<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, 1998          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)
                   45025 AVIATION DRIVE                                        20166
                         SUITE 300                                          (ZIP CODE)
                     DULLES, VA 20166
         (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.  [ ]
 
     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 19, 1998 was approximately $41.4 million.
 
<TABLE>
<CAPTION>
                                                                            SHARES OUTSTANDING
                     TITLE OF CLASS                                        AS OF JUNE 19, 1998
                     --------------                                        -------------------
<S>                                                      <C>
                      Common Stock                                              21,436,142
</TABLE>
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Registrant intends to file with the Securities and Exchange Commission a
definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to be
held on September 16, 1998, pursuant to Regulation 14A of the Securities
Exchange Act of 1934 within 120 days of the close of its fiscal year ended March
31, 1998, 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...........................................    7
 4.    Submission of Matters to a Vote of Security Holders.........    7
 
                              P A R T  I I
 5.    Market for Registrant's Common Equity and Related
         Stockholder Matters.......................................    8
 6.    Selected Consolidated Financial Information.................   10
 7.... Management's Discussion and Analysis of Financial Condition
       and Results of Operations...................................   11
 8.    Consolidated Financial Statements and Supplementary Data....   16
 9.    Disagreements with Accountants on Accounting and Financial
         Disclosure................................................   37
 
                             P A R T  I I I
       Statement of Omission.......................................   37
 
                              P A R T  I V
14.    Exhibits, Financial Statements, Schedules and Reports on
         Form 8-K..................................................   37
       Signatures..................................................   42
</TABLE>
<PAGE>   3
 
                                   P A R T  I
 
ITEM 1. BUSINESS
 
GENERAL
 
     Banner Aerospace, Inc. (the "Company") is an international supplier to the
aerospace industry, distributing a wide range of aircraft parts and related
support services. The Company's products are divided into two product groups:
rotables and engines. 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 special services, such as immediate shipment of parts for
aircraft on ground ("AOG") situations and customer tailored inventory management
programs. The Company also provides both long-term and short-term engine leasing
services to commercial airlines and air cargo carriers. Through its
subsidiaries, the Company sells its products in the United States and abroad to
most of the world's commercial airlines and air cargo carriers, as well as other
distributors, fixed-base operations, corporate aircraft operators and other
aerospace and non-aerospace companies.
 
DESCRIPTION OF BUSINESS
 
     The Company distributes a wide variety of aircraft parts, which it has
purchased on the open market, or acquired from the original equipment
manufacturer as an authorized distributor. No single distributor arrangement is
material to the Company's financial condition taken as a whole.
 
     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. Solair stocks and sells a wide variety of
aircraft rotable and expendable components. Additionally, Solair manages "power
by the hour"/overhaul programs for several foreign airlines. Under these power
by the hour programs, the Company provides management services and parts to the
customers, including engines, rotables, airframes and landing gear.
 
     Solair entered into an exclusive three-year agreement with Delta Air Lines
("Delta") which commenced in August 1997 ("Delta Contract"). Under this
agreement, Solair was designated as Delta's sole source supplier of airframe
rotable, repairable and expendable material from the surplus market (the
"Sourcing Program"). In addition, the Delta Contract contemplates a consignment
arrangement between Delta and Solair whereby Solair will remarket Delta's excess
inventory (the "Consignment Program"). At the inception of the agreement, it was
anticipated that the combined programs would generate approximately $150 million
in revenue over the three-year contract. In fiscal 1998 Solair recognized sales
of $9.6 million under the Delta Contract. Revenues have lagged the original
forecast due to greater than anticipated start-up difficulty with the Sourcing
Program and the mutual consent to postpone the Consignment Program until the
Sourcing Program is successfully integrated with Delta's normal procurement
practices. Solair has concentrated its efforts on achieving superior service
levels set by Delta. As of the first quarter of fiscal 1999, Solair was the
highest rated airframe supplier to Delta.
 
     Dallas Aerospace, Inc. ("Dallas Aerospace"), the Company's largest
subsidiary in the 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. In addition, Dallas Aerospace buys and sells large commercial
aircraft from time to time and provides engine repair management services and
engine leasing to a variety of airline and air cargo customers.
 
     Rotables are sometimes purchased as new parts, but are generally purchased
used and 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: new, overhauled, serviceable and "as is". Rotables may
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 cost to
 
                                        3
<PAGE>   4
 
overhaul the 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.
 
     In March 1996, the Company acquired Harco, Inc. ("Harco") from The
Fairchild Corporation ("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% 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
$32.7 million. 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 was being amortized over 40
years. Harco was one of the Company's subsidiaries divested as part of the
Hardware Business Disposition (refer to Note 2 in the notes to consolidated
financial statements). The results of operations of Harco have been included in
the consolidated results as of March 1, 1996 up to the closing of the Hardware
Business Disposition.
 
     On January 16, 1997, the Company, through its subsidiary, Dallas Aerospace,
Inc., consummated the acquisition of PB Herndon Aerospace, Inc. ("PB Herndon")
by acquiring 100% 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 $14.7 million 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 $1.3 million to PB Herndon to
repay loans made from the Sellers to PB Herndon. To finance the acquisition of
PB Herndon, the Company borrowed $16.0 million under a subordinated loan
agreement (refer to Note 7 in the notes to the consolidated financial
statements) 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 was being amortized over 40 years. PB Herndon was one of the Company's
subsidiaries divested as part of the Hardware Business Disposition (refer to
Note 2 in the notes to the consolidated financial statements). The results of
operations of PB Herndon have been included in the consolidated results from
April 1, 1997 up to the closing of the Hardware Business Disposition.
 
     On January 13, 1998, the Company completed the disposition of its hardware
companies and PacAero unit (the "Hardware Business") to AlliedSignal Inc. Also
included in the disposition were certain assets of Banner Aerospace Services,
Inc. related to the Company's Hardware Business. The Hardware Business was
composed of the following subsidiaries: Adams Industries, Inc., Aerospace
Bearing Support, Inc., Aircraft Bearing Corporation, Banner Distribution, Inc.,
Burbank Aircraft Supply, Inc., Harco, Inc., PB Herndon Aerospace, Inc. and
PacAero. The Company disposed of the Hardware Business to concentrate its
efforts on the rotables and jet engine businesses and because the disposition of
the Hardware Business presented a unique opportunity for the Company to realize
a significant return.
 
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% 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% 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, owning 59.3% of the Company's Common Stock as of March 31, 1997
(refer to Note 3 in the notes to consolidated financial statements).
 
     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 was
                                        4
<PAGE>   5
 
increased from 30,000,000 to 60,000,000; (ii) the number of authorized shares of
the Company's Common Stock was 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, in conjunction with
the Charter Amendments, the Company issued rights to its existing shareholders
pursuant to which each shareholder could acquire one share of the newly
established 7.5% convertible Preferred Stock for every 4.5 shares of Common
Stock 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 $34.1 million.
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 were used to reduce outstanding debt.
 
     In January 1998, the Company repurchased 2,246,967 shares of its own Common
Stock for a total cost of $23.3 million, increasing Fairchild's ownership to
66.3% at the end of fiscal 1998. This repurchase has been reflected as Treasury
Stock in the accompanying financial statements.
 
     On May 11, 1998, Fairchild commenced an offer to exchange ("Exchange
Offer") under which it agreed to exchange class A common stock of Fairchild for
up to 4,000,000 shares of Common Stock of the Company at a price of $12.50 per
share. On June 9, 1998, the Exchange Offer was consummated and shareholders
exchanged 3,659,424 shares of the Company's Common Stock for newly issued shares
of Fairchild class A common stock. As a result of the shares tendered to
Fairchild, Fairchild's ownership percentage increased to 85.4% of the Company's
Common Stock.
 
SALES
 
     The Company's subsidiaries conduct marketing efforts, through its 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 $23.2 million and $82.8 million at
March 31, 1998 and 1997, respectively. It is anticipated that in excess of 90.0%
of the backlog at March 31, 1998 will be shipped by March 31, 1999. The change
in the sales backlog resulted from the disposition of the Hardware Business
which accounted for $65.7 million or 79.3% of the March 31, 1997 balance.
 
     The table below shows the percentage of sales by each product group for the
fiscal years ended March 31, 1998, 1997 and 1996.
 
<TABLE>
<CAPTION>
                       PRODUCT GROUP                               1998        1997        1996
                       -------------                               -----       -----       -----
<S>                                                                <C>         <C>         <C>
Hardware(a).................................................        44.1%       51.3%       47.6%
Rotables....................................................        36.8        31.4        34.1
Engines.....................................................        19.1        17.3        18.3
                                                                   -----       -----       -----
                                                                   100.0%      100.0%      100.0%
                                                                   =====       =====       =====
</TABLE>
 
---------------
(a) Sales for the Hardware Group for fiscal 1998 include the period from April
    1, 1997 to December 31, 1997.
 
                                        5
<PAGE>   6
 
     Foreign sales accounted for 28.7%, 29.3% and 32.0% of the Company's total
sales for the fiscal years ended March 31, 1998, 1997 and 1996, respectively.
Export sales by geographic area for the fiscal years ended March 31, 1998, 1997
and 1996 were as follows:
 
<TABLE>
<CAPTION>
                    (IN THOUSANDS)                         1998       1997      1996
                    --------------                       --------   --------   -------
<S>                                                      <C>        <C>        <C>
Europe.................................................  $ 52,817   $ 34,922   $29,797
Asia (excluding Japan).................................    21,734     25,790    18,557
Canada.................................................    14,746     20,516    13,803
Japan..................................................    10,473     15,672    13,006
South America..........................................    10,211      4,013     3,950
Australia..............................................     2,632      7,044     5,585
Other..................................................     8,208      6,008     7,490
                                                         --------   --------   -------
                                                         $120,821   $113,965   $92,188
                                                         ========   ========   =======
</TABLE>
 
     The increase in the export sales in fiscal 1998 compared to fiscal 1997 was
primarily attributable to sales in Europe by DAC International, Inc. and engine
leasing in South America by Dallas Aerospace.
 
     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 export 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 fiscal year for 1997, 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 rotables group in late fiscal 1996 and fiscal 1997.
 
COMPETITION
 
     The rotables group competes with 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 & Whitney, as
well as the engine and engine parts divisions of AAR Corp. and AGES, and many
smaller companies.
 
EMPLOYEES
 
     As of March 31, 1998, the Company had approximately 375 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
 
     There are no material expenditures anticipated for environmental control
for fiscal 1999 and thereafter.
 
                                        6
<PAGE>   7
 
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 is for a term of ten
years, but may be terminated at the Company's option, after five years, and
requires annual lease payments of approximately $175,000. The Company also
leases an office in Cleveland, Ohio, which, as of March 31, 1998, has 7 months
remaining on the original 84-month term. The entire Cleveland office is
currently subleased. The Company owns and leases other facilities throughout the
United States, primarily for warehousing inventory and for office space. In
addition, the Company leases sales offices and warehouses in other countries,
including Switzerland, 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:
 
                           DESCRIPTION OF PROPERTIES
 
<TABLE>
<CAPTION>
                                                                           OWNED   APPROX.
                                                                             OR    SQUARE
                   SUBSIDIARY                            LOCATION          LEASED  FOOTAGE
                   ----------                            --------          ------  -------
<S>                                               <C>                      <C>     <C>
Banner Aerospace-Singapore, Inc.................  Singapore                Leased    1,300
DAC International, Inc..........................  Austin, TX               Leased    7,000
                                                  Cortaillod, Switzerland  Leased    1,500
Dallas Aerospace, Inc...........................  Carrollton, TX           Leased  126,000
                                                  Medley, FL               Leased    6,200
                                                  Miami Springs, FL        Leased    1,400
Georgetown Jet Center, Inc......................  Georgetown, TX           Leased   19,000
Matrix Aviation, Inc............................  Wichita, KS              Owned     6,300
NASAM Incorporated..............................  S. San Francisco, CA     Leased    4,800
Professional Aviation Associates, Inc...........  Atlanta, GA              Leased   29,000
                                                  Titusville, FL           Leased   15,000
Solair, Inc.....................................  Lakeland, FL             Leased   70,000
                                                  Ft. Lauderdale, FL       Leased   57,000
                                                  Atlanta, GA              Leased    3,200
                                                  Hounslow, 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.
 
                                        7
<PAGE>   8
 
                                    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 1998 and 1997:
 
<TABLE>
<CAPTION>
                                                               FISCAL 1998
                                                              -------------
                       QUARTERS ENDED                         HIGH      LOW
                       --------------                         ----      ---
<S>                                                           <C>       <C>
June 30, 1997...............................................   8 7/8    6 7/8
September 30, 1997..........................................  11 1/4    8 3/8
December 31, 1997...........................................  11 11/16  8 3/4
March 31, 1998..............................................  12        9 5/8
</TABLE>
 
<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>
 
     At March 31, 1998, the Company had a total of 3,809,550 shares of 7.5%
convertible Preferred Stock outstanding. The Preferred Stock is convertible into
Common Stock on a one-to-one basis. Through the end of fiscal 1998, 3,549 shares
of Preferred Stock had been converted to shares of Common Stock and 102,144
shares of Preferred Stock had been issued as a result of dividends on Preferred
Stock.
 
     As a result of the Exchange Offer (described in Note 16 to the consolidated
financial statements), the number of record holders of Common Stock has fallen
below the continued listing criteria for NYSE listed companies. The NYSE has not
taken any action to delist the Common Stock, but may do so in the future, in
which case, the Company will look at alternative listing arrangements.
 
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 cash dividends on the Company's Common Stock
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 4 in the notes to
consolidated financial statements) and such other factors as the Board of
Directors deems relevant. No dividends were declared in fiscal 1998 or 1997 on
the Company's Common Stock. The Company issued 102,144 shares of Preferred Stock
as a result of dividends on the Preferred Stock in fiscal 1998.
 
HOLDERS OF RECORD
 
     The Company had approximately 74 holders of record and 1,365 beneficial
holders at June 22, 1998.
 
OTHER INFORMATION
 
     Articles have appeared in the French press reporting an inquiry by a French
magistrate into certain allegedly improper business transactions involving Elf
Acquitaine, a French petroleum company, its former chairman and various third
parties, including Maurice Bidermann. In connection with this inquiry, the
magistrate has made inquiry into allegedly improper transactions between Mr.
Steiner and that petroleum company. In response to the magistrate's request that
Mr. Steiner appear in France as a witness, Mr. Steiner submitted written
statements concerning the transactions and appeared in person before the
magistrate and
 
                                        8
<PAGE>   9
 
others. Mr. Steiner, who has been put under examination (mis en examen), by the
magistrate, with respect to this matter, has not been charged.
 
     Mr. Steiner has been cited by a French prosecutor to appear on November 22,
1998, before the Tribunal de Grande Instance de Paris, to answer a charge of
knowingly benefiting in 1990, from a misuse by Mr. Bidermann of corporate assets
of Societe Generale Mobiliere et Immobiliere, a French corporation in which Mr.
Bidermann is believed to have been the sole shareholder.
 
                                        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, 1998, 1997, 1996, 1995 and 1994 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)         1998       1997       1996       1995       1994
     ------------------------------------       --------   --------   --------   --------   --------
<S>                                             <C>        <C>        <C>        <C>        <C>
INCOME STATEMENT DATA:
Net sales.....................................  $420,323   $389,111   $287,880   $222,384   $212,391
                                                --------   --------   --------   --------   --------
Cost of goods sold............................   305,385    279,041    209,609    153,261    144,245
Selling, general and administrative...........    87,296     84,557     64,704     52,389     50,815
Restructuring charges.........................        --         --         --     11,650      6,000
                                                --------   --------   --------   --------   --------
Operating income..............................    27,642     25,513     13,567      5,084     11,331
Unusual item..................................        --         --         --      5,750         --
Non-recurring income..........................   124,041         --         --         --         --
Interest expense, net.........................   (13,960)   (13,090)   (10,972)    (9,809)    (9,089)
                                                --------   --------   --------   --------   --------
Income from continuing operations before taxes
  on income...................................   137,723     12,423      2,595      1,025      2,242
Provision for taxes...........................    56,182      4,970      1,040        550        940
                                                --------   --------   --------   --------   --------
Income from continuing operations.............    81,541      7,453      1,555        475      1,302
                                                --------   --------   --------   --------   --------
Discontinued operations, net of tax
    Loss from discontinued operations, net....        --         --         --         --     (1,905)
    Loss on disposal of discontinued
       operations, net........................        --         --         --         --    (11,093)
                                                --------   --------   --------   --------   --------
                                                      --         --         --         --    (12,998)
                                                --------   --------   --------   --------   --------
Net income (loss).............................  $ 81,541   $  7,453   $  1,555   $    475   $(11,696)
                                                --------   --------   --------   --------   --------
Preferred stock dividends.....................     2,034         --         --         --         --
                                                --------   --------   --------   --------   --------
Net income (loss) available to common
  shareholders................................  $ 79,507   $  7,453   $  1,555   $    475   $(11,696)
                                                ========   ========   ========   ========   ========
Basic earnings (loss) per common share:
    Continuing operations.....................  $   3.46   $   0.32   $   0.09   $   0.03   $   0.07
    Discontinued operations...................        --         --         --         --      (0.72)
                                                --------   --------   --------   --------   --------
Net income (loss) per share...................  $   3.46   $   0.32   $   0.09   $   0.03   $  (0.65)
                                                ========   ========   ========   ========   ========
Diluted earnings (loss) per common share:
    Continuing operations.....................  $   3.10   $   0.31   $   0.08   $   0.03   $   0.07
    Discontinued operations...................        --         --         --         --      (0.72)
                                                --------   --------   --------   --------   --------
Net income (loss) per share...................  $   3.10   $   0.31   $   0.08   $   0.03   $  (0.65)
                                                ========   ========   ========   ========   ========
Weighted average number of common
  shares -- basic.............................    22,995     23,408     18,283     18,002     18,002
                                                ========   ========   ========   ========   ========
Weighted average number of common shares --
  diluted.....................................    26,333     23,673     18,296     18,002     18,002
                                                ========   ========   ========   ========   ========
BALANCE SHEET DATA:
Working capital...............................  $125,398   $270,658   $209,022   $184,087   $214,806
Total assets..................................   425,210    393,901    318,209    241,315    272,357
Long-term debt, less current maturities.......    48,900    165,148    111,900    102,800    134,017
Stockholders' equity..........................   258,110    150,195    142,603    107,504    107,029
</TABLE>
 
     The results of the Hardware Business are included in the periods until
their disposition in January 1998. Fiscal 1998 includes the non-recurring income
on the disposition of the Hardware Business. Fiscal 1994 includes the results of
the Discontinued Subsidiaries which were sold in January 1995. The reserves
recorded in fiscal 1994 were adequate to cover all losses incurred in fiscal
1995 as a result of the divestitures. These transactions materially affect the
comparability of the information stated in the selected consolidated financial
information.
 
     No cash dividends have been paid for the past five years.
 
                                       10
<PAGE>   11
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
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 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 events or circumstances after the date hereof.
 
RESULTS OF OPERATIONS
 
     On January 13, 1998, the Company completed the disposition of substantially
all of the assets and certain liabilities of its Hardware Business to two
wholly-owned subsidiaries of AlliedSignal Inc. (the "Buyers") in exchange for
unregistered shares of AlliedSignal Inc. common stock with an aggregate value
equal to $369 million (the "Hardware Business Disposition"). The purchase price
received for the Hardware Business was based on the consolidated net worth as
reflected on an estimated closing date balance sheet for the assets (and
liabilities) conveyed by the Hardware Business to the Buyers. The estimated
closing date balance sheet is subject to review by the parties, and the purchase
price will be adjusted (up or down) based on the net worth as reflected on the
final closing date balance sheet. The assets transferred to the Buyers consist
primarily of the Company's Hardware Business, which includes the distribution of
bearings, nuts, bolts, screws, rivets and other types of fasteners, and its
PacAero unit. Approximately $194 million of the common stock received from the
Buyers was used to repay outstanding term loans and a portion of the revolver
balance of the Company's subsidiaries and related fees. The remaining investment
in AlliedSignal Inc. common stock has been accounted for as an
available-for-sale security. The Company effected the Hardware Business
Disposition to concentrate its efforts on the rotables and jet engine businesses
and because the Hardware Business Disposition presented a unique opportunity to
realize a significant return. As a result of the Hardware Business Disposition
and the repayment of outstanding term loans and a portion of the revolver
balance, the Company recorded nonrecurring income of $124 million for the twelve
months ended March 31, 1998. For fiscal 1998, the Hardware Business represented
44.1% of the Company's revenues.
 
     In January 1997, the Company, through a subsidiary, consummated the
acquisition of 100% of the outstanding stock of PB Herndon Aerospace, Inc. ("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. PB
Herndon was one of the Company's subsidiaries divested as part of the Hardware
Business Disposition (refer to Notes 2 and 3 in the notes to the consolidated
financial statements).
 
     In March 1996, the stockholders of the Company approved the acquisition of
Harco, Inc. ("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 March 1, 1996. Harco was one of the
Company's subsidiaries divested as part of the Hardware Business Disposition
(refer to Notes 2 and 3 in the notes to consolidated financial statements).
 
                                       11
<PAGE>   12
 
                       ANALYSIS OF RESULTS OF OPERATIONS
           FOR THE FISCAL YEARS ENDED MARCH 31, 1998, 1997, AND 1996
 
<TABLE>
<CAPTION>
                                             1998                    1997                    1996
                                     ---------------------   ---------------------   ---------------------
          (IN THOUSANDS)              AMOUNT    PERCENTAGE    AMOUNT    PERCENTAGE    AMOUNT    PERCENTAGE
          --------------             --------   ----------   --------   ----------   --------   ----------
<S>                                  <C>        <C>          <C>        <C>          <C>        <C>
Net sales..........................  $420,323     100.0%     $389,111     100.0%     $287,880     100.0%
Cost of goods sold.................   305,385      72.7       279,041      71.7       209,609      72.8
                                     --------     -----      --------     -----      --------     -----
Gross profit.......................   114,938      27.3       110,070      28.3        78,271      27.2
Selling, general and
  administrative...................    87,296      20.7        84,557      21.7        64,704      22.5
                                     --------     -----      --------     -----      --------     -----
Operating income...................  $ 27,642       6.6%     $ 25,513       6.6%     $ 13,567       4.7%
                                     ========     =====      ========     =====      ========     =====
</TABLE>
 
OPERATING RESULTS
 
     Net sales of $420.3 million in fiscal 1998 increased by $31.2 million, or
8.0%, compared to sales of $389.1 million in fiscal 1997. The increase in sales
was attributable to an increase in sales of rotables of $32.5 million, or 26.6%,
and an increase in sales of engines of $13.0 million, or 19.0%, partially offset
by a decrease in hardware sales of $14.3 million or 7.2%. Sales of rotables
increased as a result of the introduction of a new product line by DAC
International, Inc. and an exclusive three-year agreement between Solair and
Delta which commenced in August 1997 ("Delta Contract"), whereby Solair was
designated as Delta's sole source supplier of airframe material, including
rotables, repairables and expendables, from the surplus market. In addition, the
Delta Agreement contemplates a consignment arrangement between Delta and Solair
whereby Solair will remarket Delta's excess inventory. This consignment
arrangement has yet to be completed. The decrease in hardware sales was due to
nine months of sales in fiscal 1998, compared to a full year of sales in fiscal
1997, as a result of the Hardware Business Disposition. Net sales in fiscal 1997
increased $101.2 million, compared to fiscal 1996, which reflected (i) an
increase in hardware sales of $62.1 million resulting from the PB Herndon
acquisition and including twelve months of sales from Harco in fiscal 1997
compared to one month in fiscal 1996; (ii) an increase in rotable sales of $24.0
million; and (iii) an increase in engine sales of $15.1 million. On a pro forma
basis excluding the sales recorded by the Hardware Business, net sales increased
30.7% in fiscal 1998 and 29.4% in fiscal 1997, as compared to fiscal 1997 and
1996, respectively.
 
     Gross profit as a percentage of sales was 27.3%, 28.3% and 27.2% in fiscal
1998, 1997 and 1996, respectively. The decrease in the current year was
primarily due to lower margins realized on sales of rotables, which were nearly
offset by higher margins contributed by the engine group. The decreased margins
for the rotable group were primarily the result of a change in product mix. The
increased margins for the engine group was due to the overall improvement in the
aviation market. The increase in fiscal 1997 compared to fiscal 1996 was due
primarily to higher margins realized on the sale of hardware and rotables.
Fiscal 1996 margins were adversely effected by an increase in the supply of
Stage 2 rotables in the marketplace, which in turn had a negative impact on
pricing in that year. The supply and demand of Stage 2 rotables somewhat
stabilized in fiscal 1997 allowing pricing to improve slightly. On a pro forma
basis, excluding the gross profit recorded by the Hardware Business, gross
profit would have been 22.8%, 22.7% and 21.4% in fiscal 1998, 1997 and 1996,
respectively.
 
     Selling, general and administrative ("SG&A") expense as a percentage of
sales was 20.8%, 21.7% and 22.5% in fiscal 1998, 1997 and 1996, respectively.
The decreasing trend was primarily attributable to substantial sales growth
outpacing the growth of SG&A expenses incurred to realize such sales growth. On
a pro forma basis, excluding the SG&A expenses recorded by the Hardware
Business, SG&A expense as a percentage of sales would have been 17.6%, 19.4% and
21.3% in fiscal 1998, 1997 and 1996, respectively.
 
     Operating income of $27.6 million in fiscal 1998 increased $2.1 million
compared to operating income of $25.5 million in fiscal 1997. The increase in
operating income was primarily due to the current year's growth in sales and
increased operational efficiencies. In addition, operating income for fiscal
1998 includes the results of the Hardware Business for only nine months as
compared to the full year for fiscal 1997. Operating income in fiscal 1997
improved by $11.9 million over fiscal 1996 primarily due to increased sales and
improved margins
 
                                       12
<PAGE>   13
 
resulting from a turnaround in the aerospace industry. On a pro forma basis to
exclude the results of the Hardware Business, operating income increased $5.7
million in fiscal 1998, as compared to fiscal 1997, and $5.3 million in fiscal
1997, as compared to fiscal 1996.
 
     Foreign sales accounted for 28.7%, 29.3% and 32.0% of the Company's total
sales for the fiscal years ended March 31, 1998, 1997 and 1996, respectively.
Foreign sales to Asia (excluding Japan) accounted for 5.2%, 6.6%, and 6.4% of
the Company's total sales for the fiscal years ended March 31, 1998, 1997, and
1996, respectively. The Company expects that the current Asian economic crisis
will not have a material impact on its future operating results.
 
     The following unaudited pro forma table illustrates consolidated sales and
operating income of the Company's operations, on a pro forma basis for the
twelve months ended March 31, 1998, 1997 and 1996 to give effect to the
disposition of substantially all of the assets and certain liabilities of the
Hardware Business for the past three years. The unaudited pro forma consolidated
financial information is based on the historical financial information of the
Company for the twelve months ended March 31, 1998, 1997 and 1996. The unaudited
pro forma consolidated financial information is presented for informational
purposes only and is not necessarily indicative of what earnings and results of
operations would have been had the Company disposed of the Hardware Business 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.
 
<TABLE>
<CAPTION>
                                             1998                    1997                    1996
                                     ---------------------   ---------------------   ---------------------
          (IN THOUSANDS)              AMOUNT    PERCENTAGE    AMOUNT    PERCENTAGE    AMOUNT    PERCENTAGE
          --------------             --------   ----------   --------   ----------   --------   ----------
<S>                                  <C>        <C>          <C>        <C>          <C>        <C>
Net Sales..........................  $212,757     100.0%     $162,737     100.0%     $125,737     100.0%
Cost of goods sold.................   164,283      77.2       125,728      77.3        98,879      78.6
                                     --------     -----      --------     -----      --------     -----
Gross profit.......................    48,474      22.8        37,009      22.7        26,858      21.4
Selling, general and
  administrative...................    37,420      17.6        31,623      19.4        26,778      21.3
                                     --------     -----      --------     -----      --------     -----
Operating income...................  $ 11,054       5.2%     $  5,386       3.3%     $     80       0.1%
                                     ========     =====      ========     =====      ========     =====
</TABLE>
 
INTEREST EXPENSE
 
     Interest expense for fiscal 1998, 1997 and 1996 amounted to $14.0 million,
$13.1 million and $11.0 million, respectively. The increase in interest expense
in fiscal 1998 compared to fiscal 1997 was primarily due to higher average debt
outstanding coupled with a slight increase in the effective interest rate. The
increase in interest expense in fiscal 1997 compared to fiscal 1996 was
primarily due to higher average debt outstanding, offset by a slight decrease in
the effective interest rate. The effective interest rate for fiscal 1998, 1997
and 1996 was 9.3%, 9.1% and 9.3%, respectively. The average debt outstanding for
fiscal 1998, 1997 and 1996 amounted to $147.5 million, $141.2 million and $108.1
million, respectively. The Company utilized approximately $194 million of the
proceeds received from the Hardware Business Disposition to reduce its debt. As
a result, future interest expense is expected to decrease substantially.
 
INCOME TAXES
 
     The tax provisions on income from operations for the fiscal years ended
March 31, 1998, 1997 and 1996 were $56.2 million, $5.0 million and $1.0 million,
respectively. The effective tax rates for fiscal years 1998, 1997 and 1996 were
40.8%, 40.0% and 40.1%, respectively, which approximate the combined Federal and
State effective tax rates.
 
NET INCOME
 
     For the fiscal years ended March 31, 1998, 1997 and 1996, the Company
recorded net income available to common shareholders of $79.5 million, or $3.46
basic earnings per common share, $7.5 million, or $0.32 basic earnings per
common share and $1.6 million, or $0.09 basic earnings 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.
 
                                       13
<PAGE>   14
 
COMPREHENSIVE INCOME
 
     Comprehensive income includes unrealized holding gains in the fair market
value of the AlliedSignal Inc. common stock which was received from the Hardware
Business Disposition and is classified as available-for-sale securities. The
fair market value of unrealized holding securities increased by $14.3 million,
net of taxes, for the twelve months ended March 31, 1998.
 
LIQUIDITY
 
     Total capitalization as of March 31, 1998 and 1997 amounted to $307.0
million and $315.6 million, respectively. The changes in the components of
capitalization included a decrease in debt of $116.5 million and an increase in
equity of $107.9 million. The decrease in debt was primarily the result of the
repayment of outstanding term loans with approximately $194 million of
AlliedSignal Inc. common stock received in the Hardware Business Disposition,
partially offset by additional borrowings. The increase in equity was primarily
due to the net income for the fiscal year ended March 31, 1998, which included
the non-recurring income of $124.0 million recorded as a result of the Hardware
Business Disposition and the $14.3 million net unrealized gain recorded on the
appreciation of the AlliedSignal Inc. common stock. Equity also increased $33.9
million as a result of the issuance of Preferred Stock in June 1997. In January
1998, the Company repurchased 2,246,967 shares of Common Stock for a total cost
of $23.3 million (refer to Note 14 in the notes to the consolidated financial
statements).
 
     In connection with the Hardware Business Disposition, the Company recorded
its investment in AlliedSignal Inc. common stock as an available-for-sale
investment, the value of which was $206.6 million at March 31, 1998. Although
the value of the AlliedSignal Inc. common stock appreciated a total of $23.4
million from the date of the closing of the Hardware Business Disposition to the
end of the fiscal year, there is risk associated with market fluctuation of this
investment which is inherent to stock investments.
 
     Net cash used for operating activities for the fiscal year ended March 31,
1998 and March 31, 1997 amounted to $85.0 million and $32.7 million,
respectively. The primary use of cash for operating activities in fiscal 1998
and 1997 was an increase in inventory of $56.2 million and $37.5 million,
respectively, which was mainly to support the Company's sales growth.
 
     Net cash used for investing activities for the fiscal year ended March 31,
1998 amounted to $4.6 million which was used primarily for the acquisition of
property, plant and equipment. 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 3 in the
notes to consolidated financial statements).
 
     Net cash provided by financing activities for the fiscal year ended March
31, 1998 amounted to $89.6 million which was due to increased borrowings under
the Company's credit agreement and the issuance of Preferred Stock, offset by
the repayment of debt, and the Company's purchase of treasury stock. 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 Notes 4 and 7 in the notes to consolidated financial
statements).
 
     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, any further increases in
working capital, capital expenditures and potential acquisitions. The Company is
in the process of upgrading certain of its management information systems, which
will result in additional investments in hardware and software.
 
YEAR 2000
 
     As the year 2000 approaches, the Company is preparing all of its computer
systems to be Year 2000 compliant. A review of all the computer systems
currently used throughout the Company has been performed. A number of the
Company's computer systems are currently Year 2000 compliant. The remaining
computer systems are expected to be either replaced or upgraded. The Company
expects all of its computer systems will be Year 2000 compliant on a timely
basis. However, there can be no assurance that the systems of other
                                       14
<PAGE>   15
 
companies on which the Company's systems rely will also be timely converted, or
that any such failure to convert by another company would not have an adverse
effect on the Company's systems. The cost of ensuring that all systems are Year
2000 compliant is being assessed.
 
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures
about Segments of an Enterprise and Related Information". SFAS 131 supersedes
Statement of Financial Accounting Standards No. 14 "Financial Reporting for
Segments of a Business Enterprise" and requires that a public company report
certain information about its operating segments in annual and interim financial
reports. The Company currently operates in only one reportable segment.
 
     In February 1998, FASB issued Statement of Financial Accounting Standards
No. 132 ("SFAS 132") "Employers' Disclosures about Pensions and Other
Postretirement Benefits". SFAS 132 revises and improves the effectiveness of
current note disclosure requirements for employers' pensions and other retiree
benefits by requiring additional information to facilitate financial analysis
and eliminating certain disclosures which are no longer useful. SFAS 132 does
not address recognition or measurement issues. The Company will adopt SFAS 132
in fiscal 1999.
 
                                       15
<PAGE>   16
 
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                            MARCH 31, 1998 AND 1997
 
<TABLE>
<CAPTION>
                       (IN THOUSANDS)                           1998       1997
                       --------------                         --------   --------
<S>                                                           <C>        <C>
                                     ASSETS
Current Assets:
    Receivables, less allowances of $2,881 in 1998 and
      $4,420 in 1997........................................  $ 48,046   $ 64,382
    Inventories.............................................   122,236    253,781
    Future tax benefits.....................................        --     11,307
    Other...................................................    29,741     11,375
                                                              --------   --------
                                                               200,023    340,845
                                                              --------   --------
Property, Plant and Equipment, at cost:
    Land....................................................        15        453
    Buildings and improvements..............................     2,430      9,519
    Machinery and equipment.................................     8,056     19,408
                                                              --------   --------
                                                                10,501     29,380
    Accumulated depreciation................................    (6,008)   (14,046)
                                                              --------   --------
                                                                 4,493     15,334
                                                              --------   --------
Other Assets:
    Investments.............................................   206,626         --
    Cost in excess of net tangible assets of purchased
      businesses, net.......................................    12,292     33,003
    Other...................................................     1,776      4,719
                                                              --------   --------
                                                               220,694     37,722
                                                              --------   --------
         Total assets.......................................  $425,210   $393,901
                                                              ========   ========
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
    Current maturities of long-term debt....................  $     --   $    301
    Accounts payable........................................    27,431     38,864
    Accrued salaries........................................     2,568      5,968
    Other...................................................    44,626     25,054
                                                              --------   --------
                                                                74,625     70,187
                                                              --------   --------
Long-Term Liabilities:
    Long-term debt, less current maturities.................    48,900    165,148
    Deferred federal and state income tax...................    41,194         --
    Other...................................................     2,381      8,371
                                                              --------   --------
                                                                92,475    173,519
                                                              --------   --------
         Total liabilities..................................   167,100    243,706
                                                              --------   --------
Stockholders' Equity:
    Preferred stock; $.01 par value, 10,000 shares
      authorized, 3,810 issued and outstanding at March 31,
      1998 and no shares authorized, issued and outstanding
      at March 31, 1997.....................................        38         --
    Common stock; $1.00 par value, 50,000 shares authorized,
      23,642 shares issued, 21,395 shares outstanding, at
      March 31, 1998 and 30,000 shares authorized, 23,420
      shares issued and outstanding at March 31, 1997.......    23,642     23,420
    Less: treasury stock at cost, 2,247 shares held in
      treasury at March 31, 1998............................   (23,331)        --
    Paid-in capital.........................................   150,460    113,236
    Retained earnings.......................................    93,046     13,539
    Accumulated other comprehensive income..................    14,255         --
                                                              --------   --------
                                                               258,110    150,195
                                                              --------   --------
         Total liabilities and stockholders' equity.........  $425,210   $393,901
                                                              ========   ========
</TABLE>
 
          The accompanying notes to consolidated financial statements
           are an integral part of these consolidated balance sheets.
 
                                       16
<PAGE>   17
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
                         CONSOLIDATED INCOME STATEMENTS
            FOR THE FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
 
<TABLE>
<CAPTION>
            (IN THOUSANDS EXCEPT PER SHARE DATA)                1998       1997       1996
            ------------------------------------              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Net sales...................................................  $420,323   $389,111   $287,880
                                                              --------   --------   --------
Cost of goods sold..........................................   305,385    279,041    209,609
Selling, general and administrative.........................    87,296     84,557     64,704
                                                              --------   --------   --------
     Operating income.......................................    27,642     25,513     13,567
Non-recurring income........................................   124,041         --         --
Interest expense, net.......................................   (13,960)   (13,090)   (10,972)
                                                              --------   --------   --------
     Income from operations before taxes on income..........   137,723     12,423      2,595
Provision for taxes.........................................    56,182      4,970      1,040
                                                              --------   --------   --------
Net income..................................................  $ 81,541   $  7,453   $  1,555
                                                              --------   --------   --------
Preferred stock dividends...................................    (2,034)        --         --
                                                              --------   --------   --------
Net income available to common shareholders.................  $ 79,507   $  7,453   $  1,555
                                                              ========   ========   ========
 
Basic earnings per common share.............................  $   3.46   $   0.32   $   0.09
                                                              ========   ========   ========
Diluted earnings per common share...........................  $   3.10   $   0.31   $   0.08
                                                              ========   ========   ========
 
Weighted average number of shares outstanding -- basic......    22,995     23,408     18,283
Weighted average number of shares outstanding -- diluted....    26,333     23,673     18,296
 
Net income..................................................  $ 81,541   $  7,453   $  1,555
Other comprehensive income:
Unrealized gain on available-for-sale securities (net of tax
  of $9,113)................................................    14,255         --         --
                                                              --------   --------   --------
Comprehensive income........................................  $ 95,796   $  7,453   $  1,555
                                                              ========   ========   ========
</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 STOCKHOLDERS' EQUITY
            FOR THE FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                                                          ACCUMULATED
                                                                                             OTHER
                                  PREFERRED   COMMON    TREASURY   PAID-IN    RETAINED   COMPREHENSIVE
         (IN THOUSANDS)             STOCK      STOCK     STOCK     CAPITAL    EARNINGS      INCOME        TOTAL
         --------------           ---------   -------   --------   --------   --------   -------------   --------
<S>                               <C>         <C>       <C>        <C>        <C>        <C>             <C>
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
    Issuance of preferred
      stock.....................       37          --         --     33,839        --            --        33,876
    Exercise of stock options...       --         218         --      1,135        --            --         1,353
    Purchase of common stock....       --          --    (23,331)        --        --            --       (23,331)
    Conversion of stock.........       --           4         --         (4)       --            --            --
    Acceleration of stock option
      vesting...................       --          --         --        221        --            --           221
    Unrealized holding gain from
      available-for-sale
      securities................       --          --         --         --        --        14,255        14,255
    Dividends...................        1          --         --      2,033    (2,034)           --            --
    Net income..................       --          --         --         --    81,541            --        81,541
                                   ------     -------   --------   --------   -------       -------      --------
BALANCE, MARCH 31, 1998.........   $   38     $23,642   $(23,331)  $150,460   $93,046       $14,255      $258,110
                                   ======     =======   ========   ========   =======       =======      ========
</TABLE>
 
          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.
 
                                       18
<PAGE>   19
 
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
            FOR THE FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
 
<TABLE>
<CAPTION>
                       (IN THOUSANDS)                           1998        1997       1996
                       --------------                         ---------   --------   --------
<S>                                                           <C>         <C>        <C>
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES
     Net income.............................................  $  81,541   $  7,453   $  1,555
     Adjustments to reconcile net income to net cash
       provided by (used for) operating activities:
          Depreciation and amortization.....................      4,951      4,795      3,435
          Gain on disposition of businesses.................   (124,041)        --         --
          Change in receivables.............................    (37,880)    (5,599)   (16,270)
          Change in inventories.............................    (56,206)   (37,519)   (17,513)
          Change in payables and accrued liabilities........     18,717      3,492     33,294
          Change in other accounts..........................     27,881     (5,314)    (1,817)
                                                              ---------   --------   --------
               Net cash provided by (used for) operating
                 activities.................................    (85,037)   (32,692)     2,684
                                                              ---------   --------   --------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
     Acquisition of property, plant and equipment...........     (4,587)    (4,600)    (8,505)
     Business acquisitions, net of cash acquired............         --    (15,789)        --
                                                              ---------   --------   --------
               Net cash used for investing activities.......     (4,587)   (20,389)    (8,505)
                                                              ---------   --------   --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
     Proceeds from borrowings...............................    112,775    103,000     78,600
     Repayments of debt.....................................    (35,049)   (50,058)   (74,750)
     Proceeds from issuance of preferred stock..............     33,876         --         --
     Purchase of treasury stock.............................    (23,331)        --         --
     Exercise of stock options..............................      1,353        139         21
                                                              ---------   --------   --------
               Net cash provided by financing activities:...     89,624     53,081      3,871
                                                              ---------   --------   --------
NET INCREASE (DECREASE) IN CASH.............................         --         --     (1,950)
CASH, BEGINNING OF PERIOD...................................         --         --      1,950
                                                              ---------   --------   --------
CASH, END OF PERIOD.........................................  $      --   $     --   $     --
                                                              =========   ========   ========
SUPPLEMENTAL CASH FLOW INFORMATION
     Interest paid..........................................  $  13,543   $ 11,326   $  8,504
     Income taxes paid (net of refunds).....................      5,649      6,854      2,188
</TABLE>
 
          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.
 
                                       19
<PAGE>   20
 
                    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 an initial 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 the additional shares of the Company's Common
Stock issued in connection with the acquisition of Harco, Inc. in fiscal 1996,
Fairchild became the majority owner of the Company and owned 59.3% of the
Company's Common Stock as of March 31, 1997 (refer to Note 3 in the notes to
consolidated financial statements). In January 1998, the Company repurchased
2,246,967 shares of its own Common Stock for a total cost of $23,331 which
increased Fairchild's ownership to 66.3% at the end of fiscal 1998. On June 9,
1998, Fairchild completed an Exchange Offer pursuant to which it acquired
3,659,424 shares of the Company's Common Stock in exchange for shares of
Fairchild common stock (the "Exchange Offer"). As a result of the Exchange
Offer, Fairchild's beneficial ownership of the Company's Common Stock increased
to 85.4% (refer to Note 16 in the notes to consolidated financial statements).
 
     The Company is an international supplier to the aerospace industry,
distributing a wide range of aircraft parts and related support services. The
Company's products are divided into two product groups: rotables and engines.
The Company's hardware product group, which included bearings, nuts, bolts,
screws, rivets and other types of fasteners, was disposed of as part of a
business combination completed on January 13, 1998 (refer to Note 2 in the notes
to consolidated financial statements). 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 and
customer tailored inventory management programs. The Company also provides both
long-term and short-term engine leasing services to commercial airlines and air
cargo carriers. Through its subsidiaries, the Company sells its products in the
United States and abroad to most of the world's commercial airlines and air
cargo carriers, as well as other distributors, fixed-based operations, corporate
aircraft operators and other aerospace and non-aerospace companies.
 
  Fiscal Year
 
     The fiscal year ("fiscal") of the Company ends March 31. All references
herein to "1998," "1997," and "1996" means the fiscal years ended March 31,
1998, 1997 and 1996.
 
  Principles of Consolidation
 
     The accompanying consolidated balance sheet includes the accounts of all
the Company's subsidiaries as of March 31, 1998:
 
Banner Aerospace-Singapore, Inc.
DAC International, Inc.
Dallas Aerospace, Inc.
Georgetown Jet Center, Inc.
Matrix Aviation, Inc.
NASAM Incorporated
Professional Aviation Associates, Inc.
Solair, Inc.
 
                                       20
<PAGE>   21
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
1.  SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
     As a result of the disposition of certain subsidiaries (refer to Note 2 in
the notes to consolidated financial statements), the operating results of the
following operating subsidiaries were included in the accompanying consolidated
financial statements until January 1998:
 
Adams Industries, Inc.
Aerospace Bearing Support, Inc.
Aircraft Bearing Corporation
BAI, Inc.
Banner Distribution, Inc.
Burbank Aircraft Supply, Inc.
Harco, Inc.
PacAero
PB Herndon Aerospace, Inc.
 
     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 specific identification and first-in, first-out ("FIFO").
 
  Deferred Loan Costs
 
     Deferred loan costs associated with various debt issues are being amortized
over the terms of the related debt, based on the amount of outstanding debt,
using the effective interest method. Amortization expense for these loan costs
for fiscal 1998, 1997 and 1996 was $923, $948 and $589, respectively.
 
  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 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 1998, 1997 or 1996.
 
  Long-Lived Assets
 
     In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be
 
                                       21
<PAGE>   22
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
1.  SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Disposed Of". SFAS 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, and for long-lived assets and certain
identifiable intangibles to be disposed of. The Company reviews its long-lived
assets, including property, plant and equipment, identifiable intangibles and
goodwill, for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be fully recoverable. To
determine recoverability of its long-lived assets the Company evaluates the
probability that future undiscounted net cash flows will be less than the
carrying amount of the assets. Impairment is measured based on the difference
between the carrying amount of the assets and fair value. The implementation of
SFAS 121 did not have a material effect 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. The
carrying amount of investments are marked to market value. Long-term debt
approximates fair value at March 31, 1998, as the 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 $1,018, $912 and
$575 in fiscal 1998, 1997 and 1996, respectively. Accumulated amortization at
March 31, 1998 and 1997 was $4,290 and $7,637, respectively.
 
  Earnings Per Common Share
 
     Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share" (SFAS 128). This statement
replaces the previously reported primary and fully diluted earnings per common
share with basic earnings per common share and diluted earnings per common
share. Unlike primary earnings per common share, basic earnings per common share
excludes any dilutive effects of stock options. All earnings per common share
have been restated to conform to the requirements of SFAS 128.
 
                                       22
<PAGE>   23
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
1.  SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
     Following is a reconciliation of the computations of basic earnings per
common share and diluted earnings per common share for the years ended March 31,
1998 and 1997.
 
<TABLE>
<CAPTION>
                                                                   FOR THE YEAR
                                                                  ENDED MARCH 31,
                                                              -----------------------
           (IN THOUSANDS, EXCEPT PER SHARE DATA)                1998           1997
           -------------------------------------              --------       --------
<S>                                                           <C>            <C>
BASIC EARNINGS PER COMMON SHARE:
Net income available to common shareholders.................  $79,507        $ 7,453
Weighted average shares outstanding.........................   22,995         23,408
                                                              -------        -------
Basic earnings per common share.............................  $  3.46        $  0.32
                                                              =======        =======
DILUTED EARNINGS PER COMMON SHARE:
Net income..................................................  $81,541        $ 7,453
Weighted average shares outstanding.........................   22,995         23,408
Incremental shares due to assumed conversion of preferred
  stock.....................................................    2,975             --
Incremental shares due to assumed exercise and repurchase of
  stock options.............................................      363            265
                                                              -------        -------
                                                               26,333         23,673
                                                              -------        -------
Diluted earnings per common share...........................  $  3.10        $  0.31
                                                              =======        =======
</TABLE>
 
     Options to purchase 60,000 and 100,000 shares of common stock were
outstanding, but were not included in the computation of diluted earnings per
common share because the options' exercise price was greater than the average
market price of common shares for the twelve months ended March 31, 1998 and
1997, respectively.
 
     Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 129 "Disclosure of Information about Capital Structure"
(SFAS 129). This statement establishes standards for disclosing information
about an entity's capital structure. The Company's Preferred Stock pays annual
dividends of additional Preferred Stock at 7.5% per annum of the liquidation
value of $9.20 per share. Each share of Preferred Stock is convertible into one
share of Common Stock at any time; however, all shares not previously converted
will automatically be converted into Common Stock on the fifth anniversary of
the date of initial issuance of the Preferred Stock (June 19, 2002). The
Preferred Stock has no voting rights.
 
  Comprehensive Income
 
     Effective March 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income". SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in the financial statements.
 
  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 1997 and 1996 have been reclassified to conform
to the fiscal 1998 presentation.
 
                                       23
<PAGE>   24
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
1.  SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
  Recently Issued Accounting Pronouncements
 
     In June 1997, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures
about Segments of an Enterprise and Related Information". SFAS 131 supersedes
Statement of Financial Accounting Standards No. 14 "Financial Reporting for
Segments of a Business Enterprise" and requires that a public company report
certain information about its operating segments in annual and interim financial
reports. The Company currently operates in only one reportable segment.
 
     In February 1998, FASB issued Statement of Financial Accounting Standards
No. 132 ("SFAS 132") "Employers' Disclosures about Pensions and Other
Postretirement Benefits". SFAS 132 revises and improves the effectiveness of
current note disclosure requirements for employers' pension and other retiree
benefits by requiring additional information to facilitate financial analysis
and eliminating certain disclosures which are no longer useful. SFAS 132 does
not address recognition or measurement issues. The Company will adopt SFAS 132
in fiscal 1999.
 
2.  DISPOSITIONS:
 
     On January 13, 1998, the Company completed the disposition of substantially
all of the assets and certain liabilities of its hardware companies and PacAero
unit (the "Hardware Business") to two wholly-owned subsidiaries of AlliedSignal
Inc. (the "Buyers") in exchange for unregistered shares of AlliedSignal Inc.
common stock with an aggregate value equal to $369,000 (the "Hardware Business
Disposition"). The determination of the number of AlliedSignal Inc. shares
received by the Company was based on the average closing price of such stock on
the New York Stock Exchange for a period of twenty days preceding the closing.
The Hardware Business consisted of the following companies: Adams Industries,
Inc., Aerospace Bearing Support, Inc., Aircraft Bearing Corporation, Banner
Distribution, Inc., Burbank Aircraft Supply, Inc., Harco, Inc., PB Herndon
Aerospace, Inc. (which collectively comprise the Company's hardware business),
Banner Aerospace Services, Inc. (which transferred only those assets related to
the Hardware Business) and PacAero. The purchase price received for the Hardware
Business was based on the consolidated net worth as reflected on an estimated
closing date balance sheet for the assets (and liabilities) conveyed by the
Hardware Business to the Buyers. Such estimated closing date balance sheet is
subject to review by the parties, and the purchase price will be adjusted (up or
down) based on the net worth as reflected on the final closing date balance
sheet. The assets transferred to the Buyers consist primarily of the Company's
hardware business, which includes the distribution of bearings, nuts, bolts,
screws, rivets and other types of fasteners, and its PacAero unit. Approximately
$194,000 of the common stock received from the Buyers was used to repay
outstanding term loans and a portion of the revolver balance of the Company's
subsidiaries and related fees. The remaining investment in AlliedSignal Inc.
common stock has been accounted for as an available-for-sale security. The
Company effected the Hardware Business Disposition to concentrate its efforts on
the rotables and jet engine businesses and because the Hardware Business
Disposition presented a unique opportunity to realize a significant return. As a
result of the Hardware Business Disposition and the repayment of outstanding
term loans and a portion of the revolver balance, the Company recorded
non-recurring income of $124,041 for the twelve months ended March 31, 1998.
 
     On January 2, 1998, the Company disposed of BAI, Inc. ("BAI") through a
stock purchase agreement. The Company did not realize a material gain on the
transaction.
 
     The following unaudited pro forma table illustrates consolidated sales and
operating income of the Company's operations, on a pro forma basis for the
twelve months ended March 31, 1998, 1997 and 1996 to give effect to the
disposition of substantially all of the assets and certain liabilities of the
Hardware Business and BAI for the past three years. The unaudited pro forma
consolidated financial information is based on the
 
                                       24
<PAGE>   25
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2.  DISPOSITIONS -- (CONTINUED)
historical financial information of the Company for the twelve months ended
March 31, 1998, 1997 and 1996. The unaudited pro forma consolidated financial
information is presented for informational purposes only and is not necessarily
indicative of what earnings and results of operations would have been had the
Company disposed of the Hardware Business and BAI 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, 1998, 1997 AND 1996
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                          1998       1997       1996
                                                        --------   --------   --------
<S>                                                     <C>        <C>        <C>
Net sales.............................................  $212,757   $162,737   $125,737
Cost of goods sold....................................   164,283    125,728     98,879
                                                        --------   --------   --------
Gross profit..........................................    48,474     37,009     26,858
Selling, general and administrative...................    37,420     31,623     26,778
                                                        --------   --------   --------
Operating income......................................  $ 11,054   $  5,386   $     80
                                                        ========   ========   ========
</TABLE>
 
3.  ACQUISITIONS:
 
     On January 16, 1997, the Company, through its subsidiary, Dallas Aerospace,
Inc., consummated the acquisition of PB Herndon Aerospace ("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 (refer to Note
7 in the notes to the consolidated financial statements) 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 was being amortized over 40
years. PB Herndon was one of the Company's subsidiaries divested as part of the
Hardware Business Disposition (refer to Note 2 in the notes to the consolidated
financial statements). The results of operations of PB Herndon have been
included in the consolidated results from April 1, 1997 up to the closing of the
Hardware Business Disposition.
 
     In March 1996, the Company acquired Harco, Inc. ("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% 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 was being amortized over 40 years. Harco was one of the Company's
subsidiaries divested as part of the Hardware Business Disposition (refer to
Note 2 in the notes to consolidated financial statements). The results of
operations of Harco have been included in the consolidated results as of March
1, 1996 up to the closing of the Hardware Business Disposition.
 
                                       25
<PAGE>   26
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
4.  NOTES PAYABLE AND LONG-TERM DEBT:
 
     At March 31, 1998 and 1997, notes payable and long-term debt consisted of
the following:
 
<TABLE>
<CAPTION>
                                                                               WEIGHTED
                                                                               AVERAGE
                                                                            INTEREST RATES
                                                                            --------------
                                                        1998       1997     1998      1997
                                                      --------   --------   ----      ----
<S>                                                   <C>        <C>        <C>       <C>
Senior Bank Loans:
     Term...........................................  $    --    $114,350   9.3%      9.2%
     Revolver.......................................   48,900      19,900   9.3%      9.2%
Subordinated debt...................................       --      28,000   8.4%      8.4%
Other debt..........................................       --       2,419   7.5%      7.0%
Capital leases......................................       --         780   8.2%      8.4%
                                                      -------    --------   ---       ---
                                                       48,900     165,449   9.3%      9.1%
                                                                            ===       ===
Less: Current maturities............................       --         301
                                                      -------    --------
Net long-term debt..................................  $48,900    $165,148
                                                      =======    ========
</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 accounts receivables and inventories. 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 incurrence of subordinated debt and certain acquisitions. On
November 25, 1997, the Company amended the Second Amended and Restated Credit
Agreement to provide additional financing. Immediately following this amendment,
the facility under the Second Amended and Restated Credit Agreement included (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 $121,500 six-year revolving credit facility ("Revolver"). On January 13,
1998, the Hardware Business repaid the outstanding balances of the Term Loan,
Tranche B Loan and Tranche C Loan in conjunction with the Hardware Business
Disposition.
 
     Based on the Company's financial performance, the Revolver bears interest
at prime plus 1/4% to 1 1/4% or London Interbank Offered Rate ("LIBOR") plus
1 1/2% to 2 3/4% and is subject to a nonuse fee of 30 to 50 basis points of the
unused availability. On March 31, 1998, the Company's performance level resulted
in borrowings under the Revolver bearing interest at prime plus 1/4% and LIBOR
plus 1 1/2% and a nonuse fee of 30 basis points for the quarter ending June 30,
1998. 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 minimum net worth and minimum
earnings levels, 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
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, 1998, 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
 
                                       26
<PAGE>   27
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
4.  NOTES PAYABLE AND LONG-TERM DEBT -- (CONTINUED)
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, 1998 and 1997, the Company had unused bank lines of credit
aggregating $72,600 and $51,600, respectively. No cash balances were subject to
withdrawal restrictions. At March 31, 1998 and 1997, the Company had outstanding
letters of credit of $1,309 and $472, respectively.
 
     Other fiscal 1998 debt included an unsecured demand promissory note
("Promissory Note") from RHI which was repaid in June 1997 (refer to Note 7 in
the notes to the consolidated financial statements) and a mortgage on the
distribution center building located in Salt Lake City, Utah, which was repaid
as part of the Hardware Business Disposition.
 
     Scheduled reductions in the availability under the Second Amended and
Restated Credit Agreement is $48,900 in fiscal 2002.
 
     The debt that would otherwise be classified as a current liability in
fiscal 1997 was subsequently 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.
 
5.  INCOME TAXES:
 
     The components of income tax expense (benefit) for the fiscal years ended
March 31, 1998, 1997 and 1996 were as follows:
 
<TABLE>
<CAPTION>
                                                             1998       1997       1996
                                                           --------   --------   --------
<S>                                                        <C>        <C>        <C>
Current:
     Federal.............................................  $ 2,842    $ 6,896    $ 3,261
     State...............................................      499      1,130        150
     Foreign.............................................      340        240        100
                                                           -------    -------    -------
                                                             3,681      8,266      3,511
                                                           -------    -------    -------
Deferred:
     Federal.............................................   49,548     (3,296)    (2,471)
     State...............................................    2,953         --         --
                                                           -------    -------    -------
                                                            52,501     (3,296)    (2,471)
                                                           -------    -------    -------
          Total income tax expense.......................  $56,182    $ 4,970    $ 1,040
                                                           =======    =======    =======
</TABLE>
 
                                       27
<PAGE>   28
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
5.  INCOME TAXES -- (CONTINUED)
     The following is a reconciliation of the Federal income tax at the
statutory rate to income tax expense (benefit) from operations for the fiscal
years ended March 31, 1998, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                               1998       1997       1996
                                                             --------   --------   --------
<S>                                                          <C>        <C>        <C>
Federal income tax at the statutory rate...................  $48,202     $4,348     $ 880
Goodwill amortization......................................      345        318       200
Foreign Sales Corporation..................................     (372)      (456)     (200)
State taxes................................................     (175)      (353)      (51)
Difference between book and tax basis of disposed
  subsidiaries.............................................    4,634         --        --
Other, net.................................................     (244)      (257)      (39)
                                                             -------     ------     -----
Provision for income taxes.................................  $52,390     $3,600     $ 790
                                                             =======     ======     =====
</TABLE>
 
     The net deferred tax assets (liabilities) consisted of the following
components at March 31, 1998 and 1997:
 
<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------   --------
<S>                                                           <C>        <C>
Deferred tax assets:
     Inventories............................................  $     --   $ 5,432
     Capital loss...........................................       354     2,787
     Accounts receivable....................................     1,737     2,206
     Compensation...........................................       603     1,036
     Other deferred tax assets, net.........................     3,042     2,888
                                                              --------   -------
Total deferred tax assets...................................     5,736    14,349
Valuation reserve...........................................        --    (2,787)
Deferred tax liabilities:
     Difference between book and tax basis of investments...   (45,619)       --
     Inventories............................................    (1,241)       --
     Other..................................................       (70)     (255)
                                                              --------   -------
Total deferred tax liabilities..............................   (46,930)     (255)
                                                              --------   -------
Net deferred tax assets (liabilities).......................  $(41,194)  $11,307
                                                              ========   =======
</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, 1998,
the amount of domestic taxes payable upon distribution of such earnings was not
significant.
 
6.  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 1998, 1997
and 1996 was $656, $625 and $445, respectively.
 
     During fiscal 1995, the Company adopted a Supplemental Executive Retirement
Plan (the "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
 
                                       28
<PAGE>   29
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6.  PENSIONS -- (CONTINUED)
primary Social Security benefit. The expense for the Plan was $210, $140 and
$165 for fiscal 1998, 1997 and 1996, respectively.
 
7.  RELATED PARTY TRANSACTIONS:
 
     On May 23, 1997, the Company granted all of its stockholders certain rights
to purchase Series A Convertible Paid-in-Kind Preferred Stock, $.01 par value.
On June 19, 1997, the Company issued Fairchild 3,085,885 shares of Preferred
Stock for $28,390 (refer to Note 14 in the notes to consolidated financial
statements).
 
     The Company entered into a Stock Exchange Agreement with Fairchild,
effective May 12, 1997, pursuant to which the Company could acquire Fairchild
Scandinavian Bellyloading Company AB ("FSBC") from Fairchild in exchange for
230,000 shares of Common Stock initially. This transaction was approved by a
special committee of the Board of Directors, and was approved by the Company's
stockholders at a meeting on June 18, 1997. Under the terms of the Stock
Exchange Agreement, Fairchild could terminate the agreement if it sold FSBC to a
third party by reason of an unsolicited offer, but Fairchild would be obligated
to pay the Company a reasonable termination fee and the Company's out-of-pocket
expenses. On July 1, 1997, Fairchild exercised its option to terminate the Stock
Exchange Agreement. As a result, Fairchild paid the Company a termination fee of
$300 and out of pocket expenses of $447, and also agreed to allow the Company to
participate equally in future royalties from FSBC, if any.
 
     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 in fiscal 1997 to RHI totaled $156.
 
     On December 20, 1996, the Company entered into an unsecured subordinated
loan agreement ("Subordinated Loan") with RHI. The purpose of the Subordinated
Loan was to provide funds for acquisitions and any necessary future working
capital requirements of the acquired companies. The Subordinated Loan bore
interest at 10.0% per annum for the period commencing on the date of the initial
draw and continuing for a period of six months from the initial draw date.
Thereafter, the Subordinated Loan bore interest at 11.2% per annum. The
principal and accrued interest were deferred until the maturity date of November
15, 2003, subject to certain acceleration in certain events specified in the
Subordinated Loan. A commitment fee of 1.5% per annum for six months from the
initial draw date, and 3.0% per annum thereafter, was accrued and payable on the
last day of each month, based on the balance outstanding. 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. The Subordinated Loan was
repaid in June 1997 as a result of the Preferred Stock issuance. Interest paid
to RHI from December 1996 to June 1997 totaled $1,047.
 
     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, 1998, 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 $1,530, $1,246 and $456 in
fiscal 1998, 1997 and 1996, 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.
                                       29
<PAGE>   30
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
7.  RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Company received $186 from Fairchild in fiscal 1998 for accounting support
the Company provided Fairchild.
 
     The Company had sales of products to Fairchild of $220, $122 and $48 and
purchases of products from Fairchild of $13,200, $9,384 and $5,522 in fiscal
1998, 1997 and 1996, respectively, all in the ordinary course of business.
 
8.  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, 1998
 
<TABLE>
<CAPTION>
                                                                    QUARTERS ENDED
                                                  ---------------------------------------------------
                                                  JUNE 30,   SEPTEMBER 30,   DECEMBER 31,   MARCH 31,
                                                    1997         1996            1997         1998
                                                  --------   -------------   ------------   ---------
<S>                                               <C>        <C>             <C>            <C>
Net sales.......................................  $116,930     $122,914        $119,614      $60,865
Gross profit....................................    33,545       33,959          35,869       11,565
Operating income................................     9,359        8,699           7,714        1,870
Net income......................................     3,249        3,024           2,023       73,245
Basic earnings per common share.................  $   0.14     $   0.10        $   0.06      $  3.35
Diluted earnings per common share...............  $   0.14     $   0.11        $   0.06      $  2.82
</TABLE>
 
                    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
Operating income.................................    4,859         5,981          6,073         8,600
Net income.......................................    1,317         1,664          1,613         2,859
Basic earnings per common share..................  $  0.06       $  0.07        $  0.07      $   0.12
Diluted earnings per common share................  $  0.06       $  0.07        $  0.07      $   0.12
</TABLE>
 
     Included in net income for the quarter ended March 31, 1998 is $124,041 of
non-recurring income from the Hardware Business Disposition.
 
9.  BUSINESS SEGMENTS:
 
     The Company operates in only one reportable business segment in accordance
with SFAS 14.
 
                                       30
<PAGE>   31
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
9.  BUSINESS SEGMENTS -- (CONTINUED)
     Export sales by geographic area for the fiscal years ended March 31, 1998,
1997 and 1996 were as follows:
 
<TABLE>
<CAPTION>
                                                           1998       1997       1996
                                                         --------   --------   --------
<S>                                                      <C>        <C>        <C>
Europe.................................................  $ 52,817   $ 34,922   $29,797
Asia (excluding Japan).................................    21,734     25,790    18,557
Canada.................................................    14,746     20,516    13,803
Japan..................................................    10,473     15,672    13,006
South America..........................................    10,211      4,013     3,950
Australia..............................................     2,632      7,044     5,585
Other..................................................     8,208      6,008     7,490
                                                         --------   --------   -------
                                                         $120,821   $113,965   $92,188
                                                         ========   ========   =======
</TABLE>
 
     Operating margins attributable to foreign sales were not materially
different from operating margins attributable to domestic sales.
 
10.  VALUATION AND QUALIFYING ACCOUNTS AND RESERVES:
 
     Changes in the allowance for doubtful accounts for the fiscal years ended
March 31, 1998, 1997 and 1996 were as follows:
 
<TABLE>
<CAPTION>
                                                             1998       1997       1996
                                                           --------   --------   --------
<S>                                                        <C>        <C>        <C>
Beginning balance........................................  $ 4,420    $ 3,257    $ 2,432
     Charged to expense..................................    1,328      2,009      1,990
     Write offs, net of recoveries.......................     (109)    (1,046)    (1,438)
     Other(a)............................................   (2,758)       200        273
                                                           -------    -------    -------
Ending balance...........................................  $ 2,881    $ 4,420    $ 3,257
                                                           =======    =======    =======
</TABLE>
 
     (a) Represents primarily the disposition of the allowance for doubtful
         accounts for subsidiaries disposed of as part of the Hardware Business
         Disposition in fiscal 1998, an accrual transferred to the allowance for
         doubtful accounts in fiscal 1997, and the allowance for doubtful
         accounts balance of Harco on the date of acquisition in fiscal 1996.
 
11.  LEASES:
 
     The Company leases certain of its facilities, equipment and engines under
operating leases. The following represents future minimum operating lease
commitments at March 31, 1998:
 
<TABLE>
<S>                                                           <C>
1999........................................................  $ 3,999
2000........................................................    3,691
2001........................................................    3,422
2002........................................................    2,702
2003 and thereafter.........................................    1,871
                                                              -------
                                                              $15,685
                                                              =======
</TABLE>
 
     Total rental expense for the fiscal years ended March 31, 1998, 1997, and
1996 was $2,764, $4,455 and $2,993, respectively.
 
                                       31
<PAGE>   32
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
12.  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. In addition, the Company is
subject to certain guarantee provisions under the Delta Air Lines Procurement
Program. The Company does not expect to incur any penalties, but this is
uncertain.
 
13.  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 l, 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.
 
                                       32
<PAGE>   33
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
13.  STOCK OPTIONS -- (CONTINUED)
     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>
                                         1998                    1997                    1996
                                 ---------------------   ---------------------   --------------------
                                              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.........................   1,055,700    $5.82        696,700    $5.01       907,300    $5.20
Granted........................     363,000    $8.18        407,250    $7.19       275,000    $4.88
Exercised......................    (217,617)   $6.22        (26,833)   $5.16        (4,200)   $5.13
Terminated.....................     (93,333)   $6.99        (21,417)   $6.17       (45,800)   $5.01
Expired........................          --       --             --       --      (435,600)   $5.33
                                 ----------              ----------              ---------
Outstanding at end of year.....   1,107,750    $6.42      1,055,700    $5.82       696,700    $5.01
                                 ==========              ==========              =========
Exercisable at end of year.....     606,854    $5.96        458,355    $5.44       221,819    $5.05
                                 ==========              ==========              =========
Weighted average fair value of
  options granted..............  $     3.47              $     3.15              $    2.07
                                 ==========              ==========              =========
</TABLE>
 
     At March 31, 1998, 1,000,750 of the 1,107,750 options outstanding relate to
the 1990 Stock Option Plan and have exercise prices between $4.88 and $9.88 per
share, with a weighted average exercise price of $6.39 and a weighted average
remaining contractual life of 5.4 years. Of these, 499,854 options were
exercisable at March 31, 1998. The remaining 107,000 options relate to the NED
Stock Option Plan and non-employee director options granted outside a formal
stock option plan and have exercise prices between $4.63 and $10.63 per share,
with a weighted average exercise price of $6.70 and a weighted average remaining
contractual life of 3.5 years. All of these options were exercisable at March
31, 1998.
 
     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, 1998,
1997 and 1996:
 
<TABLE>
<CAPTION>
                                                               1998       1997       1996
                                                             --------   --------   --------
<S>                                                          <C>        <C>        <C>
Net income:
     As reported...........................................  $81,541     $7,453     $1,555
     Pro forma.............................................  $81,046     $7,119     $1,555
Basic earnings per common share:
     As reported...........................................  $  3.46     $ 0.32     $ 0.09
     Pro forma.............................................  $  3.44     $ 0.31     $ 0.09
Diluted earnings per common share:
     As reported...........................................  $  3.10     $ 0.31     $ 0.09
     Pro forma.............................................  $  3.08     $ 0.30     $ 0.09
</TABLE>
 
                                       33
<PAGE>   34
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
13.  STOCK OPTIONS -- (CONTINUED)
     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 1998, 1997 and 1996:
expected volatility of 37%, 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.
 
14.  EQUITY SECURITIES:
 
     The Company had 21,393,809 shares of Common Stock outstanding at March 31,
1998. During fiscal 1998, 217,617 shares of Common Stock were issued as a result
of stock option exercises. In January 1998, the Company repurchased 2,246,967
shares of Common Stock for a total cost of $23,331. This amount has been
recorded as Treasury Stock in the accompanying consolidated financial
statements.
 
     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
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; (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. On June 18, 1997, the Company received subscriptions for 3,710,955
shares of Preferred Stock of $34,100. The Preferred Stock is convertible into
Common Stock on a one-to-one basis. At March 31, 1998, 3,549 shares of Preferred
Stock had been converted to shares of Common Stock and 102,144 shares of
Preferred Stock had been issued as Preferred Stock dividends. At March 31, 1998,
3,809,550 shares of Preferred Stock were outstanding.
 
15.  INVESTMENTS:
 
     Long-term investments at March 31, 1998 consist of 4,919,664 shares of
AlliedSignal Inc. common stock classified as available-for-sale securities,
received as a result of the Hardware Business Disposition. The twenty-day
average closing price used to determine the number of shares of AlliedSignal
Inc. common stock which the Company received at closing was $37.25. At March 31,
1998, the market value of the AlliedSignal Inc. stock had appreciated to $42.00
per share. The increase in the market value resulted in total appreciation of
$23,400, which was recorded net of a tax provision of $9,100 in retained
earnings as accumulated other comprehensive income. Short-term investments
consisting of 184,000 shares of other common stock with a market value of $1.03
at March 31, 1998 and classified as trading securities were deemed impaired as
of March 31, 1998 and resulted in a loss from impairment of $190. Net investment
loss has been included in
 
                                       34
<PAGE>   35
                    BANNER AEROSPACE, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
15.  INVESTMENTS -- (CONTINUED)
selling, general and administrative expenses in the consolidated income
statement. There were neither investments nor investment income in 1996. A
summary of investments held by the Company follows:
 
<TABLE>
<CAPTION>
                                                                 1998                  1997
                                                         --------------------   ------------------
                                                         AGGREGATE              AGGREGATE
                   NAME OF ISSUER OR                       FAIR        COST       FAIR       COST
                  TYPE OF EACH ISSUE                       VALUE      BASIS       VALUE     BASIS
                  ------------------                     ---------   --------   ---------   ------
<S>                                                      <C>         <C>        <C>         <C>
Short-term investments:
     Common stock......................................  $      0    $  1,966    $1,113     $1,992
Long-term investments:
     Common stock......................................  $206,626    $183,257    $    0     $    0
</TABLE>
 
     Investment loss is summarized as follows:
 
<TABLE>
<CAPTION>
                                                              1998    1997
                                                              -----   -----
<S>                                                           <C>     <C>
Gross realized gain (loss) from sales.......................  $  (3)  $   0
Change in unrealized holding gain (loss) from trading
  securities................................................   (901)   (879)
Gross realized loss from impairments........................   (190)      0
Dividend income.............................................    738       0
                                                              -----   -----
                                                              $(356)  $(879)
                                                              =====   =====
</TABLE>
 
16.  SUBSEQUENT EVENTS:
 
     On May 11, 1998, Fairchild commenced an offer to exchange (the "Exchange
Offer"), for each properly tendered share of Common Stock of the Company, a
number of shares of Fairchild's class A common stock, par value $0.10 per share,
equal to the quotient of $12.50 divided by $20.675 up to a maximum of 4,000,000
shares of the Company's Common Stock. The Exchange Offer expired on June 9,
1998. Approximately 3,659,424 shares of the Company's Common Stock were validly
tendered for exchange and Fairchild issued approximately 2,212,469 shares of
Fairchild class A common stock to the tendering shareholders. As a result of the
Exchange Offer, Fairchild's beneficial ownership of the Company's Common Stock
increased to 85.4%.
 
                                       35
<PAGE>   36
 
                    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, 1998
and 1997, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998, in conformity with generally accepted accounting principles.
 
                                          ARTHUR ANDERSEN LLP
 
Washington, D.C.
May 20, 1998 (Except with respect to the
matters discussed in Note 16, as to
which the date is June 10, 1998).
 
                                       36
<PAGE>   37
 
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, 1998, 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, 1998 and 1997
                      Statements of Income and Stockholders' Equity -- For the
                        Years Ended March 31, 1998, 1997 and 1996
                      Statements of Cash Flows -- For the Years Ended March 31,
                        1998, 1997 and 1996
                      Notes to Financial Statements -- For the Years Ended March
                        31, 1998, 1997 and 1996
                      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
               (h)    Amendment to Article 4 of the Company's Restated Certificate
                        of Incorporation (creating a new class of preferred
                        stock), filed with Delaware Secretary of State of June 18,
                        1997 (incorporated herein by reference to Exhibit 3.2 of
                        the Company's Registration Statement No. 333-22275 on Form
                        S-3 effective May 13, 1997)
</TABLE>
 
                                       37
<PAGE>   38
<TABLE>
<C>        <C>        <S>
      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
               (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. 33-322275 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
               (e)    Certificate of Designations, Preferences, Rights and
                        Limitations of Series A Convertible Paid-in-Kind Preferred
                        Stock, filed with the Delaware Secretary of State on June
                        18, 1997 (incorporated herein by reference to Exhibit 4.3
                        of the Company's 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)    Registration Rights Agreement, as amended, between Banner
                        Aerospace, Inc. and Banner Aerospace Holding Company II,
                        Inc., dated March 12, 1996, incorporated herein by
                        reference from Exhibit 99.8 to the Company's Amendment No.
                        1 to Schedule 14D-9 filed June 4, 1998
               (e)    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
               (f)    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
               (g)    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
               (h)    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 "CoAgents") is incorporated herein by
                        reference to Exhibit 10(i)(t) included in the Annual
                        Report on Form 10-K dated June 28, 1996
</TABLE>
 
                                       38
<PAGE>   39
<TABLE>
<C>        <C>        <S>
               (i)    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
               (j)    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 tome 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
               (k)    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")
               (l)    Amendment No. 2 dated November 25, 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.,
                        Delaware corporation, in its capacity, the "Administrative
                        Agent"), and NationsBank, N.A. and The Long-Lenders and
                        Issuing Banks hereunder (in such capacity, individually, a
                        "Co-Agent", and collectively, the "Co-Agents")
                        (incorporated by reference to the Company's Form 10-Q
                        dated December 31, 1997)
               (m)    Stock Exchange Agreement, dated February 22, 1996, between
                        The Fairchild Corporation ("Fairchild") and Banner
                        Aerospace, Inc. to acquire Harco, Inc. from Fairchild is
                        incorporated hereon 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
               (n)    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
               (o)    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
               (p)    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
</TABLE>
 
                                       39
<PAGE>   40
<TABLE>
<C>        <C>        <S>
               (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)    Asset Purchase Agreement dated as of December 8, 1997, among
                        Banner Aerospace, Inc. and seven of its subsidiaries
                        (Adams Industries, Inc., Aerospace Bearing Support, Inc.,
                        Aircraft Bearing Corporation, Banner Distribution, Inc.,
                        Burbank Aircraft Supply, Inc., Harco, Inc., and PacAero),
                        AlliedSignal Inc. and AS BAR LLC, incorporated herein by
                        reference to the Company's Form 8-K dated January 28, 1998
               (s)    Asset Purchase Agreement dated as of December 8, 1997, among
                        Banner Aerospace, Inc. and two of its subsidiaries (PB
                        Herndon Aerospace, Inc. and Banner Aerospace Services,
                        Inc.), AlliedSignal Inc. and AS BAR PHB LLC, incorporated
                        herein by reference to the Company's Form 8-K dated
                        January 28, 1998
               (t)    Letter, dated May 11, 1998 from the Company to its
                        stockholders, incorporated herein by reference from
                        Exhibit 99.1 to the Company's Amendment No. 1 to Schedule
                        14D-9 filed June 4, 1998
  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 l0-K dated
                        June 28, 1993
               (b)    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
               (c)    Tri-Fast Partnership Agreement between Banner Aerospace,
                        Inc., RHI Holdings, Inc. and Edwards & Lock Management
                        Corporation dated November l9, 1996 is incorporated herein
                        by reference to Exhibit 10.5 included in the Form 10-Q
                        dated February 14, 1997
               (d)    Lease between Banner Aerospace, Inc., as tenant, and RHI
                        Holdings, Inc., as landlord, dated April 1, 1996,
                        incorporated herein by reference to Exhibit 10.1(r) of the
                        Company's Annual Report on Form 10-K for the year ended
                        March 31, 1997
               (e)    Tax Service Agreement between The Fairchild Corporation and
                        the Company, dated December 15, 1997, incorporated herein
                        by reference to Exhibit 99.2 of the Company's Amendment
                        No. 1 to Schedule 14D-9, filed June 4, 1998
               (f)    Attorney Service Agreement between The Fairchild Corporation
                        and the Company, dated July 18, 1997, incorporated herein
                        by reference to Exhibit 99.3 of the Company's Amendment
                        No. 1 to Schedule 14D-9 filed June 4, 1998
 10(iii)       (a)    1990 Non-Qualified and Incentive Stock Option Plan of Banner
                        Aerospace, Inc., amended as of May 29, 1996, is
                        incorporated herein by reference to Exhibit A of the
                        Definitive Proxy Statement dated and filed July 26, 1996
                        with respect to the Annual Meeting of Stockholders held on
                        September 13, 1996
               (b)    Amendment dated as of January 1, 1997, to 1990 Non-Qualified
                        and Incentive Stock Option Plan is incorporated herein by
                        reference to Exhibit A of the Definitive Proxy Statement
                        dated and filed on August 8, 1997 with respect to the
                        Annual Meeting of Stockholders held on September 12, 1997
               (c)    Profit Sharing/401(k) Plan of Banner Aerospace, Inc. is
                        incorporated hereon by reference to Exhibit 10(iii)(b)
                        included in the Registration Statement No. 33-34775 on
                        Form S-1 effective July 26, 1990
               (d)    Employment Agreement between Banner Aerospace, Inc. and
                        Warren D. Persavich is incorporated hereon by reference to
                        Exhibit 10(iii)(d) included in the Annual Report on Form
                        10-K dated June 28, 1991
               (e)    Employment Agreement between Banner Aerospace, Inc. and
                        Eugene W. Juris is incorporated hereon by reference to
                        Exhibit 10(iii)(e) included in the Annual Report on Form
                        10-K dated June 28, 1991
</TABLE>
 
                                       40
<PAGE>   41
<TABLE>
<C>        <C>        <S>
               (f)    Employment Agreement between Banner Aerospace, Inc. and
                        Jeffrey J. Steiner is incorporated hereon by reference to
                        Exhibit 10(iii)(g) included in the Annual Report on Form
                        10-K dated June 28, 1993
               (g)    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
               (h)    Amended Employment Agreement between Banner Aerospace, Inc.
                        and Warren D. Persavich is incorporated hereon by
                        reference to Exhibit 10(iii)(d) included in the Annual
                        Report on Form 10-K dated June 28, 1994
               (i)    Amended 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, 1994
               (j)    1996 Non-Employee Director Stock Option Plan of Banner
                        Aerospace, Inc. is incorporated herein by reference to
                        Exhibit B of the Definitive Proxy Statement dated and
                        filed July 26, 1996 with respect to the Annual Meeting of
                        Stockholders held on September 13, 1996
              *(k)    Banner Aerospace, Inc. 1998 Deferred Bonus Plan dated
                        January 21, 1998.
    *21               List of Subsidiaries of Banner Aerospace, Inc.
    *23        (a)    Consent of Arthur Andersen LLP with regard to the Form S-8
                        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
</TABLE>
 
    (b) 8-K Filings. On January 28, 1998, Registrant filed a Form 8-K regarding
        the disposition of its Hardware Business.
 
     --------------------
     * Filed herewith
 
                                       41
<PAGE>   42
 
                                   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.

Date: June 29, 1998
                                          BANNER AEROSPACE, INC.
 
                                          By:      /s/ EUGENE W. JURIS
                                            ------------------------------------
                                                      EUGENE W. JURIS
                                                     VICE PRESIDENT AND
                                                  CHIEF FINANCIAL OFFICER
                                               (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 29, 1998
  -------------------------------------------              Executive Officer
               JEFFREY J. STEINER                    (Principal Executive Officer)
 
          By: /s/ WARREN D. PERSAVICH                  Senior Vice President and     Date: June 29, 1998
  -------------------------------------------           Chief Operating Officer
              WARREN D. PERSAVICH
 
            By: /s/ EUGENE W. JURIS                       Vice President and         Date: June 29, 1998
  -------------------------------------------           Chief Financial Officer
                EUGENE W. JURIS                      (Principal Financial Officer)
 
            By: /s/ MICHAEL T. ALCOX                           Director              Date: June 29, 1998
  -------------------------------------------
                MICHAEL T. ALCOX
 
            By: /s/ STEVEN L. GERARD                           Director              Date: June 29, 1998
  -------------------------------------------
                STEVEN L. GERARD
 
         By: /s/ PROF. CHARLES M. HAAR                         Director              Date: June 29, 1998
  -------------------------------------------
             PROF. CHARLES M. HAAR
 
            By: /s/ PHILIPPE HERCOT                            Director              Date: June 29, 1998
  -------------------------------------------
                PHILIPPE HERCOT
 
            By: /s/ MICHAEL HERDMAN                            Director              Date: June 29, 1998
  -------------------------------------------
                MICHAEL HERDMAN
 
          By: /s/ DR. ERIC I. STEINER                          Director              Date: June 29, 1998
  -------------------------------------------
              DR. ERIC I. STEINER
 
            By: /s/ LEONARD TOBOROFF                           Director              Date: June 29, 1998
  -------------------------------------------
                LEONARD TOBOROFF
</TABLE>
 
                                       42