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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: September 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



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 November 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
<PAGE>





ITEM 1: Financial Statements

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

<TABLE>
<CAPTION>
                                                                       September 30,      December 31,
                                                                           1999                1998
        ASSETS                                                          (Unaudited)
        <S>                                                            <C>                  <C>
        Current assets:

            Cash and cash equivalents                                  $         284        $       1,405
            Account receivables, net                                          31,475               28,452
            Inventories                                                       74,788               58,329
            Prepaid and other assets                                           5,273                3,200
            Deferred income taxes                                              3,318                3,318
                                                                       -------------        -------------
               Total current assets                                          115,138               94,704
        Property, plant and equipment, net                                    89,393               53,871
        Goodwill, net                                                        117,601               60,786
        Other intangible assets, net                                          50,213               52,552
        Deferred financing costs, net                                         13,417                9,033
        Other assets                                                           5,306                2,284
                                                                       -------------        -------------
   Total assets                                                        $     391,068        $     273,230
                                                                       =============        =============

        LIABILITIES & STOCKHOLDERS' EQUITY
        Current liabilities:
          Current portion of long term obligations                     $      12,637        $       5,533
          Accounts payable                                                    14,194               11,639
          Accrued liabilities                                                 20,675               17,797
          Advance billings and customer deposits                              15,638                  252
                                                                       -------------        -------------

          Total current liabilities                                           63,144               35,221
        9 1/2% senior subordinated notes                                     100,000              100,000
        Long-term obligations, less current portion                          181,154              106,201
        Deferred employee benefits                                             2,315                1,952
        Deferred income taxes                                                 20,597               20,029
                                                                       -------------        -------------
          Total liabilities                                                  367,210              263,403
                                                                       -------------        -------------

        13% Senior Cumulative Redeemable
              Preferred Stock                                                 20,104                    -

        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                                                  (10,800)              (4,727)
                                                                             --------              -------
            Total stockholders' equity
                                                                               3,754                9,827
                                                                               -----                -----
            Total liabilities and stockholders' equity                 $     391,068        $     273,230
                                                                       =============        =============
</TABLE>

      See accompanying notes to unaudited consolidated financial statements





                   STELLEX TECHNOLOGIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (Unaudited)
                                 (in thousands)

<TABLE>
<CAPTION>

                                                            Three Months Ended                     Nine Months Ended
                                                              September 30,                          September 30,
                                                       1999                 1998                 1999                 1998
                                                       ----                 ----                 ----                 ----


<S>                                           <C>                    <C>                <C>
Sales                                         $         57,433       $       49,756     $        165,767       $      116,105
Cost of sales                                           41,269               35,908              122,147               85,671
                                                --------------       --------------      ---------------       --------------
Gross profit                                            16,164               13,848               43,620               30,434
Operating expenses:
Selling, general and administrative                      6,198                5,676               19,116               15,752
Research and development                                 2,339                1,176                6,635                3,325
Amortization of intangibles                              1,972                1,525                4,947                3,018
                                               ---------------     ----------------      ---------------       --------------
    Total operating expenses                            10,509                8,377               30,698               22,095
                                               ---------------     ----------------      ---------------       --------------

Income from operations                                   5,655                5,471               12,922                8,339
                                               ---------------     ---------------       ---------------       --------------
Other income (expense):
    Interest income                                         55                   31                  138                   88
    Interest expense                                    (7,359)              (5,147)             (18,709)             (11,629)
    Other                                                  (17)                 (81)                 (19)                (214)
                                               ----------------    ----------------      ---------------       ---------------
    Total other expense                                 (7,321)              (5,197)             (18,590)             (11,755)
                                               ----------------     ----------------      ---------------      ---------------
Income (loss) before provision
    (benefit) for income taxes                          (1,666)                 274               (5,668)              (3,416)
Provision (benefit) for income taxes                      (456)                 774               (1,776)                (244)
                                               ----------------    ----------------      ----------------      ---------------
Net loss                                                (1,210)                (500)              (3,892)              (3,172)
Preferred stock dividends                                   991                 286                2,181                  858
                                               ----------------    ----------------      ---------------       --------------

Loss applicable to common stockholders         $        (2,201)     $          (786)     $        (6,073)      $      (4,030)
                                               ===============-     ================     ================      ==============
</TABLE>

                See accompanying notes to unaudited consolidated
                             financial statements.




                                       2
<PAGE>




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

<TABLE>
<CAPTION>
                                                                                              Nine Months Ended
                                                                                                September 30,
                                                                                          1999                 1998
                                                                                          ----                 ----

Cash Flows from Operating Activities:
<S>                                                                           <C>                       <C>
Net loss                                                                      $          (3,892)        $          (3,172)
Reconciliation to net cash provided by (used in) operating activities:
   Depreciation and amortization                                                         14,312                     9,229
   Amortization of step-up in inventory                                                   4,284                     2,258
   Gain on sale of property                                                                   3                        (3)
   Deferred income taxes                                                                 (1,897)                   (1,060)
   Stock compensation charge                                                                  -                     2,265
   Changes in  assets  and  liabilities  (net of  acquired  assets  and  assumed
        Liabilities):
        Accounts receivable                                                               2,238                    (2,923)
        Inventories                                                                      (7,629)                   (4,460)
        Prepaid and other assets                                                         (4,822)                    2,669
        Accounts payable                                                                    737                       450
        Accrued liabilities                                                                (797)                          (1,073)
        Advance billings and customer deposits                                           12,402                    (1,886)
                                                                               ----------------          ----------------
     Net cash provided by operating activities                                           14,939                     2,294
                                                                               ----------------          ----------------

Cash Flows from Investing Activities:
Additions to fixed assets                                                               (10,149)                   (3,160)
Proceeds from sale of fixed assets                                                           16                        25
Net cash used in acquisitions                                                          (102,753)                  (90,833)
                                                                                ---------------            --------------
     Net cash used in investing activities                                             (112,886)                  (93,968)
                                                                                ---------------            --------------

Cash Flows from Financing Activities:
Net borrowings under revolving line of credit                                             4,800                     6,000
Payment of financing costs                                                               (5,595)                   (4,424)
Borrowings from Senior Term Loans                                                        81,800                    90,000
Net proceeds from issuance of Preferred Stock                                            18,950                         -
Mandatory repayments under Senior Term Loans                                             (3,000)                     (900)
Repayments under other long-term obligations                                               (129)                      (98)
                                                                              ------------------           --------------
     Net cash provided by financing activities                                            96,826                   90,578
                                                                              ------------------           --------------
     Net increase in cash and cash equivalents                                           (1,121)                   (1,096)
Cash and cash equivalents, beginning of period                                            1,405                     3,304
                                                                              ------------------           --------------
Cash and cash equivalents, end of period                                      $             284           $         2,208

                                                                              =================           ===============
</TABLE>




                                       3
<PAGE>





                   STELLEX TECHNOLOGIES, INC. AND SUBSIDIARIES

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




<TABLE>
<CAPTION>
                                                                                          Nine Months Ended
                                                                                            September 30,
                                                                                     1999                1998
                                                                                     ----                ----

Supplemental  disclosure of cash flow  information:
    Cash paid during the period for:
 <S>                                                                              <C>                <C>
    Interest                                                                     $     12,077       $    7,703
    Income taxes                                                                          340                -
    Supplemental schedule of non-cash investing and financing activities:
      Equipment acquired under capital leases                                             348               30
      Note issued  to Seller in conjunction with Monitor Acquisition                        -            5,180
     Elimination of note payable in connection with purchase price
        adjustment attributed to the Kleinert Acquisition                               1,750                -
     Dividends payable on redeemable preferred stock                                    1,154                -
  Assets acquired and liabilities assumed in connection with
         the Acquisitions:
    Fair value of assets acquired                                               $     120,101          128,425
    Fair value of liabilities assumed                                                 (10,049)         (31,842)
                                                                                -------------       ----------
    Cash paid                                                                         110,052           96,583
    Less financing fees and expenses                                                   (5,595)          (4,343)
    Less cash acquired                                                                 (1,704)          (1,407)

    Net cash used for business acquisitions                                    $      102,753           90,833
                                                                               ==============       ==========
</TABLE>










      See accompanying notes to unaudited consolidated financial statements





                                       4
<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 Holding's 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.  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.

Under the terms of the  Kleinert  Acquisition  Agreement,  payment  of the $1.75
million  note  was  subject  to  the  verification  of  certain  representations
regarding the value of inventory.  In July 1999, the Company  determined that it
was not  required to make such  payment,  accordingly  the Company  adjusted its
allocation of purchase price by $1.75 million.

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. 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 (the "Monitor Seller Note").  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.  The Monitor Seller Note matures on May
29, 2000.

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. At present goodwill is being amortized over 15 years.

Precision  Acquisition  - On  April  22,  1999,  the  Company,  through  Stellex
Precision Machining, Inc. ("Precision"),  an indirect wholly-owned subsidiary of
Stellex,  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  $9.4  million.  At present  goodwill is being  amortized  over 25
years.  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 to the purchaser of
the  Preferred  Stock  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. On August
31, 1999,  Stellex  issued  additional  warrants to such purchaser such that the
purchaser's  total  warrants  represented  the right to purchase 3% of Stellex's
issued and outstanding  shares of common stock. 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 such that the purchaser's total
warrants  represent the right to purchase 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):

                                               Nine Months Ended
                                                 September 30,

                                       1999                      1998
                                       ----                      ----

Net sales                       $   178,228               $   190,952
Gross profit                         54,116                    55,828
Net income                              706                     2,416

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 September 30,
1999 and the consolidated  statements of operations and consolidated  statements
of cash flows for the periods  ended  September 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 the Company
as of September 30, 1999 reflects  management's  best estimates of the valuation
of  the  assets  and  liabilities  acquired.  Phoenix's  results  of  operations
presented  herein are from the date of acquisition  (March 1, 1999) to September
30, 1999.  Precision's  results of operations  are from the date of  acquisition
(April 22, 1999) to September 30, 1999. The comparative financial statements for
the nine  months  ended  September  30,  1998  include  the  accounts of Stellex
Aerospace,  Monitor  Aerospace  from the date of  acquisition  (May 29, 1998) to
September  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):
                                               September 30,        December 31,
                                                   1999                1998
                                               (Unaudited)

     Raw materials                          $     25,216         $      15,470
     Work-in-process                              30,441                25,782
     Finished goods                                9,129                 7,994
     Production tooling                           10,002                 9,083
                                                  ------                -----
     Total                                  $    74,788          $      58,329
                                            ============         =============

4. Long-Term Obligations

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

     Term Loan A                               $   57,500           $    28,500
     Term Loan B                                   109,500               59,700
     Revolving line of credit                       18,300               13,500
     7.785% Mortgage notes payable                   2,511                2,561
     Sellers notes payable                           5,180                6,930
     Obligations under capital leases                  714                  446
     Other long term obligations                        86                   97
                                               -----------           ----------
                                                   193,791              111,734
     Less current portion                           12,637                5,533
                                                   ------                -----
                             Total             $   181,154          $   106,201
                                               ===========          ===========



Under the terms of the  Kleinert  Acquisition  Agreement,  payment  of the $1.75
million  note  was  subject  to  the  verification  of  certain  representations
regarding the value of inventory.  In July 1999, the Company  determined that it
was not  required to make such  payment,  accordingly  the Company  adjusted its
allocation of purchase price by $1.75 million.


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  is not aware of any  lawsuits  that are  expected to have a material
adverse affect on the Company's financial position.

6. 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 and are  structured  such that option strike prices
will be set at or above fair market value on the date of grant.

KII Holding Corp. 1998 Option Plan

Pursuant  to  an  Agreement   entered  into  in  connection  with  the  Kleinert
Acquisition (the "Stellex  Aerospace  Investor  Agreement"),  Stellex Aerospace,
granted  stock  appreciation  rights  ("SARs")  to  certain  members  of Stellex
Aerospace's management. Effective December 31, 1998, Stellex Aerospace exchanged
the  outstanding  SARs for  options to purchase  up to an  aggregate  of 1,238.1
shares of common stock of Stellex  Aerospace (the "Option Plan").  Seventeen and
one-half percent of the Stellex  Aerospace Options granted vested on the date of
grant and the remainder vest in equal installments between December 31, 1999 and
December 31, 2002. The exercise price of the Stellex  Aerospace  Options is $391
per share,  and the options  generally  become  exercisable upon the earliest to
occur of an  initial  public  offering  by  Stellex  Aerospace,  or  Stellex,  a
Corporate  Transaction  (which is defined in the Option Plan to generally mean a
change  of  control  of  Stellex  or  Stellex  Aerospace,   a  sale  of  all  or
substantially  all of the assets of Stellex or Stellex Aerospace or the adoption
of a plan of  liquidation  for Stellex or Stellex  Aerospace) or May 1, 2007. If
the  exercise  event is an  initial  public  offering  by Stellex  Aerospace  or
Stellex,  the Board of  Directors  of Stellex may convert the Stellex  Aerospace
Options into options to purchase Stellex's Common Stock pursuant to a conversion
formula set forth in the Option Plan.

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  Class B common  stock  of  Precision.  The  Class B common  stock is
non-voting.  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. 1999 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 Class B common stock of Microwave. The Class B common stock is
non-voting.  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 Class B
common  stock of Monitor.  The Class B common  stock is  non-voting.  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. On September 7, 1999,  additional  Monitor
Options to purchase up to an  aggregate  of 60 shares of common stock of Monitor
were issued;  two-fifths of such Monitor Options vest on June 30, 2000, with the
remainder  vesting in equal  installments on each June 30 beginning 2001 through
and including 2003.

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 under the Company's senior secured credit facility 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 is the
condensed  consolidating  financial information of the guarantor subsidiaries as
of September 30, 1999 and for the three and nine 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 as of September 30, 1999
                                 (in thousands)

<TABLE>
<CAPTION>
                                 Stellex        Stellex        Stellex                                  Adjustments &      Stellex
                                 (Parent       Microwave      Aerospace      Monitor      Precision     Eliminations    Consolidated
                                  Only)
<S>                                <C>          <C>             <C>           <C>           <C>            <C>            <C>
Cash and cash equivalents          $ (1,616)    $  1,098        $   303       $   387       $   112        $      -       $     284
Accounts receivable, net                  -       13,402          5,076         8,022         4,975               -          31,475
Inventories                               -       22,463         14,654        32,052         5,619               -          74,788
Other current assets                  6,674        2,966          1,172         2,785         1,005          (6,011)          8,591
                                      -----        -----          -----         -----         -----          -------          -----
Total current assets                  5,058       39,929         21,205        43,246        11,711          (6,011)        115,138
Property, plant and                   2,252       20,533         16,322        23,063        27,223               -          89,393
  equipment, net
Goodwill and intangibles, net             -       60,385              -        59,172        48,257               -         167,814
Investment in & advances to
  Subsidiaries
                                    311,063            -              -             -             -        (311,063)              -
Other assets                          4,807        8,498          2,225         9,385         5,743         (11,935)         18,723
                                      -----        -----          -----         -----         -----         --------         ------
Total assets                       $323,180      129,345         39,752       134,866        92,934    (329,009)            391,068
                                    =======      =======         ======       =======        ======    =========            =======
Current liabilities                  17,834       28,732          5,109        14,735         3,798          (7,064)         63,144
9 1/2% senior subordinated notes    100,000            -              -             -             -               -         100,000
Intercompany notes                    1,689      100,159         22,012        64,709        59,559        (248,128)              -
Term Loans - long term              178,050            -              -             -             -               -         178,050
Other long-term liabilities          20,104        4,729          6,444        21,807           152          (7,116)         46,120
Stockholders'equity (deficit)         5,503       (4,275)         6,187        33,615        29,425         (66,701)          3,754
                                      -----       -------         -----        ------        ------         --------          -----
Total liabilities and
  stockholders' equity              323,180      129,345         39,752       134,866        92,934        (329,009)        391,068
                                    =======      =======         ======       =======        ======        =========        =======
</TABLE>




                                       5
<PAGE>




   Condensed Financial Information of Stellex and its Subsidiaries (Continued)

             Condensed Consolidating Statement of Operations For The
                     Three Months Ended September 30, 1999
                                 (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>
Sales                            $         -     $     24,469    $   7,547     $  15,772     $   9,645    $       -          57,433
Cost of sales                              -           15,955        5,462        12,307         7,545            -          41,269
Operating expenses                       595            5,256        1,325           698           663            -           8,537
Amortization of intangibles                -            1,004           -            593           500         (125)          1,972
                                       -----            -----        -----           ---           ---         -----          -----
Income (loss) from operations           (595)           2,254          760         2,174           937          125           5,655
Interest expense                      (6,700)          (2,601)        (606)       (1,648)       (1,609)       5,805          (7,359)
Other income (expense)
                                       5,828               13          (19)           12             9       (5,805)             38
                                       -----            -----         -----        -----         -----       -------          -----
Income (loss) before income           (1,467)            (334)         135           538          (663)         125          (1,666)
    taxes
Provision (benefit) for income          (587)            (216)          72           202          (322)         395            (456)
    taxes                              -----            -----         ----         -----         -----        -----           -----
Net income (loss)                       (880)            (118)          63           336          (341)        (270)         (1,210)
Preferred stock dividend                 991                -            -             -             -            -             991
                                       -----            -----         -----        -----         -----       -------          -----
Income (loss) applicable to
    common shareholders               (1,871)            (118)          63           336          (341)        (270)         (2,201)
                                      =======            =====     =======       =======          =====        =====        =======

</TABLE>

             Condensed Consolidating Statement of Operations For The
                      Nine Months Ended September 30, 1999
                                 (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>
Sales                              $       -        $  69,548    $  22,670     $  56,665     $  16,884    $       -        $165,767
Cost of sales                              -           47,634       16,878        43,335        14,300            -         122,147
Operating expenses                     1,000           15,650        3,858         2,852         2,391            -          25,751
Amortization of intangibles                -            2,604            -         1,780           813         (250)          4,947
                                       -----            -----        -----         -----        ------         -----          -----
Income (loss) from operations         (1,000)           3,660        1,934         8,698          (620)         250          12,922
Interest expense                     (16,854)          (7,047)      (1,804)       (4,663)       (2,747)      14,406         (18,709)
Other income (expense)                14,479               29          (32)           34            15      (14,406)            119
                                       -----            -----        -----         -----        ------         -----          -----


Income (loss) before income
    taxes                             (3,375)          (3,358)          98         4,069        (3,352)         250          (5,668)
Provision (benefit) for income
    taxes                             (1,350)          (1,548)          39         1,522        (1,341)         902          (1,776)
                                       -----            -----        -----         -----        ------        -----           -----

Net income (loss)                      (2,025)         (1,810)          59         2,547        (2,011)        (652)         (3,892)
Preferred stock dividend                2,181               -            -             -             -            -           2,181
                                        -----           -----         -----        -----         -----         -----          -----
Income (loss) applicable to
    common shareholders            $  (4,206)       $  (1,810)    $     59     $   2,547     $  (2,011)        (652)         (6,073)
                                      =======          =======      ======        ======        =======        =====         =======

</TABLE>





                                       6
<PAGE>




   Condensed Financial Information of Stellex and its Subsidiaries (Continued)

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

<TABLE>
<CAPTION>
                                Stellex           Stellex       Stellex                                  Adjustments &     Stellex
                                 (Parent         Microwave     Aerospace      Monitor       Precision     Eliminations  Consolidated
                                  Only)


<S>                            <C>                <C>            <C>          <C>           <C>            <C>            <C>
Net income (loss)              $     (2,025)      $ (1,810)      $     59     $   2,547     $  (2,012)     $   (651)      $  (3,892)
Depreciation and amortization           674          6,972          1,579         4,508         5,113          (250)         18,596
Deferred taxes and other             (1,351)        (1,400)             2          (135)         (392)        1,379          (1,897)
Change in operating assets
  and liabilities                      (789)        12,842             53        (7,607)         (139)       (2,228)          2,132
                                       -----        ------             --        -------         -----      --------          -----
Net cash provided by (used           (3,491)        16,604          1,693          (687)        2,570        (1,750)         14,939
  in) operations

Fixed asset additions                (1,858)        (3,555)        (2,903)       (1,900)         (281)           348        (10,149)
Cash used in acquisitions                 -        (15,175)             -             -       (87,578)             -       (102,753)
Proceeds from sale of fixed               -              -              3            13             -              -             16
                                          -              -              -            --             -              -         ------
Net cash used in investing
  activities                         (1,858)       (18,730)        (2,900)       (1,887)      (87,859)           348       (112,886)
Mandatory term loan repayments       (3,000)             -              -             -             -              -         (3,000)
Net borrowing under revolver          4,800              -              -             -             -              -          4,800
Borrowings from senior term
  loans                              81,800              -              -             -             -              -         81,800
Net proceeds from issue of
  preferred stock                    18,950              -              -             -             -              -         18,950
Intercompany loans and              (98,834)         2,119          3,112         2,607        90,996              -              -
  investments
Other
                                          -              -         (1,874)          343        (5,595)         1,402         (5,724)
                                    -------        -------         -------      -------       -------         ------         ------
Cash provided by financing            3,716          2,119          1,238         2,950        85,401          1,402         96,826
  activities
Net increase (decrease) in
  cash                         $     (1,633)            (7)            31           376           112              -         (1,121)
</TABLE>

8. Subsequent Event

The  Company's  primary  market  risk  exposure  is that of  interest  rate risk
associated with its various debt  instruments.  On October 15, 1999, the Company
entered into a capped interest swap transaction with a bank as part of a dynamic
hedging  strategy  employed  to manage its  interest  rate risk.  Under the swap
transaction, the Company is obligated to pay the fixed rate of interest equal to
6.05% on a notional  amount of $43.0 million for a period of 3 years in exchange
for a floating  rate of interest  based on 3-month LIBOR capped at 6.625% on the
same notional amount. Settlements on the swap arrangement will occur quarterly.







                                       7
<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  communications  industries.  The  Electronics  segment  consists of
Stellex  Microwave and Phoenix,  a division of Stellex  Microwave.  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  September  30,  1999  Compared to the Three  Months  Ended
September 30, 1998

   (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                      $       -   $       -   $ 32,964     $ 31,824    $ 24,469    $ 17,932    $  57,433     $ 49,756
Cost of goods sold                                       25,314       24,458      15,955      11,450       41,269       35,908
                               ---------   ---------   --------    ---------   ---------   ---------    ---------    ---------
Gross profit                           -           -      7,650        7,366       8,514       6,482       16,164       13,848
Gross margin                           -           -       23.2%        23.1%       34.8%       36.1%        28.1%        27.8%
Selling, general, and
   administrative expenses           595          67      2,686        3,297       2,917       2,312        6,198        5,676
Research & development
   expenses                            -           -          -            -       2,339       1,176        2,339        1,176
Amortization of intangibles         (125)          -      1,093          878       1,004         647        1,972        1,525
                               ----------  ---------  ----------    --------    --------   ---------    ---------   ----------

Income (loss) from operations       (470)        (67)     3,871        3,191       2,254       2,347        5,655        5,471
Interest expense                                                                                           (7,359)      (5,147)
Other income (expense)
                                                                                                               38          (50)
                                                                                                           -------      ------
Net income (loss) before
   income taxes                                                                                            (1,666)        274
Income tax (benefit)provision                                                                                (456)        774
                                                                                                        ----------   --------
Net loss                                                                                               $   (1,210)   $   (500)
                                                                                                       ===========   =========
</TABLE>

          Net Sales.  Net sales for  Stellex  totaled  $57.4  million  and $49.8
million for the three months ended  September  30, 1999 and 1998,  respectively.
Net sales for the  Electronics  segment  totaled $24.5 million and $17.9 million
for the three  months  ended  September  30,  1999 and 1998,  respectively.  The
increase  in net sales  for the  Electronics  segment  was  attributable  to the
acquisition  of Phoenix on March 1,  1999,  an  increase  in  tactical  sales at
Stellex Microwave due to the ramp up of the Longbow program and new sales in the
broadband wireless communications market.  Commercial component sales at Stellex
Microwave for the third quarter of 1999  remained  constant with the  comparable
period in 1998.  Microwave's  efforts in the broadband  wireless  communications
market  are  beginning  to show  results.  Recent  orders  for a  digital  radio
synthesizer were secured totaling over $6 million,  and field trials for outdoor
units (ODUs) supporting a significant telecommunication  manufacturer will begin
this  December.  Net sales for Phoenix for the three months ended  September 30,
1999 totaled $3.8 million.

          Net sales for the  Aerostructures  segment  totaled  $33.0 million and
$31.8  million  for  the  three  months  ended  September  30,  1999  and  1998,
respectively. The reason for the increase in sales was due to the acquisition of
Precision on April 22, 1999,  offset by reduced sales at both Stellex  Aerospace
and Monitor.  Net sales for Precision  for the three months ended  September 30,
1999  totaled  $9.6  million.  Net sales at Stellex  Aerospace  during the third
quarter of 1999 decreased $1.3 million, or 14.9%, compared to the same period in
1998 while net sales at Monitor  decreased $7.2 million,  or 31.3%,  compared to
the third  quarter  of 1998.  The  decrease  in sales at Stellex  Aerospace  and
Monitor was  primarily  the result of weak  demand  from OEMs in the  commercial
aviation market resulting primarily from Boeing-related decreases in build rates
and  inventory  management  issues,  compounded  by decreased  demand from Asian
markets.  In  addition,  sales at Stellex  Aerospace  were  further  impacted by
customer delays associated with initial deliveries on a significant new program.
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 the fourth  quarter of 1999 in  comparison  to the prior
year. The significance of any further delays is difficult to predict.

          Gross  Margins.  Gross  margin for Stellex was 28.1% and 27.8% for the
three months ended September 30, 1999 and 1998,  respectively.  Gross margin for
the Electronics segment was 34.8% and 36.1% for the three months ended September
30,  1999  and  1998,  respectively.  The  decrease  in  gross  margin  for  the
Electronics  segment was primarily at Stellex Microwave due to low gross margins
on a start-up broadband wireless program,  certain funded engineering  projects,
and the  expiration  of a high  volume  subcontract  manufacturing  arrangement,
offset  partially  by gross  margin  improvement  on certain  long run  tactical
subsystem programs.

          Gross  margin for the  Aerostructures  segment was 23.2% and 23.1% for
the three months ended September 30, 1999 and 1998,  respectively.  Gross margin
of 21.8% at Precision  for the three months ended  September 30, 1999 included a
non-recurring  acquisition  charge  relating to the  amortization  of a purchase
accounting  adjustment to profits in inventory  totaling  $2.0 million.  Stellex
Aerospace's  gross margin  totaled  27.6% for the quarter,  which was 2.3% lower
compared to the prior year quarter as a result of an unfavorable mix of new work
and higher than normal  start-up costs on new programs.  Gross margin at Monitor
was 22.0% for the quarter  compared to 20.5% for the comparable  period in 1998.
This  increase in gross  margin was due to a  nonrecurring  purchase  accounting
adjustment to profits in inventory  totaling $0.8  million,  which  impacted the
third  quarter of 1998.  In  addition,  gross  margins at Monitor  for the third
quarter of 1999 were affected by an  unfavorable  mix of new work and scheduling
inefficiencies  resulting from sporadic  program  deceleration  directives  from
customers,  which were offset by proactive  adjustments  to  production  manning
levels and a reduction in overhead spend.

          Selling,  General and Administrative  Expenses.  Selling,  general and
administrative  expenses for Stellex  totaled $6.2 million and $5.7 million,  or
10.8% and 11.4% stated as a percentage of net sales,  for the three months ended
September 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 Phoenix and  Precision,  increases in corporate  administrative
costs and additional marketing spending directed at strategic customers,  offset
partially by a reduction in workforce and the  elimination  of a non-cash  stock
compensation  charge  relating to the valuation of management  ownership puts at
Stellex Aerospace of $0.8 million.

          Research and Development  Expenses.  Research and development expenses
for Stellex  totaled  $2.3  million and $1.2  million for the three months ended
September  30,  1999 and  1998,  respectively.  The  increase  in  research  and
development expenses resulted from the expansion of engineering  capabilities at
Stellex  Microwave  relating  primarily  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  September  30,  1999,  increased  $0.4  million,  or 29.4%,
compared  to 1998  due to  significant  increases  in  goodwill  resulting  from
purchase  accounting  allocations  made in  connection  with the  Precision  and
Phoenix Acquisitions.

          Interest  Expense.  Interest expense for the Company increased to $7.4
million for the three months ended  September  30, 1999 compared to $5.1 million
during the same period in 1998. The increase in interest  expense  resulted from
the incurrence of indebtedness to finance the Precision and Phoenix acquisitions
and  increases  in LIBOR rates over the prior  year.  The  borrowings  under the
senior secured credit facilities generally bear interest based on the Eurodollar
rate.  The average  interest rate on such  borrowings for the three months ended
September 30, 1999 was approximately 8.8%.

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











                                       8
<PAGE>





Nine Months Ended September 30, 1999 Compared to the Nine Months Ended September
30, 1998

The  historical  consolidated  operating  results  for  the  nine  months  ended
September  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                       $      -    $      -   $ 96,219    $ 57,913    $ 69,548      $ 58,192     $ 165,767    $116,105
Cost of goods sold                     -                 74,513      43,544      47,634        42,127       122,147      85,671
                                --------    --------   --------   ---------   ---------     ---------    ----------   ---------
Gross profit                           -           -     21,706      14,369      21,914        16,065        43,620      30,434
Gross margin                           -           -       22.6%       24.8%       31.5%         27.6%         26.3%       26.2%
Selling, general, and
   administrative expenses         1,000          97      9,101       8,677       9,015         6,978        19,116      15,752
Research & development
   expenses                            -           -          -           -       6,635         3,325         6,635       3,325
Amortization of intangibles         (250)          -      2,593        1,088      2,604         1,930         4,947       3,018
                                --------   ---------   --------   ----------  ---------     ---------    -----------  ----------

Income (loss) from operations       (750)        (97)    10,012       4,604       3,660         3,832        12,922       8,339
Interest expense                                                                                            (18,709)    (11,629)
Other income (expense)                                                                                          119        (125)
                                                                                                           --------    ---------

Net loss before income taxes                                                                                 (5,668)     (3,415)
Income tax benefit                                                                                           (1,776)       (243)
                                                                                                             -------    --------
Net loss                                                                                                  $  (3,892)  $  (3,172)

                                                                                                          ==========  ==========
</TABLE>

         Net Sales.  Net sales for  Stellex  totaled  $165.8  million and $116.1
million for the nine months ended September 30, 1999 and 1998, respectively. Net
sales for the  Electronics  segment  totaled $69.5 million and $58.2 million for
the nine months ended September 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, an increase in tactical sales at Stellex Microwave due
to the ramp up of the Longbow  program and new sales in the  broadband  wireless
communications  market,  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.  Microwave's  efforts in the broadband  wireless
communications market are beginning to show results. Recent orders for a digital
radio  synthesizer were secured  totaling over $6 million,  and field trials for
outdoor  units (ODUs)  supporting a significant  telecommunication  manufacturer
will begin this December. Net sales for Phoenix from the date of its acquisition
on March 1, 1999 to September 30, 1999 totaled $10.5 million.

         Net sales for the  Aerostructures  segment  totaled  $96.2  million and
$57.9  million  for  the  nine  months  ended   September  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 nine months ended  September 30, 1999 totaled $56.7 million  compared to
$30.9 million for the period from its  acquisition  on May 29, 1998 to September
30, 1998. Net sales for Precision from the date of its  acquisition on April 22,
1999 to September 30, 1999 totaled $16.9  million.  The decrease in net sales at
Stellex  Aerospace  during the nine  months  ended  September  30,  1999 of $4.3
million,  or 16.1%,  as compared to the same period in 1998,  resulted from weak
demand from OEMs in the  commercial  aviation  market  resulting  primarily from
Boeing-related  decreases  in  build  rates  and  inventory  management  issues,
compound by  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.

         Gross  Margins.  Gross  margin for  Stellex was 26.3% and 26.2% for the
nine months ended  September 30, 1999 and 1998,  respectively.  Gross margin for
the Electronics  segment was 31.5% and 27.6% for the nine months ended September
30, 1999 and 1998, respectively.  Gross margin for the first nine months of 1999
and 1998 was  impacted by the  amortization  of purchase  price  adjustments  to
inventories  of $1.0 million and $1.1 million,  respectively.  In excluding this
non-recurring  adjustment,  the  Electronics  segment  would have had a recasted
gross margin of 33.0% for the nine months ended  September  30, 1999 compared to
29.6% for the comparable  period in 1998.  This increase in gross margin for the
Electronics  segment  was  primarily  due to the  acquisition  of Phoenix  whose
business yields, on average, higher gross margins.

          Gross  margin for the  Aerostructures  segment was 22.6% and 24.8% for
the nine months ended September 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 15.3% for the period
of  ownership.  The gross  margin at Precision  was impacted by a  non-recurring
acquisition  charge  relating to the  amortization  of the  purchase  accounting
adjustment  to  profits  in  inventory  totaling  $3.3  million  and a one  time
non-recurring   employee   retention  bonus  award  of  $1.0  million.   Stellex
Aerospace's  gross margin totaled 25.5% for the first nine months of 1999, which
was  significantly  lower than the 1998 result of 30.4% due to lower volume,  an
unfavorable  mix of  product  and  higher  than  normal  start-up  costs  on new
programs.  Gross  margin at Monitor  was 23.5% for the first nine months of 1999
compared  to 20.0% for the  comparable  period in 1998.  This  increase in gross
margin was due to a nonrecurring  acquisition  charge,  which impacted the first
nine months of 1998  relating to the  amortization  of the  purchase  accounting
adjustment to profits in inventory  totaling $1.2 million.  On a recasted basis,
excluding the adjustment to profits in inventory and the non-recurring  employee
retention bonus award for the first nine months of 1999 and 1998,  gross margins
for the  Aerostructures  segment would have been 27.1% and 27.0%,  respectively.
This slight  decrease in gross margins on a recasted basis was due to scheduling
inefficiencies  resulting from sporadic  program  deceleration  directives  from
customers,   offset  by  productivity  improvements  on  certain  programs,  and
proactive adjustments to production manning levels.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative  expenses for Stellex totaled $19.1 million and $15.8 million, or
11.5% and 13.6% stated as a percentage  of net sales,  for the nine months ended
September 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 $2.3 million.  As a result of the acquisitions of Monitor,  Phoenix
and Precision,  selling,  general and administrative expenses for the first nine
months 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  $6.6  million and $3.3  million for the nine months  ended
September  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
nine months ended September 30, 1999, increased $1.9 million, or 64.0%, 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.  Goodwill is being amortized over
fifteen to thirty years.  Other intangible assets are being amortized over their
estimated useful lives ranging from one to thirty years.

         Interest  Expense.  Interest expense for the Company increased to $18.7
million for the nine months ended  September  30, 1999 compared to $11.6 million
during the same period in 1998. The increase in interest  expense  resulted from
the  incurrence of  indebtedness  to finance the Monitor,  Precision and Phoenix
Acquisitions  and increases in LIBOR rates over the prior year.  The  borrowings
under the Company's senior secured credit facility generally bear interest based
on the  Eurodollar  rate. The average  interest rate on such  borrowings for the
nine months September 30, 1999 was approximately 8.4%.

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

Pro forma  results of the Company for the three and nine months ended  September
30, 1999 and 1998

         The unaudited  pro forma  results of operations  for the three and nine
months  ended  September  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, and to the refinancing
of the Company's senior debt facility.  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  employee  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 and
the  Company's  Reports on Form 8-K dated March 1, 1999 and April 22, 1999.  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.



             Table 1: Pro forma Results for the Three Months Ended
                          September 30, 1999 and 1998
<TABLE>
<CAPTION>
                                 Corporate            Aerostructures             Electronics                Total

<S>                        <C>        <C>          <C>         <C>          <C>          <C>         <C>         <C>
                              1999       1998        1999        1998         1999         1998        1999        1998


Net sales                  $       -    $      -    $ 32,964    $ 41,492     $ 24,469     $ 21,677    $ 57,433    $63,169
Cost of goods sold                 -           -      23,352      29,348       15,954       13,696      39,306     43,044
                           ---------     -------    --------   ---------    ---------    ---------   ---------   --------
                                   -          -
Gross profit                       -          -       9,612      12,144        8,515        7,981      18,127     20,125
Gross margin                       -          -        29.2%       29.3%        34.8%        36.8%       31.6%      31.9%
Selling, general, and
  administrative expenses        595         67       2,686       3,871        9,917        2,893       6,198      6,831
Research & development
  expenses                         -          -           -           -        2,339        1,554       2,339      1,554
Amortization of intangibles     (125)         -       1,093       1,158         1,005         747       1,973      1,905
                               -----     --------    --------   ---------    ----------   --------    ----------  ---------
Income (loss) from
   operations                   (470)       (67)      5,833       7,115        2,254        2,787       7,617      9,835
Interest expense                                                                                       (7,359)    (6,961)
Other income (expense)                                                                                     38        (20)
                                                                                                    ----------  ---------

Income before taxes                                                                                       296      2,854
Provision for taxes                                                                                       243      1,427
                                                                                                    --------    --------

Net income                                                                                          $      53     $1,427
                                                                                                    =========     ======

</TABLE>

Table 2: Pro forma Results for the Nine Months Ended September 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                  $           $     -     $105,926     $121,981     $ 72,302     $ 68,971    $178,228   $190,952
 ost of goods sold           75,763     87,464       48,349       47,660      124,112     135,124
                            -------     -------    ---------   ---------    ---------    ---------   ---------   ---------
Gross profit                       -          -      30,163      34,517       23,953       21,311      54,116       55,828
Gross margin                       -          -        28.5%       28.3%        33.1%        30.9%       30.4%        29.2%
Selling, general, and
  administrative expenses      1,000         67       8,612      11,169        9,153        8,695      18,765       19,931
Research & development
  expenses                         -          -           -           -        6,832        4,413       6,832        4,413
Amortization of intangibles
                               (250)          -       3,275        3,464        2,756       2,241        5,781       5,705
                           -----       --------    --------   ----------   ----------   ---------   ----------  ----------
Income (loss) from
   operations                   (750)       (67)     18,276      19,884        5,212        5,962      22,738      25,779
Interest expense                                                                                      (21,048)    (20,883)
Other income (expense)                                                                                     165        (80)
                                                                                                    ----------  ---------
Income before taxes                                                                                     1,855       4,816
Provision for taxes                                                                                     1,149       2,400
                                                                                                    ---------    --------
Net income                                                                                          $      706  $   2,416
                                                                                                    ==========  =========
</TABLE>





                                       9
<PAGE>





     Net Sales.  Pro forma net sales for Stellex  were $57.4  million and $178.2
million for the three and nine months ended  September  30, 1999,  respectively,
representing a 9.1% and a 6.7% decrease over the comparable periods in 1998. Pro
forma net sales for the  Electronics  segment  totaled  $24.5  million and $72.3
million for the three and nine months ended  September  30, 1999,  respectively,
representing  a 12.9% and a 4.8% increase over the  comparable  periods in 1998.
The increase in pro forma sales at Electronics 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  Microwave,  offset  by lower
commercial  component  sales at  Microwave.  The second  quarter of 1998 was the
final quarter at Microwave  impacted by the "catch-up" of delinquent  commercial
component orders arising from production  planning problems  associated with the
implementation  of the production  planning  software during 1996 and 1997 which
resulted in higher  sales  during the first two  quarters  of 1998.  Microwave's
efforts in the broadband  wireless  communications  market are beginning to show
results.  Recent orders for a digital radio  synthesizer  were secured  totaling
over $6  million,  and field  trials  for  outdoor  units  (ODUs)  supporting  a
significant telecommunication manufacturer will begin this December.

Pro forma net sales for the  Aerostructures  segment  totaled  $33.0 million and
$105.9  million  for the  three  and  nine  months  ended  September  30,  1999,
respectively,  representing  a 20.6% and a 13.2%  decrease  over the  comparable
periods in 1998.  The decrease in pro forma sales was 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  Boeing-related  decelerations  continues to be
difficult to predict.  Business and  regional jet program  opportunities  remain
robust,  particularly  at  Precision,  and have helped to  partially  offset the
decline in shipments and bookings from the commercial jet business.

Gross  Margin.  Pro forma  gross  margin for Stellex was 31.6% and 30.4% for the
three and nine months  ended  September  30, 1999,  respectively,  compared to a
gross margin of 31.9% and 29.2% for the  comparable  periods in 1998.  Pro forma
gross margin for  Electronics  was 34.8% and 33.1% for the three and nine months
ended September 30, 1999, respectively,  compared to a gross margin of 36.8% and
30.9% for the comparable periods in 1998. The decrease in pro forma gross margin
at  Electronics  for the quarter  ended  September 30, 1999 in comparison to the
previous  year was due to low gross  margins  on a start-up  broadband  wireless
program and certain funded non-recurring engineering projects and the expiration
of a high volume  subcontract  manufacturing  arrangement,  offset  partially by
gross margin improvement on certain long run tactical subsystem  programs.  Good
progress  has been made  toward dual  sourcing of MMICs on the Longbow  program.
Improvement  in pro forma gross margins  during the nine months ended  September
30, 1999  compared to the prior year  resulted  primarily  from  improvement  in
margins on the  Longbow  program  and a high  volume  subcontract  manufacturing
arrangement.

Pro forma gross margin for  Aerostructures was 29.2% and 28.5% for the three and
nine months  ended  September  30, 1999,  respectively,  compared to a pro forma
gross  margin  of  29.3%  and  28.3%  for  the   comparable   periods  in  1998.
Aerostructures  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 spend.  Certain
pricing  actions  recently  negotiated  with Boeing will put  pressure on future
gross margin levels. However, management believes that, based on current pricing
data, the overall impact to the  Aerostructures  business should not be material
considering continuous improvement efforts in engineering and tooling as well as
the impact of machining efficiencies resulting from new equipment  installations
primarily resident at Precision.

Selling,  General and Administrative  Expenses.  Pro forma selling,  general and
administrative  expenses for Stellex totaled $6.2 million and $18.8 million,  or
10.8% and 10.5% stated as a percentage of pro forma net sales, for the three and
nine months ended September 30, 1999 and 1998,  respectively.  When adjusted for
the elimination of non-cash  compensation  expense  relating to the valuation of
management  ownership puts at Aerospace during 1998, pro forma selling,  general
and  administration  expense would have been $6.1 million and $17.7 million,  or
9.7% and 9.3% stated as a percentage  of pro forma net sales,  for the three and
nine months ended September 30, 1999 and 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.  Pro forma research and development expenses
for Stellex  totaled $2.3 million and $6.8 million for the three and nine months
ended  September  30,  1999,  respectively,  compared  to $1.6  million and $4.4
million for the  comparable  periods in 1998. The increase in pro forma research
and development costs resulted from the expansion of engineering capabilities at
Microwave relating to new product  introductions in the commercial and broadband
wireless markets.






Liquidity and Capital Resources

         The Company  provided  cash flows from  operations of $14.9 million and
$2.3  million  for  the  nine  months  ended   September   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.

          The Company used cash flows for investing  activities,  excluding cash
flows used in connection with the Phoenix and Precision acquisitions in 1999 and
the Monitor acquisition in 1998,  totaling $10.1 million and $ 3.1 million,  for
the nine  months  ended  September  30,  1999 and  1998,  respectively.  Capital
investments during 1999 were primarily  comprised of expenditures  totaling $3.6
million  for the  Electronics  segment and $5.1  million for the  Aerostructures
segment. The Electronics segment expenditures have related  predominately to the
development   activities  in  commercial  and  broadband  product  applications.
Aerostructures  segment expenditures  represent upgrading activities relating to
CNC equipment and tooling design software as well as various  machine  equipment
investments directly relating to significant contract awards and other strategic
initiatives. Approximately $15.2 million and $87.6 million of cash proceeds were
used to consummate the  acquisitions of Phoenix and Precision in March and April
1999,  respectively,  and  approximately  $90.8  million  of  cash  was  used to
consummate the acquisition of Monitor in May 1998.

         The Company  provided  cash flows from  financing  activities  totaling
$96.8 million and $90.6 million for the nine months ended September 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  then
existing senior credit facility. 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  from the  issuance  of  $20.0  million  of  Preferred  Stock  totaling
approximately $19.0 million.

         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 September 30, 1999,  approximately  $185.3 million was outstanding  under the
senior secured credit facility, including $18.3 million under the revolving loan
facility. Borrowing availability under the revolving loan facility is subject to
customary  conditions,  including  compliance  with  the  Company's  other  debt
instruments.

         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 to the purchaser of
the  Preferred  Stock  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. On August
31, 1999,  Stellex issued  additional  warrants to such purchaser such that such
purchaser's  total  warrants  represented  the right to purchase 3% of Stellex's
issued and outstanding  shares of common stock. 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 such that such  purchaser's
total  warrants  represent  the right to  purchase  5% of  Stellex's  issued and
outstanding shares of common stock.

         The  Company's  primary  liquidity  demands  will be for debt  service,
capital  expenditures and working capital needs. During the remaining quarter of
1999,  based  on  the  Company's  existing   operations,   anticipated   capital
expenditures should total less than $2.0 million representing 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  expenditures  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,  Stellex Microwave  anticipates a level of capital spending during 2000
of  approximately  $6.0  million.  Further  to  Stellex  Microwave's  efforts in
developing new market  opportunities  for the  Electronics  segment,  consistent
levels of research and  development  spending are  anticipated  through 2000. In
addition,  Stellex  Microwave  has a planned  facilities  relocation in the late
summer to early fall of 2000 from the Palo Alto  facility  to a location  in San
Jose which may require  significant  capital  spend on  leasehold  improvements.
Discussions with the building developer on leasing terms are currently underway.

         Year 2000 capital spending for the Aerostructures  segment is currently
under  evaluation  and could  range from $7.0 to $10.0  million.  Aerostructures
related  capital  spending  would focus  primarily  on high  priority  equipment
refurbishment  programs and additional high-speed machining  capabilities to the
extent long-term program awards justify the investment.

         Debt service  requirements,  including scheduled principal  repayments,
over the next twelve months are estimated to total  approximately $36.5 million,
assuming  interest rates remain  relatively  stable.  There can be no assurances
that the Company's  substantial debt service requirements will not significantly
limit funds available for other purposes, including capital expenditures.

         The Company is currently  marketing  certain of its owned facilities as
sale-leaseback  arrangements  in order to  transfer  that  invested  capital  to
activities  with a higher rate of return.  However,  no assurances  can be given
that  such  sale-leaseback  transactions  will be  consummated  on  commercially
reasonable  terms, or at all. The Company's  management  believes that, based on
its current level of operations and projected growth potential,  its anticipated
cash  flow  from   operations   in  addition  to   anticipated   proceeds   from
sale-leaseback  activities  and  borrowing  availability  will  provide  for  an
adequate  level of liquidity to meet its  anticipated  requirements  for working
capital, capital expenditures, and debt service.

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.  The  problem is not limited to computer
systems.  Year 2000 issues may also affect  non-information  technology  systems
that have embedded microchips.

         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 involve the completion of compliance
testing.  Significant  vendors and  customers  have been  contacted and queried.
Based  on the  responses  of  such  queries  the  Company  is not  aware  of any
non-compliance  issues  which  would  present a material  risk to the  Company's
operations. 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
we  expect to incur  additional  costs of  approximately  $0.1  million  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 over which the Company has control not being Year 2000-ready by the end of
1999. The Company continues to assess its risk exposure attributable to external
factors,  such as 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.  However,  the interruption of significant
materials or services  would likely  materially  adversely  affect the Company's
operations.

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 and
requires that all  derivatives  be carried at fair value,  but also provides for
hedging  accounting  when certain  conditions  are met. This  statement  will be
effective  for fiscal  years  beginning  after June 15,  2000.  The  Company has
recently entered into a capped interest swap arrangement with a bank which would
be classified as a cash flow hedge under SFAS 133. The accounting  treatment for
a cash  flow  hedge,  assuming  it is an  effective  hedge,  would  require  the
recognition  of  other  comprehensive   income  or  loss  until  the  forecasted
transaction is actually realized,  at which time, amounts previously  recognized
in other comprehensive income would be reclassified to income. In addition, when
the cumulative change in the fair value of the derivative exceeds the cumulative
change in the fair  value of the hedged  item,  the  ineffective  portion of the
derivative's  change is recognized in income.  Management has not fully assessed
the implications of this new statement on its financial statements, 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:  the  risks  associated  with  the  Company's
dependence on a limited number of large  customers,  the risk of loss of certain
significant military programs, the Company's high degree of leverage,  operating
restrictions  contained in the  Company's  debt  instruments,  Year 2000 issues,
continued decelerations or cancellations of commercial aircraft component orders
and predatory pricing tactics within our industry segments.




                                       10
<PAGE>




ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

The  Company's  primary  market  risk  exposure  is that of  interest  rate risk
associated with its various debt  instruments.  On October 15, 1999, the Company
entered into a capped interest swap transaction with a bank as part of a dynamic
hedging  strategy  employed  to manage its  interest  rate risk.  Under the swap
transaction, the Company is obligated to pay the fixed rate of interest equal to
6.05% on a notional  amount of $43.0 million for a period of 3 years in exchange
for a floating  rate of interest  based on 3-month LIBOR capped at 6.625% on the
same notional amount. Settlements on the swap arrangement will occur quarterly.

At September 30, 1999,  the Company's  total  outstanding  debt was comprised of
fixed  interest rate  obligations  of  $108,492,000  and variable  interest rate
obligations of $185,300,000.

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

<TABLE>
<CAPTION>
<S>             <C>           <C>           <C>              <C>         <C>          <C>
                                 Fixed Rate Debt

                                                            Senior
Year ending     Term Loan   Term Loan    Revolving      Subordinated      Seller
December 31,        A           B       Loan Facility       Notes          Notes        Other
-----------      -------    ---------   ------------        -----          -----        -----

1999            $ 1,250       $   250       $     -          $    -      $     -           47
2000              6,875         1,000             -               -        5,180          266
2001              9,375         1,000             -               -            -        2,609
2002             10,000         1,000             -               -            -          158
2003             11,875         1,000             -               -            -           90
2004             14,375         1,000             -               -            -          121
Thereafter        3,750       104,250       $18,300        $100,000            -           21
              ---------      --------       -------        --------      -------        -----
Total           $57,500      $109,500       $18,300        $100,000      $ 5,180       $3,312
                =======      ========       =======        ========      =======       ======
Fair Market     $57,500      $109,500       $18,300        $ 74,050      $ 5,180       $3,312
Value           =======      ========       =======        ========      =======       ======
</TABLE>

Based upon the Company's current level of variable rate debt, a 100 basis points
increase or decrease in interest rates will cause an  approximate  $1.85 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).






                                       11
<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 actions outstanding are unlikely to 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)   Exhibit 27: Financial Data Schedule.

         (b)   Reports on Form 8-K:  None





                                       12
<PAGE>





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 November 15, 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          November 15, 1999
------------------------
       William L. Remley                  Officer, Treasurer and Director of Stellex
                                          Technologies, Inc.

/s/    P. Roger Byer                      Chief Financial Officer of Stellex                 November 15, 1999
--------------------
       P. Roger Byer                      Technologies, Inc. (principal financial
                                          and accounting officer)
</TABLE>