4,286,100)
                             ----------         -------         -------         -------         -------      ---------- 
Cash provided by (used
  in) financing
  activities ...........    (92,122,000)      2,693,800        (787,000)           --              --        93,963,900
                            -----------       ---------        --------         -------         -------      ----------
Net increase (decrease)
  in cash ..............   $    (10,300)       (731,600)        (43,100)   $    167,100      1,407,000 (1)      789,100
                           ============        ========         =======    ============      ==========         =======

(1)  $1,407,000 relates to cash on hand at Monitor at acquistion.

  Condensed Consolidating Statement of Operations For The Six Months Ended
June 30, 1998
    

                             Stellex             Stellex                       Monitor      Eliminations        Stellex
                           (Parent Only)        Microwave     KII Holding     Aerospace (1)                     Consolidated

Sales ...................           --      $ 40,260,200    $ 18,155,700    $  7,933,100            --      $ 66,349,000

Cost of sales ...........           --        30,677,100      12,606,400       6,480,000            --        49,763,500
Operating expenses ......         30,800       6,814,100       3,955,800       1,424,000            --        12,224,700
Amortization of
  intangibles ...........           --         1,283,000            --           210,000            --         1,493,000
                                --------       ---------      ----------         -------       ---------       ---------
Income (loss) from
  operations ............        (30,800)      1,486,000       1,593,900        (180,900)           --         2,867,800
Interest expense ........     (5,936,800)     (4,699,500)     (1,237,600)       (851,400)      6,243,700      (6,481,600)
Other income (expense) ..      6,263,600          23,500        (124,100)          5,400      (6,243,700)        (75,300)
                               ---------          ------        --------           -----      ----------         ------- 
Income (loss) before
   income taxes .........        296,600      (3,190,000)        231,800      (1,026,900)           --        (3,689,100)
Provision (benefit) for
   income taxes .........           --        (1,222,000)        606,900        (403,000)           --        (1,018,100)
                                --------       ---------      ----------         -------       ---------       ---------
Net income (loss) .......        296,000      (1,968,000)       (375,100)       (623,900)           --        (2,671,000)
Preferred stock dividend        (572,600)           --              --              --              --          (572,600)
                                --------       ---------      ----------         -------       ---------       ---------
Income (loss) applicable
   to common shareholders   $   (276,600)   $ (1,968,000)   $   (375,100)   $   (623,900)   $       --      $ (3,243,600)
                            ============    ============    ============    ============    ========        ============ 

(1)  Monitor's  results  are for the one month  ended  June 30,  1998 which were
impacted by non-recurring charges associated with the acquisition. These charges
include  $400,000  amortization  of step up in value of inventory and $1,000,000
financial advisory fee to Mentmore Holdings Corporation, an affiliate.




7.  Condensed Financial Information of Stellex and its Subsidiaries -
Continued

Condensed Consolidating Statement of Cash Flows for the Six Months Ended June
                                   30, 1998

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

Net income (loss) ......   $    296,000    $ (1,968,000)      $(375,100)   $   (623,900)   $       --        (2,671,000)

Depreciation and
  amortization .........           --         4,446,700         894,900       1,038,000            --         6,379,600
Deferred taxes and other           --        (1,219,400)      1,637,600          42,000            --           460,200

Change in operating
  assets and liabilities       (333,300)     (4,184,700)       (158,200)       (209,000)           --        (4,885,200)
                               --------      ----------        --------        --------       ---------      ---------- 

Net cash provided by
  (used in) operations .        (37,300)     (2,925,400)      1,999,200        (247,100)           --          (716,400)
                                -------      ----------       ---------        --------        --------        -------- 
Fixed asset additions ..           --          (678,000)     (1,454,200)        (80,000)           --        (2,212,200)

Purchase of Monitor
  Aerospace ............    (91,836,000)           --              --              --         1,471,900     (90,364,100)

Proceeds from sale of
  fixed assets .........           --              --            24,500            --              --            24,500
                                -------         -------          ------         --------        -------          ------
                            (91,836,000)       (678,000)     (1,429,700)        (80,000)      1,471,900     (92,551,800)
Cash used in investing
  activities

Proceeds from borrowings
  under term loans .....     90,000,000            --              --              --              --        90,000,000

Net borrowing under
  revolver .............      5,479,200            --              --              --         2,770,800       8,250,000
Intercompany loans
  (repayments) .........          3,000       3,510,800        (743,000)           --        (2,770,800)           --
Other ..................     (4,100,200)        (77,000)        (61,700)           --           (64,900)     (4,303,800)
                             ----------         -------         -------          -----          -------      ---------- 

Cash provided by (used
in) financing activities     91,382,000       3,433,800        (804,700)           --           (64,900)    (93,946,200)
                             ----------       ---------        --------          -----          -------     ----------- 

Net increase (decrease)
  in cash ..............   $   (491,300)   $   (169,600)   $   (235,200)   $    167,100    $  1,407,000 (1)$    678,000
                           ============    ============    ============    ============    ============    ============
</TABLE>
(1)  $1,407,000 relates to cash on hand at Monitor at acquisition.






<PAGE>



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

Coincident  with  the  Monitor  Acquisition,  Stellex  Industries  formed  a new
subsidiary,  Stellex  Aerospace  Holdings,  to  better  organize  the  Company's
machining-related activities.  Stellex Aerospace Holdings consists of Monitor, a
wholly  owned  subsidiary,  and  KII  Holdings,  an  80%-owned  subsidiary.  The
following  tables  segregate  the  operating  data of the  Company  into its two
operating segments,  Stellex Microwave and Stellex Aerospace  Holdings,  for the
three and  six-month  periods ended June 30, 1998.  Comparative  figures for the
periods ended June 30, 1997 are of Kleinert (the  predecessor  of Stellex).  All
figures set forth below are a percentage of net sales:

Results of Operations

Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997.

                            Stellex Aerospace         Stellex
                                 Holdings            Microwave
                          ---------------------------------------
                               1998         1997        1998
                               ----         ----        ----
                                       (Predecessor)
Net sales                      100.0%       100.0%      100.0%
Cost of sales                   74.1         69.9        70.8
                                ----         ----        ----
Gross margin                    25.9         30.1        29.2
Selling, general and            
administrative                  19.5         11.5        12.0
Research and development         0.0          0.0         5.8
Amortization of                  
intangible assets                1.2          0.1         3.1                  
                                 ---        -----       -----
Operating income                 5.2         18.5         8.3
Other expense (income):
  Interest expense               8.3          2.5        11.5
  Other                          0.3          1.1        (0.0)
                               -----          ---       ------
(Loss) income before            
  income taxes                  (3.4)        14.9        (3.2)
(Benefit) provision for          
  income taxes                   0.0          6.0        (1.2)
                                 ---          ---        ---- 
Net (loss) income               (3.4)%        8.9%       (2.0)%
                                =====       =====       ======

Net Sales

Net sales for Stellex for the  quarter  ended June 30, 1998 were $38.4  million,
which was 389.5%  greater  than the  second  quarter  of 1997.  The  significant
increase in net sales came primarily as a result of the  acquisitions of Stellex
Microwave  ($20.6  million) and Monitor  ($7.9  million).  Net sales for Stellex
Aerospace  Holdings,  exclusive of Monitor,  were $9.9 million,  which was 25.8%
greater than the second  quarter of 1997.  The increase in net sales for Stellex
Aerospace was a result of the strong demand in the  commercial  aviation  market
for new aircraft  production,  primarily at Boeing,  increases in  manufacturing
requirements for military  aircraft and increase  deliveries of  turbo-machinery
components.

Gross Margins

Gross  margin for Stellex for the quarter  ended June 30, 1998 was 27.7%,  which
decreased from 30.1% in the previous year. The decrease in gross margin resulted
primarily  from the  acquisition  of Monitor,  which  achieved a gross margin of
18.3%,  which  was  impacted  by  non-recurring   charges  associated  with  the
amortization  of the step up in value of its  inventory  as a result of purchase
accounting totaling $400,000. Gross margin for Stellex Aerospace for the quarter
ended June 30,  1998 was 31.9%  which  increased  from  30.1% in the  comparable
period in the prior year primarily as a result of increased  volumes  leading to
improved manufacturing efficiencies and fixed cost utilization.



<PAGE>



Selling, general and administrative

Selling,  general and  administrative  expenses for Stellex  were $5.9  million,
which was 559.3% greater than the second quarter of 1997. This increase resulted
primarily  from the  acquisitions  of Stellex  Microwave,  which  incurred  $2.5
million of  expense,  and  Monitor,  which  incurred  $1.4  million of  expense.
Selling,  general and administrative expenses for Stellex Aerospace totaled $2.0
million, which represented an increase in expense of $1.1 million. This increase
was due primarily to incremental  non-cash  charges of $775,000  relating to the
valuation of management ownership puts and managerial hires.

Amortization of Intangibles

Amortization  of intangible  expense for Stellex was $851,000  which  represents
amortization  of  various  intangibles  such as value  of  workforce  in  place,
tradename and goodwill for the three months ended June 30, 1998  resulting  from
the  application  of purchase  accounting  to Stellex  Microwave  and Monitor in
conjunction with their acquisitions.

The respective  purchase cost of Monitor will be allocated based on the relative
fair values of the acquired assets and liabilities as of the closing date, based
on  valuations  and other  studies  which  are not yet  complete.  However,  the
Company's  management believes that the effects of the final allocation will not
differ materially from those set forth herein.

Interest expense

Interest  expense for Stellex was $3.7 million,  which was $3.5 million  greater
than interest expense in the second quarter of 1997. The significant increase in
interest expense was due to the  refinancings  that occurred in conjunction with
the  Stellex  Microwave  and Monitor  acquisitions.  The  consummation  of these
acquisitions resulted in outstanding indebtedness for the second quarter of 1998
of  approximately  $148 million at an average  borrowing  rate of  approximately
9.2%.

Earnings before Interest, Taxes, Depreciation, Amortization and Non-recurring
items (EBITDA)

EBITDA for  Stellex for the second  quarter  ended June 30,  1998  totaled  $7.2
million  compared  to  $1.8  million  during  1997.  EBITDA  for  1998  included
adjustments for an investment banking fee paid to Mentmore Holdings Corporation,
an  affiliate  of  Stellex,  totaling  $1.0  million  in  conjunction  with  the
acquisition of Monitor,  non-cash charges for changes in the value of management
put  rights in KII  Holdings  totaling  $775,000,  and  non-cash,  non-recurring
charges relating to the Monitor acquisition  totaling $701,000.  The increase in
EBITDA over the prior year was a direct  result of the  acquisitions  of Stellex
Microwave and Monitor,  as well as a 23.6% improvement  within Stellex Aerospace
due primarily to improved  profitability  resulting from net sales increases and
plant efficiencies.



<PAGE>



Results of Operations

Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997

                            Stellex Aerospace         Stellex
                                 Holdings            Microwave
                          ---------------------------------------
                                1998        1997           1998
                                ----        ----           ----
                                       (Predecessor)
Net sales                      100.0%       100.0%       100.0%
Cost of sales                   73.2         70.9         76.2
                                ----         ----         ----
Gross margin                    26.8         29.1         23.8
Selling, general and            
   administrative               20.6         12.5         11.6
Research and development         0.0          0.0          5.3
Amortization of                  
   intangible assets             0.8          0.1          3.2
                               -----        -----        -----
   
Operating income                 5.4         16.5          3.7
Other expense (income):
   Interest expense              8.0          2.6         11.7
   Other                         0.5          0.7         (0.1)
                               -----        -----        ------
(Loss) income before             
   income taxes                  3.0         13.2         (7.9)
(Benefit) provision for          
   income taxes                  0.8          5.3         (3.0)
                               -----        -----        ------
   
Net (loss) income               (3.8)%        7.9%        (4.9)%
                              =======       =====        ======

Net sales

Net sales for Stellex for the six months ended June 30, 1998 were $66.3 million,
which was 364.1% greater than the first half of 1997. The  significant  increase
in net sales came primarily as a result of the acquisitions of Stellex Microwave
($40.3  million) and Monitor  ($7.9  million).  Net sales for Stellex  Aerospace
Holdings, exclusive of Monitor, were $18.2 million, which was 27.0% greater than
the first half of 1997.  The increase in net sales for Stellex  Aerospace  was a
result of the strong demand in the commercial  aviation  market for new aircraft
production,  primarily at Boeing,  increases in  manufacturing  requirements for
military aircraft and increased deliveries of turbo-machinery components.

Gross margins

Gross margin for Stellex for the six months ended June 30, 1998 was 25.0%, which
decreased from 29.1% in the previous year. The decrease in gross margin resulted
primarily from the  acquisitions  of Stellex  Microwave,  which achieved a gross
margin of 23.8%,  and Monitor,  which  achieved a gross  margin of 18.3%.  These
margins were impacted by non-recurring  charges associated with the amortization
of the step up in value of its  inventory  as a result of  purchase  accounting,
totaling $1,457,000. Gross margin for Stellex Aerospace for the six months ended
June 30, 1998 was 30.6% which  increased from 29.1% in the comparable  period in
the prior year  primarily as a result of increased  volumes  leading to improved
manufacturing efficiencies and fixed cost utilization.

Selling, general and administrative

Selling,  general and  administrative  expenses for Stellex  were $10.1  million
which was 465.1%  greater than the first half of 1997.  This  increase  resulted
primarily  from the  acquisitions  of Stellex  Microwave,  which  incurred  $4.7
million of  expense,  and  Monitor,  which  incurred  $1.4  million of  expense.
Selling,  general and administrative expenses for Stellex Aerospace totaled $4.0
million, which represented an increase in expense of $2.1 million. This increase
was due primarily to incremental  non-cash  charges of $1.5 million  relating to
the  valuation  of  management  ownership  puts  and  managerial  hires,  offset
partially  by selling  costs  incurred  during  1997  relating  to the  Kleinert
Acquisition.

Amortization of Intangibles

Amortization of intangible expense for Stellex was $1.5 million which represents
amortization  of  various  intangibles  such as value  of  workforce  in  place,
tradename and goodwill for the six months ended June 30, 1998 resulting from the
application  of  purchase   accounting  to  Stellex  Microwave  and  Monitor  in
conjunction with their acquisitions.

The respective  purchase cost of Monitor will be allocated based on the relative
fair values of the acquired assets and liabilities as of the closing date, based
on  valuations  and other  studies  which  are not yet  complete.  However,  the
Company's  management believes that the effects of the final allocation will not
differ materially from those set forth herein.

Interest expense

Interest  expense for Stellex was $6.5 million,  which was $6.1 million  greater
than interest expense in the second quarter of 1997. The significant increase in
interest expense was due to the  refinancings  that occurred in conjunction with
the  Stellex  Microwave  and Monitor  acquisitions.  The  consummation  of these
acquisitions resulted in average outstanding  indebtedness for the first half of
1998 of approximately $130 million at an average borrowing rate of approximately
9.3%.

Earnings before Interest, Taxes, Depreciation, Amortization and Non-recurring
items (EBITDA)

EBITDA for Stellex for the six months ended June 30, 1998 totaled  $11.4 million
compared to $3.1 million during 1997.  EBITDA for 1998 included  adjustments for
an investment banking fee paid to Mentmore Holdings Corporation, an affiliate of
Stellex,  totaling $1.0 million in conjunction  with the acquisition of Monitor,
non-cash  charges  for  changes  in the value of  management  put  rights in KII
Holdings totaling $1.5 million, and non-cash,  non-recurring charges relating to
the Monitor acquisition  totaling $2.2 million.  The increase in EBITDA over the
prior year was a direct  result of the  acquisitions  of Stellex  Microwave  and
Monitor,  as well as a 21.0% improvement  within Stellex Aerospace due primarily
to  improved  profitability   resulting  from  net  sales  increases  and  plant
efficiencies.

Liquidity and Capital Resources

Stellex was a net user of cash flows from operations for the three and six month
periods  ended  June 30,  1998,  in the  amount of $1.8  million  and  $716,400,
respectively,  compared to a net  provider of cash in the amount of $466,000 and
$479,000  for the  comparable  periods  during 1997.  During the second  quarter
period,  Stellex  Microwave's cash flow was impacted negatively due to the build
up of a significant  AMRAAM RF-head order for Raytheon  scheduled to ship during
the  third  quarter.  In  addition,  as a  result  of the  Monitor  acquisition,
non-recurring  investment banking fees relating to the transaction totaling $1.0
million were paid to Mentmore Holdings Corporation, an affiliate.

Stellex was a net user of cash flows from investing activities for the three and
six month  periods ended June 30, 1998, in the amount of $91.4 million and $92.6
million, respectively,  compared to a net user of cash in the amount of $390,000
and $835,000 for the  comparable  periods  during 1997. The increase in usage of
cash for corporate  investing  activities was due to the acquisitions of Stellex
Microwave  and Monitor  and  increased  capital  expenditures  required  for the
maintenance  and  upgrading  of  a  significantly   larger  operating   company.
Approximately  $90.4 million of cash  proceeds  were utilized to consummate  the
acquisition of Monitor in May 1998.

Stellex generated net cash flows from financing  activities during the three and
six month  periods  ended June 30, 1998,  totaling  approximately  $94.0 million
primarily  to finance the  acquisition  of Monitor and  refinance  the  existing
revolving loan facility so as to increase the maximum borrowing availability for
Stellex by $10 million to $35 million.

Stellex's  liquidity  demands for the near term will consist of normal levels of
capital  expenditure  requirements  sufficient to accommodate growth in backlog,
working  capital  needs and debt service  funding.  Stellex is in the process of
upgrading  machining  equipment at Monitor with the latest in CNC  technology in
order to improve tolerances and manufacturing  efficiencies and adding necessary
equipment  capacity at Stellex  Aerospace in order to support the very  positive
order  growth at Bandy and Paragon.  Capital  expenditures  anticipated  for the
second half of the year should approximate $3.2 million.



<PAGE>



Debt  service  requirements  for  Stellex  for the latter  half of the year will
include principal  reduction  payments totaling $1.9 million under the term loan
facilities and interest payments totaling approximately $9.5 million.

Management  believes that current levels of operating cash flow and availability
under its revolving credit facility will provide  adequate  liquidity to Stellex
to satisfy its near term liquidity demands.

Pro Forma Results for the Six Months Ended June 30, 1997 and 1998

The unaudited pro forma consolidated results for the three and six-month periods
ended June 30, 1997 and 1998 give effect to the acquisition of Stellex Microwave
and Monitor Aerospace  ("Acquisitions")  which were acquired on October 31, 1997
and May  29,  1998  respectively.  For  purposes  of the pro  forma  results  of
operations,  the Acquisitions are reflected as of January 1, 1997. The pro forma
consolidated  statements of operations  exclude  non-recurring  changes directly
related to the  Acquisitions,  including (i)  investments  banking and financial
advisory fees paid to Mentmore  Holdings  Corporation,  an  affiliate,  and (ii)
increases in cost of sales arising from write-up of  inventories  at the date of
consummation of the Acquisitions to fair market value.

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
operation 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.




<PAGE>


Statement  of  Operation       Three Months Ended            Six Months Ended
Data:                               June 30,                     June 30,
                             1998             1997           1998         1997
                             ----             ----
Net Sales                  $54,317          $48,629       $104,435      $95,637
Cost of Sales               39,917           37,068         78,330       72,812
                          --------           ------         ------      -------
Gross Profit                14,400           11,561         26,105       22,825
Research and development     1,209              500          2,149        1,100
Selling, general, and        
administrative               5,630            4,772         10,809        9,567
Amortization of     
intangibles                  1,279            1,185          2,564        2,370
Operating Income             6,282            5,104         10,583        9,788
Interest expense             5,250            5,458         10,372       10,767
Other                           60              (78)           119          (89)
                         -----------     -----------      --------    ----------
Income(loss)before       
taxes                          972             (276)            92         (890)
Provisions of taxes            389             (112)            37         (357)
                         ----------      -----------     ----------   ----------
Net Income (loss)        $     583        $    (164)     $      55    $     533
                         =========        ==========     ==========   =========

EBITDA                     $10,653         $  9,595        $19,304      $18,618
                           =======         ========        =======      =======

Net Sales

Net sales for Stellex  Industries  were $54.3 million and $104.4 million for the
three and six months  ended June 30,  1998,  respectively.  Net sales at Stellex
Aerospace were $9.9 million and $18.2 million for the three and six months ended
June 30, 1998, respectively,  representing a 25.9% and a 27.0% increase over the
comparable periods in 1997. Net sales continue to grow at Stellex Aerospace as a
result of the strong demand in the commercial  aviation  market for new aircraft
production,  increases in manufacturing  requirements for military  aircraft and
increased deliveries of turbo-machinery components.

Stellex  Microwave's  net sales for the three and six months ended June 30, 1998
were $20.6 million and $40.3 million, representing decreases of 10.3% and 13.8%,
respectively, from net sales levels during the comparable periods in 1997. These
decreases were due primarily to 1997 shipments of delinquent orders arising from
production  planning problems  associated with the poor  implementation of a new
production  planning  software  system  in 1996  and  lower  1998  shipments  of
receivers due to the completion of certain  non-recurring orders in 1997. During
July,  Stellex  Microwave  effected a restructuring  in response to the negative
trend experienced in microwave device orders over the past several months, which
resulted in a reduction  of  workforce  of  approximately  12%. For the tactical
subsystems  business a reduction in shipments of AMRAAM  subsystems during 1998,
based on 1997 end of contract  shipments under certain contracted lots, was more
than offset by increased shipments on the Standard Missile and MFE programs.

Shipments  at Monitor  Aerospace  were $23.8  million and $46.0  million for the
three and six months  ended June 30, 1998,  representing  increases of 33.8% and
32.9%,  respectively,  from net sales levels  during the  comparable  periods in
1997. These increases were due to the stronger commercial aircraft market.

Gross Margin

Gross  margin for Stellex  Industries  was 26.5% and 25.0% for the three and six
months ended June 30, 1998, respectively,  compared to gross margin of 23.8% and
23.9% for the comparable  periods in 1997. Gross margin at Stellex Aerospace was
31.9% and 30.6% for the three and six months ended June 30, 1998,  respectively,
compared to gross margin of 30.1% and 30.0% for the comparable  periods in 1997.
Gross  margin  improvement  at Stellex  Aerospace  has resulted  primarily  from
increased sales volume.

Gross  margin for  Stellex  Microwave  was 29.2% and 26.4% for the three and six
months ended June 30, 1998, respectively,  compared to gross margin of 23.0% and
24.0% for the comparable  periods in 1997.  Gross margin  improvement at Stellex
Microwave resulted from improved  productivity,  lower  manufacturing  costs and
improved profitability on the completion of certain programs.

Gross  margin for  Monitor  Aerospace  was 21.9% and 21.5% for the three and six
months ended June 30, 1998, respectively,  compared to gross margin of 21.6% and
21.2% for the  comparable  periods in 1997.  Gross  margin at Monitor  Aerospace
remained  relatively  consistent  as a  result  of  new  program  inefficiencies
offsetting benefits from the higher sales volume on fixed overheads.

Research and Development

Research and  development  costs have  increased over the prior year by $709,000
during  the  second  quarter  and $1.0  million  for the  first six  months  due
principally to the expansion of engineering capabilities at Stellex Microwave in
order to address new product  introductions and cost reductions in manufacturing
and packaging.

Selling, General and Administrative Expenses

Selling,   general  and  administrative  expenses  for  the  consolidated  group
increased  $858,000  and $1.2  million  to 10.4% of net sales from the three and
six-month  periods ended June 30, 1998,  respectively.  These increases were due
primarily  to  incremental  non-cash  charges  of  $775,000  and  $1.5  million,
respectively,  relating to the valuation of management ownership puts in Stellex
Aerospace.

EBITDA before  Interest,  Taxes,  Depreciation  and  Amortization and non-cash
charges ("EBITDA")

Earnings before interest, income taxes, depreciation,  amortization and non-cash
charges ("EBITDA") totaled $10.7 million and $19.3 million for the three and six
months ended June 30, 1998,  respectively,  which was 11.1% and 3.7% better than
comparable prior year periods. The increase in EBITDA came primarily as a result
of improved gross margin.

The Year 2000 Issue

The Company has made an  assessment  of the impact of the Year 2000 issue on its
internal  operations  and has  developed  a plan to  bring  all of its  computer
systems into compliance  before the end of 1998.  Based on the assessment of the
Company's computer systems software,  it has been determined that certain of the
Company's hardware and software systems are either currently Year 2000 compliant
or have an existing upgrade available from the software vendor that is Year 2000
compliant.  It is management's intention that all systems that are not currently
Year 2000  compliant  will  either be  upgraded  to be Year  2000  compliant  or
replaced  with  alternative  systems that are Year 2000  compliant by the end of
1998.  The costs to be  incurred  in  addressing  the Year 2000  issues  are not
expected to have a material impact on the Company's future financial results.

Recent Accounting Standards

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  About Segments of an
Enterprise  and Related  Information".  The  standard  requires  that  companies
disclose  "operating  segments"  based on the way management  disaggregates  the
company for making internal operating decisions. The new rules will be effective
for the Company's 1998 fiscal year end.

In February 1998, the FASB issued SFAS No. 132,  "Employers"  Disclosures  about
Pensions and Other  Postretirement  Benefits," which standardizes the disclosure
requirement for pensions and other postretirement  benefits.  The implementation
of SFAS No. 132 is not  expected  to have an impact on the  Company's  financial
statements.  The standard  will be effective  for the Company for the year ended
December 31, 1998.

Cautionary Statement on Forward-Looking Statements

This  report  contains  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 and involve risks and  uncertainties  and that
actual results may differ materially from those in forward-looking statements as
a result of various factors  including but not limited to: (i) general  economic
conditions in the markets in which the Company  operates,  (ii)  cancellation of
specific  aircraft  or  missile  programs  due to  defense  spending  or general
budgetary  constraints or poor customer demand,  (iii)  development of competing
technology and scientific  know-how  similar or superior to that of the Company,
(iv) downturn in the commercial aircraft industry, and (v) success in hiring and
retaining key management and technical personnel.



<PAGE>



Part II - Other Information

Item 6.  Exhibit and Reports on Form 8-K

      (a)    Exhibit 27: Financial Data Schedule

(b)  Reports on Form 8-K: A Form 8-K was filed on June 15, 1998  describing  the
details of the Monitor acquisition and providing pro forma financial information
for Stellex.  A Form 8-K/A was filed on August 13, 1998,  including the required
historical  audited  financial  statements  for  Monitor.

                               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 14, 1998.

                                       STELLEX INDUSTRIES, 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.

         Signature                      Title                      Date

/s/  Richard L. Kramer      Chairman of the Board of         August 14, 1998
     Richard L. Kramer      Directors and
                            Director of Stellex
                            Industries, Inc.

/s/  William L. Remley      Vice Chairman, President,        August 14, 1998
     William L. Remley      Chief Executive Officer,
                            Treasurer and Director of
                            Stellex Industries, Inc.

/s/  P. Roger Byer          Chief Financial Officer of       August 14, 1998
     P. Roger Byer          Stellex Industries, Inc.
                            (principal financial and
                            accounting officer)

------------------------------------
1.   $1,407,000 relates to cash on hand at Monitor at acquisition.
2   $1,407,000 relates to cash on hand at Monitor at acquisition.




<PAGE>