<PAGE>   1
 
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                   FORM 10-K
 
                    ANNUAL REPORT UNDER SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED MARCH 31, 1997          COMMISSION FILE NUMBER 1-10561
 
                             BANNER AEROSPACE, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                               <C>
                     DELAWARE                                     95-2039311
         (STATE OR OTHER JURISDICTION OF             (I.R.S. EMPLOYER IDENTIFICATION NO.)
          INCORPORATION OR ORGANIZATION)
              300 WEST SERVICE ROAD                                  20041
     WASHINGTON DULLES INTERNATIONAL AIRPORT                      (ZIP CODE)
                 WASHINGTON, D.C.
     (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 478-5790
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
<TABLE>
<CAPTION>
                                                            NAME OF EACH EXCHANGE
                TITLE OF CLASS                               ON WHICH REGISTERED
----------------------------------------------------------------------------------------------
<S>                                            <C>
         Common Stock, $1.00 par value                     New York Stock Exchange
</TABLE>
 
        SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
 
     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 [ ]
 
     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]
 
     Aggregate market value of the voting stock held by nonaffiliates of the
registrant based on the closing price at which stock was sold on the New York
Stock Exchange on June 6, 1997: $187,388,880.
 
<TABLE>
<CAPTION>
                                                             SHARES OUTSTANDING
                TITLE OF CLASS                               AS OF JUNE 6, 1997
----------------------------------------------------------------------------------------------
<S>                                            <C>
                 Common Stock                                    23,423,610
</TABLE>
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Registrant intends to file with the Securities and Exchange Commission a
definitive Proxy Statement for the 1997 Annual Meeting of Stockholders to be
held on September 12, 1997 pursuant to Regulation 14A of the Securities Exchange
Act of 1934 within 120 days of the close of its fiscal year ended March 31,
1997, portions of which document are incorporated by reference in Part III
(Items 10, 11, 12 and 13) of this Annual Report on Form 10-K from the date such
document is filed.
 
================================================================================
<PAGE>   2
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
ITEM                                                                                       PAGE
----                                                                                       ----
<C>     <S>                                                                                <C>
                                          P A R T  I
 1.     Business........................................................................     3
 2.     Properties......................................................................     7
 3.     Legal Proceedings...............................................................     8
 4.     Submission of Matters to a Vote of Security Holders.............................     8
 
                                         P A R T  I I
 5.     Market for Registrant's Common Equity and Related Stockholder Matters...........     9
 6.     Selected Consolidated Financial Information.....................................    10
 7.     Management's Discussion and Analysis of Financial Condition and Results of
          Operations....................................................................    10
 8.     Consolidated Financial Statements and Supplementary Data........................    15
 9.     Disagreements with Accountants on Accounting and Financial Disclosure...........    33
 
                                        P A R T  I I I
        Statement of Omission...........................................................    33
 
                                         P A R T  I V
14.     Exhibits, Financial Statements, Schedules and Reports on Form 8-K...............    33
        Signatures......................................................................    37
</TABLE>
<PAGE>   3
 
                                   P A R T  I
 
ITEM 1. BUSINESS
 
GENERAL
 
     Banner Aerospace, Inc. (the "Company") is a leading international supplier
to the aerospace industry as a distributor, providing a wide range of aircraft
parts and related support services. The Company's products are divided into
three product groups: hardware, rotables and engines. Hardware includes
bearings, nuts, bolts, screws, rivets and other types of fasteners. Rotables
include flight data recorders, radar and navigation systems, instruments,
landing gear and hydraulic and electrical components. Engines include jet
engines and engine parts for use on both narrow and wide body aircraft and
smaller engines for corporate and commuter aircraft. The Company provides a
number of services such as immediate shipment of parts in aircraft on ground
("AOG") situations. The Company provides products to original equipment
manufacturers and subcontractors ("OEMs") in the aerospace industry under
just-in-time ("JIT") and inventory management programs. The Company also
provides both long term and short term engine leasing services to several
commercial airlines and air freight carriers. The Company, through its
subsidiaries, sells its products in the United States and abroad to most of the
world's commercial airlines and to air cargo carriers, as well as to many OEMs,
other distributors, fixed-base operations, corporate aircraft operators and
other aerospace and non-aerospace companies.
 
     The Company's long-term strategies are: (i) to become the most cost
efficient supplier of quality parts to the aerospace industry; (ii) to grow both
internally through increased market share at each subsidiary and externally by
acquisitions and/or strategic alliances; and (iii) to continuously focus on its
customers' needs and to provide products and services which best address their
requirements. The Company's immediate goals are: (i) to reduce operating costs
in the hardware group by consolidating operations in California and (ii) to
integrate new computer systems to enhance inventory management and delivery
systems.
 
     According to Boeing's 1997 Current Market Outlook, the total market
potential for new commercial aircraft from 1997 through 2016 will reach 16,160
new deliveries. The delivery rate of new aircraft reached an industry high in
1991 of 844 aircraft and declined precipitously to 485 units in 1995. Boeing's
pro-rated annual forecast between 1997 and 2001 increases to an average of 742
aircraft per year, or a 53.0% increase over 1995 rates. Boeing predicts that the
greatest geographical needs are expected to occur in the Asian market with
predictions of average annual growth of 8.4% in revenue passenger miles between
1997 and 2006. Travel in China and Hong Kong alone is expected to grow by over
9.6% per year. This bodes well for the Company's strategy of delivering services
around the world, including the expansion of two facilities in that region,
Singapore and Australia.
 
     Federal Aviation Administration data forecasts that regional and commuter
markets will also reflect steady increases in annual growth rates.
 
     Equally as important, industry trends show OEM and aftermarket customers
are continuing to rely on outsourcing programs, looking for low-cost, single
source providers. With the Company's broad product lines, distribution
experience, procurement expertise and low cost-structure, it is well-positioned
to take advantage of these trends.
 
DESCRIPTION OF BUSINESS
 
     The Company distributes a wide variety of aircraft parts, which it carries
in inventory. In addition to selling products that it has purchased on the open
market, the Company also acts as a non-exclusive, authorized distributor of many
different product lines. No single distributor arrangement is material to the
Company's financial condition taken as a whole.
 
     The Company believes it is the world's largest independent stocking
distributor of aircraft hardware, including bearings, nuts, bolts, screws,
rivets and other types of fasteners that are used on aircraft. The Company
purchases its inventory of hardware parts principally from manufacturers. An
extensive inventory of products and a quick response time are essential in
providing services to the Company's customers. Another
 
                                        3
<PAGE>   4
 
key factor in selling to its customers is the Company's ability to maintain a
system that provides for traceability of parts back to the manufacturer.
 
     In fiscal 1996, the Company opened its distribution center in Salt Lake
City, Utah ("Distribution Center"), which currently houses a significant portion
of the Company's hardware inventory. The Distribution Center has an automated
storage and retrieval system ("ASRS") with integrated bar-coding capabilities,
optical scanning for a paperless environment, a computer imaging system for more
accurate traceability and an on-line document reference. All of these are
expected to improve the Company's productivity and efficiency, as well as
provide an additional source of cost savings. Although the Distribution Center
was fully operational in fiscal 1997, it is anticipated that the forecasted
savings will not be fully realized until the end of fiscal 1998.
 
     The Company's largest subsidiary, Burbank Aircraft Supply, Inc. ("Burbank
Aircraft"), sells fasteners to most commercial airlines and air cargo carriers
and many OEMs in the world, as well as to aircraft overhaul facilities and to
other distributors. Burbank Aircraft is not dependent on any single customer,
the loss of which would have a material adverse effect on the Company's
operating results or financial position taken as a whole. Burbank Aircraft's
computerized inventory system and its ability to ship products from the
Distribution Center in Salt Lake City, Utah enable Burbank Aircraft to respond
promptly to customer needs and offer immediate shipment in AOG situations
virtually anywhere in the world, 24 hours a day, 365 days a year. In addition,
Burbank Aircraft has a distribution facility in Hamburg, Germany to enhance
service to its European customers.
 
     In 1993, Burbank Aircraft began supplying Rohr, Inc. ("Rohr"), a leading
manufacturer of aircraft engine nacelle systems, on a JIT basis. Currently, the
agreement with Rohr calls for supplying more than 15,000 different line items of
aircraft fasteners and electrical components to eight Rohr plants. The JIT
contract is supported through warehouses in Utah and California, as well as
three forward stocking locations in Arkansas, Texas and Alabama.
 
     In addition, Burbank Aircraft has a non-exclusive support arrangement with
Airbus Industrie ("Airbus") pursuant to which Burbank Aircraft maintains an
inventory of fasteners for aircraft manufactured by Airbus. Burbank Aircraft has
been designated by Airbus as its recommended worldwide supplier of standard
hardware for its aircraft. Management believes that Burbank Aircraft is the
largest supplier of replacement hardware for Airbus aircraft in the world.
However, there are other suppliers and thus competition in the sale of fasteners
for Airbus aircraft exists.
 
     In March 1996, the Company acquired Harco, Inc. ("Harco"), a former
subsidiary of The Fairchild Corporation ("Fairchild"). Harco is an authorized
stocking distributor for numerous self-locking nut manufacturers and has an
automated CD-ROM retrieval system for manufacturer certifications and test
reports to maintain traceability to the original manufacturer of each fastener
production lot. Harco supplies directly or through indirect distribution to many
commercial and military aerospace customers in the United States and Europe.
Inventory has been strategically provisioned near customers to allow immediate
delivery of locknuts and gang-channels required by OEMs. Harco also provides
replacement and spare parts to commercial airlines and overhaul and repair
facilities.
 
     In January 1997, the Company, through a subsidiary, consummated the
acquisition of PB Herndon Company ("PB Herndon") which is a wholesale
distributor of a diverse selection of high quality aerospace fasteners and
related components, effective October 1996. PB Herndon provides validation of
dimensional specifications, certification of testing levels and revision level
information on all parts. PB Herndon sells its products to OEMs and commercial
and military customers in the aerospace industry and to the U.S. Government. PB
Herndon has an on-site U.S. Government Quality Assurance Representative at its
facility which enhances its delivery capabilities to the U.S. Government.
 
     Through its other hardware subsidiaries, the Company distributes bearings
to the aerospace industry and high-precision miniature and instrument ball
bearings to OEMs of medical equipment and to distributors that sell to the
medical, aerospace and computer industries. In a generally fragmented industry,
the Company believes that its relatively large size and financial strength
provide a competitive advantage, allowing its hardware group to purchase
inventory in large quantities at favorable prices.
 
                                        4
<PAGE>   5
 
     Solair, Inc. ("Solair") is the Company's largest subsidiary in the rotable
group. A rotable is a part that must be removed periodically as required by the
manufacturer or the Federal Aviation Administration ("FAA") and is then
typically overhauled and re-used. The Company stocks and sells a broad spectrum
of aircraft rotables and manages power by the hour contracts and overhaul
programs for several foreign airlines. Under the power by the hour contracts,
the Company is required to provide full management support for certain services
to the customers, overseeing maintenance and providing parts. These services
include engines, rotable/consumable parts, airframe, landing gear, or any
combination of these items.
 
     The Company, through its engine group, sells jet engines and engine parts
for use on both narrow and wide body aircraft and smaller engines for corporate
and commuter aircraft. Dallas Aerospace, Inc. ("Dallas Aerospace"), the
Company's largest subsidiary in the engine group, also buys and sells large
commercial aircraft from time to time and provides engine repair management
services and engine leasing to a variety of airline customers.
 
     In October 1994, the Company established a sales office in Singapore to
participate in business opportunities in the Pacific Rim. It is staffed by
representatives of several of its subsidiaries.
 
     Hardware is usually purchased new from manufacturers, but may also be
purchased from other distributors. Hardware is sold only in new condition.
Rotable parts are sometimes purchased as new parts, but are generally purchased
as used parts which are then overhauled for the Company by outside contractors,
including the original manufacturers and FAA-licensed facilities. Rotables are
sold in a variety of conditions such as new, overhauled, serviceable and as is.
Rotables can also be exchanged instead of sold. An exchange occurs when an
overhauled aircraft part in inventory is exchanged for a used part from the
customer and the customer is charged an exchange fee plus the actual cost to
overhaul the used part. Engines and engine components are sold in overhauled
condition, as is or are disassembled for resale as parts.
 
     In January 1995, the Company sold three operating units, AJ Aerospace
Services, Inc., Austin Jet Corporation and Barcel Wire and Cable Corp.
("Discontinued Subsidiaries"), to focus its resources on enhancing its position
as a marketer of aircraft hardware, rotables and engines.
 
FORMATION AND STOCK OWNERSHIP OF THE COMPANY
 
     The term "Company" refers to Banner Aerospace, Inc. and its consolidated
subsidiaries. Prior to the initial public offering in 1990, Fairchild owned,
through a subsidiary, 100.0% of the shares of the Common Stock of the Company.
As a result of the initial public offering, Fairchild's indirect beneficial
ownership of Common Stock was reduced from 100.0% to 47.2%. However, as a result
of the additional shares of the Company's Common Stock issued in connection with
the acquisition of Harco in fiscal 1996, Fairchild became the majority owner of
the Company and currently owns 59.3% of the Company's Common Stock (refer to
Note 2 in the notes to consolidated financial statements).
 
     In May 1997, the Company submitted to the Company's shareholders for
approval the acquisition from RHI Holdings, Inc., which is a wholly-owned
subsidiary of Fairchild ("RHI"), of a business consisting of two companies: (i)
Fairchild Scandinavian Bellyloading Company AB, and (ii) Scandinavian
Bellyloading International, Inc. (the "Bellyloading Companies"). If this
acquisition is completed, the Company would initially issue 230,000 shares of
its Common Stock to RHI, increasing Fairchild's control position in the Company
from 59.3% to approximately 59.7% of the voting power of the Company. This
percentage could increase based upon the purchase price as ultimately adjusted,
but not to exceed 1,500,000 shares of Common Stock (refer to Note 15 in the
notes to consolidated financial statements). Consummation of this acquisition is
subject to the satisfaction of certain conditions. RHI may terminate this
transaction if it sells the Bellyloading Companies to a third party by reason of
an unsolicited offer, provided that RHI pays a reasonable termination fee to the
Company plus the Company's out-of-pocket expenses. As of June 23, 1997, this
transaction had not been consummated.
 
     In June 1997, the Company's shareholders approved the following changes to
the Company's capital structure: (i) the total number of shares of capital stock
which the Company has the authority to issue were increased from 30,000,000 to
60,000,000; (ii) the number of authorized shares of the Company's Common
 
                                        5
<PAGE>   6
 
Stock were increased from 30,000,000 to 50,000,000; and (iii) a new class of
Preferred Stock, par value $.01 per share was created , and the Company was
given the authority to issue 10,000,000 shares of such Preferred Stock
(collectively, the "Charter Amendments"). In May 1997, and in conjunction with
the Charter Amendments, the Company issued rights to its existing shareholders
pursuant to which each shareholder had the right to acquire one share of the
newly established 7.5% convertible Preferred Stock for every 4.5 shares owned.
Fairchild signed a commitment to subscribe for its pro rata share of such newly
established Preferred Stock. On June 18, 1997, the Company received
subscriptions for 3,710,955 shares of Preferred Stock or $34,140,786. By virtue
of this transaction, Fairchild's beneficial ownership of the Company increased
from 59.3% to approximately 62.6%. The proceeds received from the rights
offering will be used to reduce outstanding debt.
 
SALES
 
     The Company's subsidiaries conduct marketing efforts, which may involve the
Company's direct sales force, outside representatives and, for some product
lines, overseas sales offices. Sales in the aviation aftermarket depend on
price, service, quality and reputation. The Company's business does not
experience significant seasonal fluctuations nor does the Company's business
depend on a single customer. No single customer of the Company accounts for more
than 10.0% of the Company's revenue. The sales order backlog amounted to $82.8
million and $63.4 million at March 31, 1997 and 1996, respectively. It is
anticipated that approximately 90.0% of the backlog at March 31, 1997 will be
shipped by March 31, 1998.
 
     The table below shows the percentage of sales by each product group for the
fiscal years ended March 31, 1997, 1996 and 1995.
 
<TABLE>
<CAPTION>
                         PRODUCT GROUPS                              1997       1996       1995
----------------------------------------------------------------     -----      -----      -----
<S>                                                                  <C>        <C>        <C>
Hardware........................................................      51.3%      47.6%      44.6%
Rotables........................................................      31.4       34.1       40.9
Engines.........................................................      17.3       18.3       14.5
                                                                     -----      -----      -----
                                                                     100.0%     100.0%     100.0%
                                                                     =====      =====      =====
</TABLE>
 
     Foreign sales accounted for 29.3%, 32.0% and 33.5% of the Company's total
sales for the fiscal years ended March 31, 1997, 1996 and 1995, respectively.
Export sales by geographic area for the fiscal years ended March 31, 1997, 1996
and 1995 were as follows:
 
<TABLE>
<CAPTION>
                         (IN THOUSANDS)                              1997       1996       1995
----------------------------------------------------------------   --------    -------    -------
<S>                                                                <C>         <C>        <C>
Europe..........................................................   $ 34,922    $29,797    $23,252
Asia (excluding Japan)..........................................     25,790     18,557     14,090
Canada..........................................................     20,516     13,803      7,446
Japan...........................................................     15,672     13,006     15,887
Australia.......................................................      7,044      5,585      4,286
South America...................................................      4,013      3,950      2,463
Other...........................................................      6,008      7,490      7,048
                                                                   --------    -------    -------
                                                                   $113,965    $92,188    $74,472
                                                                   ========    =======    =======
</TABLE>
 
     The increase in the export sales in fiscal 1997 compared to fiscal 1996 was
primarily attributable to the increases in sales to Europe, Asia (excluding
Japan) and Canada. The increased sales to Europe and Canada of approximately
17.2% and 48.6%, respectively, were primarily due to the inclusion of sales
recorded by Harco for the entire current fiscal year compared to one month of
sales included in fiscal 1996. The increased sales to Asia (excluding Japan) of
approximately 39.0% were primarily due to several large contracts obtained by
the rotable group in late fiscal 1996 and fiscal 1997.
 
     The increase in the export sales in fiscal 1996 compared to fiscal 1995 was
attributable to the increases in sales to Europe, Asia (excluding Japan) and
Canada. Sales to Europe increased approximately 28.2%
 
                                        6
<PAGE>   7
 
primarily due to improved conditions of the European economy. Increased sales to
Asia (excluding Japan) of approximately 31.7% were primarily due to increased
sales efforts made in this region, specifically by opening a sales office in
Singapore. Sales to Canada increased approximately 85.4% primarily due to
several new hardware contracts obtained during fiscal 1996.
 
COMPETITION
 
     The hardware product group competes with OEMs such as Boeing, which
supports the fleet of Boeing-produced aircraft; fastener manufacturers, as well
as independent distributors such as Wesco Aircraft Hardware Corp., M&M Aerospace
Hardware, Tri-Star Aerospace, Inc. and many other large and small companies. The
Company believes it generally has a price advantage over manufacturers in the
smaller quantities in which it usually deals, and can generally provide more
expeditious service. In the rotable group, the major competitors are AAR Corp.,
Air Ground Equipment Services ("AGES"), Aviation Sales Company, The Memphis
Group and other large and small companies in a very fragmented industry. The
major competitors for the Company's engine group are OEMs such as General
Electric Company and Pratt and Whitney, as well as the engine/engine parts
divisions of AAR Corp. and AGES and many smaller companies.
 
EMPLOYEES
 
     As of March 31, 1997, the Company had approximately 820 employees. None of
the Company's employees are covered by collective bargaining agreements. The
Company believes that relations with its employees are satisfactory.
 
ENVIRONMENTAL MATTERS
 
     Presently, there are no material expenditures anticipated for environmental
control for fiscal 1998 and thereafter.
 
ITEM 2. PROPERTIES
 
     The Company's corporate office consists of approximately 10,000 square feet
and is located near the Washington Dulles International Airport in Northern
Virginia. The Company currently leases the space from Fairchild under an
operating lease which commenced on April 1, 1996. The lease term is ten years
with the option to terminate the lease after five years and requires annual
lease payments of approximately $170,000. The Company also has an office in
Cleveland, Ohio which has 20 months remaining on the original 84 month lease as
of March 31, 1997. The entire Cleveland office is currently subleased. The
Company leases another facility in Ft. Lauderdale, Florida, which is occupied by
its technology group. The Company owns and leases many other facilities
throughout the United States and has a distribution facility in Hamburg,
Germany. In addition, the Company leases sales offices and warehouses in other
foreign countries, including Australia, Canada, the United Kingdom and
Singapore. All of the Company's properties are maintained on a regular basis and
are adequate for the Company's present requirements. The following table
identifies the principal properties owned or leased by the Company. These are
primarily used for inventory storage and office space. In addition, the Company
leases a number of smaller facilities.
 
                                        7
<PAGE>   8
 
                           DESCRIPTION OF PROPERTIES
 
<TABLE>
<CAPTION>
                                                                         OWNED     APPROX.
                                                                          OR       SQUARE
               SUBSIDIARY                           LOCATION            LEASED     FOOTAGE
----------------------------------------    ------------------------    -------    -------
<S>                                         <C>                         <C>        <C>
Adams Industries, Inc...................    Suffield, CT                Owned       30,000
                                            Cincinnati, OH              Leased       1,000
Aerospace Bearing Support, Inc..........    Moorpark, CA                Leased      12,000
Aircraft Bearing Corporation............    Aliso Viejo, CA             Leased      15,000
BAI, Inc................................    S. San Francisco, CA        Leased       9,000
Banner Aerospace-Singapore, Inc.........    Singapore                   Leased       1,000
Banner Distribution, Inc................    West Valley City, UT        Owned       81,000
Burbank Aircraft Supply, Inc............    El Segundo, CA              Leased      30,000
                                            Hamburg, Germany            Leased      26,000
                                            Chula Vista, CA             Leased       8,000
                                            Foley, AL                   Leased       7,500
                                            Little Rock, AR             Leased       5,000
                                            Arlington, TX               Leased       2,000
                                            Edina, MN                   Leased       2,000
                                            Wichita, KS                 Leased       1,500
DAC International, Inc..................    Austin, TX                  Leased       7,000
                                            Cortaillod, Switzerland     Leased       1,500
Dallas Aerospace, Inc...................    Carrollton, TX              Leased      80,000
                                            Miami Spring, FL            Leased       1,500
Georgetown Jet Center, Inc..............    Georgetown, TX              Leased      19,000
Harco, Inc..............................    El Segundo, CA              Leased      17,000
                                            St. Louis, MO               Leased      11,000
                                            Ontario, Canada             Leased       5,000
                                            Leicester, England          Leased       5,000
Matrix Aviation, Inc....................    Wichita, KS                 Owned        6,500
NASAM Incorporated......................    S. San Francisco, CA        Leased       5,000
PacAero.................................    Burbank, CA                 Leased      28,000
                                            Melbourne, Australia        Leased       3,500
                                            Melbourne, Australia        Owned        3,500
PB Herndon Company......................    Earth City, MO              Leased      50,000
Professional Aviation Associates,
  Inc...................................    Atlanta, GA                 Leased      17,000
                                            Titusville, FL              Leased      15,000
Solair, Inc.............................    Ft. Lauderdale, FL          Leased      57,000
                                            Carrollton, TX              Leased      47,000
                                            Luton, England              Leased       1,000
</TABLE>
 
ITEM 3. LEGAL PROCEEDINGS
 
     The Company is involved in various claims and lawsuits incidental to its
operations. In the opinion of management, the ultimate resolution of these
claims and lawsuits will not have a material adverse effect on the operating
results or financial position of the Company.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
 
                                        8
<PAGE>   9
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
PRICE RANGE OF COMMON STOCK
 
     The Company's Common Stock trades on the New York Stock Exchange ("NYSE")
under the symbol BAR. The following tables set forth the quarterly high and low
prices as reported by the NYSE composite transactions for fiscal 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                                            FISCAL 1997
                                                                            -----------
                                 QUARTERS ENDED                             HIGH    LOW
        -----------------------------------------------------------------   ----    ---
        <S>                                                                 <C>     <C>
        June 30, 1996....................................................     9     5 3/8
        September 30, 1996...............................................   8 3/8   7 3/8
        December 31, 1996................................................   8 5/8   7 3/4
        March 31, 1997...................................................   9 3/4   7 1/4
</TABLE>
 
<TABLE>
<CAPTION>
                                                                            FISCAL 1996
                                                                            -----------
                                 QUARTERS ENDED                             HIGH    LOW
        -----------------------------------------------------------------   ----    ---
        <S>                                                                 <C>     <C>
        June 30, 1995....................................................   5 1/8   3 1/2
        September 30, 1995...............................................   6 1/4   4 1/8
        December 31, 1995................................................   6 3/8   4 3/4
        March 31, 1996...................................................   6 3/4   5 1/2
</TABLE>
 
DIVIDENDS
 
     It is the Company's current policy to retain earnings to support the growth
of its present operations and to reduce its outstanding debt. Any future
determination as to the payment of dividends will be at the discretion of the
Company's Board of Directors and will depend on the Company's financial
condition, results of operations and capital requirements, restrictive covenants
in the credit agreement that limit the payment of dividends in any fiscal year
(refer to Note 5 in the notes to consolidated financial statements) and such
other factors as the Board of Directors deems relevant. No dividends were
declared in fiscal years 1997 or 1996.
 
HOLDERS OF RECORD
 
     The Company had approximately 76 holders of record and 1,200 beneficial
holders at May 31, 1997.
 
                                        9
<PAGE>   10
 
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL INFORMATION
 
     The following table presents selected historical financial data and is
qualified in its entirety by the more detailed consolidated financial statements
contained elsewhere in this Form 10-K. The selected financial data for the years
ended March 31, 1997, 1996, 1995, 1994 and 1993 are extracted from the Company's
audited consolidated financial statements.
 
<TABLE>
<CAPTION>
                                                       FOR THE FISCAL YEARS ENDED MARCH 31,
                                             --------------------------------------------------------
   (IN THOUSANDS EXCEPT PER SHARE DATA)        1997        1996        1995        1994        1993
------------------------------------------   --------    --------    --------    --------    --------
<S>                                          <C>         <C>         <C>         <C>         <C>
INCOME STATEMENT DATA:
Net sales.................................   $389,111    $287,880    $222,384    $212,391    $224,777
                                             --------    --------    --------    --------    --------
Cost of goods sold........................    279,041     209,609     153,261     144,245     159,728
Selling, general and administrative.......     84,557      64,704      52,389      50,815      59,791
Restructuring charges.....................         --          --      11,650       6,000          --
                                             --------    --------    --------    --------    --------
Operating income..........................     25,513      13,567       5,084      11,331       5,258
Unusual item..............................         --          --       5,750          --          --
Interest expense, net.....................    (13,090)    (10,972)     (9,809)     (9,089)     (7,510)
                                             --------    --------    --------    --------    --------
Income (Loss) from continuing operations
  before taxes on income..................     12,423       2,595       1,025       2,242      (2,252)
Provision for taxes.......................      4,970       1,040         550         940          40
                                             --------    --------    --------    --------    --------
Income (Loss) from continuing
  operations..............................      7,453       1,555         475       1,302      (2,292)
                                             --------    --------    --------    --------    --------
Discontinued operations, net of tax (1):
     Loss from operations.................         --          --          --      (1,905)       (848)
     Loss on disposal.....................         --          --          --     (11,093)         --
                                             --------    --------    --------    --------    --------
                                                   --          --          --     (12,998)       (848)
                                             --------    --------    --------    --------    --------
Net income (loss).........................   $  7,453    $  1,555    $    475    $(11,696)   $ (3,140)
                                             ========    ========    ========    ========    ========
Earnings (Loss) per common share:
     Continuing operations................   $   0.32    $   0.09    $   0.03    $   0.07    $  (0.13)
     Discontinued operations..............         --          --          --       (0.72)      (0.04)
                                             --------    --------    --------    --------    --------
Net income (loss) per share...............   $   0.32    $   0.09    $   0.03    $  (0.65)   $  (0.17)
                                             ========    ========    ========    ========    ========
Weighted average number of common
  shares..................................     23,408      18,283      18,002      18,002      18,000
                                             ========    ========    ========    ========    ========
BALANCE SHEET DATA:
Working capital...........................   $270,658    $209,022    $184,087    $214,806    $250,742
Total assets..............................    393,901     318,209     241,315     272,357     305,809
Long-term debt, less current maturities...    165,148     111,900     102,800     134,017     157,927
Stockholders' equity......................    150,195     142,603     107,504     107,029     118,714
</TABLE>
 
---------------
(1) Discontinued operations include the results of Discontinued Subsidiaries.
 
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
       OF OPERATIONS
 
RESULTS OF OPERATIONS
 
     In January 1997, the Company, through a subsidiary, consummated the
acquisition of 100.0% of the outstanding stock of PB Herndon from the
shareholders of PB Herndon, effective October 1996. PB Herndon, located near St.
Louis, Missouri, is a wholesale distributor of a diverse selection of high
quality aerospace fasteners and related components (refer to Note 2 in the notes
to the consolidated financial statements).
 
     In March 1996, the stockholders of the Company approved the acquisition of
Harco from Fairchild. Harco is an authorized stocking distributor of precision
fasteners to the aerospace industry and is located in El Segundo, California.
Harco's operating results were included in the consolidated results of the
Company as of
 
                                       10
<PAGE>   11
 
March 1, 1996. Harco is the second largest subsidiary in the hardware group
(refer to Note 2 in the notes to consolidated financial statements).
 
     In January 1995, the Company sold the operations of the Discontinued
Subsidiaries to focus its resources on enhancing the Company's position as a
marketer of aircraft rotables and hardware.
 
     The fiscal 1995 results included non-cash restructuring charges of $11.7
million which resulted from the devaluation of certain Stage 2 inventories in
the rotable group and the scrapping of certain inventories in the hardware group
that would be uneconomical to move to the Company's new Distribution Center
(refer to Note 4 in the notes to consolidated financial statements).
 
     In November 1993, one of the Company's warehouses located in Carrollton,
Texas was damaged by a wind and rain storm. In January 1995, the Company
received from its insurance companies an aggregate settlement which included
$4.2 million relating to the business interruption income recorded by the
Company during fiscal 1995 and 1994. In fiscal 1995 the Company also recorded a
non-recurring unusual item of $5.8 million representing insurance proceeds in
excess of cost of damaged property.
 
                       ANALYSIS OF RESULTS OF OPERATIONS
               FOR THE FISCAL YEARS ENDED MARCH 31, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                                1997                       1996
                                                       ----------------------    ------------------------
                   (IN THOUSANDS)                       AMOUNT     PERCENTAGE      AMOUNT      PERCENTAGE
----------------------------------------------------   --------    ----------    ----------    ----------
<S>                                                    <C>         <C>           <C>           <C>
Net sales...........................................   $389,111       100.0%      $ 287,880       100.0%
Cost of goods sold..................................    279,041        71.7         209,609        72.8
                                                       --------       -----        --------       -----
Gross profit........................................    110,070        28.3          78,271        27.2
Selling, general and administrative.................     84,557        21.7          64,704        22.5
                                                       --------       -----        --------       -----
Operating income....................................   $ 25,513         6.6%      $  13,567         4.7%
                                                       ========       =====        ========       =====
</TABLE>
 
     Net sales increased $101.2 million or 35.2% for the fiscal year ended March
31, 1997 compared to fiscal 1996. The increase in sales was attributable to an
increase in hardware sales of approximately $62.1 million or 45.2%. This
increase in hardware sales was primarily due to (i) the incremental sales
recorded as a result of the acquisition of PB Herndon, and (ii) the inclusion of
twelve months of sales recorded by Harco in fiscal 1997 compared to only one
month of sales in fiscal 1996. Excluding the sales recorded by Harco and PB
Herndon, hardware sales would have increased $12.1 million or 9.0% in fiscal
1997 compared to fiscal 1996, which was attributable to an increase in sales to
OEM customers. Sales in the rotables and engine groups also contributed to the
increase of net sales by $24.0 million or 24.4% and $15.1 million or 29.0%,
respectively. The increase in the rotables sales was primarily due to higher
sales to commercial airlines and fixed based operations in fiscal 1997 compared
to fiscal 1996 and a change in product mix to higher margined power by the hour
contracts in fiscal 1997. The increased engine sales were mainly due to a $9.4
million sale/leaseback transaction of 11 engines made with two financial
institutions in fiscal 1997.
 
     Gross profit as a percentage of sales increased to 28.3% for the fiscal
year ended March 31, 1997 from 27.2% for the fiscal year ended March 31, 1996.
Excluding the gross profit from Harco and PB Herndon, gross profit for the
fiscal year ended March 31, 1997 would have increased slightly to 27.3% compared
to 27.1% in the prior fiscal year. The increase in the gross profit percentage
was primarily due to higher margins realized on sales of hardware and rotables
in fiscal 1997 compared to fiscal 1996. The prior fiscal year's gross profit
percentage was negatively affected by the continued increase in the supply of
Stage 2 rotables in the marketplace, which in turn had a negative impact on
pricing. The supply and demand of Stage 2 rotables has somewhat stabilized in
fiscal 1997, thus, overall pricing for Stage 2 inventory has improved slightly.
Excluding Harco and PB Herndon, the inventory turnover ratio increased for the
fiscal year ended March 31, 1997 to 1.25 times per year as compared to 1.19
times per year for the fiscal year ended March 31, 1996. The increase in
inventory turnover ratio was primarily due to a significant increase in sales.
 
                                       11
<PAGE>   12
 
     Selling, general and administrative ("SG&A") expense for the fiscal year
ended March 31, 1997 increased $19.9 million or 30.7% compared to the fiscal
1996. Excluding the SG&A expenses from Harco and PB Herndon, SG&A expenses for
the fiscal year ended March 31, 1997 would have increased by $11.4 million or
17.7% compared to fiscal 1996. The increase in SG&A expenses was primarily due
to an overall increase in employment costs and commission expense as a result of
increased sales and incremental costs associated with the relocation to the
Distribution Center.
 
                       ANALYSIS OF RESULTS OF OPERATIONS
               FOR THE FISCAL YEARS ENDED MARCH 31, 1996 AND 1995
 
<TABLE>
<CAPTION>
                                                                1996                       1995
                                                       ----------------------    ------------------------
                   (IN THOUSANDS)                       AMOUNT     PERCENTAGE      AMOUNT      PERCENTAGE
----------------------------------------------------   --------    ----------    ----------    ----------
<S>                                                    <C>         <C>           <C>           <C>
Net sales...........................................   $287,880       100.0%      $ 222,384       100.0%
Cost of goods sold..................................    209,609        72.8         153,261        68.9
                                                       --------       -----        --------       -----
Gross profit........................................     78,271        27.2          69,123        31.1
Selling, general and administrative.................     64,704        22.5          52,389        23.6
Restructuring charge................................         --       --             11,650         5.2
                                                       --------       -----        --------       -----
Operating income....................................     13,567         4.7           5,084         2.3
Unusual item........................................         --       --             (5,750)       (2.6)
                                                       --------       -----        --------       -----
Income from operations before interest and taxes on
  income............................................   $ 13,567         4.7%      $  10,834         4.9%
                                                       ========       =====        ========       =====
</TABLE>
 
     Net sales increased $65.5 million or 29.5% for the fiscal year ended March
31, 1996 compared to the fiscal year ended March 31, 1995. The increase in sales
was attributable to increases in hardware sales of $38.0 million or 38.3% and
engines and engine parts sales of $20.6 million or 64.2% in fiscal 1996,
compared to fiscal 1995. Excluding the sales from Harco, the hardware sales
would have increased approximately $35.2 million or 35.5% which was primarily
due to an increase in sales to OEM customers. The increase in engines and engine
parts sales was primarily due to increases in sales to commercial airlines and
other distributors. In addition, sales of engine parts were unfavorably affected
in fiscal 1995 as the engine parts were under a voluntary quarantine throughout
the majority of fiscal 1995. Overall, the improvement in sales in fiscal 1996
compared to fiscal 1995 is attributable to the general turnaround in the
aerospace industry, the return to profitability of the world's airlines as a
group and the increased delivery rate of aircraft by the OEMs.
 
     Gross profit as a percentage of sales decreased to 27.2% for the fiscal
year ended March 31, 1996 from 31.1% for the fiscal year ended March 31, 1995.
The decrease in the gross profit percentage in fiscal 1996 was attributable to
lower margins realized on sales of turbine engines and engine parts compared to
fiscal 1995. The decrease was also affected by the continued increase in the
supply of Stage 2 rotables in the marketplace, which in turn had a negative
impact on pricing. In fiscal 1995, the Company recorded business interruption
income of $1.7 million as a reduction in cost of goods sold with no
corresponding sales activity, which also contributed to the decrease in the
gross profit percentage in fiscal 1996 compared to fiscal 1995. Excluding the
results of Harco, the inventory turnover ratio increased for the fiscal year
ended March 31, 1996 to 1.19 times per year as compared to 0.88 times per year
for the fiscal year ended March 31, 1995. The increase in inventory turnover
ratio was primarily due to a significant increase in sales and an increase in
cost of goods sold as a percentage of sales in fiscal 1996 compared to fiscal
1995.
 
     Selling, general and administrative ("SG&A") expense for the fiscal year
ended March 31, 1996 increased $12.3 million or 23.5% compared to the fiscal
year ended March 31, 1995. Excluding the SG&A expenses from Harco, SG&A expenses
for the fiscal year ended March 31, 1996 would have increased by $11.7 million
or 22.4% compared to fiscal 1995. The increase in SG&A expenses was primarily
due to an overall increase in the employment costs due to increased sales and
incremental costs associated with the relocation to the Distribution Center.
 
                                       12
<PAGE>   13
 
INTEREST EXPENSE
 
     Interest expense for fiscal 1997, 1996 and 1995 amounted to $13.1 million,
$11.0 million and $9.8 million, respectively. The increase in interest expense
in fiscal 1997 compared to fiscal 1996 was primarily due to the increase in the
average debt balance outstanding, offset by a slight decrease in the effective
interest rate. The increase in interest expense in fiscal 1996 compared to
fiscal 1995 was primarily due to the increase in the effective interest rate
offset by a lower average outstanding debt balance. The effective interest rate
for fiscal 1997, 1996 and 1995 was 9.1%, 9.3% and 8.4%, respectively. The
average debt balance outstanding for fiscal 1997, 1996 and 1995 amounted to
$141.2 million, $108.1 million and $126.8 million, respectively. The higher
interest expense in fiscal 1996 compared to fiscal 1995 was also attributable to
the write-off of the deferred loan costs relating to the prior existing credit
agreement in the amount of $0.6 million.
 
INCOME TAXES
 
     The tax provisions on income from operations for the fiscal years ended
March 31, 1997, 1996 and 1995 were $5.0 million, $1.0 million and $0.6 million,
respectively. The effective tax rates for fiscal years 1997, 1996 and 1995 were
40.0%, 40.1% and 53.7%, respectively. The effective tax rate for fiscal 1995 was
substantially higher than the statutory rates as a result of the nominal pre-tax
earnings.
 
NET INCOME
 
     The Company recorded net income for the fiscal years ended March 31, 1997,
1996 and 1995 of $7.5 million or $0.32 per common share, $1.6 million or $0.09
per common share and $0.5 million or $0.03 per common share, respectively.
 
     Inflation has had minimal effect on the Company's current operations and
the Company believes that this trend will continue in the immediate future.
 
LIQUIDITY
 
     Total capitalization as of March 31, 1997 and 1996 amounted to $315.6
million and $254.5 million, respectively. The changes in the components of
capitalization included an increase in debt of $53.5 million and an increase in
equity of $7.6 million. The increase in debt was primarily the result of
increased borrowings under its credit agreement and new borrowings under a
subordinated loan agreement with Fairchild (refer to Note 5 and Note 8 in the
notes to consolidated financial statements). The increase in equity was
primarily due to the net income for the fiscal year ended March 31, 1997.
 
     Net cash used by operating activities for the fiscal year ended March 31,
1997 amounted to $32.7 million and net cash provided by operating activities for
the fiscal year ended March 31, 1996 amounted to $2.7 million. The primary use
of cash for operating activities in fiscal 1997 was an increase in inventory of
$37.5 million which was mainly to support the Company's sales growth. The
primary source of cash from operating activities in fiscal 1996 was an increase
in payables and accrued liabilities of $33.3 million which was offset by an
increase in receivables and inventories. These increases were primarily the
result of the increased sales level.
 
     Net cash used for investing activities for the fiscal year ended March 31,
1997 amounted to $20.4 million which was primarily used for business
acquisitions, net of cash acquired (refer to Note 2 in the notes to consolidated
financial statements). Net cash used for investing activities for the fiscal
year ended March 31, 1996 amounted to $8.5 million which was used for capital
expenditures primarily related to the Distribution Center.
 
     Net cash provided by financing activities for the fiscal year ended March
31, 1997 amounted to $53.1 million which was due to increased bank borrowings
under the Company's credit agreement and borrowings under a subordinated loan
agreement with Fairchild (refer to Note 8 in the notes to consolidated financial
statements). Net cash provided by financing activities for the fiscal year ended
March 31, 1996 amounted to $3.9 million which was due to increased bank
borrowings under the Company's credit agreement.
 
                                       13
<PAGE>   14
 
     In August 1995, the Company entered into a credit agreement which provides
funds for working capital, capital expenditures and potential acquisitions
subject to certain conditions (refer to Note 5 in the notes to consolidated
financial statements). The Company is currently investigating additional
financing options to support potential acquisitions and additional working
capital requirements due to the significant sales increase in the current year,
as well as anticipated sales growth in the future which is attributable to the
current growth in the aerospace industry. For at least the next three years,
cash flows from operations along with funds available under the credit agreement
and any additional financing should be adequate to finance the Company's
operations. These sources should enable the Company to finance any further
increases in working capital, capital expenditures and potential acquisitions.
The Company is in the process of upgrading its management information systems,
which will result in additional investments in hardware and software. The
Company had no other material capital commitments or planned expenditures as of
March 31, 1997.
 
SAFE HARBOR STATEMENT
 
     This document contains statements which, to the extent they are not
historical fact, constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 (the "Safe Harbor Acts"). All forward-looking statements
involve risks and uncertainties. When used in this document, the words "expect,"
"believe," "anticipate," "plan" and similar expressions are intended to identify
forward-looking statements. The forward-looking statements in this document are
intended to be subject to the safe harbor protection provided by the Safe Harbor
Acts.
 
     The Company cautions that such statements are qualified by important
factors that could cause actual results to differ materially from those in the
forward-looking statements. Results actually achieved thus may differ materially
from expected results included in these statements. The Company undertakes no
obligation to republish revised forward-looking statements to reflect the
occurrence of unanticipated events or circumstances after the date hereof.
 
                                       14
<PAGE>   15
 
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                            MARCH 31, 1997 AND 1996
 
<TABLE>
<CAPTION>
                             (IN THOUSANDS)                                  1997        1996
------------------------------------------------------------------------   --------    --------
<S>                                                                        <C>         <C>
                                            ASSETS
Current Assets:
     Receivables, less allowances of $4,420 in 1997 and $3,257 in
      1996..............................................................   $ 64,382    $ 57,006
     Inventories........................................................    253,781     204,595
     Future tax benefits................................................     11,307       8,011
     Other..............................................................     11,375       2,654
                                                                           --------    --------
                                                                            340,845     272,266
                                                                           --------    --------
Property, Plant and Equipment, at cost:
     Land...............................................................        453         453
     Buildings and improvements.........................................      9,519       8,601
     Machinery and equipment............................................     19,408      14,975
                                                                           --------    --------
                                                                             29,380      24,029
     Accumulated depreciation...........................................    (14,046)    (10,921)
                                                                           --------    --------
                                                                             15,334      13,108
                                                                           --------    --------
Other Assets:
     Cost in excess of net tangible assets of purchased businesses,
      net...............................................................     33,003      28,239
     Other..............................................................      4,719       4,596
                                                                           --------    --------
                                                                             37,722      32,835
                                                                           --------    --------
          Total assets..................................................   $393,901    $318,209
                                                                           ========    ========
                             LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
     Current maturities of long-term debt...............................   $    301    $     --
     Accounts payable...................................................     38,864      42,233
     Accrued salaries...................................................      5,968       5,562
     Accrued overhaul costs.............................................      6,845       2,382
     Other..............................................................     18,209      13,067
                                                                           --------    --------
                                                                             70,187      63,244
                                                                           --------    --------
Long-Term Liabilities:
     Long-term debt, less current maturities............................    165,148     111,900
     Other..............................................................      8,371         462
                                                                           --------    --------
                                                                            173,519     112,362
                                                                           --------    --------
          Total liabilities.............................................    243,706     175,606
                                                                           --------    --------
Commitments and Contingencies (Notes 12 and 13).........................         --          --
Stockholders' Equity:
     Common stock, $1.00 par value, 30,000 shares authorized, 23,420
      shares issued and outstanding in 1997 and 23,393 shares issued and
      outstanding in 1996...............................................     23,420      23,393
     Paid-in capital....................................................    113,236     113,124
     Retained earnings..................................................     13,539       6,086
                                                                           --------    --------
                                                                            150,195     142,603
                                                                           --------    --------
          Total liabilities and stockholders' equity....................   $393,901    $318,209
                                                                           ========    ========
</TABLE>
 
          The accompanying notes to consolidated financial statements
           are an integral part of these consolidated balance sheets.
 
                                       15
<PAGE>   16
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
                         CONSOLIDATED INCOME STATEMENTS
            FOR THE FISCAL YEARS ENDED MARCH 31, 1997, 1996 AND 1995
 
<TABLE>
<CAPTION>
             (IN THOUSANDS EXCEPT PER SHARE DATA)                  1997        1996        1995
--------------------------------------------------------------   --------    --------    --------
<S>                                                              <C>         <C>         <C>
Net sales.....................................................   $389,111    $287,880    $222,384
                                                                 --------    --------    --------
Cost of goods sold............................................    279,041     209,609     153,261
Selling, general and administrative...........................     84,557      64,704      52,389
Restructuring charges.........................................         --          --      11,650
                                                                 --------    --------    --------
     Operating income.........................................     25,513      13,567       5,084
Unusual item..................................................         --          --       5,750
Interest expense, net.........................................    (13,090)    (10,972)     (9,809)
                                                                 --------    --------    --------
     Income from operations before taxes on income............     12,423       2,595       1,025
Provision for taxes:
     Federal..................................................      3,600         790         410
     State....................................................      1,130         150         110
     Foreign..................................................        240         100          30
                                                                 --------    --------    --------
                                                                    4,970       1,040         550
                                                                 --------    --------    --------
Net income....................................................   $  7,453    $  1,555    $    475
                                                                 ========    ========    ========
Earnings per common share.....................................   $   0.32    $   0.09    $   0.03
                                                                 ========    ========    ========
Weighted average number of common shares......................     23,408      18,283      18,002
                                                                 ========    ========    ========
</TABLE>
 
          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.
 
                                       16
<PAGE>   17
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
            FOR THE FISCAL YEARS ENDED MARCH 31, 1997, 1996 AND 1995
 
<TABLE>
<CAPTION>
                                                         COMMON     PAID-IN     RETAINED
                    (IN THOUSANDS)                        STOCK     CAPITAL     EARNINGS     TOTAL
------------------------------------------------------   -------    --------    --------    --------
<S>                                                      <C>        <C>         <C>         <C>
BALANCE, MARCH 31, 1994...............................   $18,002    $ 84,971    $  4,056    $107,029
     Net income.......................................        --          --         475         475
                                                         -------    --------    --------    --------
BALANCE, MARCH 31, 1995...............................   $18,002    $ 84,971    $  4,531    $107,504
     Exercise of stock options........................         4          17          --          21
     Acquisition of Harco.............................     5,387      28,136          --      33,523
     Net income.......................................        --          --       1,555       1,555
                                                         -------    --------    --------    --------
BALANCE, MARCH 31, 1996...............................   $23,393    $113,124    $  6,086    $142,603
     Exercise of stock options........................        27         112          --         139
     Net income.......................................        --          --       7,453       7,453
                                                         -------    --------    --------    --------
BALANCE, MARCH 31, 1997...............................   $23,420    $113,236    $ 13,539    $150,195
                                                         =======    ========     =======    ========
</TABLE>
 
          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.
 
                                       17
<PAGE>   18
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
            FOR THE FISCAL YEARS ENDED MARCH 31, 1997, 1996 AND 1995
 
<TABLE>
<CAPTION>
                        (IN THOUSANDS)                             1997        1996        1995
--------------------------------------------------------------   --------    --------    --------
<S>                                                              <C>         <C>         <C>
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
     Net income...............................................   $  7,453    $  1,555    $    475
     Adjustments to reconcile net income to net cash provided
       by (used for) operating activities:
          Depreciation and amortization.......................      4,795       3,435       2,772
          Change in receivables...............................     (5,599)    (16,270)        275
          Change in inventories...............................    (37,519)    (17,513)     18,564
          Change in payables and accrued liabilities..........      3,492      33,294      (3,640)
          Change in other accounts............................     (5,314)     (1,817)      2,385
     Adjustments to reconcile loss from discontinued
       operations to net cash provided by (used for) operating
       activities:
          Depreciation and amortization.......................         --          --         272
          Change in net assets held for sale..................         --          --        (402)
                                                                 --------    --------    --------
               Net cash provided by (used for) operating
                 activities...................................    (32,692)      2,684      20,701
                                                                 --------    --------    --------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
     Acquisition of property, plant and equipment.............     (4,600)     (8,505)     (1,082)
     Net proceeds from divestitures...........................         --          --       9,981
     Acquisition of subsidiaries, net of cash acquired........    (15,789)         --          --
                                                                 --------    --------    --------
               Net cash provided by (used for) investing
                 activities...................................    (20,389)     (8,505)      8,899
                                                                 --------    --------    --------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
     Proceeds from term loans.................................     75,000      55,000          --
     Repayments of term loans.................................    (12,150)    (74,750)    (25,750)
     Borrowings from subordinated loan........................     28,000          --          --
     Net borrowings (repayments) of revolver..................    (37,908)     23,600      (2,127)
     Exercise of stock options................................        139          21          --
                                                                 --------    --------    --------
               Net cash provided by (used for) financing
                 activities...................................     53,081       3,871     (27,877)
                                                                 --------    --------    --------
NET INCREASE (DECREASE) IN CASH...............................         --      (1,950)      1,723
CASH, BEGINNING OF PERIOD.....................................         --       1,950         227
                                                                 --------    --------    --------
CASH, END OF PERIOD...........................................   $     --    $     --    $  1,950
                                                                 ========    ========    ========
SUPPLEMENTAL CASH FLOW INFORMATION:
     Interest paid............................................   $ 11,326    $  8,504    $ 11,357
     Income taxes paid (net of refunds).......................      6,854       2,188          96
</TABLE>
 
          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.
 
                                       18
<PAGE>   19
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
 
1.  SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
 
  Organization and Operations
 
     Prior to the initial of public offering on August 1, 1990, Banner
Aerospace, Inc. (the "Company") was a wholly-owned subsidiary of The Fairchild
Corporation ("Fairchild"). As a result of the initial public offering,
Fairchild's indirect beneficial ownership of the Company's common stock was
reduced from 100.0% to 47.2%. However, as a result of additional shares of the
Company's common stock issued in connection with the acquisition of Harco, Inc.
("Harco") from Fairchild in fiscal 1996 (refer to Note 2), Fairchild became the
majority owner of the Company and currently owns 59.3% of the Company's common
stock.
 
     The Company is a leading international supplier to the aerospace industry.
The Company's products are divided into three product groups: hardware, rotables
and engines. Hardware includes bearings, nuts, bolts, screws, rivets and other
types of fasteners. Rotables include flight data recorders, radar and navigation
systems, instruments, landing gear and hydraulic and electrical components.
Engines include jet engines, engine parts and engine leasing for use on both
narrow and wide body aircraft and smaller engines for corporate and commuter
aircraft. The Company provides a number of services such as immediate shipment
of parts in aircraft on ground ("AOG") situations. The Company also provides
products to original equipment manufacturers and subcontractors ("OEMs") in the
aerospace industry under just-in-time ("JIT") and inventory management programs.
The Company distributes its products in the United States and abroad to most of
the world's commercial airlines and to air cargo carriers, as well as many OEMs,
distributors, fixed-base operations, corporate aircraft operators and other
aerospace and non-aerospace companies.
 
  Principles of Consolidation
 
     The accompanying consolidated financial statements include the accounts of
all the Company's subsidiaries including the following operating subsidiaries:
 
<TABLE>
<S>                                  <C>
Adams Industries, Inc.               Georgetown Jet Center, Inc.
Aerospace Bearing Support, Inc.      Harco, Inc.
Aircraft Bearing Corporation         Matrix Aviation, Inc.
BAI, Inc.                            NASAM Incorporated
Banner Aerospace-Singapore, Inc.     PacAero
Banner Distribution, Inc.            PB Herndon Company
Burbank Aircraft Supply, Inc.        Professional Aviation Associates, Inc.
DAC International, Inc.              Solair, Inc.
Dallas Aerospace, Inc.
</TABLE>
 
     All significant intercompany accounts and transactions between the
consolidated subsidiaries have been eliminated.
 
  Inventories
 
     Inventories consist of finished goods and are stated at the lower of cost
or market. The Company's subsidiaries use various cost methods for inventory
including average cost, specific identification and first-in, first-out
("FIFO").
 
  Property, Plant and Equipment
 
     For financial reporting purposes, the policy of the Company is to provide
for depreciation of property, plant and equipment, principally by the
straight-line method, at annual rates sufficient to amortize the cost of
 
                                       19
<PAGE>   20
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
1.  SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
the assets during their estimated useful lives. For tax purposes, the Company
generally uses accelerated depreciation methods.
 
     Major classes of assets and their depreciable lives are as follows:
 
<TABLE>
    <S>                                                                     <C>
    Buildings and improvements............................................  10-33 1/3 Years
    Machinery and equipment...............................................  3-10 Years
</TABLE>
 
     Maintenance and repair expenditures are charged to expense as incurred, and
expenditures for significant improvements and major renewals are capitalized.
The carrying amounts of assets which are sold or retired and the related
accumulated depreciation are removed from the accounts in the year of disposal,
and any resulting gains or losses are reflected in income. Such gains and losses
were not significant in fiscal 1997, 1996 or 1995.
 
  Long-Lived Assets
 
     In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used for long-lived assets and certain identifiable intangibles to be disposed
of. SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, and that certain long-lived assets and identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell. The adoption of SFAS No. 121 did not have a
material impact on the Company's consolidated results of operations.
 
  Fair Value of Financial Instruments
 
     Financial instruments are defined as cash, evidence of an ownership
interest in an entity, or a contract that imposes an obligation to deliver cash
or other financial instruments to a second party. The carrying amounts of
current assets and current liabilities in the accompanying financial statements
approximate fair value due to the short maturity of these instruments. Long-term
debt approximates fair value at March 31, 1997, as the majority of debt bears a
variable interest rate.
 
  Revenue Recognition
 
     Sales and related cost of sales are recognized primarily upon shipment of
products and performance of services. Sales and related cost of sales on
long-term contracts are recognized as products are delivered and services are
performed, determined by the percentage of completion method based on the
relationship of costs incurred to date to estimated total costs under the
respective contracts. Lease revenue is recognized as earned.
 
  Amortization
 
     The amounts included in the accompanying consolidated balance sheets as
"Cost in excess of net tangible assets of purchased businesses, net" are
primarily amortized over 40 years. Amortization expense was $912, $575 and $545
in fiscal 1997, 1996 and 1995, respectively. Accumulated amortization at March
31, 1997 and 1996 was $7,637 and $6,725, respectively.
 
                                       20
<PAGE>   21
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
1.  SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
  Earnings Per Common Share
 
     Earnings per common share was calculated based on net income divided by the
weighted average shares outstanding. Stock options were excluded from the
calculation of earnings per common share as they were not materially dilutive
(refer to Note 14).
 
  Use of Estimates in the Preparation of Financial Statements
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
 
  Reclassifications
 
     Certain amounts in fiscal 1996 and 1995 have been reclassified to conform
to the fiscal 1997 presentation.
 
  Recently Issued Accounting Standards
 
     In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128") was issued. SFAS No. 128 requires
presentation of basic earnings per share and diluted earnings per share and
supersedes or amends all previous earnings per share presentation requirements.
Basic earnings per share will be based on income available to common
shareholders divided by the weighted average number of common shares
outstanding. Diluted earnings per share is also based on income available to
common shareholders divided by the sum of the weighted average number of common
shares outstanding and all potential common shares which are dilutive. SFAS No.
128 is effective for fiscal years ending after December 15, 1997. Earlier
adoption is not allowed. The Company is currently analyzing the impact on its
future earnings per share presentations.
 
2.  ACQUISITIONS:
 
     On January 16, 1997, the Company, through its subsidiary, Dallas Aerospace,
Inc., consummated the acquisition of PB Herndon Company ("PB Herndon") by
acquiring 100.0% of the outstanding stock of PB Herndon from the shareholders of
PB Herndon ("Sellers"), effective October 1996. PB Herndon, located near St.
Louis, Missouri, is a distributor of specialty fasteners and other aerospace
related components. At closing, the cash purchase price of $14,700 was paid to
the Sellers. The purchase price was based upon PB Herndon's net assets as of
September 30, 1996 plus capital contributions made by the Sellers after August
31, 1996. In addition, the Company loaned $1,300 to PB Herndon to repay loans
made from the Sellers to PB Herndon. To finance the acquisition of PB Herndon,
the Company borrowed $16,000 under a subordinated loan agreement (see Note 8)
from RHI Holdings, Inc. ("RHI"), which is a wholly-owned subsidiary of
Fairchild. This acquisition was accounted for using the purchase method of
accounting. The excess of the purchase price over the net tangible assets
acquired is being amortized over 40 years.
 
     In March 1996, the Company acquired Harco from Fairchild. Harco is an
authorized stocking distributor of precision fasteners to the aerospace industry
and is located in El Segundo, California. The acquisition of Harco was effected
through the issuance of 5,386,477 shares of the Company's common stock in
exchange for 100.0% of the outstanding shares of Harco. The issuance of the
Company's common stock was based on an average price per share of $6.075
resulting in a total value of $32,723. This acquisition was accounted for using
the purchase method of accounting as applied to simultaneous common control
mergers. The excess of the purchase price over the net tangible assets acquired
is being amortized over 40 years. The results of operations
 
                                       21
<PAGE>   22
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2.  ACQUISITIONS -- (CONTINUED)
of Harco have been included in the consolidated results as of March 1, 1996. As
a result of the transaction, Fairchild, which previously owned 47.2% of the
Company's common stock, currently owns 59.3% of the Company's common stock.
 
     The following unaudited supplemental pro forma information has been
prepared from the consolidated financial records of the Company, Harco and PB
Herndon. This unaudited supplemental pro forma information is presented for
informational purposes only and is not necessarily indicative of what combined
earnings and results of operations would have been had the Company acquired
Harco and PB Herndon at the beginning of the periods presented, nor is such
information intended necessarily to be indicative of the future results of
operations that may occur.
 
                  UNAUDITED SUPPLEMENTAL PRO FORMA INFORMATION
               FOR THE FISCAL YEARS ENDED MARCH 31, 1997 AND 1996
                      (IN THOUSANDS EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                         1997        1996
                                                                       --------    --------
    <S>                                                                <C>         <C>
    Net sales.......................................................   $396,585    $331,296
    Gross profit....................................................    112,500      92,768
    Income from operations before interest and taxes................     26,231      18,497
    Net income......................................................      7,682       4,066
    Earnings per common share.......................................   $   0.33    $   0.17
    Weighted average shares outstanding.............................     23,408      23,393
</TABLE>
 
There were no acquisitions in fiscal 1995.
 
3.  DISCONTINUED OPERATIONS:
 
     In January 1995, the Company sold the operations of AJ Aerospace Services,
Inc., Austin Jet Corporation and Barcel Wire and Cable Corp. ("Discontinued
Subsidiaries") for net proceeds of $9,981. The Discontinued Subsidiaries had
sales of approximately $28,950 in fiscal 1995. The reserve recorded in fiscal
1994 was adequate to cover all losses incurred in fiscal 1995 as a result of the
divestitures of the Discontinued Subsidiaries. Interest expense allocated to the
Discontinued Subsidiaries was based upon the ratio of the Discontinued
Subsidiaries' net assets to the total Company's net assets plus debt. Interest
expense allocated to the Discontinued Subsidiaries was $1,063 in fiscal 1995.
 
4.  RESTRUCTURING CHARGES AND UNUSUAL ITEM:
 
     In fiscal 1995, the Company developed strategic initiatives to reduce the
Company's cost structure and planned to open a distribution center in Salt Lake
City, Utah ("Distribution Center") to house a substantial portion of the
Company's hardware inventory and to enable the Company to reduce the cost of
inventory storage and handling. In anticipation of this move, the Company
performed an analysis of its inventory and determined that it would not be
economical to move all inventories to the Distribution Center. As a result, the
Company recorded non-cash restructuring charges of $11,650 in fiscal 1995.
Certain inventories in the hardware group were scrapped to avoid unnecessary
incremental relocation costs. The restructuring charges also resulted from a
fundamental change in the industry which caused the devaluation of certain Stage
2 rotable inventories. Stage 2 aircraft are older generation aircraft which do
not comply with lower noise levels of Stage 3 aircraft established by the
Federal Aviation Administration ("FAA"). Scrapping and devaluating of the
inventories related to the restructuring charges were completed as of the end of
fiscal 1997.
 
                                       22
<PAGE>   23
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
4.  RESTRUCTURING CHARGES AND UNUSUAL ITEM -- (CONTINUED)
     In November 1993, one of the Company's warehouses located in Carrollton,
Texas was damaged by a wind and rain storm. In January 1995, the Company
received from its insurance companies an aggregate settlement which included
$4,200 relating to the business interruption income recorded by the Company
during fiscal 1995 and 1994. In fiscal 1995, the Company also recorded a
non-recurring unusual item of $5,750 representing insurance proceeds in excess
of cost of damaged property.
 
5.  NOTES PAYABLE AND LONG-TERM DEBT:
 
     At March 31, 1997 and 1996, notes payable and long-term debt consisted of
the following:
 
<TABLE>
<CAPTION>
                                                                                    WEIGHTED
                                                                                     AVERAGE
                                                                                    INTEREST
                                                                                      RATES
                                                                                  -------------
                                                            1997        1996      1997     1996
                                                          --------    --------    ----     ----
    <S>                                                   <C>         <C>         <C>      <C>
    Senior bank loans:
         Term..........................................   $114,350    $ 51,500    9.2%     9.3%
         Revolver......................................     19,900      60,400    9.2      9.3
    Subordinated loan..................................     28,000          --    8.4      --
    Other debt.........................................      2,419          --    7.0      --
    Capital leases.....................................        780          --    8.4      --
                                                          --------    --------    ----     ----
                                                           165,449     111,900    9.1%     9.3%
                                                                                  ====     ====
         Less: Current maturities......................        301       --
                                                          --------    --------
         Net long-term debt............................   $165,148    $111,900
                                                          ========    ========
</TABLE>
 
     On August 2, 1995, the Company entered into a credit agreement ("Credit
Agreement") that provides for working capital and potential acquisitions. On
July 1, 1996, the Company amended the Credit Agreement ("Amended and Restated
Credit Agreement") to provide additional financing, as well as require that
loans made to the Company will not exceed a defined borrowing base which is
based upon a percentage of eligible inventories and accounts receivables. On
December 12, 1996, the Company amended the Amended and Restated Credit Agreement
("Second Amended and Restated Credit Agreement") to provide additional financing
and approve the incurrences of subordinated debt and certain acquisitions. The
facility under the Second Amended and Restated Credit Agreement includes (i) a
$55,000 six-year term loan ("Term Loan"); (ii) a $30,000 seven-year term loan
("Tranche B Loan"); (iii) a $40,000 six-year term loan ("Tranche C Loan"); and
(iv) a $71,500 six-year revolving credit facility ("Revolver"). On March 31,
1997, the Company borrowed $40,000 under the Tranche C Loan. The Term Loan,
Tranche B Loan and Tranche C Loan require certain semi-annual payments which
commence on February 1, 1996, February 1, 1997 and August 1, 1997, respectively.
The Term Loan and Revolver bear interest at prime plus 1 1/4% or London
Interbank Offered Rate ("LIBOR") plus 2 1/2%. The interest rate under the Term
Loan and Revolver may increase by  1/4% or decrease by up to 1.0% based upon
certain performance criteria. The Tranche B Loan bears interest at prime plus
1 3/4% or LIBOR plus 3.0%. The interest rate for the Tranche C Loan is initially
prime plus 1 1/2% or LIBOR plus 2 3/4%. The interest rate under the Tranche C
Loan may decrease by  1/4% if the Company meets certain performance criteria. On
March 31, 1997, the Company's performance level resulted in borrowings under the
Term Loan and Revolver bearing interest at prime plus  3/4% and LIBOR plus 2.0%
for the quarter ending June 30, 1997. The Revolver is subject to a nonuse fee of
55 basis points of the unused availability. The Second Amended and Restated
Credit Agreement contains certain financial and nonfinancial covenants which the
Company is required to meet on a quarterly basis. The financial covenants
include a minimum net worth, and minimum ratios of interest coverage, fixed
charges and debt to earnings before interest, taxes, depreciation and
amortization. The Company also has certain limitations on the incurrence of
additional debt and has
 
                                       23
<PAGE>   24
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
5.  NOTES PAYABLE AND LONG-TERM DEBT -- (CONTINUED)
restrictions on dividends and distributions on the capital stock of the Company
in that the aggregate amount of such dividends and distributions may not exceed
$150 in any fiscal year. At March 31, 1997, the Company was in compliance with
all covenants under the Second Amended and Restated Credit Agreement.
Substantially all of the Company's assets are pledged as collateral under the
Second Amended and Restated Credit Agreement.
 
     In September 1995, the Company entered into several interest rate hedge
agreements ("Hedge Agreements") to manage its exposure to increases in interest
rates on its floating rate debt. The Company entered into the Hedge Agreements
with two of its major lenders to provide interest rate protection on $60,000 of
debt for a period of five years. Effectively, the Hedge Agreements provide for a
LIBOR cap of 7.0% if the 90 day LIBOR exceeds 7.0%. If the 90 day LIBOR drops
below the LIBOR floor of 5.0%, the Company will be required to pay interest at a
floor rate of approximately 6.0%. The above rates exclude any spread above
LIBOR. No cash outlay was required as the cost of the cap was offset by the sale
of the floor.
 
     In November 1996, the Company entered into an additional hedge agreement
("Additional Hedge Agreement") with one of its major lenders to provide interest
rate protection on an additional $20,000 of debt for a period of three years.
Effectively, the Additional Hedge Agreement provides for a cap of 7 1/4% if the
90 day LIBOR exceeds 7 1/4%. If the 90 day LIBOR drops below 5.0%, the Company
will be required to pay interest at a floor rate of approximately 6.0%. No cash
outlay was required to obtain the Additional Hedge Agreement as the cost of the
cap was offset by the sale of the floor.
 
     The Company recognizes interest expense under the provisions of the Hedge
Agreements and Additional Hedge Agreement based on the fixed rate. The Company
is exposed to credit loss in the event of non-performance by the lenders,
however, such non-performance is not anticipated.
 
     At March 31, 1997 and 1996, the Company had unused bank lines of credit
aggregating $51,600 and $10,287, respectively. No cash balances were subject to
withdrawal restrictions. At March 31, 1997 and 1996, the Company had outstanding
letters of credit of $472 and $813, respectively.
 
     The Company obtained an unsecured subordinated loan agreement
("Subordinated Loan") from RHI to provide funds for acquisitions and any
necessary future working capital requirements of the acquired companies (refer
to Note 8).
 
     Other fiscal 1997 debt includes an unsecured demand promissory note
("Promissory Note") from RHI which was repaid in March 1997 (refer to Note 8)
and a mortgage on the Distribution Center building located in Salt Lake City,
Utah. The mortgage, which commenced on August 7, 1996, bears interest at 7.6%
per annum for a period of 20 years. As of March 31, 1997, the balance
outstanding on the mortgage was $2,419. The Company has various capital leases
for property, plant and equipment which are used for its operations (refer to
Note 12).
 
     Principal payments on long-term debt obligations other than the senior bank
loans are anticipated to be as follows: $28,057 for fiscal 1998, $61 for fiscal
1999, $66 for fiscal 2000, $71 for fiscal 2001, $77 for fiscal 2002 and $2,087
thereafter. Scheduled reductions in the availability under the Second Amended
and Restated Credit Agreement are as follows: $8,200 for fiscal 1998, $9,200 for
fiscal 1999, $9,700 for fiscal 2000, $12,700 for fiscal 2001, $28,100 for fiscal
2002 and $126,750 thereafter.
 
     The debt that would otherwise be classified as a current liability will
subsequently be repaid through an increase in the Revolver, which is not due
until 2002. As such, the majority of the current payments are reflected as
long-term debt in the accompanying consolidated balance sheets due to this
refinancing strategy.
 
                                       24
<PAGE>   25
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6.  INCOME TAXES:
 
     The components of income tax expense (benefit) for the fiscal years ended
March 31, 1997, 1996 and 1995 were as follows:
 
<TABLE>
<CAPTION>
                                                                 1997       1996       1995
                                                                -------    -------    -------
    <S>                                                         <C>        <C>        <C>
    Current:
         Federal.............................................   $ 6,896    $ 3,261    $(5,053)
         State...............................................     1,130        150        110
         Foreign.............................................       240        100         30
                                                                -------    -------    -------
                                                                  8,266      3,511     (4,913)
    Deferred.................................................    (3,296)    (2,471)     5,463
                                                                -------    -------    -------
         Total income tax expense............................   $ 4,970    $ 1,040    $   550
                                                                =======    =======    =======
</TABLE>
 
     The following is a reconciliation of the federal income tax at the
statutory rate to federal income tax expense (benefit) from operations for the
fiscal years ended March 31, 1997, 1996 and 1995:
 
<TABLE>
<CAPTION>
                                                                     1997     1996     1995
                                                                    ------    -----    -----
    <S>                                                             <C>       <C>      <C>
    Federal income tax at the statutory rate.....................   $4,348    $ 880    $ 350
    Goodwill amortization........................................      318      200      140
    Foreign Sales Corporation....................................     (456)    (200)    (260)
    State taxes..................................................     (353)     (51)     (37)
    Other, net...................................................     (257)     (39)     217
                                                                    ------    -----    -----
    Provision for federal income taxes...........................   $3,600    $ 790    $ 410
                                                                    ======    =====    =====
</TABLE>
 
     The net deferred tax assets consisted of the following components at March
31, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                                          1997       1996
                                                                         -------    -------
    <S>                                                                  <C>        <C>
    Deferred tax assets:
         Inventories..................................................   $ 5,432    $ 4,062
         Capital loss.................................................     2,787      2,486
         Accounts receivable..........................................     2,206      1,095
         Compensation.................................................     1,036      1,128
         Other deferred tax assets, net...............................     2,888      2,310
                                                                         -------    -------
    Total deferred tax assets.........................................    14,349     11,081
    Valuation reserve.................................................    (2,787)    (2,486)
    Total deferred tax liabilities....................................      (255)      (584)
                                                                         -------    -------
    Net deferred tax assets...........................................   $11,307    $ 8,011
                                                                         =======    =======
</TABLE>
 
     Domestic income taxes, less available credits, are provided on the
unremitted income of foreign subsidiaries and affiliated companies, to the
extent that such earnings are intended to be repatriated. No domestic income
taxes or foreign withholding taxes are provided on the undistributed earnings of
foreign subsidiaries and affiliates, which are considered permanently invested,
or which would be offset by allowable foreign tax credits. At March 31, 1997,
the amount of domestic taxes payable upon distribution of such earnings was not
significant.
 
     In the opinion of management, an adequate provision has been made for all
income taxes and interest, and any liability that may arise for prior periods
will not have a material effect on the financial condition or results of
operations of the Company.
 
                                       25
<PAGE>   26
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
7.  PENSIONS:
 
     The Company and its subsidiaries have a defined contribution plan covering
eligible employees. The majority of the benefits and current contributions are
derived from an amount equal to a defined percentage of annual compensation or a
defined percentage of operating profit. Pension expense for fiscal 1997, 1996
and 1995 was $625, $445 and $388, respectively.
 
     During fiscal 1995, the Company adopted a Supplemental Executive Retirement
Plan for the benefit of the executive officers which provides a retirement
benefit based on final average earnings and years of service. The Plan provides
a maximum retirement benefit equal to the difference between sixty percent of
the participant's average base salary for the last five years of employment and
the participant's primary Social Security benefit. The expenses for the Plan
were $140, $165, and $171 for fiscal 1997, 1996 and 1995, respectively.
 
8.  RELATED PARTY TRANSACTIONS:
 
     On December 20, 1996, the Company entered into the Subordinated Loan
agreement with RHI. The purpose of the Subordinated Loan is to provide funds for
acquisitions and any necessary future working capital requirements of the
acquired companies. The Subordinated Loan bears interest at 10.0% per annum for
the period commencing on the date of the initial drawing and continuing for a
period of six months from the initial draw date. Thereafter, the Subordinated
Loan bears interest at 11.2% per annum. The principal and accrued interest are
deferred until the maturity date of November 15, 2003 subject to certain
accelerations under the Subordinated Loan agreement. A commitment fee will be
accrued and payable on the last day of each month based on the balance
outstanding. The commitment fee will be equal to 1.5% per annum for six months
from the initial draw date and 3.0% per annum thereafter. As of March 31, 1997,
the Company borrowed $28,000 under the Subordinated Loan to fund the purchase of
PB Herndon and other working capital requirements. Interest expense for the
fiscal year ended March 31, 1997 was $610.
 
     On October 17, 1996, the Company borrowed $5,000 from RHI, under an
unsecured demand promissory note ("Promissory Note"). Under the terms of the
Promissory Note, the Company could select interest periods up to six months with
an interest rate during each such interest period determined at LIBOR plus the
Applicable LIBOR Margin as defined in the Second Amended and Restated Credit
Agreement, less 80 basis points. The Company had the ability to borrow and repay
the Promissory Note at any time subject to restrictions under the Second Amended
and Restated Credit Agreement. The Promissory Note was repaid in March 1997.
Interest paid to RHI totaled $156.
 
     The Company is a party to several agreements with Fairchild which provide
for various methods of expense sharing related to combined sales and marketing
efforts in foreign countries. For the fiscal year ended March 31, 1997, the
Company had contributed less than $125 under these agreements. In addition,
Fairchild and the Company would share commission income to the extent
commissions exceed expenses. No such commissions have been received to date.
 
     The Company paid to Fairchild and its affiliates $1,246, $456 and $276
during fiscal 1997, 1996 and 1995, respectively, for various expenses such as
rent, tax, legal and communication services. All services are and have been in
the ordinary course of business and were included in selling, general and
administrative expenses.
 
     The Company had sales of products to Fairchild of $122, $48 and $28 and
purchases of products from Fairchild of $9,384, $5,522 and $4,814 in fiscal
1997, 1996 and 1995, respectively, all in the ordinary course of business.
 
                                       26
<PAGE>   27
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
9.  QUARTERLY FINANCIAL DATA (UNAUDITED):
 
     The following quarterly financial data has been prepared from the financial
records of the Company without audit, and reflects all adjustments which, in the
opinion of management, were of a normal recurring nature and necessary for a
fair presentation of the results of operations for the interim periods
presented.
 
                    FOR THE FISCAL YEAR ENDED MARCH 31, 1997
 
<TABLE>
<CAPTION>
                                                                        QUARTERS ENDED
                                                    ------------------------------------------------------
                                                    JUNE 30,    SEPTEMBER 30,    DECEMBER 31,    MARCH 31,
                                                      1996          1996             1996          1997
                                                    --------    -------------    ------------    ---------
<S>                                                 <C>         <C>              <C>             <C>
Net sales........................................   $ 94,276       $84,107         $ 96,986      $ 113,742
Gross profit.....................................     25,202        25,593           26,312         32,963
Income from operations before interest and
  taxes..........................................      4,859         5,981            6,073          8,600
Net income.......................................      1,317         1,664            1,613          2,859
Earnings per common share........................   $   0.06       $  0.07         $   0.07      $    0.12
</TABLE>
 
                    FOR THE FISCAL YEAR ENDED MARCH 31, 1996
 
<TABLE>
<CAPTION>
                                                                        QUARTERS ENDED
                                                    ------------------------------------------------------
                                                    JUNE 30,    SEPTEMBER 30,    DECEMBER 31,    MARCH 31,
                                                      1995          1995             1995          1996
                                                    --------    -------------    ------------    ---------
<S>                                                 <C>         <C>              <C>             <C>
Net sales........................................   $ 60,633       $66,490         $ 72,022       $88,735
Gross profit.....................................     17,621        19,702           19,358        21,590
Income from operations before interest and
  taxes..........................................      3,747         4,349            2,763         2,708
Net income.......................................        712           732               62            49
Earnings per common share........................   $   0.04       $  0.04         $     --       $  0.01
</TABLE>
 
10.  BUSINESS SEGMENTS:
 
     The Company operates in only one reportable business segment.
 
     Export sales by geographic area for the fiscal years ended March 31, 1997,
1996 and 1995 were as follows:
 
<TABLE>
<CAPTION>
                                                                 1997       1996       1995
                                                               --------    -------    -------
    <S>                                                        <C>         <C>        <C>
    Europe..................................................   $ 34,922    $29,797    $23,252
    Asia (excluding Japan)..................................     25,790     18,557     14,090
    Canada..................................................     20,516     13,803      7,446
    Japan...................................................     15,672     13,006     15,887
    Australia...............................................      7,044      5,585      4,286
    South America...........................................      4,013      3,950      2,463
    Other...................................................      6,008      7,490      7,048
                                                               --------    -------    -------
                                                               $113,965    $92,188    $74,472
                                                               ========    =======    =======
</TABLE>
 
     Operating margins attributable to foreign sales were not materially
different from operating margins attributable to domestic sales. The Company has
no significant assets located in the geographic areas listed above.
 
                                       27
<PAGE>   28
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11.  VALUATION AND QUALIFYING ACCOUNTS AND RESERVES:
 
     Changes in the allowance for doubtful accounts for the fiscal years ended
March 31, 1997, 1996 and 1995 were as follows:
 
<TABLE>
<CAPTION>
                                                                  1997       1996       1995
                                                                 -------    -------    ------
    <S>                                                          <C>        <C>        <C>
    Beginning balance.........................................   $ 3,257    $ 2,432    $2,352
         Charged to expense...................................     2,009      1,990       546
         Write offs, net of recoveries........................    (1,046)    (1,438)     (466)
         Other................................................       200        273        --
                                                                 -------    -------    ------
    Ending balance............................................   $ 4,420    $ 3,257    $2,432
                                                                 =======    =======    ======
</TABLE>
 
     In fiscal 1997, the other reserve of $200 represents an accrual transferred
to the allowance for doubtful accounts. In fiscal 1996, the other reserve of
$273 represents the allowance for doubtful accounts balance of Harco on the date
of acquisition.
 
12.  LEASES:
 
     The Company leases certain of its facilities and equipment under capital
and operating leases. The following is an analysis of assets under capital
leases included in property, plant and equipment at March 31, 1997. There were
no capital leases at March 31, 1996.
 
<TABLE>
<CAPTION>
                                    DESCRIPTION
            ------------------------------------------------------------
            <S>                                                            <C>
            Machinery and equipment.....................................   $ 981
            Accumulated depreciation....................................    (193)
                                                                           -----
                                                                           $ 788
                                                                           =====
</TABLE>
 
     The following represents future minimum operating and capital lease
commitments at March 31, 1997:
 
<TABLE>
<CAPTION>
                                                                          OPERATING    CAPITAL
                                                                           LEASES      LEASES
                                                                          ---------    -------
    <S>                                                                   <C>          <C>
    1998...............................................................    $ 3,496      $ 310
    1999...............................................................      3,037        308
    2000...............................................................      2,295        228
    2001...............................................................      1,999         26
    2002 and thereafter................................................      4,083       --
                                                                          ---------    -------
                                                                           $14,910        872
                                                                           =======
         Amount representing interest..................................                   (92)
                                                                                       -------
         Present value of capital lease obligation ....................                 $ 780
                                                                                        =====
</TABLE>
 
     Total rental expenses for the fiscal years ended March 31, 1997, 1996 and
1995 were $4,455, $2,993 and $2,664, respectively.
 
13.  CONTINGENCIES:
 
     The Company is involved in various claims and lawsuits incidental to its
operations. In the opinion of management, the ultimate resolution of these
claims and lawsuits will not have a material adverse effect on the operating
results or financial position of the Company.
 
                                       28
<PAGE>   29
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
14.  STOCK OPTIONS:
 
     The Company's Non-Qualified and Incentive Stock Option Plan (the "1990
Stock Option Plan"), adopted in August 1990, authorizes the granting of options
at not less than the fair market value of the stock at the time of the granting
of the options. On September 13, 1996, the stockholders approved an amendment to
the 1990 Stock Option Plan to increase the number of shares of its common stock
("Common Stock") authorized to be issued under the 1990 Stock Option Plan and to
extend the period under which options may be exercised. The Company has reserved
for issuance two million shares of Common Stock under the 1990 Stock Option
Plan. The option price is payable in cash or, with the approval of the stock
option committee of the Board of Directors, in shares of Common Stock, valued at
fair market value at the time of exercise. The 1990 Stock Option Plan terminates
in the year 2000; however, all stock options outstanding as of August 2, 2000
shall continue to be exercisable pursuant to their terms. Under the 1990 Stock
Option Plan, all options granted are for a term of seven years. Options granted
on or before August 1, 1993 may be immediately exercisable and options granted
subsequent to August 1, 1993 vest over a period of three to four years.
 
     On September 13, 1996, the stockholders approved the 1996 Non-Employee
Director Stock Option Plan (the "NED Stock Option Plan"). The Company has
reserved for issuance 150,000 shares of Common Stock under the NED Stock Option
Plan which terminates in the year 2006. However, all stock options outstanding
as of May 29, 2006 shall continue to be exercisable pursuant to their terms. The
option price is payable in cash or, with the approval of the stock option
committee of the Board of Directors, in shares of Common Stock, valued at fair
market value at the time of exercise. All options are for a term of five years
and vest immediately upon issuance of the grant. Each newly elected non-employee
director shall be granted an option for 5,000 shares of Common Stock and on the
date of each succeeding annual meeting, each non-employee director elected at
such meeting shall be granted an option for 1,000 shares of Common Stock. On
September 13, 1996, all eight non-employee directors were each granted an option
for 5,000 shares of Common Stock. Stock options granted to non-employee
directors prior to the approval of the NED Stock Option Plan were not granted
under a formal stock option plan.
 
     Stock option activity under the 1990 Stock Option Plan, the NED Stock
Option Plan and non-employee director options granted outside a formal stock
option plan is as follows:
 
<TABLE>
<CAPTION>
                                             1997                     1996                     1995
                                    ----------------------    ---------------------    --------------------
                                                  WEIGHTED                 WEIGHTED                WEIGHTED
                                                  AVERAGE                  AVERAGE                 AVERAGE
                                                  EXERCISE                 EXERCISE                EXERCISE
                                      SHARES       PRICE       SHARES       PRICE       SHARES      PRICE
                                    ----------    --------    ---------    --------    --------    --------
<S>                                 <C>           <C>         <C>          <C>         <C>         <C>
Outstanding at beginning of
  year...........................      696,700     $ 5.01       907,300     $ 5.20      668,100     $ 5.23
Granted..........................      407,250     $ 7.19       275,000     $ 4.88      256,000     $ 5.13
Exercised........................      (26,833)    $ 5.16        (4,200)    $ 5.13           --      --
Terminated.......................      (21,417)    $ 6.17       (45,800)    $ 5.01      (16,800)    $ 5.13
Expired..........................           --      --         (435,600)    $ 5.33           --      --
                                    ----------                ---------                --------
Outstanding at end of year.......    1,055,700     $ 5.82       696,700     $ 5.01      907,300     $ 5.20
                                     =========                =========                ========
Exercisable at end of year.......      458,355     $ 5.44       221,819     $ 5.05      421,825     $ 5.28
                                     =========                =========                ========
Weighted average fair value of
  options granted................   $     3.15                $    2.07                $   2.25
                                     =========                =========                ========
</TABLE>
 
     At March 31, 1997, 948,700 of the 1,055,700 options outstanding relate to
the 1990 Stock Option Plan and have exercise prices between $4.75 and $9.38 per
share, with a weighted average exercise price of $5.79 and a weighted average
remaining contractual life of 5.2 years. 351,355 of these options are
exercisable. The remaining 107,000 options relate to the NED Stock Option Plan
and non-employee director options granted
 
                                       29
<PAGE>   30
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
14.  STOCK OPTIONS -- (CONTINUED)
outside a formal stock option plan and have exercise prices between $4.63 and
$8.13 per share, with a weighted average exercise price of $6.59 and a weighted
average remaining contractual life of 3.2 years. All of these options are
exercisable.
 
     In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") was issued. SFAS No.
123 is effective for fiscal years beginning after December 15, 1995. SFAS No.
123 encourages companies to adopt the fair value method for compensation
expenses recognition related to employee stock options. Existing accounting
requirements of Accounting Principles Board Opinion No. 25 ("APB No. 25") use
the intrinsic value method in determining compensation expense which represents
the excess of the market price of the stock over the exercise price on the
measurement date. The Company elected to remain under APB No. 25 rules for stock
options, under which no compensation cost has been recognized, and is required
to provide pro forma disclosures of what net income and earnings per share would
have been had the Company adopted the new fair value method for recognition
purposes. The following information is presented as if the Company had adopted
SFAS No. 123 and restated its results for the fiscal years ended March 31, 1997
and 1996:
 
<TABLE>
<CAPTION>
                                                                            1997      1996
                                                                           ------    ------
    <S>                                                                    <C>       <C>
    Net income:
         As reported....................................................   $7,453    $1,555
         Pro forma......................................................   $7,119    $1,555
    Earnings per common share:
         As reported....................................................   $ 0.32    $ 0.09
         Pro forma......................................................   $ 0.31    $ 0.09
</TABLE>
 
     For the above information, the fair value of each option grant was
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for grants in fiscal 1997 and 1996: expected
volatility of 37.0%, expected lives of 5 years, a risk free interest rate
ranging from 5.8% to 7.2% and a zero expected dividend rate.
 
     Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to April 1, 1995, the above pro forma amounts may not be
representative of the compensation costs to be expected in future years.
 
15.  SUBSEQUENT EVENTS:
 
     In May 1997, the Company submitted to the Company's shareholders for
approval the acquisition from RHI of a business consisting of two companies: (i)
Fairchild Scandinavian Bellyloading Company AB ("FSBC"), a designer and
manufacturer of patented cargo loading systems which are installed in the cargo
area of commercial aircraft, enabling cargo to be loaded rapidly and
efficiently, and (ii) Scandinavian Bellyloading International, Inc. ("SBIC", and
together with FSBC, the "Bellyloading Companies"), engaged in sales and
marketing of FSBC's cargo loading systems in the United States. If this
acquisition is completed, the Company will initially issue 230,000 shares of its
common stock increasing Fairchild's control position in the Company from 59.3%
to approximately 59.7% of the voting power of the Company. The Company will
maintain a right to rescind its purchase of the Bellyloading Companies if the
Bellyloading Companies fail to meet certain earnings before tax targets. For
accounting purposes, the acquisition will occur once this contingency period
expires and the right to rescind the transaction is not exercised. Until the
expiration of this rescission right, the Company will record its profits or
losses from managing the Bellyloading Companies based on the stock exchange
agreement. If the rescission right is not utilized by the Company, the
percentage of the Company owned by Fairchild may increase based upon the
purchase price as ultimately adjusted, but
 
                                       30
<PAGE>   31
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
15.  SUBSEQUENT EVENTS: -- (CONTINUED)
not to exceed 1,500,000 shares of common stock. The Company's acquisition of the
Bellyloading Companies would enhance the Company's reputation as a leading
international distributor to the aerospace industry. Consummation of this
acquisition is subject to the satisfaction of certain conditions. RHI has a
right to terminate this transaction if it sells the Bellyloading Companies to a
third party by reason of an unsolicited offer, provided that RHI pays a
reasonable termination fee and the Company's out-of-pocket expenses. As of June
23, 1997, the acquisition had not been consummated.
 
     In June 1997, the Company's shareholders approved the following changes to
the Company's capital structure: (i) the total number of shares of capital stock
which the Company has the authority to issue were increased from 30,000,000 to
60,000,000; (ii) the number of authorized shares of the Company's common stock
were increased from 30,000,000 to 50,000,000; and (iii) a new class of Preferred
Stock, par value $0.01 per share was created , and the Company was given the
authority to issue 10,000,000 shares of such Preferred Stock (collectively, the
"Charter Amendments"). In May 1997, and in conjunction with the Charter
Amendments, the Company issued rights to its existing shareholders pursuant to
which each shareholder had the right to acquire one share of the newly
established 7.5% convertible Preferred Stock for every 4.5 shares owned.
Fairchild signed a commitment to subscribe for its pro rata share of such newly
established Preferred Stock. On June 18, 1997, the Company received
subscriptions for 3,710,955 shares of Preferred Stock or $34,140,786. By virtue
of this transaction, Fairchild's beneficial ownership of the Company increased
from 59.3% to approximately 62.6%. The proceeds received from the rights
offering will be used to reduce outstanding debt.
 
                                       31
<PAGE>   32
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Stockholders and Board of Directors,
Banner Aerospace, Inc.:
 
     We have audited the accompanying consolidated balance sheets of Banner
Aerospace, Inc. (a Delaware corporation) and Subsidiaries as of March 31, 1997
and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Banner Aerospace, Inc. and
Subsidiaries as of March 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1997, in conformity with generally accepted accounting principles.
 
                                          ARTHUR ANDERSEN LLP
 
Washington, D.C.
May 16, 1997 (Except with respect to the
matters discussed in Note 15, as to
which the date is June 25, 1997).
 
                                       32
<PAGE>   33
 
ITEM 9.  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
     None
 
                                    PART III
 
     Part III is omitted inasmuch as the Company intends to file with the
Securities and Exchange Commission within 120 days of the close of its fiscal
year ended March 31, 1997, a definitive proxy statement pursuant to Regulation
14A of the Securities Exchange Act of 1934.
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
 
<TABLE>
<C>         <C>         <S>
     (a)          (1)   The following consolidated financial statements are included in Part II,
                          Item 8:
                        Report of Independent Public Accountants
                        Balance Sheets -- March 31, 1997 and 1996
                        Statements of Income and Stockholders' Equity -- For the Years Ended March
                          31, 1997, 1996 and 1995
                        Statements of Cash Flows -- For the Years Ended March 31, 1997, 1996 and
                          1995
                        Notes to Financial Statements -- For the Years Ended March 31, 1997, 1996
                          and 1995
                        Supplementary Financial Information
                  (2)   All schedules have been omitted since the required information is not
                          present in amounts sufficient to require submission of the schedule, or
                          because the information required is included in the consolidated financial
                          statements including notes thereto
                  (3)   Exhibits
      3           (a)   Certificate of Incorporation of Banner Aerospace, Inc. is incorporated
                          herein by reference to Exhibit 3(a) included in the Registration Statement
                          No. 33-34775 on Form S-1 effective July 26, 1990
                  (b)   Certificate of Merger of Banner Aerospace, Inc. filed March 5, 1990 is
                          incorporated herein by reference to Exhibit 3(b) included in the
                          Registration Statement No. 33-34775 on Form S-1 effective July 26, 1990
                  (c)   Certificate of Amendment of Certificate of Incorporation of Banner
                          Aerospace, Inc. filed June 14, 1990 is incorporated herein by reference to
                          Exhibit 3(c) included in the Registration Statement No. 33-34775 on Form
                          S-1 effective July 26, 1990
                  (d)   Certificate of Amendment of Certificate of Incorporation of Banner
                          Aerospace, Inc. filed June 18, 1990 is incorporated herein by reference to
                          Exhibit 3(d) included in the Registration Statement No. 33-34775 on Form
                          S-1 effective July 26, 1990
                  (e)   Certificate of Amendment of Certificate of Incorporation of Banner
                          Aerospace, Inc. filed June 19, 1990 is incorporated herein by reference to
                          Exhibit 3(e) included in the Registration Statement No. 33-34775 on Form
                          S-1 effective July 26, 1990
                  (f)   Amended and Restated Bylaws of Banner Aerospace, Inc. is incorporated herein
                          by reference to Exhibit 3(f) included in the Registration Statement No.
                          33-34775 on Form S-1 effective July 26, 1990
                  (g)   Restated Certificate of Amendment of Certificate of Incorporation of Banner
                          Aerospace, Inc. filed June 18, 1990 is incorporated herein by reference to
                          Exhibit 3(a) included in the quarterly report on Form 10-Q dated September
                          4, 1990
      4           (a)   Specimen of Definitive Common Stock Certificate is incorporated herein by
                          reference to Exhibit 4(b) included in the Registration Statement No.
                          33-34775 on Form S-1 effective July 26, 1990
</TABLE>
 
                                       33
<PAGE>   34
 
<TABLE>
<C>         <C>         <S>
                  (b)   Certificates for the Preferred Stock subscribed for in the Rights Offering
                          by Banner Aerospace, Inc., filed February 24, 1997 is incorporated herein
                          by reference to the Registration Statement No. 333-22275 on Form S-3
                          effective May 13, 1997
                  (c)   Amendment No. 1 to Certificates for the Preferred Stock subscribed for in
                          the Rights Offering by Banner Aerospace, Inc., filed April 29, 1997 is
                          incorporated herein by reference to the Registration Statement No.
                          333-22275 on Form S-3 effective May 13, 1997
                  (d)   Amendment No. 2 to Certificates for the Preferred Stock subscribed for in
                          the Rights Offering by Banner Aerospace, Inc., filed May 12, 1997 is
                          incorporated herein by reference to the Registration Statement No.
                          333-22275 on Form S-3 effective May 13, 1997
   10(i)          (a)   License Agreement between The Fairchild Corporation and Banner Aerospace,
                          Inc. is incorporated herein by reference to Exhibit 10(i)(c) included in
                          the Annual Report on Form 10-K dated June 28, 1991
                  (b)   Tax Indemnity Agreement between The Fairchild Corporation, Banner Aerospace
                          Holding Company I, Inc. and Banner Aerospace, Inc. is incorporated herein
                          by reference to Exhibit 10(i)(d) included in the Annual Report on Form
                          10-K dated June 28, 1991
                  (c)   Registration Rights Agreement between Banner Aerospace Holding Company II,
                          Inc. and Banner Aerospace, Inc. is incorporated herein by reference to
                          Exhibit 10(i)(e) included in the Annual Report on Form 10-K dated June 28,
                          1991
                  (d)   Transitional Agreement between The Fairchild Corporation and Banner
                          Aerospace, Inc. is incorporated herein by reference to Exhibit 10(i)(f)
                          included in the Annual Report on Form 10-K dated June 28, 1991
                  (e)   Assignment and Assumption between The Fairchild Corporation and Banner
                          Aerospace, Inc. is incorporated herein by reference to Exhibit 10(i)(g)
                          included in the Annual Report on Form 10-K dated June 28, 1991
                  (f)   Credit Agreement, dated August 2, 1995, among Banner Aerospace, Inc. and
                          Burbank Aircraft Supply, Inc. (collectively referred to as "Borrowers"),
                          institutions from time to time a party thereto as Lenders and Issuing
                          Bank, Citicorp USA, Inc., in its capacity as administrative agent for the
                          lenders and the Issuing Banks (individually, a "Co-Agent", and
                          collectively, the "Co-Agents") is incorporated herein by references to
                          Exhibit 10 (i)(r) included in the Annual Report on Form 10-K dated June
                          28, 1996
                  (g)   Amendment No. 1 dated March 11, 1996 to the Credit Agreement dated August 2,
                          1995 among Banner Aerospace, Inc. and Burbank aircraft Supply, Inc.
                          (collectively referred to as "Borrowers"), institutions from time to time
                          a party thereto as Lenders and Issuing Bank, Citicorp USA, Inc., in its
                          capacity as administrative agent for the lenders and the Issuing Banks
                          (individually, a "Co-Agent", and collectively, the "Co-Agents") is
                          incorporated herein by reference to Exhibit 10 (i)(t) included in the
                          Annual Report on form 10-K dated June 28, 1996
                  (h)   Amended and Restated Credit Agreement dated as of July 11, 1996 among Banner
                          Aerospace, Inc. and Burbank Aircraft Supply, Inc. (collectively referred
                          to as "Borrowers"), institutions from time to time a party hereto as
                          Lenders and Issuing Banks, whether by execution of this Agreement or an
                          Assignment and Acceptance, Citicorp USA, Inc., in its capacity as
                          administrative agent for the Lenders and Issuing Banks hereunder (in such
                          capacity, the "Administrative Agent"), and NationsBank, N.A. and The
                          Long-Term Credit Bank of Japan, Ltd., Chicago Branch, in their capacity as
                          co-agents for the Lenders and Issuing Banks hereunder (in such capacity,
                          individually, a "Co-Agent", and, collectively, the "Co-Agents") is
                          incorporated herein by reference to exhibit 10 (i) included in the form
                          10-Q dated August 13, 1996
</TABLE>
 
                                       34
<PAGE>   35
 
<TABLE>
<C>         <C>         <S>
                  (i)   Second Amended and Restated Credit Agreement dated as of December 12, 1996
                          among Banner Aerospace, Inc. and Burbank Aircraft Supply, Inc.
                          (collectively referred to as "Borrowers"), institutions from time to time
                          a party hereto as Lenders and Issuing Banks, whether by execution of this
                          Agreement or an Assignment and Acceptance, Citicorp USA, Inc., a Delaware
                          corporation, in its capacity as administrative agent for the Lenders and
                          the Issuing Banks hereunder (in such capacity, the "Administrative
                          Agent"), and NationsBank, N.A. and The Long-Term Credit Bank of Japan,
                          Ltd., Chicago Branch, in their capacity as co-agents for the Lenders and
                          Issuing Banks hereunder (in such capacity, individually, a "Co-Agent", and
                          collectively, the "Co- Agents") is incorporated herein by reference to
                          exhibit 10.1 included in the Form 10-Q dated February 14, 1997
                 *(j)   Amendment No. 1 dated March 31, 1997 to the Second Amendment and Restated
                          Credit Agreement dated December 12, 1996 among Banner Aerospace, Inc. and
                          Burbank Aircraft Supply, Inc. (collectively referred to as "Borrowers"),
                          institutions from time to time a party hereto as Lenders and Issuing
                          Banks, whether by execution of this Agreement or an Assignment and
                          Acceptance, Citicorp USA, Inc., a Delaware corporation, in its capacity as
                          administrative agent for the Lenders and the Issuing Banks hereunder (in
                          such capacity, the "Administrative Agent"), and NationsBank, N.A. and The
                          Long-Term Credit Bank of Japan, Ltd., Chicago Branch, in their capacity as
                          co-agents for the Lenders and Issuing Banks hereunder (in such capacity,
                          individually, a "Co-Agent", and collectively, the "Co-Agents")
                  (k)   Stock Exchange Agreement, dated February 22, 1996, between The Fairchild
                          Corporation ("Fairchild") and Banner Aerospace, Inc. to acquire Harco,
                          Inc. from Fairchild is incorporated herein by reference to the Definitive
                          Proxy Statement dated and filed on February 23, 1996 with respect to the
                          special Meeting of Shareholders of Registrant held on March 12, 1996
                  (l)   Stock Purchase Agreement, dated January 15, 1997, between Dallas Aerospace,
                          Inc., and PB Herndon Company to acquire PB Herndon Company is incorporated
                          herein by reference to Exhibit 2.1 included in the Form 8-K dated and
                          filed on January 24, 1997
                  (m)   Promissory note agreement between Banner Aerospace, Inc. and RHI Holdings,
                          Inc. dated October 17, 1996 is incorporated herein by reference to exhibit
                          10.2 included in the Form 10-Q dated February 14, 1997
                  (n)   Subordinated loan agreement between Banner Aerospace, Inc. and RHI Holdings,
                          Inc. dated December 20, 1996 is incorporated herein by reference to
                          Exhibit 10.3 included in the Form 10-Q dated February 14, 1997
                  (o)   Stock Issuance and Expense Sharing Agreement between Banner Aerospace, Inc.
                          and RHI Holdings, Inc. and Aero International, Inc. dated October 31, 1996
                          is incorporated herein by reference to Exhibit 10.4 included in the Form
                          10-Q dated February 14, 1997
                  (p)   Tri-Fast Partnership Agreement between Banner Aerospace, Inc., RHI Holdings,
                          Inc. and Edwards & Lock Management Corporation dated November 19, 1996 is
                          incorporated herein by reference to Exhibit 10.5 included in the Form 10-Q
                          dated February 14, 1997
                  (q)   Stock Exchange Agreement, dated May 12, 1997, between RHI Holdings, Inc. and
                          Banner Aerospace, Inc. to acquire Fairchild Scandinavian Bellyloading
                          Company AB and Scandinavian Bellyloading International, Inc. from RHI is
                          incorporated herein by reference to the Definitive Proxy Statement dated
                          and filed on May 13, 1997 with respect to the special meeting of
                          shareholders of registrant held on June 18, 1997
                 *(r)   Lease between Banner Aerospace, Inc., as tenant, and RHI Holdings, Inc., as
                          landlord, dated April 1, 1996
  10(ii)          (a)   The Spare Parts Purchase Agreement between Banner Aerospace, Inc. and Pan
                          American World Airways, Inc. dated August 21, 1992 is incorporated herein
                          by reference to Exhibit 10(ii)(a) included in the Annual Report on Form
                          10-K dated June 28, 1993
 10(iii)          (a)   Non-Qualified and Incentive Stock Option Plan of Banner Aerospace, Inc. is
                          incorporated herein by reference to Exhibit 10(iii)(a) included in the
                          Annual Report on Form 10-K dated June 28, 1991
</TABLE>
 
                                       35
<PAGE>   36
 
<TABLE>
<C>         <C>         <S>
                  (b)   Profit Sharing/401(k) Plan of Banner Aerospace, Inc. is incorporated herein
                          by reference to Exhibit 10(iii)(b) included in the Registration Statement
                          No. 33-34775 on Form S-1 effective July 26, 1990
                  (c)   Employment Agreement between Banner Aerospace, Inc. and Warren D. Persavich
                          is incorporated herein by reference to Exhibit 10(iii)(d) included in the
                          Annual Report on Form 10-K dated June 28, 1991
                  (d)   Employment Agreement between Banner Aerospace, Inc. and Eugene W. Juris is
                          incorporated herein by reference to Exhibit 10(iii)(e) included in the
                          Annual Report on Form 10-K dated June 28, 1991
                  (e)   Employment Agreement between Banner Aerospace, Inc. and Jeffrey J. Steiner
                          is incorporated herein by reference to Exhibit 10(iii)(g) included in the
                          Annual Report on Form 10-K dated June 28, 1993
                  (f)   Employment Agreement between Banner Aerospace, Inc. and John C. Wertz is
                          incorporated herein by reference to Exhibit 10(iii)(i) included in the
                          Annual Report on Form 10-K dated June 28, 1994
                  (g)   Amended Employment Agreement between Banner Aerospace, Inc. and Warren D.
                          Persavich is incorporated herein by reference to Exhibit 10(iii)(j)
                          included in the Annual Report on Form 10-K dated June 28, 1994
                  (h)   Amended Employment Agreement between Banner Aerospace, Inc. and Eugene W.
                          Juris is incorporated herein by reference to Exhibit 10(iii)(k) included
                          in the Annual Report on Form 10-K dated June 28, 1994
                  (i)   1996 Stock Option Plan Amendments dated May 29, 1996 to the 1990
                          Non-Qualified and Incentive Stock Option Plan is incorporated herein by
                          reference to the Registration statement No. 333-20255 on Form S-8 dated
                          January 23, 1997
                  (j)   1996 Banner Aerospace, Inc. Non-Employee Directors' Stock Option Plan dated
                          May 29, 1996, is incorporated herein by reference to the Registration
                          statement No. 333-20255 on Form S-8 dated January 23, 1997
    *21                 List of Subsidiaries of Banner Aerospace, Inc.
    *23           (a)   Consent of Arthur Andersen LLP with regard to the Form S-8s file numbers
                          33-43100 and 33-43101 of Banner Aerospace, Inc. dated September 30, 1991
                          and with regard to the Form S-8 file number 33-60318 of Banner Aerospace,
                          Inc. dated March 31, 1993 and with regard to the Form S-8 file number 333-
                          20255 of Banner Aerospace, Inc., dated January 23, 1997
    *27                 Financial Data Schedule
                  (b)   Registrant has filed Form 8-K dated January 16, 1997 regarding the
                          acquisition of PB Herndon Company including Audited Financial Statements
                          of PB Herndon Company as of June 30, 1996, Unaudited Interim Financial
                          Statements of PB Herndon Company as of September 30, 1996 and Unaudited
                          Pro Forma Condensed Consolidated Financial Information of Banner
                          Aerospace, Inc. and PB Herndon Company as of September 30, 1996
</TABLE>
 
---------------
* Filed herewith
 
                                       36
<PAGE>   37
 
                                   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.
 
                                          BANNER AEROSPACE, INC.
 
                                          By:    /s/ WARREN D. PERSAVICH
                                            ------------------------------------
                                                    WARREN D. PERSAVICH
                                                 SENIOR VICE PRESIDENT AND
                                                  CHIEF FINANCIAL OFFICER
Date: June 30, 1997                            (PRINCIPAL FINANCIAL OFFICER)
 
     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.
 
<TABLE>
<S>                                        <C>                               <C>
       By: /s/ JEFFREY J. STEINER                Chairman and Chief          Date: June 30, 1997
----------------------------------------          Executive Officer
           JEFFREY J. STEINER               (Principal Executive Officer)
 
         By: /s/ JOHN C. WERTZ                Senior Vice President and      Date: June 30, 1997
----------------------------------------       Chief Operating Officer
             JOHN C. WERTZ
 
      By: /s/ WARREN D. PERSAVICH             Senior Vice President and      Date: June 30, 1997
----------------------------------------       Chief Financial Officer
          WARREN D. PERSAVICH               (Principal Financial Officer)
 
        By: /s/ EUGENE W. JURIS               Vice President -- Finance      Date: June 30, 1997
----------------------------------------            and Secretary
            EUGENE W. JURIS                (Principal Accounting Officer)
 
        By: /s/ MICHAEL T. ALCOX                      Director               Date: June 30, 1997
----------------------------------------
            MICHAEL T. ALCOX
 
   By: /s/ FREDERICK W. BRADLEY, JR.                  Director               Date: June 30, 1997
----------------------------------------
       FREDERICK W. BRADLEY, JR.
 
        By: /s/ STEVEN L. GERARD                      Director               Date: June 30, 1997
----------------------------------------
            STEVEN L. GERARD
 
     By: /s/ PROF. CHARLES M. HAAR                    Director               Date: June 30, 1997
----------------------------------------
         PROF. CHARLES M. HAAR
 
        By: /s/ PHILIPPE HERCOT                       Director               Date: June 30, 1997
----------------------------------------
            PHILIPPE HERCOT
 
       By: /s/ SAMUEL J. KRASNEY                      Director               Date: June 30, 1997
----------------------------------------
           SAMUEL J. KRASNEY
 
      By: /s/ DR. ERIC I. STEINER                     Director               Date: June 30, 1997
----------------------------------------
          DR. ERIC I. STEINER
 
        By: /s/ LEONARD TOBOROFF                      Director               Date: June 30, 1997
----------------------------------------
            LEONARD TOBOROFF
</TABLE>
 
                                       37