FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

      For the fiscal year ended                      Commission file number: 
          December 31, 1998                                  0-27992

                              Elamex, S.A. de C.V.
             (Exact name of Registrant as specified in its charter)

            Mexico                                           Not Applicable
(State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                            Identification No.)

  Avenida Insurgentes No. 4145-B Ote.                          C.P. 32340
     Cd. Juarez, Chihuahua Mexico                              (zip code)
(Address of principal executive offices)

                                 (915) 774-8252
       (Registrant's telephone number including area code, in El Paso, TX)

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

       Title of each class                  Name of exchange on which registered
Class I Common Stock, no par value                 NASDAQ National Market

      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 |_| 

      The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 9, 1999 was: $11,615,175.

      The number of shares of Class I Common Stock of the registrant outstanding
as of March 9, 1999 was: 6,866,100

                       DOCUMENTS INCORPORATED BY REFERENCE

      Item 14 incorporates by reference exhibits to the registrant's
registration statement on Form S-1, file number 333-01768.

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
<PAGE>

                                     PART I

References in this form 10-K to "Elamex" or the "Company" are to Elamex, S.A. de
C.V. and its subsidiaries, collectively, and references to "Elamex, S.A. de
C.V." are solely to Elamex, S.A. de C.V. In this Form 10-K, references to "$"
and "U.S. dollars" are to United States dollars and references to "Ps$" and
"Pesos" are to Mexican pesos.

Item 1. Business

      Elamex is a leading contract manufacturer located in Mexico, delivering
high-quality finished goods to Original Equipment Manufacturers ("OEMs") based
in North America pursuant to manufacturing contracts. Although functioning as an
independent contractor, the Company operates as a manufacturing arm for its
customers, offering a rapid and cooperative response to the customers' needs.
The Company focuses on the effective management of assembly processes, which
range from assembly-only services managed by the customer or by Elamex, to full
materials procurement and assembly contracts that are referred to in the
industry as "turnkey" contracts. The Company frequently works with customers
from product design and prototype stages through ongoing production, and
provides manufacturing services for successive product generations.

      Elamex's OEM customers are primarily U.S. companies, mainly in the
consumer electronics, telecommunications, automotive, industrial
instrumentation, avionics and medical industries. The Company's sales contracts
generally call for payment in United States ("U.S.") dollars and accordingly,
its revenues are in U.S. dollars. Financing is obtained in the same currency.
The Company's headquarters and certain of its manufacturing facilities are
located within nine miles of the U.S. border, the El Paso International Airport,
and rail and truck depots in El Paso, Texas. Elamex currently operates or
directs operations in 25 manufacturing facilities. The Company prepares
financial statements in U.S. Dollars in conformity with Generally Accepted
Accounting Principles applicable in the U.S. ("U.S. GAAP") and also maintains
certain financial and tax information in conformity with Generally Accepted
Accounting Principles applicable in Mexico ("Mexican GAAP").

      The Company was a pioneer in Mexico's Border Industrialization Program,
usually referred to as the Maquiladora program, in which, originally, real
estate, and later also labor, was provided to foreign companies. These companies
managed the production for export, or the enhancement of their own imports into
Mexico for subsequent export. Elamex' business has evolved from the early
Maquiladora concept to its present state, which includes management, by Elamex
itself, of assembly services and turnkey manufacturing services. Elamex, S.A. de
C.V. is the successor pursuant to the merger, effective October 1, 1995, of
Elamex Internacional, S.A. de C.V. ("Elamex Internacional") with and into
Elamex, S.A. de C.V. The predecessor of Elamex, S.A. de C.V. was formed in 1990,
when Accel, S.A. de C.V. ("Accel"), a public company listed on the Mexican Stock
Exchange, indirectly acquired a majority interest in the Company's operations.

Industry Background

      During the early 1980s, the commercialization of the personal computer
began to fuel substantial growth in the electronics industry and, with it, the
growth of contract manufacturers. OEMs originally utilized
contract-manufacturing sources primarily to reduce labor costs in the production
of electronic assemblies and to provide additional manufacturing capacity in
times of peak demand. These early contract manufacturers typically were employed
on an assembly basis in which the OEMs provided the circuit and production
designs, procured all components, frequently managed the production process, and
performed the final product testing.


                                       2
<PAGE>

      In the mid-1980s, significant advances were made in commercial
manufacturing technology as Surface Mount Technology ("SMT") began to replace
Pin Through-Hole ("PTH") technology as the preferred method for the assembly of
circuit boards. SMT provided OEMs with significant cost savings while at the
same time increasing the performance of their products. However, SMT assembly
was a more complex process than PTH. Contract manufacturers were quick to adopt
the new technology and OEMs found the simplest way to convert to SMT was to
outsource. The complexity of the process required contract manufacturers to have
more control of the complete process from design to material procurement to
testing.

      As contract manufacturers began to perform more management services, the
relationship between OEMs and contract manufacturers became more strategic in
nature, with the two now linked in a closer relationship in order to quickly
deliver cost-effective, high-quality products to the marketplace. The practice
of contract manufacturers providing management services has evolved into turnkey
manufacturing, in which the contract manufacturer performs the procurement
function and manages the assembly process. In Elamex's experience, procurement
generates lower margins to Elamex than assembly work, and Elamex believes the
same is true for other contract manufacturers. However, Elamex has also found
that parts and equipment procurement creates other advantages, such as greater
control over the manufacturing process and increased customer satisfaction due
to the reduction of an additional cost to the OEMs. Elamex believes that the
ability to provide these procurement advantages reinforces its strategic
relationship with its clients.

      The Company believes that the strategic use of contract manufacturers has
provided significant benefits to contract manufacturers and to OEMs. Contract
manufacturers have benefited from the economies of scale resulting from larger
and more frequent orders from OEMs, as well as from the strategic and
operational benefits arising from the stability of longer-term relationships.
OEMs have been able to reduce costs and increase flexibility through the use of
the shared resources they access through contract manufacturers.

      Technology Forecasters, Inc. estimates that U.S. and Canadian demand for
electronics contract manufacturing will grow from expenditures of approximately
$27.2 billion in 1996 to approximately $104.2 billion by 2001, an average annual
growth rate of approximately 31%, and that the worldwide electronics contract
manufacturing industry will grow from expenditures of $59.8 billion in 1996 to
approximately $178 billion by 2001, an average annual growth rate of
approximately 24%. In addition, the Company believes that OEM's will have an
increasing need to reduce product time to market and to manage more complex
product designs, inventories and component procurements. The company believes
these factors will offer opportunities for professional contract manufacturing.

Manufacturing Services

      Elamex offers one of the broadest portfolios of services in the contract
manufacturing industry. Elamex's work for the consumer electronics, medical,
telecommunications, avionics and automotive industries includes the assembly of
board-level products on both rigid and flexible printed circuit boards, and
subsystem and system level assembly. The Company's work for the
electromechanical industry includes the manufacture of such electrical devices
as smoke detectors, automatic timer switches and other devices that are not
based on complex electronic circuitry. The Company is also engaged in repair and
the refurbishment of telephones in a service category typically known as "repair
depot." Elamex' work for the medical industry also includes assembling surgery
sets and medical products packaging. Additionally, during 1998 the company
increased its capabilities in plastic injection molding and metal stamping, new
manufacturing areas it had entered in 1997.


                                       3
<PAGE>

      The Company's basic business is to provide contract manufacturing.
However, there are various levels of service that Elamex can provide. The two
primary levels of service are assembly-only and turnkey. Approximately 24% of
Elamex's net sales in 1998 were derived from assembly-only projects, in which
Elamex provides manufacturing services, while the customer retains
responsibility for parts procurement and, in some cases, direct management of
Elamex's employees. Turnkey projects, which accounted for 76% of Elamex' net
sales during 1998, are those in which Elamex is responsible for manufacturing
and delivering the completed product. All turnkey projects involve manufacturing
and assembly services and materials procurement. In these projects, Elamex buys
raw materials from U.S. and worldwide suppliers, and then performs the required
assembly work using those raw materials. The majority of the finished products
are returned to the United States and the import duty, if any, is paid only on
the value added during assembly plus the value of foreign content. When finished
products are delivered from the United States to other countries, the customer
pays the import duty, if any imposed by such other country. Under The North
America Free Trade Agreement ("NAFTA"), most products produced by Elamex are
duty-free into the United States.

      As an independent contractor-manufacturing arm of its customers, Elamex
combines stringent quality control, sophisticated inventory management and
cost-effective assembly techniques for the benefit of its customers. The
Company's manufacturing operations are structured to incorporate the complex
design specifications of its customers' products and to respond rapidly to their
design changes. Prior to commencing a manufacturing project, Elamex works
closely with the OEMs to determine the manufacturing operations and the
organization, selection and training of the work force, with particular emphasis
on sophisticated training techniques. In establishing a "total manufacturing
solution" to its OEM customers, the Company provides expertise in managing the
work force available at its facilities, assists its customers with accounting
and management functions, and handles customs, warehousing and other matters
inherent in manufacturing in Mexico. In a further effort to create a "total
manufacturing solution" relationship with its customers, the Company has
improved communications and information reporting using electronic data
interchange with its customers. Elamex maintains a microwave link across the
border to El Paso, Texas, and as a result it can be reached through telephone
numbers in the El Paso area code; this system also functions for electronic data
interchange, fully integrating the Company into the U.S. telephone system.

      Approximately 49% of Elamex's net sales for 1998 were derived from the
manufacture of electronic products. Over the last three decades, continuous
advances have been made in the design of electronic components and in
interconnection technologies. Prior to the 1980s, manufacturers developed the
technique of PTH technology. In PTH assembly, electrical components such as
integrated circuits are attached to printed circuit boards by means of pins or
leads that are inserted into pre-drilled holes and soldered to the electrical
circuits on the boards. As electronic devices required greater numbers of
components with increasing functional density and more interconnections,
manufacturers developed SMT. The SMT process eliminates the need for holes in
the printed circuit board, permitting a higher number of leads than PTH and
finer lead-to-lead spacings ("pitch"). This technology also allows components to
be placed on both sides of a board. Both factors substantially reduce board
size. SMT requires the use of more expensive automated assembly equipment and
substantially more engineering expertise than PTH. Elamex has adopted SMT as the
primary electronic assembly technique for a number of major products, including
computer peripheral products, communications equipment, automotive sensors and
audio mixing boards. The Company's capabilities include complex wire cable
assemblies, plastic over-molded SMT printed circuit boards, and fiber optic
cables and connectors.

      Elamex customizes its assembly lines for each customer by assigning a team
to each project. 


                                       4
<PAGE>

Elamex analyzes the customer's proposed production process, including the
original process if applicable, and proposes improvements whenever possible.
Assembly lines are customized to the customer's needs before manufacturing
begins. Elamex and the customer jointly determine the size of an assembly line.
The customer generally provides some of the equipment, particularly for
specialized testing and other customer-specific work, while Elamex provides the
assembly services and generic equipment. Some customers provide materials used
in the production process, while others contract for turnkey projects involving
procurement. Final manufacturing inspection may be performed at the customer's
plant or by Elamex in "dock to stock" arrangements. Additionally, many products
manufactured by Elamex are in the early stages of their product life cycle and,
therefore, may require ongoing design or engineering changes. Responsiveness to
customers, particularly with respect to engineering changes once manufacturing
has commenced, is a crucial component of Elamex' manufacturing approach.

      The Company's business is materially dependent on its ability to
manufacture products of uniformly high quality. The Company has established
quality processes under International Standards Organization certification 9002
("ISO 9002"), is compliant with Quality Standard 9000 ("QS 9000"), military
specifications of the U.S. Department of Defense, and FDA Good Manufacturing
Practices. Where appropriate, Elamex also works to achieve this objective using
specialized "pick and place" automated equipment. To implement and maintain
these quality goals, Elamex employs a large staff of professional engineers.

Customers and Markets

      The Company has attempted to balance its marketing efforts and
manufacturing services between OEMs of industrial and professional products and
those of consumer electronics products. Elamex customers are a diverse group of
United States and multinational OEMs. Contracts with Elamex's five largest
customers for 1998 accounted for approximately 48% of Elamex's committed
contract revenues. Approximately 21%, 7% and 7% of the Company's net sales for
1998 were derived from sales to a manufacturer of home appliance consumer
products, a manufacturer of consumer products, and a manufacturer of
telecommunication equipment, respectively. Approximately 19%, 14% and 10% of the
Company's net sales for 1997 were derived from sales to a manufacturer of home
appliance consumer products, a manufacturer of telecommunication equipment,
switchboards, and fiber-optic cable connections, and a manufacturer of consumer
products, respectively. Approximately 18%, 16% and 14% of the Company's net
sales in 1996 were derived from sales to a manufacturer of home appliance
consumer products, a flexible and rigid circuit boards/component assembly
customer, and a manufacturer of telecommunication equipment, respectively.
Certain of the Company's contracts contain pricing mechanisms that are based on
the Company's costs.

      Elamex, in conjunction with another company, are parties to a
manufacturing contract pursuant to which Elamex has agreed to manufacture
shotgun components and safe deposit boxes. Due to the Mexican government's
regulation of the manufacture of firearms, this contract is performed by Elamex
de Torreon, S.A. de C.V. ("Elamex de Torreon"), a company beneficially owned by
certain of the Company's officers and directors, under contract to Elamex.

      The U.S. Department of Defense has qualified Elamex for manufacturing
military and aerospace specification products. To serve a larger base of
customers in Europe as well as in the United States, Elamex has been registered
under ISO 9000 at all of the facilities where Elamex manages the labor force.
Elamex also supports a variety of third party quality programs required for
specific industries including FDA GMPs, UL, QS 9000 and BABT. 


                                       5
<PAGE>

Sales and Marketing

      The Company has pursued the diversification of its market segments and
customer base and sought relationships with leading OEMs in the markets it
serves. The Company's principal sources of new business originate from the
growth of existing relationships, referrals and direct sales through senior
management and direct sales personnel. Sales personnel, supported by the
executive staff, identify and attempt to develop relationships with potential
OEM customers who meet a certain profile, which includes financial stability,
industry leadership, need for technology and assembly-driven manufacturing,
anticipated unit volume growth and long-term relationship potential. Elamex also
advertises, participates in industry trade shows and conducts seminars to
introduce potential customers to the benefits of contract manufacturing in
Mexico. In addition to the efforts of its sales force, Elamex may pursue the
growth through selective acquisitions.

Competition

      The electronics assembly and the contract manufacturing industries are
comprised of a large number of companies, several of which have achieved
substantial market share. Several of Elamex' competitors have significantly
higher sales, primarily those manufacturers of high volume computer components
where sales volume can be high. Elamex also faces competition from current and
prospective customers who evaluate Elamex' capabilities against the merits of
manufacturing products internally. Elamex competes with various companies,
depending on the type of service or geographic area. Certain of Elamex'
competitors, including SCI Systems, Inc. and Solectron Corporation have
substantially greater resources than Elamex.

      The Company believes that the primary bases of competition in its targeted
markets are time to market, capability, price, manufacturing quality, advanced
manufacturing technology and reliable delivery. Elamex believes that it
generally competes favorably with respect to each of these factors. To remain
competitive, the Company must continue to provide technologically advanced
manufacturing services, maintain world-class quality levels, offer flexible
delivery schedules, deliver reliable finished products and compete favorably on
the basis of price.

Effect of NAFTA

      The Company believes that NAFTA is having an overall positive effect on
its business. NAFTA eliminates import duties and reduces other restrictions on
certain imports into the U.S. and Canada. These benefits enable Elamex to
manufacture goods from imports into Mexico and to return the finished product to
the U.S. and Canada, without paying significant duties. Moreover, the Company
believes that NAFTA has the general effect of encouraging growth in industries
for which Elamex provides manufacturing services, and will permit the Company's
customers to increase their sales in the Mexican market.

Backlog

      Backlog consists of firm purchase orders, commitments and forecasts that
are to be filled within the next 12 months. However, since orders and
commitments may be rescheduled, increased or canceled, the Company does not
consider backlog to be a meaningful indicator of future financial performance.


                                       6
<PAGE>

Suppliers

      The Company uses numerous suppliers of electronic components and other
materials for its operations. Although the Company has a general policy against
procuring components without a customer commitment to pay for them, it must do
so on occasion. While the Company will work with customers and suppliers to
minimize the impact of any component shortages or allocations, component
shortages and allocations have had, and are expected to have from time to time,
short-term adverse effects on Company sales.

Raw Materials

      Raw materials consist of electronic commodities, including integrated
circuits, transistors and other solid state elements, printed circuit boards and
other circuit elements, as well as components for electromechanical and medical
assembly, many of which are provided by customers. Virtually all raw materials
supplied by Elamex are purchased in Asia and the U.S., with the larger part
coming from the U.S. Elamex believes that it is not materially dependent on any
one supplier or group of suppliers; it purchased slightly more than 4% of its
supplies from its largest vendor in 1998. Certain vendors operate at full
capacity from time to time and allocate their products among customers. Elamex
believes that larger companies generally command larger allocations; however,
because of its large-scale purchases of these products, Elamex also believes
that it sometimes has greater bargaining power for particular products than its
customers do even though Elamex may be smaller.

Employees

      Elamex had 5,431 employees at December 31, 1998, of which 306 were
employees subcontracted from Elamex de Torreon. There are 25 active facilities
currently used by Elamex in its manufacturing operations. 376 employees in 3
facilities are covered by collective bargaining agreements, all other employees
of the Company at the remaining 22 facilities are not. Elamex believes that its
labor relations are good in all of its facilities.

      Forty of the Company's executives and senior managers who are citizens or
residents of the United States are employees of a U.S. corporation owned by such
executives, and provide contracted services to Elamex. The purpose of this
arrangement is to provide these employees U.S. dollar-denominated salaries and
U.S.-style employee benefits. Under the contract, the Company pays to the
corporation an amount equal to the salary and benefits provided to the
executives by the corporation.

Environmental Compliance

      The Company's operations are subject to the Mexican General Law on
Ecological Equilibrium and Environmental Protection (the "Ecological Law") and
the regulations promulgated thereunder. In accordance with the Ecological Law,
companies engaged in industrial activities are subject to the regulatory
jurisdiction of the Secretaria del Medio Ambiente, Recursos Naturales y Pesca
(the "Ministry of the Environment, Natural Resources and Fisheries"). Since
September 1990, each such company has been required to file several semi-annual
reports regarding its production facilities and to comply with the Ecological
Law and the regulations thereunder, with respect to its environmental protection
controls for air emissions, waste water discharge and the disposition of
industrial waste. The Company is licensed to handle radioactive materials, which
are presently used in the manufacture of smoke alarms, and complies with both
U.S. and Mexican standards relating to the handling of such materials. In
addition, the Company is subject to U.S. environmental laws and regulations as a
consequence of the return to the United States of hazardous wastes generated by
the 


                                       7
<PAGE>

Company that are derived from materials imported from the U.S., a requirement of
its participation in the Maquiladora program. Such laws and regulations may
impose joint and several liabilities on certain statutory classes of persons for
the costs of investigation and remediation of contaminated properties regardless
of fault or the legality of the original disposal. These persons include the
present and former owner or operator of a contaminated property and companies
that generated, disposed of, or arranged for the disposal of hazardous
substances found at a property.

      Mexican environmental laws and regulations have become increasingly
stringent over the last decade. This trend is likely to continue and may be
influenced by the environmental agreement entered into by Mexico, the U.S. and
Canada in connection with NAFTA. The Company believes that its policies with
respect to environmental matters in Mexico currently exceed the standards set
forth in the Ecological Law. The Company is committed to maintaining high
standards of environmental protection controls.

Exchange Rates

      The following table sets forth, for the periods indicated, the high, low,
average and period-end free market rates for the purchase and sale of U.S.
dollars (presented in each case as the average between such purchase and sale
rates), expressed in nominal Pesos per U.S. dollar.

YEAR ENDED DECEMBER 31,        HIGH(1)    LOW(1)     AVERAGE(2)   PERIOD END(1)
-----------------------        -------    ------     ----------   -------------
1990                           Ps$2.95    Ps$2.68     Ps$2.84        Ps$2.95
1991                              3.07       2.95        3.01           3.07
1992                              3.14       3.06        3.08           3.12
1993                              3.16       3.02        3.11           3.11
1994                              5.00       3.11        3.35           5.00
1995                              8.05       5.00        6.44           7.69
1996                              8.05       7.33        7.60           7.86
1997                              8.24       7.78        7.93           8.13
1998                             10.64       8.04        9.15           9.87
1999 (through February 20)       10.63       9.78       10.07           9.97

------------------                                                
SOURCE: Ciemex-Wefa Group                                        
(1) Monthly rates at market close.
(2) Average of monthly rates.


                                       8
<PAGE>

Item 2. Properties

      The Company's Ciudad Juarez facilities (including its headquarters) are
located only a short distance from the U.S. border and the international
airport, rail and truck depots in El Paso Texas. Below are Elamex's
manufacturing facilities:

<TABLE>
<CAPTION>
                  SQUARE
 LOCATION          FEET                           ACTIVITY                             LEASED/OWNED
 --------         ------                          --------                             ------------
<S>               <C>       <C>                                                           <C>
Cd. Juarez        28,311    Industrial Bag, Packaging Material Manufacturing              Leased
Cd. Juarez        79,301    Electronic Equipment Assembly and Electronic Circuit Mfg.     Leased(1)
Cd. Juarez        90,848    Battery Chargers                                              Leased
Cd. Juarez        58,841    Medical Product Assembly                                      Owned(2)
Cd. Juarez        50,000    Medical Product Assembly                                      Owned
Cd. Juarez        43,034    Avionics Product Assembly                                     Owned
Cd. Juarez        64,784    Electromechanical Product Assembly                            Leased(1)
Cd. Juarez        54,754    Auto Part Assembly                                            Leased(2)
Cd. Juarez        67,038    Electronic Equipment Assembly                                 Owned
Cd. Juarez        40,263    Telephone Repair                                              Leased
Cd. Juarez        94,145    Plastic Injection Molding                                     Leased
Cd. Juarez        23,529    Electromechanical Product Assembly                            Leased
Chihuahua         47,835    Smoke Alarm Assembly                                          Owned(2)
Chihuahua         29,033    Customized Rubber Parts Manufacturing                         Leased
Delicias          54,507    Electronic Circuit Manufacturing                              Leased
Nuevo Laredo      60,658    Telephone Repair and Auto Part Assembly                       Owned
Nuevo Laredo      43,900    Telephone Repair                                              Leased(1)
Torreon           55,845    Assembly of Shotgun Parts                                     Owned
Tijuana           55,647    Electromechanical Product Assembly                            Leased
Tijuana           13,778    Electromechanical Product Assembly                            Leased
Monterrey         22,099    Electromechanical Product Assembly                            Leased
Monterrey         22,099    Electromechanical Product Assembly                            Leased
Monterrey         33,148    Electromechanical Product Assembly                            Leased
Monterrey         82,500    Air Conditioning Compressor Assembly                          Leased
Saltillo           1,399    Electromechanical Product Assembly                            Leased
Praxedis          11,513    Electromechanical Product Assembly                            Leased
               ---------
   Total       1,228,809   
               =========   
</TABLE>

------------------
(1)   Leased from a company controlled by Federico Barrio, a Director of the
      Company.
(2)   Facility currently being leased to a third party.

Item 3. Legal Proceedings

      The Company is not a party to any claim, actions and complaints, the
ultimate disposition of which, in the opinion of management, will have a
material adverse effect on the business or financial position of the Company.

Item 4. Submission of Matters to a Vote of Security Holders

      On April 24, 1998 the stockholders of Elamex, S.A. de C.V. at a general
ordinary annual stockholders meeting approved: (i) the business report on
Elamex, S.A. de C.V. for 1997 fiscal year; (ii) the presentation of audited
financial statements as of December 31, 1997 and the report by the statutory
auditor; (iii) the proposal for application of Net Income; (iv) the election of
Board of Directors, Secretary and Statutory Auditor; and (v) the ratification of
the appointment of KPMG LLP as independent auditors of Elamex, S.A. de C.V. for
the fiscal year ending December 31, 1998.


                                       9
<PAGE>

                                     PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

      The Company's Class I Common Stock, no par value ("Common Stock") has been
traded on The NASDAQ National Market under symbol ELAMF since March 20, 1996.
The following table sets forth, for the period stated the high and low closing
sales prices for the Common Stock as reported on the NASDAQ National Market
Systems.

                                          CLOSING      SALES PRICE
                                          -------      -----------
PERIOD                                      HIGH           LOW
March 20, 1996 - March 31, 1996             9 1/8         8 7/8
April 1, 1996 - June 30, 1996              10 3/8         8 7/8
July 1, 1996 - September 30, 1996           9 7/8         8
October 1, 1996 - December 31, 1996        10 1/2         8 7/8

January 1, 1997 - March 31, 1997           11 3/4         9
April 1, 1997 - June 30, 1997               9 3/4         7 1/2
July 1, 1997 - September 30, 1997          12 1/4         9 1/2
October 1, 1997 - December 31, 1997        11 3/8         7 1/2

January 1, 1998 - March 31, 1998            7 7/8         6 7/16
April 1, 1998 - June 30, 1998               7 3/8         5 3/4
July 1, 1998 - September 30, 1998           6 7/8         5 1/4
October 1, 1998 - December 31, 1998         5 3/8         3 1/2

      The Company currently intends to follow a policy of retaining earnings, if
any, for use in the development of business and to finance growth. The Company
has never paid cash dividends on its Common Stock and has no plans to do so in
the foreseeable future. Certain of the Company's existing bank credit lines
impose limitations on the amount of dividends that Elamex may pay. Specifically,
one limits the amount of dividends that may be declared, without the consent of
the lender, to the prior year's net profits. Another credit agreement permits
payment of dividends only if the Company has complied with all of its covenants
and other obligations under such credit agreement. As of March 09, 1999, there
were approximately 897 beneficial holders of the Company's Common Stock.

      The Mexican Law of Commercial Companies ("Ley General de Sociedades
Mercantiles") requires that at least 5% of the Company's net income each year
(after profit sharing and other deductions required by law) be allocated to a
legal reserve fund, which is not thereafter available for distribution except as
a stock dividend until the amount of such fund equals 20% of the Company's
historical capital stock. The Company may also maintain additional reserves.

Taxation of Dividends

United States Federal Income Taxes

      Dividends (other than certain dividends paid on a pro rata basis in
additional Common Stock) paid by the Company with respect to Common Stock out of
current or accumulated earnings and profits ("E&P") to a U.S. holder will be
treated as ordinary income to such holder. United States corporations that hold
Common Stock will not be entitled to the dividends received deduction generally
available for dividends received from United States corporations (and certain
non-United States corporations). To the extent a distribution exceeds E&P, it
will be treated first as a return of such holder's basis to the extent thereof,
and then as gain from the sale of a capital asset. Such capital 


                                       10
<PAGE>

gain will be long term if such holder has held the Common Stock for more than
one year.

      Dividends generally will constitute foreign source "passive income" or, in
the case of certain United States holders, "financial services income" for U.S.
foreign tax credits purposes.

      Dividends paid in Mexican Pesos will be included in gross income of a
United States holder in a U.S. dollar amount calculated by reference to the
exchange rate in effect on the date of receipt of the distribution, whether or
not the Pesos are in fact converted into U.S. dollars at that time. If Pesos are
converted into U.S. dollars on the day they are received by a United States
holder, such holder generally should not be required to recognize foreign
currency gain or loss in respect of the dividend income. United States holders
should consult their own tax advisors regarding the treatment of any foreign
currency gain or loss on any Pesos which are not converted into U.S. dollars on
the day the Pesos are received by such holders.

      Distributions of additional Common Stock to United States holders with
respect to their pre-distribution holdings of Common Stock (old Common Stock)
that are made as part of a pro rata distribution to all stockholders of the
Company generally will not be subject to U.S. federal income tax (except with
respect to cash received in lieu of fractional shares of Common Stock). The
basis of the Common Stock so received will be determined by allocating the
United States holders' adjusted basis in the old Common Stock between the old
Common Stock and the Common Stock so received.

      A holder of Common Stock that is, with respect to the United States, not a
United States holder (a "non-United States holder") will not be subject to U.S.
federal income or withholding tax on dividends paid with respect to the Common
Stock, unless such dividends are effectively connected with the conduct by the
holder of a trade or business in the United States.

Mexican Income Taxes

      Mexican income tax law requires that Mexican corporations must pay income
tax on taxable income for each fiscal year. Mexican corporations must maintain
an account called the Cuenta de Utilidad Fiscal Neta or "previously taxed net
earnings account" ("CUFIN", from the Spanish initials). In its CUFIN the Mexican
Corporation records the balance of the taxed profits from previous years, on
which income tax has already been paid plus dividends received from Mexican
corporations. The CUFIN account balance is subject to restatement for inflation.

      Whenever a Mexican Corporation pays dividends to its stockholders, if the
amount maintained in the CUFIN balance exceeds the dividend payment to be made,
neither the Mexican Corporation nor the stockholders will have to pay Mexican
income tax on such dividend payment. Therefore, for Mexican tax purposes,
dividend payments made by the Company to United States holders will not
generally be subject to imposition of Mexican income taxes. However, if the
Mexican corporation's CUFIN balance is less than the dividend payment, then the
Mexican Corporation must pay income tax of 34% and 35% of 1.515 and 1.5385 times
the amount in 1998 and 1999, respectively, which exceeds such balance.

      If the Company distributes stock dividends to United States holders, or
pays a dividend in cash and such payment is to be used by the United States
holders for a capital subscription or for reinvestment in the Company's stock,
and either such transaction by the United States holders occurs within 30 days
following the date of the dividend payment, there will be no Mexican tax
consequences for such United States holders, so long as the Company does not
reduce its capital stock liquidity. If the Company reduces its capital stock and
the balance of its CUFIN plus its capital contributions restated for inflation
is less than the amount of such stock reduction, the Company will 


                                       11
<PAGE>

be required to pay income tax on such excess. Tax must also be paid on the
excess, if any, of the shareholder's equity over the sum of the CUFIN, the
capital contributions restated for inflation and the taxable amount determined
as previously indicated. In this case the taxable basis cannot be greater than
the total amount of the capital reduction.

Item 6. Selected Financial Data

      Although the Company is a Mexican company located in Mexico, its
functional currency is the U.S. dollar, which is the principal currency in which
it conducts business. The Company prepares consolidated financial statements in
U.S. dollars in conformity with U.S. GAAP and also maintains certain financial
and tax information in conformity with Mexican GAAP. Except as otherwise stated
herein, all monetary amounts in this report have been presented in U.S. dollars.

      The following table sets forth selected consolidated financial data of the
Company as of and for each of the years ended December 31, 1994, 1995, 1996,
1997, and 1998. Each of the Company's fiscal quarters is comprised of 13 weeks
and ends on a Sunday, except for the first quarter, which starts on January 1,
and the fourth quarter which ends on December 31. This table is qualified by
reference to and should be read in conjunction with the Consolidated Financial
Statements, related Notes thereto and other financial data included elsewhere in
this Form 10-K.

      The selected consolidated financial data presented below under the
captions "Income Statement Data" for each of the years in the five-year period
ended December 31, 1998 and "Balance Sheet Data" as of December 31, 1994, 1995,
1996, 1997 and 1998, set forth below, have been derived from consolidated
financial statements of Elamex, S.A. de C.V. and subsidiaries, which financial
statements have been audited by KPMG LLP, independent certified public
accountants. The consolidated financial statements as of December 31, 1998, and
1997, and for each of the years in the three-year period ended December 31,
1998, and the report thereon, are included elsewhere in this Form 10-K.

      These historical results are not necessarily indicative of the results to
be expected in the future.

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                               -----------------------
                                                  1994        1995        1996       1997       1998
                                                  ----        ----        ----       ----       ----
                                                       (In thousands, except per share amounts)
<S>                                             <C>         <C>         <C>        <C>        <C>     
INCOME STATEMENT DATA:
Net sales ...................................   $ 84,816    $ 97,544    $118,919   $131,772   $128,890
Gross profit ................................     10,210      14,972      18,683     17,683     14,634
Operating income ............................      2,748       8,788      10,366      8,956      3,630
Other income (expense) ......................       (460)       (852)        136      1,326      2,531
Income tax provision ........................        743       1,727       2,575      2,898      2,082
Net income ..................................   $  1,545    $  6,209    $  7,927   $  7,383   $  4,313
Basic and diluted net income per share(1) ...   $   0.23    $   1.20    $   1.15   $   1.00   $   0.59
EBITDA (2) ..................................      4,703      11,206      13,315     13,965      9,634
BALANCE SHEET DATA:
Current assets ..............................   $ 23,360    $ 30,586    $ 38,955   $ 45,399   $ 46,398
Property, plant and equipment, net ..........     22,684      24,023      28,611     28,503     34,739
Total assets ................................     46,783      55,110      67,976     74,645     81,669
Short-debt and current maturities of long-
term debt ...................................      2,830       5,257         564        496        464
Long-term debt excluding current maturities..     16,176      15,212         923        654         --
Total stockholders' equity ..................   $ 14,495    $ 23,196    $ 49,864   $ 57,032   $ 59,092
</TABLE>

(1)   1998, 1997 and 1996 net income per share of Common Stock was calculated by
      dividing net income by the weighted 


                                       12
<PAGE>

      average number of shares of common stock outstanding which was
      approximately 7.3 million, 7.4 million and 6.9 million shares,
      respectively. 1995 and previous years' net income per share of Common
      Stock was calculated by dividing net income by the number of common shares
      outstanding as of the Effective Date, 5,000,000, after deducting amounts
      attributable to the rights of senior securities.
(2)   EBITDA as defined under "Liquidity and Capital Resources."

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation

Introduction

General

      The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere herein.
The Company was acquired by Accel, S.A. de C.V. and certain other investors in
May 1990, and is controlled by Accel, S.A. de C.V.; however, the internal
organizational structure changed. Elamex, S.A. de C.V. is the successor pursuant
to the merger, effective October 1, 1995 (the "Effective Date"), of Elamex
Internacional with and into Elamex, S.A. de C.V.

      Although the Company is a Mexican Corporation located in Mexico, its
functional currency is the U.S. dollar, which is the principal currency in which
it conducts business. The Company maintains certain financial information in
accordance with Mexican GAAP, but prepares Consolidated Financial Statements in
U.S. dollars in conformity with U.S. GAAP.

Exchange Rates and Inflation

      In the following cases the Company's results of operations are generally
affected by changes in the exchange rate between Pesos and U.S. dollars. In the
case of an appreciation in value of the U.S. dollar against the Peso, the
Company generally experiences a benefit because its revenues are denominated in
U.S. dollars and certain of its costs and expenses are denominated in Pesos.
This benefit will be reduced by relative inflation in the Peso versus the U.S.
dollar, by inflation within Mexico, and by competitive pressures from the
Company's customers. In the case of a depreciation of the U.S. dollar against
the Peso, the Company generally experiences a detriment mirroring the situation
as to appreciation of the dollar, and this detriment will similarly be reduced
by relative inflation in the U.S. dollar against the Peso and increased pricing
by the Company.

      On October 26, 1996, the Mexican government signed a pact with labor and
business representatives called the Alliance for Economic Growth (the
"Alliance"). The Alliance defines a macroeconomic policy designed to support
Mexico's economic recovery and promote future growth. By its provisions, the
minimum wage rate was to increase by 17% effective December 1996. Also, over the
12 months following the execution of the Alliance, utility charges were to
increase an average of approximately 20%. Under the Alliance the Mexican
government has attempted to boost the economy by providing tax incentives for
new business investments, while utilizing wage and price controls to contain
inflation. As part of the Alliance the Mexican government has committed to
maintaining a free flotation system for the Peso in the international currency
markets. The Alliance also calls for development of social and rural programs.

Certain Accounting Policies

      Direct manufacturing contract costs related to initial manufacturing
layout and setups for new contracts ("Initial Manufacturing Expenses") are
expensed in the current period when such costs are 


                                       13
<PAGE>

not considered significant. When such costs are considered significant, the
portion of such costs expended for capital equipment are capitalized and are
amortized using the straight-line method during the length of the applicable
contract. No manufacturing contract costs have been capitalized for the years
ended December 31, 1998 and 1997. In addition, labor costs required to achieve
normal productivity levels are expensed in the period incurred. Commencing in
1995, the Company also adopted a policy of not engaging in futures contracts
with the purpose of hedging U.S. dollar/Peso revenues or costs, with the
exception of regular treasury operations to cover operating requirements for up
to 30 days.

Statutory Employee Profit Sharing

      All Mexican companies are required to pay their employees, in addition to
their agreed compensation benefits, profit sharing in an aggregate amount equal
to 10% of net income, calculated for employee profit sharing purposes, of the
individual corporation employing such employees. All of Elamex's employees are
employed by its subsidiaries, each of which pays profit sharing in accordance
with its respective net income for profit sharing purposes. Tax losses and
certain other adjustments for USGAAP purposes do not affect employee profit
sharing. Statutory employee profit sharing expense is reflected in the Company's
cost of goods sold and selling, general and administrative expenses, depending
upon the function of the employees to whom profit sharing payments are made. The
Company's net income on a consolidated basis as shown in the Consolidated
Financial Statements is not a meaningful indication of net income of the
Company's subsidiaries for profit sharing purposes or of the amount of employee
profit sharing.

      Statutory employee profit sharing was $80,140, $38,410, and $159,731 for
the years ended December 31, 1998, 1997, and 1996, respectively.

Results of Operations

General

      The following table sets forth, for the periods indicated, income
statement data as a percentage of net sales, derived from audited Consolidated
Financial Statements included elsewhere herein. The financial information and
the discussion below should be read in conjunction with the Consolidated
Financials Statements and Notes thereto.


                                       14
<PAGE>

                                                  PERCENTAGE OF NET SALES
                                                   YEAR ENDED DECEMBER 31,
                                                  ------------------------
                                                  1996      1997       1998
                                                  ----      ----       ----

                                                   %         %          %
Net sales                                        100.0     100.0      100.0
Cost of sales                                     84.3      86.6       88.6
Gross profit                                      15.7      13.4       11.4
Selling, general and administrative                7.0       6.6        6.9
expenses
Research & development                             0.0       0.0        1.6
Operating income                                   8.7       6.8        2.8
Other income                                       0.1       1.0        2.0
Income before taxes                                8.8       7.8        4.8
Income tax provision                               2.2       2.2        1.6
Minority interest                                   --        --       -0.2
Net income                                         6.7       5.6        3.3

1998 Compared to 1997

Net Sales

      Net sales decreased 2.2% to $128.9 million in 1998 from $131.8 million in
1997. The decrease is primarily due to the completion of projects and to
fluctuations in demand from certain other customers, but was partially offset by
sales to new customers.

Gross Profit

      Gross profit decreased by $3.0 million, or 17.2%, to $14.6 million in 1998
compared to $17.7 million for the prior year. Gross profit as a percentage of
net sales ("gross margin") decreased to 11.4% in 1998 from 13.4% in 1997,
basically due to start up expenses associated with the addition of new customers
during the second half of the year. In addition, the Company's sales mix changed
to include a greater percentage of projects with higher levels of material
content.

Selling, General and Administrative Expenses

      Selling, General and Administrative Expenses increased 2.3% to $8.9
million, or 6.9% of net sales, for the year ended December 31, 1998, as compared
to $8.7 million, or 6.6% of net sales, for the year ended December 31, 1997. The
increase is primarily caused by the addition of a new sales force in Mexico as
well as in United States. This increase was slightly offset by a decrease in
administrative expenses, mainly due to reduction in legal fees as a result of
the utilization of internal counsel and the absence of projects requiring
outside counsel.

      Of the Company's aggregate cost of sales and selling, general and
administrative expenses in 1998, approximately 28.0% were incurred in Pesos,
compared to approximately 28.1% in 1997.

Research and Development Expenses

      Research and Development Expenses (R&D) represents in absolute dollars and
as a percentage of net sales, $2.1 million and 1.6%, respectively. They are
directly attributed to expenses incurred by Optimag, Inc. ("Optimag"), a
California corporation, in developing optical stations and electrical test
equipment for companies that produce disk drive heads, magnetic media, and
optical media. During the month of August 1998, Optimag completed the first of
three prototypes of the equipment and has sold two units since that time. Three
beta units are currently in the field, two production units have completed
testing, and one is undergoing testing. The Company has committed to make
additional investment in 


                                       15
<PAGE>

Optimag of up to $1.0 million during 1999, subject to Optimag's achieving
certain performance objectives.

Operating Income

      Operating income decreased by 59.5% to $3.6 million, or 2.8% of net sales,
during the year ended December 31, 1998 from $9.0 million, or 6.8% of net sales,
during the year ended December 31, 1997, as a result of the above factors. The
decrease in operating income is due to the decrease in net sales and gross
profit as explained above and the $2.1 million incurred in research and
development during the current fiscal year.

Other Income

      Interest and other income increased to $2.5 million, or 2.0% of net sales,
for the year ended December 31, 1998, from $1.3 million or 1.0% of net sales,
for the year ended December 31, 1997. This increase is primarily due to the
interest earned on surplus cash and investments. Also, in 1998, the Company
recognized a gain of $774,505, on the sale of its plastics molding and stamped
metal operations to the joint venture with General Electric.

1997 Compared to 1996

Net Sales

      Net Sales increased 11% to $131.8 million in 1997 from $118.9 million in
1996. The increase was attributable to increased dollar volume of assembly and
turnkey sales to existing customers, the purchase of Eurotech (see
"Acquisitions"), and, to a lesser extent, an expansion of business from new
customers in 1997.

Gross Profit

      Gross Profit decreased by $1.0 million, or 5.4%, to $17.7 million in 1997
compared to $18.7 million for the prior year. Gross profit as a percentage of
net sales ("gross margin") decreased to 13.4% in 1997 from 15.7% in 1996 due
primarily to general Mexican inflation pressures and Peso appreciation during
the first six months of 1997.

Selling, General and Administrative Expenses

      Selling, General and Administrative Expenses increased 5.0% to $8.7
million, or 6.6% of net sales, for the year ended December 31, 1997, as compared
to $8.3 million, or 7.0% of net sales, for the year ended December 31, 1996.
This increase resulted in part from an increase in the administrative
manufacturing infrastructure and wage inflation without peso depreciation.

      Of the Company's aggregate cost of sales and selling, general and
administrative expenses in 1997, approximately 28.1% were incurred in Pesos,
compared to approximately 30.3% in 1996.

Operating Income

      Operating income decreased by 13.6% to $9.0 million, or 6.8% of net sales,
during the year ended December 31, 1997 from $10.4 million, or 8.7% of net
sales, during the year ended December 31, 1996. The most significant factor
affecting operating income was inflationary pressure without peso depreciation
as described under "Gross Profit" and "Selling, General and Administrative


                                       16
<PAGE>

Expenses" above.

Other Income

      Interest and other income increased to $1.3 million, or 1.0% of net sales,
for the year ended December 31, 1997, from $0.1 million or 0.1% of net sales,
for the year ended December 31, 1996. This increase resulted principally from
the interest gained due to excess of cash flows, decrease of expense from debt,
and a gain of $0.5 million from the sale of a building.

Income Tax and Assets Tax

      Under Mexican tax law as presently in effect, Mexican companies must pay
the greater of income or asset tax. The corporate income tax rate is 34% for
1998. For income tax purposes, taxpayers may deduct certain expenses and
recognize certain effects of inflation and exchange rate gains or losses, but
these deductions are for different amounts than expenses recognized for
financial reporting under U.S. GAAP. For income tax purposes, tax losses,
updated to recognize the effects of inflation, may be carried forward ten years
succeeding the year of the loss.

      Effective January 1, 1999, a new tax rate was enacted whereby the
corporate tax rate is 32% and 30% on taxable earnings and 3% and 5% on all
dividends for the years ended December 31, 1999 and 2000, respectively. While
the statutory rate is 35%, the Company's effective tax rate in the future can be
expected to vary from 35% because of the effects of the inflation and
appreciation or devaluation, of the Mexican Peso, on the Mexican Peso amounts
for Mexican tax purposes. These items are not reflected in the Company's results
of operations for US GAAP purposes.

      Previously paid assets tax, adjusted for inflation, may be used to offset
income taxes that exceed the asset tax due for the year for ten years following
the payment of the tax. In addition, the Mexican Company that incurred the
losses can utilize tax net operating loss carry forwards. The amounts of the
Company's asset tax and net operating loss carry forwards at December 31, 1998
and 1997 are set forth in Note 7 to the Consolidated Financial Statements.

      The Mexican asset tax is a 1.8% tax on assets, computed by recognizing
certain effects of inflation, and by reducing the asset base of certain
liabilities. The asset tax operates like an alternative minimum tax in the U.S.

      The Company's effective tax rate was 24.5% in 1996, 28.2% in 1997 and
33.8% in 1998.

      The effective tax rate increased from 28.2% at December 31, 1997 to 33.8%
at December 31, 1998 due to Optimag (R&D) expenses which are non deductible for
Mexican tax purposes. The effective tax rate increased from 24.5% at December
31, 1996 to 28.2% at December 31, 1997 due to the fact that the exchange rate
(taxable income for purposes of Mexican tax) increased at a greater rate than
inflation (deductible for purposes of Mexican tax) in 1997 versus 1996. This
increase would have been even greater but during 1996 a valuation allowance on
deferred tax assets was established which was partially reduced during 1997.

      Accel files consolidated Mexican federal income tax returns, which include
Elamex. Consequently, Accel and Elamex have entered into a tax sharing agreement
providing for the allocation of taxes and tax benefits to the Company. Under
such agreement Elamex will pay Accel an amount equal to the Mexican Federal
monthly estimated income tax or assets tax (whichever applies), proportionate to
Accel's direct or indirect percentage of ownership of the capital stock of
Elamex, S.A. de C.V. and its subsidiaries. The amount Elamex must pay under this
agreement will 


                                       17
<PAGE>

not exceed the amount Elamex would be liable to pay in taxes if each entity in
the Elamex group filed separate tax returns.

Liquidity and Capital Resources

      The Company's working capital (defined as inventory plus trade and other
accounts receivable, minus accounts payable) increased for the year. At December
31, 1998, the Company had working capital of $29.4 million compared to $24.6
million at December 31, 1997. This increase was primarily due to a $6,218,141
loan made to a related party. Refer to note 11 to the Consolidated Financial
Statements for further information. Also, the Company experienced slight
increases in inventories and accounts receivable, which partially offsets
corresponding increases in accounts payable.

      For the year ended December 31, 1998, the company had net cash provided by
operating activities of $6.5 million, which consists of net income of $4.3
million plus depreciation and amortization of $4.3 million, deferred income
taxes of $0.1 million, increase in accounts payable of $4.5 million, partially
offset by an increase of accounts receivable, inventories and refundable income
tax and prepaid expenses of $3.8 million, and decrease in accrued and other
liabilities of $1.5 million.

      In 1998 EBITDA was $9.6 or 7.5% of net sales, and capital expenditures
were $10.7 million. EBITDA in 1998 decreased 31.0% over 1997. In 1997 EBITDA was
$13.9 million. EBITDA is defined by the Company as operating income before
interest, income taxes, depreciation and amortization. EBITDA is presented in
this discussion of liquidity and capital resource because it is a widely
accepted financial indicator of the Company's ability to incur and service debt.
However, EBITDA should not be considered in isolation as a substitute for net
income or cash flow data prepared in accordance with accounting principles
generally accepted in the United States or as a measure of the Company's
profitability or liquidity. In addition, this measure of EBITDA might not be
comparable to measures as defined and reported by other companies.

      During 1998 and 1997, the Company had repurchased 515,400 and 18,500
Elamex shares, respectively, under its stock repurchase program at a cost of
$2,303,132 and $215,000, respectively.

The Company had the following lines of credit and outstanding borrowings at
December 31, 1998:

<TABLE>
<CAPTION>
                                                                 Amount      Interest
Lender of Class of Securities              Type               Outstanding      Rate         Maturity Date
-----------------------------              ----               -----------      ----         -------------
<S>                            <C>                                 <C>         <C>      <C>    
Comerica Bank                  $10 million Line of Credit                --    8.25%    May 1, 1999
Bank of America                $10 million Line of Credit                --    8.06%    December 15, 1999
Citibank, S.A.                 $2 million Line of Credit                 --     N/A     Processing Renewal
Norwest Bank El Paso           $5 million Line of Credit                 --    7.75%    December 6, 2001
Banco Bilbao Vizcaya           $5 million Line of Credit                 --     N/A     March 31, 1999
GE Financial                   Capital Lease                        463,800    7.92%    December 15, 1999
                                                            ---------------
       Total                                                       $463,800
                                                            ===============
</TABLE>

      Under its several credit agreements, Elamex has committed to maintain: (a)
a debt service coverage ratio of 1.3, (b) a current ratio no lower than 1.25,
(c) a leverage ratio (defined as the ratio of senior indebtedness to the sum of
capital plus subordinated indebtedness) no greater than 1.5 and (d) equity plus
subordinated indebtedness of no less than $18 million. The Company may not
invest in or advance significant amounts to other companies who are not a party
to one of the debt agreements. During the last three years, the Company has been
in compliance with all material covenants related to its debt obligations and
credit agreements. 

      The Company entered into a capital lease transaction to lease machinery
and equipment with 


                                       18
<PAGE>

an original cost of approximately $1.4 million and the related accumulated
depreciation of $411,000 at December 31, 1998. The future minimum rental
payments under this equipment lease and other capital leases are $490,663. See
Note 6 to the Consolidated Financial Statements for further information
regarding operating lease commitments.

Acquisitions

      On July 1, 1997, the Company completed the acquisition of a Mexican
plastic molding and metal stamping plant based in Cd. Juarez, Mexico, through an
asset based transaction. This acquisition expands the Company's plastic molding
injection capacity and adds metal stamping and powder coat painting
capabilities. The plastic operation generated sales of $3.1 million during the
six months ended December 31, 1997.

      On July 14, 1998, the Company formed a Joint Venture (JV) with General
Electric International Mexico, S.A. de C.V. (GE) to produce plastic molding and
stamped metal components in Cd. Juarez, Mexico. The Company contributed its
plastic molding and stamped metal operations to the JV in exchange for 51%
interest in the JV. GE paid approximately $3,500,000 to the Company in exchange
for a 49% interest. In connection with the JV, GE received a three-year warrant
to purchase up to 6.3% of Elamex's common stock exercisable at $7.81 per share
subject to anti-dilution provisions. GE also receives the right to select a
representative on the Company's Board. The warrant was valued at $50,000. The JV
began with a $10,000,000 commitment of business from GE expected to increase
over the next year. The Company recognized a gain on the sale of its interest of
the plastics molding and stamped metal operations of $774,505, which is included
in other income. A majority of the Board members of the JV are Elamex Board
members. The Company has consolidated the operations of the JV.

      In January 1998, the Company signed a Preferred Stock Purchase Agreement
to purchase 2,525,000 shares of Series A 9% Cumulative Convertible Preferred
Stock ("Preferred Stock") of Optimag. Optimag was formed to develop,
manufacture, and market optical inspection stations and electrical test
equipment to companies that produce disk drive heads, magnetic media, and
optical heads and optical media. Preferred Stock purchases are based on Optimag
meeting certain performance targets. The Company has consolidated the operations
of this investment. As of December 31, 1998 approximately $2.1 million has been
expensed. As of December 31, 1998, the Company has purchased 2,525,000 shares of
Preferred Stock for $1.00 per share, convertible into common stock 1 for 1.

Year 2000 Issue

The Company's state of readiness:

      The Company has formed a Year 2000 task force, consisting of team members
from various departments. The Company's Year 2000 task force is proceeding on
schedule to identify and address those software programs and embedded chips that
for IT and non-IT systems may interpret "00" as the year 1900 instead of the
year 2000. The task force is responsible for all Company locations throughout
Mexico as well as reviewing relationships with entities external to the
organization both in Mexico and the United States. An inventory of all systems
that are expected to be affected by the Year 2000 issue has been completed. The
task force completed most of its testing during the fourth quarter of 1998, has
developed solutions to the problems it has identified, and will continue to test
if and when there is a major change of equipment or operating system. A
contingency plan will then be developed when a reasonable assessment of a worst
case scenario can be determined.


                                       19
<PAGE>

      The task force is concentrating on three areas critical to the viability
of the Company: manufacturing and industrial facilities, information technology
infrastructure, and third-party suppliers and customers (supply chain
management).

Manufacturing and Industrial Facilities

      The Company believes that its industrial facilities are not Year 2000
sensitive. With regards to manufacturing equipment, the Company has identified
the equipment Elamex believes will be affected by the Year 2000 issue. The
Company is currently updating programs with Year 2000 compliant software and
testing such programs for compliance. The testing phase is near completion.

Information Technology Infrastructure

      A majority of the Company's software programs that support day-to-day
operations are commercial products. There is little reliance on internally
developed programs. As a result, most Year 2000 issues have been or will be
addressed by integrating vendor upgrades that will ensure that these software
programs are Year 2000 compliant. Upgrades are expected to be completed by the
first quarter of 1999.

      Three of the most important software systems that Elamex uses are the JD
Edwards Enterprise Resource Planning ("ERP") software, Payroll and Human
Resources, and Customs. In the third Quarter of 1998, the Company completed the
installation of the Y2K compliant ERP software on which a majority of the
Company's operations are performed.

      During the fourth quarter of 1998, the Company successfully tested the ERP
software and Customs software for importing and exporting purposes. The year
2000 version of the Payroll system has also been tested and is ready for upgrade
in late March 1999.

      The Company's contingency plan for unexpected problems with software
applications consists of contracting services in advance from a programming firm
for four (4) weeks that would cover part of January and part of February of
2000. The objective is to have available programming resources to fix
unidentified problems. In fulfillment of the contingency plan, Elamex has
already identified firms that the Company believes will meet its needs and is
negotiating an arrangement with one of them.

      A majority of the Company's systems hardware has been certified as Year
2000 compliant by its vendors. During the fourth quarter of 1998 the Company
tested the complete network infrastructure. The results of the test helped to
identify certain problems with some personal computers used in non-critical
processes. The task force identified potential problems with two PBX systems
late in 1998. Further testing has shown that the equipment will not present a
problem during year 2000.

Supply Chain Management

      Supply chain management includes the process of identifying those
suppliers and customers that are most critical to support the operations of the
Company. In some instances Elamex uses raw materials from vendors who have been
approved by Elamex's customers. The task force has identified critical vendors
and has requested from them in writing their plans and progress in addressing
the Year 2000 issue, in the form of a survey. Approximately 42% of the Company's
critical vendors have satisfactorily responded to the survey. The Company's
contingency plant consists of the Company working with its customers to follow
up with those vendors who have failed 


                                       20
<PAGE>

to respond or who have not responded in a satisfactory manner, and to identify
alternate vendors that will be Year 2000 compliant. In addition, the contingency
plan includes using alternate vendors as the need arises during the second and
third Quarter of 1999.

Cost of Addressing the Year 2000 Issues:

      The Company has invested approximately $2.9 million in the implementation
of a new ERP software. Because the software was purchased to enhance the
performance of key areas of the Company as well as the information provided for
managerial decisions and customer satisfaction, costs associated with the
implementation have been capitalized. The Company has included approximately
$0.4 million in its 1999 budget to address the Year 2000 issue.

Risks Associated with the Company's Year 2000 Issues:

      Failure to properly address the Year 2000 issue can result in an
interruption of, or a failure in, the normal business activities of the Company.
Because of the uncertainty inherent in the Year 2000 issue and the unfinished
efforts of the task force to identify those critical customers and suppliers
that are not or will not be Year 2000 compliant, the Company is unable, at this
time, to determine the impact any Year 2000 failures will have on the Company's
results of operations, liquidity or financial condition. Nonetheless, the
Company believes that it is taking the necessary steps to reduce its risk of
possible interruptions or failures that could adversely impact the viability of
the Company.

Contingency Plan:

      Contingency plans for the three critical areas detailed above will be
developed once the testing phase is completed for each area. At that point, the
Company feels that it can reasonably determine the extent of its worst case
scenario for each area and develop plans accordingly to mitigate the risks
inherent in the Year 2000 issue. Contingency plans are expected to be in place
by the end of the second quarter of 1999.

New Accounting Principles

      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 and is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Given the Company's
current operations and policies, the adoption of SFAS 133 is not expected to
have an impact on the financial statements of the Company.

      In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use and is effective for financial statements with fiscal years
beginning after December 15, 1998. The Company does not expect the adoption of
SOP 98-1 to have a material impact on its financial statements.

      In April 1998, the AICPA issued Statement of Position 98-5, Reporting on
the Costs of Start-Up Activities (SOP 98-5). SOP 98-5 requires that costs
incurred during start-up activities, including organization costs, be expensed
as incurred and is effective for financial statements issued for fiscal years
beginning after December 15, 1998. The Company does not expect the adoption of
SOP 98-5 to have a material impact on its financial statements.


                                       21
<PAGE>

Forward Looking Comments

      This Form 10-K includes forward-looking statements that involve risks and
uncertainties, including, but not limited to, risks associated with the
company's future growth and profitability, the ability of the Company to
continue to increase sales to existing customers and to new customers and the
effects of competitive and general economic conditions.

      There can be no assurance that the Company's principal customers will
continue to purchase products and services from the Company at current levels,
if at all, and the loss of one or more major customers could have a material
adverse effect on the Company's results of operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      Elamex's functional currency is in the U.S. dollar and is exposed to the
risk of currency fluctuations of the Mexican peso against the U.S. dollar.
Elamex's currency fluctuation risk management objective is to limit the impact
of currency fluctuations. The Company has adopted a policy of not engaging in
future contracts with the purpose of hedging U.S. dollar/peso revenues or costs,
with the exception of regular treasury operations to cover operating
requirements for up to thirty days.


                                       22


<PAGE>

Item 8. Financial Statements and Supplementary Data

                          Independent Auditors' Report

The Board of Directors and Stockholders
Elamex, S.A. de C.V.:

We have audited the accompanying consolidated balance sheets of Elamex, S. A. de
C.V. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Elamex, S.A. de C.V.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with accounting principles generally
accepted in the United States of America.

                                    KPMG LLP

El Paso, Texas
March 1, 1999
                                        23
<PAGE>

                     ELAMEX, S. A. DE C.V. AND SUBSIDIARIES

                           Consolidated Balance Sheets
                                (In U.S. Dollars)

                                                           December 31,
                                                   ----------------------------
                         Assets                        1998           1997
                                                       ----           ----
Current assets:
  Cash and cash equivalents                        $  5,697,035      13,597,581
  Receivables (note 5):
    Trade accounts, less allowance for
      doubtful accounts of $414,289 in
      1998 and $450,480 in 1997                      15,578,310      14,343,265
    Other receivables, net                            2,146,325       1,872,747
    Related party note receivable (note 11)           6,218,141              --
                                                   ------------    ------------

      Total receivables                              23,942,776      16,216,012
                                                   ------------    ------------

  Investment security                                        --       2,080,000
  Inventories, net (note 3)                          14,331,006      12,696,705
  Refundable income taxes                             1,590,554         389,258
  Prepaid expenses                                      836,854         419,851
                                                   ------------    ------------

        Total current assets                         46,398,225      45,399,407

Property, plant and equipment, net
  (notes 4 and 5)                                    34,739,087      28,503,121
Other assets, net                                       531,292         742,644
                                                   ------------    ------------

                                                   $ 81,668,604      74,645,172
                                                   ============    ============

Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable                                 $  8,875,526       4,337,223
  Accrued expenses                                    3,016,967       3,854,638
  Current obligations of capital leases (note 6)        463,800         496,190
  Taxes payable                                         614,476       1,306,126
  Deferred income taxes (note 7)                      6,144,184       6,285,338
  Due to related parties (note 11)                        9,053          45,480
                                                   ------------    ------------

        Total current liabilities                    19,124,006      16,324,995

Capital lease obligations, excluding current
  obligations (note 6)                                       --         654,462
Other liabilities                                       347,032         258,988
Deferred income taxes (note 7)                          664,309         375,047
                                                   ------------    ------------

          Total liabilities                          20,135,347      17,613,492
                                                   ------------    ------------

Minority Interest                                     2,441,365              --
                                                   ------------    ------------

Stockholders' equity (note 8):
  Preferred stock, authorized 50,000,000
    shares, none issued or outstanding                       --              --
  Common stock, authorized 22,400,000 shares,
    7,400,000 issued and, 6,866,100 and
    7,381,500 shares outstanding at December
    31, 1998 and 1997, respectively                  35,060,468      35,010,468
  Retained earnings                                  26,549,556      22,236,212
  Treasury stock, 533,900 and 18,500
    shares at cost at December 31, 1998
    and 1997, respectively                           (2,518,132)       (215,000)
                                                   ------------    ------------

        Total stockholders' equity                   59,091,892      57,031,680
                                                   ------------    ------------

Commitments and contingencies (notes 6, 8 and 12)            --              --

                                                   $ 81,668,604      74,645,172
                                                   ============    ============

See accompanying notes to consolidated financial statements.


                                       24
<PAGE>

                     ELAMEX, S. A. DE C.V. AND SUBSIDIARIES

                        Consolidated Statements of Earnings
                                 (In U. S. Dollars)

<TABLE>
<CAPTION>
                                                             Years ended December 31,
                                                 -----------------------------------------------
                                                     1998             1997             1996
                                                     ----             ----             ----
<S>                                              <C>                <C>              <C>        
Net sales                                        $ 128,890,407      131,771,731      118,918,913
Cost of sales                                      114,256,837      114,088,518      100,236,384
                                                 -------------    -------------    -------------

     Gross profit                                   14,633,570       17,683,213       18,682,529
                                                 -------------    -------------    -------------

Operating expenses:
   General and administrative                        7,208,912        7,977,783        7,630,870
   Selling                                           1,721,387          749,739          685,544
   Research and Development                          2,072,983               --               --
                                                 -------------    -------------    -------------

     Total operating expenses                       11,003,282        8,727,522        8,316,414
                                                 -------------    -------------    -------------

     Operating income                                3,630,288        8,955,691       10,366,115
                                                 -------------    -------------    -------------

Other income (expense):
   Interest income                                     973,618          680,673          255,362
   Interest expense                                   (154,108)        (223,207)        (944,003)
   Other, net                                        1,711,524          868,051          825,076
                                                 -------------    -------------    -------------

     Total other income (expense)                    2,531,034        1,325,517          136,435
                                                 -------------    -------------    -------------

     Income before income taxes and
        minority interest                            6,161,322       10,281,208       10,502,550

   Income tax provision (note 7)                     2,082,108        2,898,337        2,575,079
                                                 -------------    -------------    -------------

   Income before minority interest                   4,079,214        7,382,871        7,927,471

   Minority interest                                   234,130               --               --
                                                 -------------    -------------    -------------

     Net income                                  $   4,313,344        7,382,871        7,927,471
                                                 =============    =============    =============

Basic and diluted net income per common share$            0.59             1.00             1.15

Weighted average shares outstanding                  7,310,148        7,395,532        6,880,548
</TABLE>

See accompanying notes to consolidated financial statements.


                                       25
<PAGE>

                     ELAMEX, S. A. DE C.V. AND SUBSIDIARIES

                 Consolidated Statements of Stockholders' Equity
                               (In U. S. Dollars)

<TABLE>
<CAPTION>
                                            Common Stock                                          Total
                       Preferred      Shares                      Retained       Treasury     Stockholders'
                         Stock      Outstanding       Amount      Earnings        Stock          Equity
                      -----------   -----------    -----------   -----------   -----------    -------------
<S>                   <C>             <C>          <C>             <C>         <C>             <C>       
Balances at
   December 31,
   1995                        --     5,000,000    $16,270,459     6,925,870            --     23,196,329

Net income                     --            --             --     7,927,471            --      7,927,471

Proceeds from
   sale of common
   Stock, net                  --     2,400,000     18,740,009            --            --     18,740,009
                      -----------   -----------    -----------   -----------   -----------    -----------

Balances at
   December 31,
   1996                        --     7,400,000     35,010,468    14,853,341            --     49,863,809

Net income                     --            --             --     7,382,871            --      7,382,871

Purchase of
   common stock                --       (18,500)            --            --      (215,000)      (215,000)
                      -----------   -----------    -----------   -----------   -----------    -----------

Balances at
   December 31,
   1997                        --     7,381,500     35,010,468    22,236,212      (215,000)    57,031,680

Net income                                   --             --     4,313,344            --      4,313,344

Issuance of warrant
   (note 2)                    --            --         50,000            --            --         50,000

Purchase of
   common stock                --      (515,400)            --            --    (2,303,132)    (2,303,132)
                      -----------   -----------    -----------   -----------   -----------    -----------

Balances at
   December 31,
   1998                        --     6,866,100    $35,060,468    26,549,556    (2,518,132)    59,091,892
                      ===========   ===========    ===========   ===========   ===========    ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       26
<PAGE>

                     ELAMEX, S. A. DE C.V. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows
                               (In U. S. Dollars)

<TABLE>
<CAPTION>
                                                                                 Years ended December 31,
                                                                       --------------------------------------------
                                                                           1998            1997            1996
                                                                           ----            ----            ----
<S>                                                                    <C>                <C>             <C>      
Cash flows provided by operating activities:
    Net income                                                         $  4,313,344       7,382,871       7,927,471
    Adjustments to reconcile net income to net cash
        provided by operating activities:
            Depreciation and amortization                                 4,291,517       4,141,694       2,948,887
            Allowance for doubtful trade accounts receivable                (36,191)        (74,549)        376,400
            Gain on sale of minority interest in plastics division         (774,505)             --              --
            Minority interest in loss of consolidated subsidiaries         (234,130)             --              --
            Allowance for excess and obsolete inventory                    (639,541)       (180,178)        426,358
            Deferred income taxes, net                                      148,108       2,800,203       2,495,775
            (Gain) loss on disposal of property, plant and equipment        181,183        (330,711)             --
            Change in assets and liabilities:
                Trade accounts receivable                                (1,198,854)       (323,768)        539,370
                Other receivables                                          (273,578)        174,272      (1,215,279)
                Inventories                                                (994,760)      3,683,622      (5,268,325)
                Refundable income taxes and prepaid expenses             (1,618,299)       (316,176)        193,833
                Other assets                                                211,352        (332,184)       (224,071)
                Accounts payable                                          4,538,303      (4,549,390)      1,751,670
                Accrued expenses, related parties, and
                     taxes payable                                       (1,494,877)      1,540,687         901,562
                Other liabilities                                            88,044          46,585          30,439
                                                                       ------------    ------------    ------------

                   Net cash provided by operating activities              6,507,116      13,662,978      10,884,090
                                                                       ------------    ------------    ------------

Cash flows used by investing activities:
    Proceeds from (purchase) of investment security                       2,080,000      (2,080,000)             --
    Purchase of property, plant and equipment                           (10,708,666)     (3,897,517)     (7,221,541)
    Purchase of plastics operating assets                                        --      (3,868,903)             --
    Proceeds from disposal of property, plant and equipment                      --       4,063,035              --
    Proceeds from sale of minority interest in
      plastics division, net of related expenses                          3,379,129              --              --
    Advances to related party                                            (6,218,141)             --              --
                                                                       ------------    ------------    ------------

                   Net cash used by investing activities                (11,467,678)     (5,783,385)     (7,221,541)
                                                                       ------------    ------------    ------------

Cash flows provided (used) by financing activities:
    Net decrease in notes payable                                                --              --      (2,000,000)
    Repayment of long-term debt                                                  --              --     (17,722,233)
    Principal repayments of capital lease obligations                      (686,852)       (620,158)       (565,555)
    Proceeds from financing of equipment through capital
        leases                                                                   --         283,321       1,306,427
    Purchase of treasury stock                                           (2,303,132)       (215,000)             --
    Proceeds from sale of stock, net                                             --              --      18,740,009
    Issuance of warrant                                                      50,000              --              --
                                                                       ------------    ------------    ------------

                   Net cash used by financing activities                 (2,939,984)       (551,837)       (241,352)
                                                                       ------------    ------------    ------------

Net increase (decrease) in cash and cash equivalents                     (7,900,546)      7,327,756       3,421,197

Cash and cash equivalents, beginning of year                             13,597,581       6,269,825       2,848,628
                                                                       ------------    ------------    ------------

Cash and cash equivalents, end of year                                 $  5,697,035      13,597,581       6,269,825
                                                                       ============    ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                       27
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(1)   Organization and Basis of Presentation

      Company Background

      Elamex, S.A. de C.V. and its subsidiaries ("Elamex" or the "Company") are
         Mexican companies, incorporated under the laws of Mexico. Elamex
         provides contract assembly services and turnkey manufacturing services
         to customers primarily located in the United States and Canada. The
         Company manufactures products mainly for companies in the electronics
         industry as well as in the electromechanical, avionics, and medical
         industries. The Company views itself as a single reportable segment.
         All of the Company's manufacturing machinery and equipment are located
         in facilities in Ciudad Juarez, Chihuahua, Nuevo Laredo, Saltillo,
         Monterrey, Tijuana, and Delicias, Mexico. Although the organizational
         structure of Elamex changed during 1995, the business has operated
         under the control of substantially the same investor group since May
         1990.

      During 1998, the Company purchased 2,525,000 shares ($1 per share) of
         Series A 9% Cumulative Convertible Preferred Stock ("Preferred Stock")
         of Optimag, Inc. ("Optimag"), a California corporation. At December 31,
         1998, preferred stock is convertible into 51% of outstanding common
         stock. A majority of the Board members of Optimag are Elamex directors.
         Optimag was formed to develop, manufacture, and market optical
         inspection stations and electrical test equipment to companies that
         produce disk drive heads, magnetic media, and optical heads and optical
         media. The Company consolidated operations of this investment.

      The Company is a subsidiary of Accel, S.A. de C.V. ("Accel") which owns
         approximately 51% of the Company's issued and outstanding common shares
         at December 31, 1998. As presented in these financial statements, the
         Company was formed effective October 1, 1995 (the "Effective Date") by
         means of a merger transaction between the predecessor to Elamex and its
         parent holding company, Elamex Internacional, S.A. de C.V.
         ("Internacional"). The merger was accounted for in a manner similar to
         a pooling of interests due to common control of the merged entities. As
         part of the merger transaction, the stock of Elamex, S.A. de C.V. was
         canceled and replaced by shares issued to Internacional's stockholders
         proportionate to their ownership interest. Internacional's stock was
         subsequently canceled.

      Basis of Presentation

      These financial statements and accompanying notes are prepared in U.S.
         dollars, the functional and reporting currency of Elamex.

      These consolidated financial statements are prepared in accordance with
         accounting principles generally accepted in the United States of
         America (U.S.). All material intercompany balances and transactions
         have been eliminated in consolidation.

      Management Estimates

      The preparation of financial statements in conformity with accounting
         principles generally accepted in the U.S. requires management to make
         certain estimates that affect the reported amounts of assets and
         liabilities and disclosure of contingent assets and liabilities at the
         date of the financial statements. Actual results could differ from
         those estimates.


                                       28
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(2)   Summary of Significant Accounting Policies

      Cash and Cash Equivalents

      The Company considers all highly liquid debt instruments and investments
         purchased with an original maturity of three months or less to be cash
         equivalents. Cash includes deposits in Mexican banks, denominated in
         Mexican pesos, of approximately $94,000 and $357,000, at December 31,
         1998 and 1997, respectively, and deposits denominated in U.S. dollars
         of approximately $880,000 and $595,000 at December 31, 1998 and 1997,
         respectively, in U.S. banks. The Company had approximately $4,723,000
         and $12,645,000 of short-term repurchase agreements, denominated in
         U.S. dollars, deposited in U.S. banks and offshore branches of Mexican
         banks at December 31, 1998 and 1997, respectively.

      Foreign Currency Translation

      The functional currency of the Company is the U.S. dollar, the currency of
         the primary economic environment in which the Company operates. Gains
         and losses on foreign currency transactions and translation of balance
         sheet amounts are reflected in net income. Included in "other, net" on
         the accompanying consolidated statements of earnings are foreign
         exchange gains (losses) of $(168,149), $(55,517), and $437,845 for the
         years ended December 31, 1998, 1997, and 1996, respectively. Assets and
         liabilities of the Company are denominated in U.S. dollars except for
         certain amounts as indicated below. Certain balance sheet amounts
         (primarily inventories, property, plant and equipment, accumulated
         depreciation, prepaid expenses, and common stock) denominated in other
         than U.S. dollars are translated at the rates in effect at the time the
         relevant transaction was recorded and all other assets and liabilities
         are translated at rates effective as of the end of the related periods.
         Revenues and expenses denominated in other than U.S. dollars are
         translated at weighted-average exchange rates for the relevant period
         the transaction was recorded. Assets and liabilities denominated in
         pesos are summarized as follows in U.S. dollars at the translation rate
         published in the Diario Oficial de la Federacion (the "Official Gazette
         of the Federation"), which is the approximate rate at which a
         receivable or payable can be settled as of each period-end:

                                                         1998           1997
                                                     -----------    -----------

            Cash and cash equivalents                $   177,459        356,848
            Other receivables                            878,101        690,906
            Prepaid expenses                           1,851,550        248,609
            Other assets, net                            212,967         80,249
            Accounts payable                            (355,023)      (376,168)
            Accrued expenses and other liabilities    (1,190,945)    (2,547,084)
                                                     -----------    -----------

            Net foreign currency position            $ 1,574,109     (1,546,640)
                                                     ===========    ===========

      In addition, the Company has recorded a net deferred tax liability
         pursuant to Statement of Financial Accounting Standards (SFAS) No. 109,
         Accounting for Income Taxes (SFAS 109) (note 7). The recorded amount of
         $6,808,493 represents the net dollar value of amounts provided for
         temporary differences between the financial statement carrying amounts
         of existing assets and liabilities and their respective Mexican tax
         basis.


                                       29
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(2)   Summary of Significant Accounting Policies, Continued

      Foreign Exchange Instruments

      Effective January 1995, the Company adopted a policy of not engaging in
         futures contracts with the purpose of hedging U.S. dollar/peso revenues
         or costs, with the exception of regular treasury operations to cover
         operating requirements for up to thirty days. The Company had no open
         hedge contracts at December 31, 1998 or 1997.

      Investment Security

      The investment security at December 31, 1997 consisted of a Mexican bond
         denominated in U.S. dollars issued by a Mexican bank maturing March 4,
         2004. During 1998, the Company disposed of its investment security. The
         Company classified this investment as available for sale in accordance
         with SFAS 115, Accounting for Certain Investments in Debt and Equity
         Securities. Accordingly, this security was recorded at fair value.

      Inventories

      Inventories are stated at the lower of cost or market. Cost is determined
         using the first-in, first-out (FIFO) method. Inventory cost includes
         material, labor, and overhead. Overhead content in ending inventory at
         December 31, 1998 and 1997 was approximately $762,000 and $500,000,
         respectively. Inventory reserves, which are charged to cost of sales,
         are provided for excess inventory, obsolete inventory and for
         differences between inventory cost and its net realizable value.

      Research and Development Costs

      Research and development is conducted through Optimag. Research and
         development costs are charged to expense as incurred and were
         $2,072,983 during 1998. No research and development costs were incurred
         during 1997 or 1996.

      Property, Plant and Equipment

      Property, plant and equipment are stated at cost, less accumulated
         depreciation and amortization. Plant and equipment under capital leases
         are stated at the lower of their fair value at the inception of the
         lease or the present value of minimum lease payments. Depreciation and
         amortization are calculated using the straight-line method over the
         shorter of related lease terms or estimated useful lives of the assets.
         The policy of the Company is to charge amounts expended for maintenance
         and repairs to expense and to capitalize expenditures for major
         replacements and improvements.

      Basic and Diluted Net Income per Share

      Basic and diluted net income per share of common stock was calculated by
         dividing net income by the weighted average number of common shares
         outstanding for the year. There are no potentially dilutive common
         shares.


                                       30
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(2)   Summary of Significant Accounting Policies, Continued

      Income Taxes

      The Company accounts for income taxes under the asset and liability
         method, as required by SFAS 109. Under the asset and liability method,
         deferred tax assets and liabilities are recognized for the future tax
         consequences attributable to differences between the financial
         statement carrying amounts of existing assets and liabilities and their
         respective tax basis. Deferred tax assets and liabilities are measured
         using enacted tax rates expected to apply to taxable income in the
         years in which those temporary differences are expected to be recovered
         or settled. Under SFAS 109, the effect on deferred tax assets and
         liabilities of a change in tax rates is recognized in income in the
         period that includes the enactment date.

      Provision for taxes are made based upon the applicable tax laws of Mexico
         or the United States. In conformity with SFAS 109, deferred tax assets
         and liabilities are not provided for differences related to assets and
         liabilities that are remeasured from pesos into U.S. dollars using
         historical exchange rates and that result from indexing for Mexican
         purposes or exchange rate changes.

      Revenue Recognition

      Turnkey contract sales are recognized at the time the order is shipped.
         Sales from contract assembly services are recognized over the contract
         period and billed weekly as services are provided.

      Employees' Statutory Profit Sharing

      A  provision, when material, for deferred employees' statutory profit
         sharing is computed on income subject to statutory profit sharing which
         differs from net income, due to certain differences in the recognition
         of income and expenses for statutory profit sharing and book purposes.

      Postretirement Benefits

      Employees are entitled to certain benefits upon retirement after fifteen
         years or more of service (seniority premiums), in accordance with the
         Mexican Federal Labor Law. The benefits are accrued as a liability and
         recognized as expense during the year in which services are rendered.

      Fiscal Year

      The Company uses thirteen-week quarters ending on a Sunday except that the
         first quarter starts on January 1 and the fourth quarter ends on
         December 31.

      Financial Instruments

      The carrying amounts of financial instruments, including cash and cash
         equivalents, receivables, investment available for sale, accounts
         payable, accrued expenses, notes receivable, taxes payable, and amounts
         due to related parties, approximated fair value as of December 31, 1998
         because of the relatively short maturity of these instruments.


                                       31
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(2)   Summary of Significant Accounting Policies, Continued

      Acquisitions

      Effective July 1, 1997, the Company completed the acquisition of the
         assets of Eurotech, S.A. de C.V. (Eurotech) for approximately
         $3,900,000. Eurotech is a Mexican plastic molding and metal stamping
         plant located in Cd. Juarez, Mexico. The acquisition of Eurotech has
         been accounted for as a purchase. The acquisition price has been
         allocated to tangible assets. The operating results of Eurotech have
         been included in the Company's consolidated financial statements since
         the date of acquisition. The assets acquisition, if it had occurred at
         the beginning of the year, would not have a material effect on the
         consolidated financial statements.

      Joint Venture

      On July 14, 1998, the Company formed a Joint Venture (JV) with General
         Electric International Mexico, S.A. de C.V. (GE) to produce plastic
         molding and stamped metal components in Cd. Juarez, Mexico. The Company
         contributed its plastic molding and stamped metal operations to the JV
         in exchange for 51% interest in the JV. GE paid approximately
         $3,500,000 to the Company in exchange for a 49% interest. In connection
         with the JV, GE received a three-year warrant to purchase up to 6.3% of
         Elamex's common stock exercisable at $7.81 per share subject to
         anti-dilution provisions. GE also received the right to select a
         representative on the Company's Board. The warrant was valued at
         $50,000. The JV began with a $10,000,000 commitment of business from GE
         expected to increase over the next year. The Company recognized a gain
         on the sale of a 49% interest of the plastics molding and stamped metal
         operations of $774,505, which is included in other income. A majority
         of the Board members of the JV are Elamex Board members. The Company
         has consolidated the operations of the JV.

      New Accounting Pronouncements

      In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
         No. 133, Accounting for Derivative Instruments and Hedging Activities
         and is effective for all fiscal quarters of fiscal years beginning
         after June 15, 1999. Given the Company's current operations and
         policies, the adoption of SFAS 133 is not expected to have an impact on
         the financial statements of the Company.

      In March 1998, the American Institute of Certified Public Accountants
         (AICPA) issued Statement of Position 98-1, Accounting for the Costs of
         Computer Software Developed or Obtained for Internal Use (SOP 98-1).
         SOP 98-1 provides guidance on accounting for the costs of computer
         software developed or obtained for internal use and is effective for
         financial statements with fiscal years beginning after December 15,
         1998. The Company does not expect the adoption of SOP 98-1 to have a
         material impact on its financial statements.

      In April 1998, the AICPA issued Statement of Position 98-5, Reporting on
         the Costs of Start-Up Activities (SOP 98-5). SOP 98-5 requires that
         costs incurred during start-up activities, including organization
         costs, be expensed as incurred and is effective for financial
         statements issued for fiscal years beginning after December 15, 1998.
         The Company does not expect the adoption of SOP 98-5 to have a material
         impact on its financial statements.


                                       32
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(2)   Summary of Significant Accounting Policies, Continued

      Reclassifications

      Certain prior year amounts have been reclassified to conform to the 1998
         financial statement presentation.

(3)   Inventories

      Inventories consist of the following:

                                                       1998            1997
                                                   ------------    ------------

            Raw materials                          $ 12,377,208      10,732,767 
            Work-in-process                             602,679       1,213,553
            Finished goods                            2,429,125       2,467,932
                                                   ------------    ------------
                                                   
                                                     15,409,012      14,414,252
                                                   
            Less reserve for excess and            
              obsolete inventory                     (1,078,006)     (1,717,547)
                                                   ------------    ------------
                                                   
                                                   $ 14,331,006      12,696,705
                                                   ============    ============
                                          
      The provision for excess and obsolete inventory is charged against cost of
         sales. The reserve decreased by $(639,541) and $(180,178) for the years
         ended December 31, 1998 and 1997, respectively.

(4)   Property, Plant and Equipment

      A  summary of property, plant and equipment, all of which is located in
         Mexico, is as follows:

<TABLE>
<CAPTION>
                                           Estimated
                                         useful lives
                                            (years)          1998             1997
                                         -------------  ------------    ------------

            <S>                             <C>         <C>                <C>      
            Land                              --        $  3,641,418       3,641,418
            Buildings                         20          11,891,912      11,750,832
            Machinery and equipment         3 - 10        34,875,173      26,381,117
            Leasehold improvements             5           1,679,242       1,307,253
            Vehicles                           5             176,174         158,997
            Construction-in-progress          --             933,862          67,404
                                                        ------------    ------------

                                                          53,197,781      43,307,021
            Less accumulated depreciation                (18,458,694)    (14,803,900)
                                                        ------------    ------------

                                                        $ 34,739,087      28,503,121
                                                        ============    ============
</TABLE>

      Included in property, plant and equipment is approximately $1,398,000 and
         $1,682,000 of machinery and equipment under capital leases and
         approximately $411,000 and $280,000 in related accumulated amortization
         at December 31, 1998 and 1997, respectively.


                                       33
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(5)   Notes Payable and Long-Term Debt

      At December 31, 1998, the Company had a $2,000,000 short-term credit
         facility, with a bank, with an adjusted interest rate of Libor, plus 3
         to 5%. Certain equipment secures the line. Promissory notes under the
         line are renewable, with adjusted interest rates, and are due 90 days
         or 180 days after issuance. Interest on the promissory notes is payable
         at each note maturity. At December 31, 1998 and 1997, no balance was
         outstanding under this facility.

      The Company has long-term credit facilities that are denominated in U.S.
         dollars and consist of the following at December 31, 1998:

      o     Line of credit for up to $5,000,000 or 75% of appraised value of
            certain properties with an adjusted interest rate of prime. The
            available balance at December 31, 1998 was $5,000,000. The line of
            credit matures on December 6, 2001 and is secured by a trust
            guaranty in certain properties.

      o     The Company has a revolving credit facility for $10,000,000 with a
            bank. The revolving credit facility allows the Company to draw on
            term notes payable, with adjusted interest rates of LIBOR plus 3%,
            through December 15, 1999. The credit facility is secured by
            eligible accounts receivable. The available balance at December 31,
            1998 was $3,436,622.

      o     Line of credit with a bank for up to $10,000,000 with an adjusted
            interest rate of prime, plus 1/2%. The line of credit is secured by
            eligible accounts receivable. The available balance at December 31,
            1998 was $9,117,442. The line of credit expires on May 1, 1999.
            Commitment fees of 1/16% of the unfunded balances are due quarterly.

      o     Line of credit with a bank for up to $5,000,000. Interest rate,
            fees, and security are subject to finalization.

      Interest payments, including commitment fees, on the credit facilities,
         notes payable, and long-term debt were $75,000, $78,000, and $857,104
         for the years ended December 31, 1998, 1997, and 1996, respectively.

      The available credit facilities place certain restrictions on the payment
         of dividends and use of proceeds from disposition of collateralized
         fixed assets, limit investments or advances in other companies, limit
         the incurrence of debt, and require the Company to maintain certain
         financial ratios and insurance coverage. The Company is in compliance
         with such covenants or restrictions at December 31, 1998.

(6)   Leases

      The Company utilizes certain machinery and equipment and occupies certain
         buildings under lease arrangements that expire at various dates from
         1999 through 2003, some of which have renewal options for additional
         periods. Rental expense for certain manufacturing and warehouse
         facilities, mainly for operating lease agreements, aggregated
         $3,886,773, $2,786,242, and $2,406,815 for the years ended December 31,
         1998, 1997, and 1996, respectively. Interest payments on capital leases
         were $58,046, $96,473, and $33,160 for the years ended December 31,
         1998, 1997, and 1996, respectively.


                                       34
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(6)   Leases, Continued

      Future minimum lease obligations at December 31, 1998 for assets under
         capital leases and for rental commitments under non-cancelable
         operating leases having an initial or remaining term in excess of one
         year are as follows:

<TABLE>
<CAPTION>
                                                               Capital      Operating 
            Year ended December 31,                            Leases        Leases
                                                              ---------    -----------
            <S>                                               <C>            <C>      
            1999                                              $ 490,663      4,113,878
            2000                                                     --      3,011,285
            2001                                                     --      2,404,160
            2002                                                     --      2,048,032
            2003                                                     --        393,049
                                                              ---------    -----------

              Total minimum obligations                         490,663     11,970,404
                                                                           ===========
                Less amounts representing interest
                  (approximately 3.5% to 7.92%)                  26,863
                                                              ---------

            Present value of minimum lease obligations          463,800

              Less current obligations under capital leases    (463,800)
                                                              ---------

            Capital lease obligations, excluding current
              obligations                                     $      --
                                                              =========
</TABLE>

      The Company leases manufacturing facilities to unrelated parties under
         operating lease agreements that expire in 1999 and 2000. The Company
         pays certain taxes on the properties and provides for general
         maintenance. Included in property, plant and equipment at December 31,
         1998 is the cost of the land and buildings under operating lease
         agreements of $4,966,598 and the related accumulated depreciation of
         $1,064,229.

      Rental income was $661,350, $732,832, and $644,187 for the years ended
         December 31, 1998, 1997, and 1996, respectively. The future minimum
         rental income to be received under these operating leases is $621,621
         in 1999 and $362,231 in 2000.

(7)   Income Taxes

      Mexican tax legislation requires that companies pay a tax calculated as
         the greater of tax resulting from taxable income or tax on the total
         value of certain assets less certain liabilities (assets tax). Taxes
         resulting from net income are calculated using Mexican tax regulations,
         which define deductibility of expenses and recognize certain effects of
         inflation.

      Effective January 1, 1999, a new tax rate was enacted in Mexico whereby
         the corporate tax rate is 32% on taxable earnings and 3% on all
         dividends for the year ended December 31, 1999 and 30% on taxable
         earnings and 5% on all dividends for the year ended December 31, 2000
         and thereafter.


                                       35
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(7)   Income Taxes, Continued

      The tax provision differs from the expected tax rate of 34% in 1998, 1997,
         and 1996 on taxable income as follows:

                                                           1998    1997   1996
                                                           ----    ----   ----

            Statutory tax rate                             34.0%   34.0   34.0
            Foreign currency gains or losses not subject
               to income taxes                              0.7     0.2   (1.4)
            Non-deductible expenses                         2.3     2.5    2.1
            Income not subject to tax                      (5.3)     --     --

            Inflation and currency exchange rate gains
               or losses on monetary items for tax
               purposes only(i)                             2.5    (9.2) (15.1)

            Inflation and currency exchange rate portion
               of depreciation expense for tax purposes
               only(i)                                     (9.3)    3.1    0.5

            Deferred income tax valuation reserve
               adjustment(ii)                               6.7    (2.4)   4.4
            Effect of income tax rate change                2.2      --     --
                                                           ----    ----   ----

                                                           33.8%   28.2   24.5
                                                           ====    ====   ====

      Significant items impacting the Company's effective tax rate include: (i)
         under Mexican tax laws, inflation and currency exchange rate
         adjustments are required for income tax purposes; and (ii) changes in
         valuation reserves for assets tax carryforwards due to management's
         evaluation of realizability.

      Income tax expense attributable to income consists of:

                                              Current     Deferred       Total
                                            ----------    ---------    ---------

            Year ended December 31, 1998    $1,934,000      148,108    2,082,108
            Year ended December 31, 1997        98,134    2,800,203    2,898,337
            Year ended December 31, 1996        79,303    2,495,776    2,575,079

      Significant components of deferred income tax expense attributable to
         income for the year ended December 31, 1998, 1997, and 1996 are as
         follows:

<TABLE>
<CAPTION>
                                                                1998            1997          1996
                                                             -----------    -----------   -----------
            <S>                                              <C>              <C>           <C>      
            Deferred tax expense (exclusive of the effects
              of other components below)                     $   (35,722)     2,800,203     2,495,776

            Adjustment to deferred tax assets and
              liabilities for enacted changes in laws and
              rates                                              183,830             --            --
                                                             -----------    -----------   -----------

                                                             $   148,108      2,800,203     2,495,776
                                                             ===========    ===========   ===========
</TABLE>


                                       36
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(7)   Income Taxes, Continued

      Total income taxes paid were $3,596,000, $224,000, and $352,000 in the
         years ended December 31, 1998, 1997, and 1996, respectively.

      The tax effect of significant temporary differences representing deferred
         tax assets and liabilities is as follows:

<TABLE>
<CAPTION>
                                                                1998           1997
                                                            -----------    -----------
            <S>                                             <C>              <C>      
            Deferred tax assets:
               Assets tax carryforwards                     $ 1,294,409      1,499,681
               Net operating loss carryforwards (Mexico)        467,723      1,477,921
               Net operating loss carryforwards (U.S.)          723,800             --
               Other                                            371,983             --
                                                            -----------    -----------

                    Total gross deferred tax assets           2,857,915      2,977,602
                  Less valuation allowance                     (723,800)      (211,534)
                                                            -----------    -----------

                    Net deferred tax assets                   2,134,115      2,766,068
                                                            -----------    -----------

            Deferred tax liabilities:
               Property, plant and equipment, principally
                  due to differences in useful lives         (2,282,066)    (3,078,486)
               Inventories                                   (6,173,786)    (6,125,239)
               Other                                           (486,756)      (222,728)
                                                            -----------    -----------

                    Total gross deferred tax liability       (8,942,608)    (9,426,453)
                                                            -----------    -----------

                    Net deferred tax liability               (6,808,493)    (6,660,385)
                                                            ===========    ===========
</TABLE>

      A  valuation allowance is provided when it is more likely than not that
         some portion or all of the deferred tax assets will not be realized. A
         reserve for certain deferred assets tax carryforwards of $211,534 was
         provided at December 31, 1997. During the year ended December 31, 1998,
         the Company completely reduced this valuation allowance. At December
         31, 1998, the Company expected that income levels for certain companies
         with asset tax credits would be sufficient to fully utilize such
         credits.

      At December 31, 1998, Optimag, a U.S. corporation, had a net operating
         loss carryforward of approximately $2,068,000 that expires in 2019. The
         Company has recorded a valuation allowance in the amount of $723,800
         for the entire tax effect of this carryforward.

      The assets tax paid, adjusted for inflation, may be used to offset income
         taxes that exceed the assets tax due for the year, for ten years
         following the payment of the tax. These assets tax carryforwards as of
         December 31, 1998 is $1,294,409 and expire from 1999 through 2007.


                                       37
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(7)   Income Taxes, Continued

      At December 31, 1998, certain of the Mexican companies within the
         consolidated group had tax net operating loss carryforwards that can be
         utilized only by the Mexican Company that incurred the losses. These
         net operating loss carryforwards may be adjusted for inflation. These
         tax net operating loss carryforwards, as adjusted for inflation, expire
         as follows, if not previously utilized to offset taxable income:

                              2002       $   172,000
                              2003           133,000
                              2007            12,000
                              2008         1,931,000
                                         -----------

                                         $ 2,248,000
                                         ===========

      The majority stockholder has filed a consolidated tax return with the
         Company's operations since 1995. The tax sharing agreement entered into
         between the majority stockholder, Accel S.A. de C.V., and Elamex
         provides that Elamex will transfer monthly an amount equal to its
         estimated tax payment, less credits. The payments are calculated as
         required by the Mexican tax authority as if Elamex and subsidiaries
         were filing a stand-alone income tax return for such year. The majority
         stockholder further agrees to reimburse Elamex for use of any of
         Elamex's tax benefits at the time Elamex would otherwise realize the
         benefit.

      Dividends paid by Mexican companies which exceed earnings and profits, as
         defined by the Mexican income tax law, are subject to a 34% income tax
         during 1998 and 35% income tax during 1999, payable by the Company, on
         1.515 and 1.5385 times the amount in excess of earnings and profits
         during 1998 and 1999, respectively. Dividends paid which do not exceed
         earnings and profits are not currently subject to Mexican tax to either
         the Company or the stockholder. The Mexican companies paid no dividends
         on common stock in 1998, 1997, or 1996.

(8)   Stockholders' Equity

      Common Stock

      Effective March 19, 1996, the Company completed a public offering of
         2,400,000 shares of Class I, no par value, common stock for proceeds of
         approximately $18,700,000, net of expenses of approximately $2,800,000.
         The shares are traded on the NASDAQ National Market. The common stock
         outstanding after the offering is 7,400,000 shares. Upon completion of
         the offering, Accel remained as the majority stockholder; accordingly,
         Accel has the ability to elect a substantial majority of the Company's
         directors, subject to certain limitations, and will continue to control
         the Company.

      During 1998 and 1997, a subsidiary of the Company purchased 515,400 and
         18,500 shares, respectively, of the Company's common stock in the open
         market for an aggregate amount of $2,303,132 and $215,000,
         respectively. This treasury stock has been presented in the
         accompanying consolidated balance sheet at cost as a reduction of
         stockholders' equity.


                                       38
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(8)   Stockholders' Equity, Continued

      Common Stock, Continued

      Under the bylaws and Mexican law, the capital stock of Elamex, S.A. de
         C.V. must consist of fixed capital and may have, in addition thereto,
         variable capital. Stockholders holding shares representing variable
         capital common stock may require the Company, with a notice of at least
         three months prior to December 31 of the prior year, to redeem those
         shares at a price equal to the lesser of either (i) 95% of the market
         price, based on the average of trading prices in the stock exchange
         where it is listed during the thirty trading days preceding the end of
         the fiscal year in which the redemption is to become effective or (ii)
         the book value of the Company's shares as approved at the meeting of
         stockholders for the latest fiscal year prior to the redemption date.
         At December 31, 1998, the Company has not issued any of its authorized
         variable capital common stock. Although the variable capital common
         stock is redeemable by the terms described above, such shares would be
         classified as a component of stockholders' equity in the consolidated
         balance sheets. Management believes the variable common stock
         represents permanent capital because the timing and pricing mechanisms
         through which a stockholder would exercise the option to redeem are
         such that a stockholder, from an economic standpoint, would not
         exercise this option. At the time a stockholder is required to give
         notice of redemption, the stockholder will not be able to know at what
         price the shares would be redeemed and would not expect the present
         value of the future redemption payment to equal or exceed the amount
         which would be received by the stockholder in an immediate public sale.

      Under Mexican Law, dividends must be declared in pesos. If dividends are
         declared in the future, the Company's intent is to pay the dividends to
         all stockholders in U.S. dollars, as converted from pesos as of the
         date of record, unless otherwise instructed by the stockholder.

      Mexican Law requires that at least 5% of the Company's net income each
         year (after profit sharing and other deductions required by law) be
         allocated to a legal reserve fund, which is not thereafter available
         for distribution, except as a stock dividend, until the amount of such
         fund equals 20% of the Company's historical capital stock. The legal
         reserve fund at December 31, 1998 and 1997 was approximately
         $1,094,000, (8,285,000 pesos) and $725,000 (5,277,000 pesos),
         respectively. The Company anticipates an additional allocation will be
         made at its annual stockholders' meeting in April 1999 of approximately
         $216,000 (2,144,000 pesos). Retained earnings available for dividends
         under Mexican law at December 31, 1998 were 258,013,915 pesos
         ($25,958,440 at December 31, 1998 exchange rates). However, debt
         agreements place certain restrictions on the payment of dividends (note
         5).

      Common Stock Purchase Restrictions and Preemptive Rights

      Any person who seeks to acquire ownership of 15% or more of the total
         outstanding shares of the Company's common stock must receive written
         consent from the Company's Board of Directors. Should shares in excess
         of 15% be acquired without permission, the purchaser will be subject to
         liquidated damages, which will be used by the Company to repurchase
         stock in excess of the 15% ownership limitation. In addition, in the
         event that the Company issues additional shares, existing stockholders
         will have preemptive rights to subscribe for new shares, except when
         shares are issued in connection with a


                                       39
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(8)   Stockholders' Equity, Continued

      Common Stock Purchase Restrictions and Preemptive Rights, Continued

         merger or for the conversion of convertible debentures. The 15,000,000
         shares of variable capital authorized on December 15, 1995 are not
         subject to preemptive rights.

      Preferred Stock

      As part of the December 15, 1995 amendment and restatement of the
         Company's bylaws, the Company's Board of Directors, at its discretion,
         can issue up to an aggregate of 50,000,000 shares of preferred stock in
         one or more series. The Board may attach any preferences, rights,
         qualifications, limitations, and restrictions to the shares of each
         series issued, including dividend rights and rates, conversion rights,
         voting rights, terms of redemption, and liquidation preferences. The
         shares may be issued at no par value or at a par value determined by
         the Board of Directors. No shares of preferred stock have been issued
         as of December 31, 1998.

(9)   Executive Phantom Stock Plan

      During 1995, the Company adopted an Executive Phantom Stock Plan (the
         "Plan") which offers certain key executives of the Company and related
         entities long-term incentives in addition to their current
         compensation. Participants receive benefits expressed in shares of
         common stock, but which are not actual shares of common stock ("Phantom
         Stock Shares"). A participant may exercise the right to receive payment
         for Phantom Stock Shares two years after the determination date (as
         defined in the Plan); however, such shares expire after ten years. Upon
         termination of employment for cause, Phantom Stock Shares and accrued
         dividends and interest are forfeited.

      The Company keeps a record of the amount of Phantom Stock Shares held by
         each participant. Each participant is credited with dollar amounts
         equal to dividends paid on issued and outstanding common stock, and
         such amounts accrue interest at the short-term money market rate
         published by the Chase Manhattan Bank, N.A. The Plan provides that the
         number of Phantom Stock Shares awarded be determined by a committee of
         the Board of Directors charged with administering the Plan and the
         aggregate number of Phantom Stock Shares awarded for any year shall in
         no event exceed 10% of the number of the Company's issued and
         outstanding common shares as of the end of such year. For the years
         ended December 31, 1998 and 1997, the Company expensed approximately
         $-0- and $224,000, respectively, as obligations under the Phantom Stock
         Plan. At December 31, 1998, no Phantom Stock Shares were fully vested.

      Transactions involving the plan are summarized as follows:

                                                               Option Shares
                                                            -------------------
                                                              1998        1997
                                                            -------     -------

            Outstanding January 1                            30,980      16,354 
            Granted                                              --      16,236
            Canceled                                             --      (1,610)
            Exercised                                            --          --
                                                            -------     -------
            Exercisable December 31                          30,980      30,980
                                                            =======     =======


                                       40
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(10)  Major Customers

      The Company has agreements that provide for the sale of its assembly
         services and turnkey manufacturing at established prices. The Company's
         business is dependent on one-to five-year agreements, which are subject
         to termination or renewal.

      Certain customers (all foreign) accounted for significant percentages of
         the Company's total sales during the periods ended as follows:

        Customer      Products and Services             1998      1997     1996
      ------------ ---------------------------------   ------    ------   ------

           A       Printed circuit boards and 
                     final assembly                      21%       19       18

           B       Flexible and rigid circuit 
                     boards/component assembly           --         9       16

           C       Printed circuit boards and cables      6         6       14

           D       PBX/switchboards and fiber optic 
                     cable connections                    7        14       11

           E       Assembly consumer products             6        10        4

(11)  Related Party Transactions

      The Company engages in various transactions in the ordinary course of
         business with certain stockholders and other related parties. A summary
         of significant related party transactions follows:

      o     As part of the Company's reorganization and recapitalization, which
            took place during 1993, the Company issued approximately $2,045,000
            of subordinated debentures to certain stockholders of the Company in
            1993. The principal was subject to acceleration under certain
            circumstances, including a public offering of the Company's common
            stock. As a result, these subordinated debentures were paid-off
            during the first quarter of 1996 with the net proceeds of the public
            offering.

      o     The Company leased a manufacturing facility from a stockholder,
            which resulted in rent expense of approximately $88,000 at December
            31, 1996. The facility was not leased during 1997 or 1998.

      o     During May 1996, the Company exercised an option to purchase from a
            related party two manufacturing facilities, located in Torreon and
            Chihuahua, Mexico. In management's opinion, the purchase price of
            approximately $3,100,000 represents the fair market value as
            determined by an independent appraiser.

      o     The Company leases the Torreon facilities to a related party. Lease
            income generated by the Company was approximately $211,000,
            $211,000, $123,000 for the years ended December 31, 1998, 1997, and
            1996, respectively.


                                       41
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(11)  Related Party Transactions, Continued

      o     The Company leases three manufacturing facilities from companies
            that are owned by a related party. Included in rent expense are
            rental payments under these leases of approximately $917,000,
            $831,000, and $900,000 during December 31, 1998, 1997, and 1996,
            respectively.

      o     Elamex de Torreon, S.A. de C.V., a Mexican company owned by
            affiliates of Elamex, exclusively provides assembly services under
            the direction of Elamex to a customer of Elamex. Under a
            manufacturing contract between Elamex and the Mexican Company, the
            Mexican Company is required to submit its budget annually to the
            Board of Directors of Elamex for approval. For the years ended
            December 31, 1998, 1997, and 1996, the Mexican Company had sales to
            Elamex of $594,000, $1,731,000, and $1,618,000, respectively. Elamex
            had a receivable from the Mexican Company of $131,000 and $146,000
            at December 31, 1998 and 1997, respectively.

      o     A U.S. corporation, owned by certain executives and senior
            management of the Company, exclusively provides professional
            services to Elamex. Under the service agreement, the U.S.
            Corporation is obligated to submit its annual budget to the Board of
            Directors of Elamex for approval. For the years ended December 31,
            1998, 1997, and 1996, this company provided services to Elamex for
            $3,139,000, $2,425,000, and $2,852,000, respectively. Elamex had
            payables to this company of $9,000 and $45,000 at December 31, 1998
            and 1997, respectively. During 1998, the Company formed a wholly
            owned subsidiary, Elamex Administration, Inc., a U.S. corporation.
            The function of the subsidiary is to replace the current related
            party U.S. Corporation beginning January 1, 1999.

      o     During 1998, sales to a related party for approximately $33,000 were
            made.

      o     The Company made payments to the Board of Directors of the Company
            in the amounts of approximately $361,000, $327,000, and $238,000 for
            the years ended December 31, 1998, 1997, and 1996, respectively.

      o     The Company paid consulting fees, consisting of tax advice and
            return preparation, and other administration services, of
            approximately $192,000, $190,000, and $213,000 during December 31,
            1998, 1997, and 1996, respectively, to companies which are related
            parties.

      o     The Company purchases insurance through an insurance broker that is
            a related party. Premiums paid approximated $410,000, $442,000, and
            $306,000 for the years ended December 31, 1998, 1997, and 1996,
            respectively.

      o     During 1998, the Company entered into an agreement with a related
            party whereby a total of $7,800,000 would be loaned to the related
            party by the Company, bearing interest of 8.9%, for construction of
            a manufacturing facility in Chihuahua, Mexico. The note receivable
            is fully secured by the assets of the related party and is due in
            full on May 7, 1999. Upon completion of the facility, the Company
            will lease the facility from the related party. At December 31,
            1998, the balance of the note receivable was $6,192,000 and accrued
            interest income on the note was $26,141.


                                       42
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(12)    Commitments and Contingencies

      The Company is a party to various claims, actions and complaints, the
         ultimate disposition of which, in the opinion of management, will not
         have a material adverse effect on the operations or financial position
         of the Company.

      The Mexican Federal Labor Law requires a severance payment for all
         permanent employees that are terminated by the employer. This payment
         is calculated on the basis of ninety days pay for termination anytime
         during the first year of employment, with an additional twelve days pay
         per year for each year of service thereafter. While most of the
         Company's Mexican assembly labor is hired under temporary labor
         contracts during the first two months of employment, the labor force is
         changed to permanent labor contracts after this period. The Company has
         agreements with many of its contract-assembly customers, which require
         that, the customers pay the severance costs incurred in the event that
         assembly contracts are terminated prior to their scheduled completion.
         In management's opinion, any severance costs incurred upon the
         termination of any manufacturing contracts would not be material.

      Seniority premiums to which employees are entitled upon retirement after
         fifteen years or more of service, in accordance with the Mexican
         Federal Labor Law, are recognized as expense during the year in which
         services are rendered, based on actuarial computations. Included in
         other liabilities is approximately $347,000 and $258,000 as of December
         31, 1998 and 1997, respectively, which fully accrues for these
         estimated seniority obligations. No significant seniority payments have
         been made through December 31, 1998.

      During 1999, the Company agreed to commit additional funding to Optimag
         for up to a total of $1,000,000. Funding will be provided in five
         tranches of $200,000 each, subject to achievement of certain
         performance objectives. The first tranch was paid January 19, 1999 and
         was matched by Optimag management (one time only) for the same
         approximate amount.

      In January 1999, the Company settled with a company (claimant) which had a
         claim against the management of Optimag. The settlement consisted of
         payment of $25,000 to the claimant immediately and $125,000 lump sum
         two years from the date of settlement. Additionally, a 2% royalty was
         agreed to be paid to the claimant on the first $15,000,000 in Optimag
         sales.

      At December 31, 1998, the Company has an obligation to purchase inventory
         held by suppliers valued at approximately $1,445,000.

(13)  Year 2000

      During 1998, the Company began a corporate-wide system conversion to a
         software system that is Year 2000 compliant. The conversion covered all
         significant computer applications of the Company. Implementation of all
         systems was completed by December 31, 1998. The Year 2000 issues are
         the result of computer programs being written using two digits rather
         than four to define the applicable year. The Company presently believes
         that, with the implementation of the upgrades, the Year 2000 problem
         will not pose significant operational problems.


                                       43
<PAGE>

                      ELAMEX, S.A. DE C.V. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                                (In U.S. Dollars)

(14)  Selected Quarterly Financial Data (Unaudited) 

(In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                       1998 Quarters                                  1997 Quarters
                          -------------------------------------           ------------------------------------
                            1st        2nd       3rd       4th              1st       2nd       3rd       4th
                          -------    ------    ------    ------           ------    ------    ------    ------

      <S>                 <C>        <C>       <C>       <C>              <C>       <C>       <C>       <C>   
      Net sales           $28,306    30,668    30,757    39,159           33,815    33,827    32,872    31,258
      Gross profit          3,197     3,933     3,611     3,893            4,434     5,267     4,216     3,766
      Net income              650       958       681     2,024(a)         1,687     2,130     1,731     1,835
                                                                          
      Basic and diluted                                                   
        net income per                                                    
        common share      $  0.09      0.13      0.09      0.28             0.23      0.29      0.23      0.25
</TABLE>

      (a)   In the fourth quarter of 1998, the Company reduced its previously
            recorded income tax provision by approximately $1,533 upon
            finalization of the year-end tax provision, primarily as a result of
            a reduction in the previously estimated effective annual income tax
            rate for the year.


                                       44
<PAGE>

Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

      Not applicable

Item 10. Directors and Executive Officers of the Registrant

      The names, ages, and positions of the Director and executive officers of
the Company as of March 13, 1999 are as follows:

           Name                Age             Position
--------------------------------------------------------------------------------
Eloy S. Vallina                61       Chairman of the Board of Directors
Federico Barrio                62       Vice Chairman of the Board of Directors
Jesus Alvarez-Morodo           52       Vice Chairman of the Board of Directors
Hector M. Raynal               45       President, Chief Executive Officer and 
                                        Director
Carlos D. Martens              50       Vice President-Finance and Chief 
                                        Financial Officer and Secretary
Susan E. Mucha                 40       Vice President-Sales and Marketing
David Crawford                 62       Vice President-Manufacturing Operations
Wayne Rout                     55       Vice President-Materials
Jesus E. Vallina               50       Director
Eloy Vallina Garza             27       Director
Eduardo L. Gallegos            57       Director
Robert J. Whetten              56       Director
Antonio L. Elias               50       Director
Jerry W. Neely                 62       Director
Leon Reinhart                  56       Director
Tomas de Leon                  45       Statutory Auditor

Eloy S. Vallina

      Mr. Vallina has been Chairman of the Board of Accel and its predecessor,
Grupo Chihuahua, S.A. de C.V., since its inception in 1979. He is also chairman
of Kleentex Corp., and an Advisory Director of First National Bank of San Diego.
Mr. Vallina was Chairman of Banco Comercial Mexicano, later Multibanco Comermex,
one of Mexico's largest commercial banks at that time, from 1971 until its
expropriation in 1982. He graduated with a B.A. in Business Administration from
the Instituto Tecnologico y de Estudios Superiores de Monterrey.

Federico Barrio

      Mr. Barrio has been Vice Chairman of the Board of Elamex and its
predecessor companies, or has held the functionally equivalent position, for 25
years and was a founding stockholder of the Elamex business. He is a partner in
Constructora Lintel, a major developer of industrial and commercial buildings in
Ciudad Juarez, and he has been Constructora Lintel's President since 1983. He
has also been an Advisory Director of Norwest Bank El Paso since 1991. He has a
B.S. in Industrial Engineering from the Chihuahua Technological Institute and an
M.B.A. degree from the University of Chihuahua. Mr. Barrio was former Dean of
Juarez Technological Institute and has 29 years of experience in industrial
development and general contracting.


                                       45
<PAGE>

Jesus Alvarez-Morodo

      Mr. Alvarez-Morodo has been Vice Chairman of the Board of Elamex since
1995 and President and CEO of Accel since 1992. He has been a director of Elamex
since 1990. Mr. Alvarez-Morodo has held various positions with Accel, and its
predecessor, Grupo Chihuahua and its subsidiaries since 1982, including Vice
President from 1989 to 1992. He graduated from the Universidad Iberoamericana
with a B.S. in Electromechanical Engineering and from the Sloan School of
Management, Massachusetts Institute of Technology with an M.S. degree in
Management.

Hector M. Raynal

      Mr. Raynal has been President and Chief Executive Officer of Elamex since
January 1995. In 1994 he was the General Director of Pondercel, S.A. de C.V., a
pulp and paper manufacturer. From 1990 to 1994, Mr. Raynal directed the paper
unit at Pondercel, and served as a director, Vice President and Secretary of
Pondercel's U.S. marketing subsidiary. Mr. Raynal has held various positions
with Accel and Grupo Chihuahua since 1983. He received a B.S. and M.S. in
Electrical Engineering and an M.B.A., both from Stanford University.

Carlos D. Martens

      Mr. Martens has been Vice President and Chief Financial Officer of Elamex
since March 1997. He has more than 21 years of multinational business and
financial experience with large conglomerates such as Grupo Empresarial G of
Guadalajara and Grupo Industrial Alfa of Monterrey as well as start-up
situations in California and Chicago. He received a B.S. in Electrical
Engineering from Escuela Superior de Ingenieria Mecanica y Electrica del
Instituto Politecnico Nacional ("ESIME"), a M.S. in Industrial Engineering and
an M.B.A. both from Stanford University.

Susan E. Mucha

      Ms. Mucha has been Vice President Sales and Marketing of Elamex since
1997. From 1995 to 1997 she was associated with Sparton Electronics Inc. as
Director of Business Development and later as Director of Strategic Planning.
Ms. Mucha has nearly 18 years of experience in the contract manufacturing
industry, having held marketing and marketing management positions at several
contractors including Flextronics International, AVEX Electronics, Inc. and SCI
Systems. She received a B.S. degree from the University of Florida and an M.A.S.
degree from the University of Alabama in Huntsville. She is on the Steering
Committee of the Institute for Interconnecting and Packaging Electronic Circuits
(IPC) Electronic Manufacturing Services Industry (EMSI) Council.

David R. Crawford

      Mr. Crawford has been Vice President Manufacturing Operations of Elamex
since August 1995. From 1987 to 1995 he was Director of Operations of the Allen
Bradley Business Unit Electronic Components, a subsidiary of Rockwell
International Corporation. Mr. Crawford has 38 years of experience in electronic
assembly and components manufacturing from major manufacturing companies in the
area. He received a B.S. from Purdue University.

Wayne Rout

      Mr. Rout has been Vice-President of Materials for Elamex since 1988. Mr.
Rout has 31 years of experience in manufacturing and materials. Mr. Rout has a
B.S. degree from Brigham Young University. Mr. Rout holds the APICS, NAPM and
IMMS certifications.


                                       46
<PAGE>

Jesus E. Vallina

      Mr. Vallina has been Director of Public Relations of Accel and its
predecessor, Grupo Chihuahua, for the past 23 years. He is President of
Constructora Inmobiliaria Las Americas, S.A. de C.V., and Director of Kleentex
Corp. He is also an Advisory Director of Norwest Bank El Paso. Mr. Vallina is a
graduate of the University of Texas at El Paso, where he received a degree in
Business Administration.

Eloy Vallina Garza

      Mr. Vallina is currently in charge of the Business Operations
International Banking of First National Bank in San Diego. He is also a director
of Accel, Almacenadora, S.A. and Copamex. Mr. Vallina is a graduate of the
University of Monterrey, where he received a B.A. in Business Administration.

Eduardo L. Gallegos

      Mr. Gallegos has been with Accel and its predecessor, Grupo Chihuahua, for
30 years. He has been President of Esvamex, S.A. de C.V. since 1985. Mr.
Gallegos graduated as a Certified Public Accountant from the Instituto
Tecnologico y de Estudios Superiores de Monterrey, and has studied at the
American Management Association, Stanford Executive Program, Advanced Management
College and Instituto de Administracion Cientifica de las Empresas.

Robert J. Whetten

      Mr. Whetten has been a Director of Elamex since 1994. He served as
President and Chief Executive Officer of Norwest Bank El Paso from 1991 until
February 1996. Mr. Whetten has 20 years of banking experience in the United
States and Latin America. He received a B.A. in Finance and a Master of Public
Administration from Brigham Young University. Mr. Whetten is out of the country
and does not expect to attend meetings until his return. Mr. Whetten has
consented to continue as a director while away and has agreed to resume to full
status upon his return.

Antonio L. Elias

      Mr. Elias is Senior Vice President, Advanced Projects Group, at Orbital
Sciences Corporation ("OSC") since 1989. Mr. Elias joined OSC in 1986 as Chief
Engineer, becoming Vice President of Engineering in 1988 and Corporate Vice
President in 1989. From 1980 to 1986 he was Assistant Professor, Aeronautics and
Astronautics, at Massachusetts Institute of Technology. Mr. Elias obtained a
B.S., M.S., E.A.A. and Ph.D. in Aeronautics and Astronautics from Massachusetts
Institute of Technology.

Jerry W. Neely

            Mr. Neely is Director and Chairman of the Executive Committee of
Smith International, Inc. Mr. Neely retired as President/Chairman CEO in 1988.
He held several positions at Smith International, Inc. from 1966 to 1988. He
serves on the Boards of Norris Cancer Hospital and All Coast Forest Products, is
a Trustee of The University of Southern California, Past Chairman of Petroleum
Equipment Supplies Association and Past Chairman of The Young Presidents
Organization. Mr. Neely received a B.S. in Industrial Management/Business
Administration from University of Southern California.

Leon Reinhart

      Mr. Reinhart is President and CEO of First National Bank of San Diego. He
has more than 30 years of banking experience including various senior capacities
with Citibank, in the United States, Latin America and the Middle East.


                                       47
<PAGE>

Tomas de Leon

      Mr. de Leon has been Elamex's statutory auditor since 1988. He has also
been a partner in KPMG Cardenas Dosal, S.C. since 1988. Mr. de Leon is a member
of the Mexican Institute of Public Accountants and has obtained a public
accounting degree from the Universidad Iberoamericana in Mexico City.

Item 11. Executive Compensation

      During the year ended December 31, 1998, Elamex paid, either directly or
through a related company, MTI Services Corporation (MTI), an aggregate of
$1,107,056 to all of its directors and officers as a group for services in all
capacities and an additional $95,160 in respect of a discretionary compensation
plan. During such year, the Company, through MTI, set aside or accrued an
aggregate of $14,720 to provide pension, retirement or similar benefits for its
directors and officers pursuant to existing plans, consisting solely of a 401(k)
plan for its U.S. based officers and Directors.

      Forty of the Company's executives and senior managers who are citizens or
residents of the United States are employees of a U.S. corporation owned by such
executives, and provide contracted services to Elamex. The purpose of this
arrangement is to provide these employees U.S. dollar-denominated salaries and
U.S.-style employee benefits. Under the contract, the Company pays to the
corporation an amount equal to the salary and benefits provided to the
executives by the corporation.

Item 12. Security Ownership of Certain Beneficial Owners and Management

   Name and Address of       Amount of Shares     Percent of
     Beneficial Owner              Owned             Total

Eloy S. Vallina
Avenida Zarco No. 2401
Chihuahua, Chih. Mexico           4,051,300          54.8%

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

Accel, S. A. de C. V.
Avenida Zarco No. 2401
Chihuahua, Chih. Mexico           4,051,300          54.8%

(1) Mr. Vallina directly owns 130,862,957 shares, or approximately 45%, of the
    outstanding voting common stock of Accel. In addition, Mr. Vallina controls
    companies that hold 46,414,851 shares, or approximately 16%, of the
    outstanding voting common stock of Accel. Accel, in turn, owns approximately
    54.8% of the outstanding common stock of Elamex.

Item 13. Certain Transactions

      Hector Raynal is an executive officer of Elamex de Torreon. Transactions
between Elamex de Torreon and the Company are described in "Notes: Related Party
Transactions."

      Eloy Vallina has an equity interest in Esvamex, S.A. de C.V. ("Esvamex").
Esvamex provided consulting services to Elamex further described in "Notes:
Related Party Transactions."

      Federico Barrio has an equity interest and is an executive officer of
Constructora Lintel, S.A. de C.V. ("Lintel"). The Company made lease payments to
Lintel in the aggregate amount of $917,000 during 1998 as described in "Notes:
Related Party Transactions."


                                       48
<PAGE>

      Eloy Vallina has an equity interest in the parent of Seguridad Planeada,
an insurance broker which provided services to the Company, which services are
further described in "Notes: Related Party Transactions."

      Eloy Vallina has an equity interest in Corporacion Chihuahua, S.A. de
C.V., which received a loan from the Company further described in "Notes:
Related Party Transactions."

      Hector Raynal is an executive officer of MTI Services, Inc., a U.S.
corporation which provided professional services to the Company, further
described in "Notes: Related Party Transactions."

Item 14. Exhibits and Financial Statement Schedules

a) Financial Statements

      (i)   The consolidated balance sheets of Elamex, S.A. de C.V. and its
            subsidiaries as of December 31, 1998 and 1997 and the related
            consolidated statements of earnings, stockholders' equity and cash
            flows for each of the years in the three-year period ended December
            31, 1998 are filed in Item 8 of this report.

      (ii)  Financial statement schedule, valuation and qualifying accounts and
            reserves and report thereon included on pages 50 and 51.

b) The following exhibits are filed as part of this report:

Exhibit
Number                          Description
------                          -----------
3           Estatutos Sociales (By-Laws) of the Registrant (including English
            translation). *
10.1        Modification Agreement between Fonlyser, S.A. and Accel, S.A. de
            C.V., with a translation in English and subsequent modification
            letter, with a translation in English. *
10.2        Credit Agreement with Confia, S.A., with a summary in English, and
            renewal letter, with a translation in English. *
10.2        Revolving Credit Agreement with Comerica Bank. *
10.5        Tax Sharing Agreement between Accel, S.A. de C.V. and Elamex S.A. de
            C.V.*
10.6        Lease of Elamex de Juarez Plant #3, with a translation in English. *
10.7        Lease of Elamex de Juarez Plant #4, with a translation in English. *
10.8        Lease of Elamex de Juarez Plant #5, with a translation in English. *
10.9        Lease of Elamex de Juarez Plant #9. *
10.10       Lease of Elamex de Nuevo Laredo Plant. *
10.12       Executive Phantom Stock Plan. *
21          Subsidiaries of the Registrant. *
99          Financial statement schedule, valuation and qualifying accounts and
            reserves and report thereon included on pages 51 and 52.

      * Filed as an exhibit to the Company's Registration Statement on Form S-1,
        file No. 333-01768

a) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.


                                       49
<PAGE>

                          Independent Auditors' Report

The Board of Directors and Stockholders
Elamex, S.A. de C.V.:

Under date of March 1, 1999, we reported on the consolidated balance sheets of
Elamex, S.A. de C.V. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998,
which are included in Item 8 of the 1998 annual report on Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule in the Form 10-K. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.

In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

                                          KPMG LLP

El Paso, Texas
March 1, 1999


                                       50
<PAGE>

Elamex & Subsidiaries
Valuation and qualifying accounts and reserves

<TABLE>
<CAPTION>
           Column A           Column B           Column C           Column D     Column E
           --------           --------           --------           --------     --------

                               Balance    Charged to   Charged to               Balance at
         For the Year         Beginning    Cost and      Other                    End of
            Ended              of Year     Expenses     Accounts    Deduction      Year
            -----              -------     --------     --------    ---------      ----
<S>                             <C>              <C>       <C>      <C>            <C>
Allowance for doubtful accounts (b):
December 31, 1998A              $  528           240       --       (a)   137        631
December 31, 1997A                 525           311       --       (a)   308        528
December 31, 1996A                 149           527       --       (a)   151        525
December 31, 1995A                 194           160       --       (a)   205        149

Allowance for material obsolescence:
December 31, 1998A              $1,718            --       --       (c)   640      1,078
December 31, 1997A               1,898            --       --       (c)   180      1,718
December 31, 1996A               1,471           427       --          --          1,898
December 31, 1995A                 863           608       --          --          1,471
</TABLE>

----------
(a) Uncollectible accounts written off
(b) Included as a reduction of trade and other receivables
(c) Inventory related to these accounts was disposed of during the year and this
    corresponding reduction was reflected in cost of sales.


                                       51
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                       ELAMEX, S.A. DE C.V.

March 19, 1999              By: /s/Hector M. Raynal
--------------                  ------------------------------------------------
Date                            Hector M. Raynal, President and Chief Executive
                                Officer

March 19, 1999              By: /s/ Carlos D. Martens
--------------                  ------------------------------------------------
Date                            Carlos D. Martens, Vice-President of Finance and
                                Chief Financial Officer and Secretary

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

March 19, 1999              By: /s/ Eloy S. Vallina                             
--------------                  ------------------------------------------------
Date                            Eloy S. Vallina, Chairman of the Board of 
                                Directors

March 19, 1999              By: /s/ Jesus Alvarez-Morodo                        
--------------                  ------------------------------------------------
Date                            Jesus Alvarez-Morodo, Vice Chairman of the 
                                Board of Directors

March 19, 1999              By: /s/Hector M. Raynal                             
--------------                  ------------------------------------------------
Date                            Hector M. Raynal, President, Chief Executive 
                                Officer, and Director (Principal Executive 
                                Officer)

March 19, 1999              By: /s/ Federico Barrio                             
--------------                  ------------------------------------------------
Date                            Federico Barrio, Vice Chairman of the Board of
                                Directors

March 19, 1999              By: /s/ Jesus E. Vallina                            
--------------                  ------------------------------------------------
Date                            Jesus E. Vallina, Director

March 19, 1999              By: /s/ Eloy Vallina Garza                          
--------------                  ------------------------------------------------
Date                            Eloy Vallina Garza, Director

March 19, 1999              By: /s/ Eduardo L. Gallegos                         
--------------                  ------------------------------------------------
Date                            Eduardo L. Gallegos, Director


                                       52
<PAGE>


March 19, 1999              By: /s /Antonio L. Elias                            
--------------                  ------------------------------------------------
Date                            Antonio L. Elias, Director

March 19, 1999              By: /s/ Jerry W. Neely                              
--------------                  ------------------------------------------------
Date                            Jerry W. Neely, Director

March 19, 1999              By: /s/ Leon Reinhart                               
--------------                  ------------------------------------------------
Date                            Leon Reinhart, Director

                            By:                                                 
-------------                   ------------------------------------------------
Date                            Robert J. Whetten, Director