<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934

     FOR THE FISCAL YEAR ENDED MAY 31, 2006    COMMISSION FILE NUMBER: 001-12810

                         HI-SHEAR TECHNOLOGY CORPORATION
                 (Name of Small Business Issuer in its Charter)

                   DELAWARE                               22-2535743
       (State or other jurisdiction of                 (I.R.S. Employer
        incorporation or organization)               Identification No.)

      24225 GARNIER STREET, TORRANCE, CA                  90505-5355
   (Address of principal executive offices)               (Zip Code)

          Issuer's Telephone Number:                    (310) 784-2100

         Securities registered under Section 12(b) of the Exchange Act:
     (Title of each class)           (Name of each exchange on which registered)
          COMMON STOCK                         AMERICAN STOCK EXCHANGE

         Securities registered under Section 12(g) of the Exchange Act:
                              (Title of each class)
                                      NONE

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 ( )

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. ( X )

State issuer's revenues for its most recent fiscal year: $ 21,052,000.

The aggregate value of the Registrants Common Stock held by non-affiliates of
the Registrant was approximately $33,085,000 as of July 11, 2006, based upon the
closing sale price on the American Stock Exchange on that date at which the
stock was last sold.

There were approximately 6,774,000 shares of the Registrants Common Stock issued
and outstanding as of July 11, 2006.

Part III, other than Item 13, is incorporated by reference from the Registrant's
Proxy Statement for its 2006 Annual Meeting of Stockholders to be filed with the
Commission within 120 days of May 31, 2006.

Transitional Small Business Disclosure Format YES ( ) NO ( X )

<PAGE>

                         HI-SHEAR TECHNOLOGY CORPORATION
                                   FORM 10-KSB

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
PART I.
       ITEM 1    BUSINESS....................................................  1

       ITEM 2    PROPERTIES..................................................  4

       ITEM 3    LEGAL PROCEEDINGS...........................................  4

       ITEM 4    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........  6

PART II.
       ITEM 5    MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
                 SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES........  7

       ITEM 6    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS.........................  7

       ITEM 7    FINANCIAL STATEMENTS........................................ 11

       ITEM 8    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                 ACCOUNTING AND FINANCIAL DISCLOSURE......................... 11

       ITEM 8A   CONTROLS AND PROCEDURES..................................... 11

PART III.
       ITEM 9    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
                 PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
                 ACT......................................................... 12

       ITEM 10   EXECUTIVE COMPENSATION...................................... 12

       ITEM 11   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                 AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.............. 12

       ITEM 12   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 12

       ITEM 13   EXHIBITS ................................................... 12

       ITEM 14   PRINCIPAL ACCOUNTANT FEES AND SERVICES...................... 12

SIGNATURES................................................................... 13

EXHIBIT INDEX................................................................ 14

INDEX TO FINANCIAL STATEMENTS................................................ 15

<PAGE>

                                     PART I

ITEM 1. BUSINESS

                                GENERAL OVERVIEW

     Hi-Shear Technology Corporation designs and manufactures high reliability
pyrotechnic, mechanical and electronic products for the aerospace industry,
national defense and other applications where pyrotechnic power is desirable.
Its products are primarily used in space satellites and satellite launch
vehicles, exploration missions, strategic missiles, tactical weapons, advanced
fighter aircraft and military systems. Customers such as the military, satellite
manufacturers, launch vehicle assemblers, U.S. Government departments and
agencies (including NASA), foreign space agencies, and others in the aerospace
and defense business widely use the Company's products.

     The Company's executive offices are located at 24225 Garnier Street,
Torrance, CA 90505-5355, Telephone (310) 784-2100 - Facsimile (310) 325-5354.

                                HI-SHEAR PRODUCTS

     Hi-Shear's products meet the specialized needs of the United States space
program and defense applications, and consist primarily of pyrotechnic power
cartridges and various types of separation devices designed to meet the demand
for reliable high performance, with the strength to fasten two structures under
rigorous conditions and then provide quick release upon command. Hi-Shear
cartridges, cutters, pin pullers, separation nuts and separation bolts are used
widely in the functioning of satellites and the vehicles which launch them into
space. In addition, we design and manufacture electronic firing systems that
control and sequentially fire the pyrotechnic devices according to
pre-programmed parameters. These electronic devices and pyrotechnic products are
used in missiles, launch vehicles, weapon systems, fighter aircraft ejection
seats and other applications. We continually adapt our technology to produce
products for other applications where pyrotechnic power is desirable. Hi-Shear's
products can be grouped into three product categories as follows:

     PYROTECHNIC CARTRIDGES/INITIATORS. Satellites, missiles, weapon systems and
other space vehicles require substantial stand-by power to perform certain
timing-dependent functions such as separation, cutting and deployment. Hi-Shear
designs, markets and manufactures pyrotechnic power cartridges/initiators that
have a high-energy output. These power cartridges are hermetically sealed
electro-explosive devices that are compact, lightweight, environment and
corrosion resistant and operate with ultra high reliability. The power cartridge
provides the energy to operate the Company's separation devices, pin pullers,
thrusters, actuators and cutters. These devices are used to separate rocket
motors, nose cones, satellites, open satellite doors, payload fairings, operate
valves, deploy solar panels, booms, communications antennae, missile fins, and
in driving stage separation on many of today's major launch vehicles. Hi-Shear
manufactures the highest reliability NASA standard initiator used throughout its
space exploration missions and the Space Shuttle.

     CARTRIDGE ACTUATED DEVICES. Hi-Shear's cartridge actuated devices are
mechanical gas-activated products utilized for use on satellites, launch
vehicles, missiles and other space vehicles. These devices include separation
nuts, separation bolts, thrusters, wing/fin actuators, cutters valves, pin
pullers and other devices. They are designed for use as standard high strength
fastening hardware with the ability to separate and/or release components or
structures on command. These devices provide the low shock mechanical action
required for rapid separation or deployment of structures or components in
multistage launch vehicles, such as satellites, payload fairings, nose cones,
capsules, booster rockets, tanks, solar arrays, antenna booms and other devices.
We maintain an active program for new designs, including pyrotechnic and
electric low shock deployment systems for the increasingly lighter satellites
used in communications and intelligence gathering.


                                       1
<PAGE>

     In addition to pyrotechnic cartridge activated devices, we manufacture a
line of electrically driven ultra low shock separation nuts for satellite
applications where an alternative to pyrotechnic activation is desirable. These
high performance electric separation devices provide the strength and flight
heritage identical to our cartridge activated separation nuts while providing
the advantage of reduced shock and resettable usage for appropriate
applications. Hi-Shear also manufactures sophisticated highly reliable
mechanical sub-components used on satellites to aim the satellites onboard
communications array and other components for space vehicles and weapons systems
according to customer supplied detailed designs and testing requirements.

     Hi-Shear manufactures handheld cartridge driven cutters for use in a wide
range of emergency situations for fire and rescue. The LIFESHEAR cutter's light
weight, and ease of use enable it to quickly cut through auto parts and
reinforcing bar in order that a victim can readily be extracted from a life
threatening situation or access can be quickly gained to a locked area. The
tools are manufactured and marketed outside the United States and Canada under
license by Akers Krutbruk Protection AB, Akers Styckebruk, Sweden.

     ELECTRONIC PRODUCTS. Hi-Shear is a key supplier of electronic products that
fire pyrotechnic and/or explosive charges while at the same time maintaining the
utmost in safety.

     Hi-Shear supplies electronic safe arm fuzes for various military programs.
The Company's Patriot (PAC-3) missile system safe arm fuze is used to fire
explosive elements contained in the PAC-3 missile. This dual function high
reliability safe arm fuze is a key operational component onboard each missile
launch. The PAC-3 high performance anti-missile batteries are deployed with the
U.S. Army and its allies throughout the world to protect against enemy missile
attack. We employ a proprietary initiator in the safe arm product that, when
removed, permits full testing of the electronics without risk to personnel or
damaging the integrity of the missile system. This allows for economical missile
system safety checks, and an extended shelf life estimated at 30 years, which is
among the longest in the industry.

     Hi-Shear manufactures both the electronic Mark 58 Acoustic Firing Device
and its master control unit, the Mark 92 Acoustic Firing Code Transmitter, for
use by the U.S. Navy. This unique ordnance firing system utilizes acoustic
signals for underwater demolition and is used by Navy divers to dispose of sea
mines, limpet mines, sonobuoys and torpedoes. The acoustic firing device is
specially constructed and tested to be non-magnetic equipment so that it may be
used safely in the proximity of magnetic influenced ordnance. The acoustic
firing device is consumed in each explosive disposal firing.

     The Firing Code Transmitter is the compact portable electronic console that
is operated on the oceans surface to remotely control the operation of the
firing device. The firing code transmitter is programmed by its operator to
effectively function the acoustic firing device, which is located underwater, at
a significant distance from the code transmitter console. The transmitter is
self contained in a briefcase sized weather proof case and has its own power
supply. The transmitter unit is completely reusable and may efficiently signal
the firing of many acoustic firing devices.

     The Company supplies, both in the U.S. and overseas, ejection seat control
units and the ordnance devices that it signals to fire. These devices are sold
for use on the U.S. Air Force ACES II crew ejection seat installed in many
fighter and bomber aircraft, including the A-10, B-2, F-15 and F-16. The
ejection seat control unit fires multiple ordnance devices that deploy
parachutes, rockets and other events crucially necessary for the pilot's
ejection from the aircraft.


                                       2
<PAGE>

                             CUSTOMERS AND CONTRACTS

     Most of the Company's customers are large aerospace prime or
subcontractors. In addition, the Company derives a significant amount of its
revenue from contracts it has directly with Government customers, including the
U.S. Air Force, U.S. Navy, U.S. Army and NASA. Sales to Lockheed Martin and the
United States Government accounted for 26% and 27%, respectively, of the
Company's revenues in fiscal year 2006, compared to 31% and 29%, respectively,
of the Company's revenues in fiscal year 2005. Contract awards and contract
competition phases vary from year to year, and therefore sales distribution
among customers during any one fiscal year should not be considered indicative
of future sales to those customers.

     In both fiscal years 2006 and 2005, all of the Company's contracts were on
a fixed price contract basis where we agree to perform certain work for a fixed
price. These fixed price contracts carry certain inherent risks, including the
underestimation of costs, problems with new technologies, costly changes made by
the customer for which it refuses to pay or the occurrence of adverse changes
over the contract period. Due to economies that can be encountered over the
period of the contract, these fixed price contracts can also offer significant
profit potential. The Company's contracts that evolve from the U.S. Government
or from contractors are subject to termination for convenience by the customer
or the U.S. Government. However, if this termination for convenience were
exercised, the Company would be entitled to payment of costs incurred up to the
date of termination and a reasonable termination fee. U.S. Government contracts
extending beyond one year are also conditioned upon the continuing availability
of Congressional appropriations because Congress usually appropriates on a
fiscal year basis even though contract performance may take several years.

                                     BACKLOG

     The average time to design, manufacture and ship our products is typical of
the lead times required for highly engineered, custom manufactured aerospace
products. The final negotiation of the detailed contract requirements together
with the purchase of long lead time material, manufacturing processes and
testing take between 4 to 12 months or more to accomplish. During fiscal year
2006, we continued our programs to reduce many of the manufacturing lead-times
to help our customers with more timely delivery. This is part of an overall
strategy by Hi-Shear's aerospace customers to carry fewer components in
inventory and to speed the construction of launch vehicles, satellites and
weapon systems.

     Total requirements included in contracts undertaken by us may contain
options that extend beyond one year, and accordingly, portions are carried
forward from one year to the next as part of the backlog. Some of the Company's
contracts with the U.S. Government and its prime contractors are supply
contracts and/or multi-year options whose requirements are primarily based on
the Government's demand for products on a periodic basis. Because many factors
affect the scheduling of projects, no assurances can be given as to when revenue
will be realized on projects that are included in the Company's backlog.
Although backlog represents business that is considered to be firm, there can be
no assurance that cancellation, changes in quantities, funding changes, or scope
adjustments will not occur.

     As of May 31, 2006, the Company's backlog of unrecognized revenue and
unbilled amounts on open customers' orders was $12.9 million and $19.6 million,
respectively, compared to unrecognized revenue and unbilled backlog amounts as
of the end of the prior fiscal year of $12.7 million and $17.3 million,
respectively. The increase in both backlogs was a consequence of the total
amount of new orders booked during fiscal year 2006 being greater than both
revenue recognized and billings to customers during fiscal year 2006.

                                   COMPETITION

     Hi-Shear's aerospace and defense products are thoroughly tested
individually, as well as tested in conjunction with the end product into which
they are incorporated. After commencement of a given program, it is very costly
for competitors to design new competitive components or for customers to change
suppliers of the components since the customer would then be required to
re-qualify the products. Therefore, due to the Company's extensive financial


                                       3
<PAGE>

investment and years of involvement in the development of our products and the
practical barriers to entry into the market by competitors, competition is not a
critical factor for subsequent orders. In addition, local, state and federal
permits and licenses that are required to manufacture such pyrotechnic and
explosive devices as the Company produces are difficult to obtain and therefore
provide further barriers to entry into the market by competitors. Hi-Shear
currently qualifies as a small business entity for the purposes of obtaining
small business set aside contracts and dealing with U.S. Government contracts or
programs.

                          MANUFACTURING AND PRODUCTION

     Production consists of fabricating and assembling the hardware components
and separately preparing the pyrotechnic charge used in the power cartridge.
Production of the mechanical and electronic devices involves machining
components in the precision machining center, the assembly of the components and
the testing of the completed units. Throughout the entire process, strict
quality assurance controls are maintained including customer and, where
required, government inspection. After assembly, the products are functionally
tested on a sample basis. During fiscal year 2006, Hi-Shear had approximately
100 full time employees, the majority of whom are engineers and technicians. The
handling and processing of pyrotechnic materials requires extensive experience
and expertise as well as the proper equipment, facilities and permits. We have
been safely handling and processing these fuels and oxidizers for over forty
years.

                             ADDITIONAL INFORMATION

     The Company files annual and quarterly reports and proxy statements with
the Securities and Exchange Commission (the "Commission") pursuant to federal
securities laws. You may inspect such reports, including the exhibits thereto,
without charge, at the Public Reference Room of the Commission at 450 Fifth
Street N.W., Washington, D.C. You may obtain information on the operation of the
Public Reference Room by calling the Commission at 1-800-SEC-0330. You may also
access such material electronically by means of the Commission's home page on
the Internet at http://www.sec.gov.

     We intend to make available to our stockholders annual reports containing
financial statements audited by an independent certified public accounting firm.
We may also make available to our stockholders, from time to time, other reports
about material corporate developments.

ITEM 2. PROPERTIES

     Hi-Shear's manufacturing and executive offices are located in Torrance,
California, in a 76,000 square foot building organized for electronic,
mechanical, and pyrotechnic manufacturing and assembly operations. The Company
leases these offices pursuant to a five (5) year lease through August 31, 2009.
The Company also owns and operates a plant on twelve acres of land in Santa
Clarita, California that it utilizes as a storage and powder-blending facility.
We believe that our current leased facilities in Torrance and the property in
Santa Clarita are adequately covered by insurance and will adequately support
the Company's operations for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

     In November 2000, to recover damages, which included numerous contract
invoices totaling $1,319,000 for specially manufactured aerospace components and
an unbilled amount for work performed of $384,000, Hi-Shear filed suit against
United Space Alliance, LLC, a Delaware limited liability company ("Alliance"),
and its predecessor USBI Company, a Delaware Corporation ("USBI"), in the
Circuit Court of the Eighteenth Judicial Circuit in and for Brevard County,
Florida. The Company also sought compensatory damages alleging that Alliance
fraudulently induced it to enter into contracts that the defendant had no
intention of performing, and subsequently repudiated. Further damages were
sought for defendants' misappropriation of Hi-Shear's confidential, proprietary
and/or trade secret protected designs, drawings, and specifications for other
aerospace components.


                                       4
<PAGE>

     A counterclaim was subsequently filed by the defendants for damages in the
amount of $458,004 exclusive of costs, interest and attorney's fees based on the
Company's alleged breach of contract. It also alleged a claim for a declaratory
judgment, a claim for conversion seeking return of certain alleged government
property and an accounting for a claim. As part of its defense in the
litigation, Alliance claimed that it was coerced through duress to enter into a
contract with the Company where the Company was the successful lowest bidder. In
addition, Alliance demanded that Hi-Shear ship uncertified flight hardware to it
for use on the United States Space Shuttle, ahead of its normal certification
schedule.

     Regarding events related to the United Space Alliance lawsuit, Hi-Shear
filed suit against Pacific Scientific Energetic Materials Company, a Delaware
Corporation, in July 2004 in the Circuit Court of the Eighteenth Judicial
Circuit in and for Brevard County, Florida. Hi-Shear filed suit to recover
damages resulting from the defendant's misappropriation of Hi-Shear's
confidential, proprietary and/or trade secret protected designs, drawings and
specifications for certain aerospace components, conspiracy to steal and
misappropriate said items, and interference with Hi-Shear's advantageous
business relationships. Pending further resolution of the United Space Alliance
lawsuit, activity in the action against Pacific Scientific has been informally
abated.

     Trial of the lawsuit against Alliance and USBI commenced on July 5, 2005 in
Titusville, Florida. Approximately two weeks following the start of the trial,
the court made legal rulings holding that the Company does not own exclusive
rights to all of its technical data, which constitute the trade secrets that the
Company alleged were misappropriated. Accordingly, the court made rulings on
motions for summary judgments in favor of Alliance and USBI, which caused the
dismissal of some of Hi-Shear's claims for misappropriation of trade secrets. In
addition to the summary judgment regarding trade secrets, the court also ruled
on another summary judgment motion to dismiss Hi-Shear's claims for willful
breach of a non-disclosure agreement against Alliance. As a result of the
court's rulings, and in order to perfect a subsequent appeal of the rulings,
Hi-Shear dismissed, "with prejudice", the remaining claims of its lawsuit
alleging misappropriation of trade secrets. As a consequence of those rulings
and actions, USBI was dropped as an active participant in the trial and USBI did
not seek an award of attorneys fees incurred by it in the litigation. USBI has
made a claim against the Company for recovery of its costs amounting to
approximately $48,000. The Company intends to challenge this claim and
management believes the ultimate amount of fees, if any, will not be material to
the Company's future financial position or results of operations. Due to the
uncertainty surrounding the likelihood and amount of potential fees Hi-Shear has
not made an accrual for a potential amount payable.

     On September 2, 2005, the jury of the trial of Hi-Shear's lawsuit against
United Space Alliance, LLC rendered verdicts regarding both Hi-Shear's breach of
contract claims and Alliance's counterclaims. The jury ruled for Hi-Shear on one
breach of contract claim, for which it awarded damages in the amount of $57,781,
and it ruled against Hi-Shear on the remaining breach of contract claims. The
jury also determined that Hi-Shear converted certain property, and awarded
Alliance the amount of one dollar. All of the jury awards were exclusive of
interest and attorneys' fees. The trial court entered a final judgment on May
18, 2006 based on the jury's verdict.

     Post-trial hearings before the circuit court regarding this litigation
continue. Among the issues to be addressed in those hearings will be the
responsibility for attorneys' fees in this case. The trial court has retained
jurisdiction to award attorneys fees and costs but has not yet ruled on which
party may be entitled to its fees or costs and, if so, the amount thereof. Both
Hi-Shear and Alliance have filed various motions related to attorney's fees or
costs. Alliance has filed motions requesting an award of $3.4 million in
attorney's fees and costs. The Company has not yet filed its amount of fees and
costs and intends to oppose the Alliance motions and to vigorously pursue
collection of its fees and costs from the defendant. The court will determine to
what extent Hi-Shear may recover its attorneys' fees and costs from Alliance,


                                       5
<PAGE>

and to what extent, if any, Alliance may recover its attorneys' fees and costs
from Hi-Shear. Hi-Shear is not able to estimate either the amount of attorneys'
fees for which it may be reimbursed or liable, if any. Accordingly, no accruals
for potential amounts payable have been made at this time. An award of
attorneys' fees against Hi-Shear could have a material adverse impact on the
Company's financial position and results of operations.

     On October 7, 2005 Hi-Shear timely filed a notice of appeal to the Florida
Fifth District Court of Appeal seeking review of the adverse judgment entered in
favor of USBI. The judgment appealed principally involves the trial court's
rejection of Hi-Shear's claims for recovery of damages from USBI for the
misappropriation of its trade secrets and technical data. The Company has also
timely filed a Notice of Appeal to challenge the trial courts final judgment and
the myriad of questionable adverse rulings by the court during the course of the
trial.

     In addition, the Company is subject to other claims and legal actions that
may arise in the ordinary course of business. In the opinion of the Company,
after consultation with counsel, the ultimate liability, if any, with respect to
these other claims and legal actions will not have a material effect on the
financial position or on the results of operations.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.



                                       6
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES

     Hi-Shear's Common Stock is traded on the American Stock Exchange under the
symbol "HSR". The following table reflects the high and low sales prices of the
Company's Common Stock, as reported by the American Stock Exchange composite
tape, for the periods set forth below:

                                                        High           Low
                                                        ----           ---
            Fiscal Year 2006 ending May 31, 2006

                        4th Quarter                   $ 12.00       $  3.50
                        3rd Quarter                      3.77          2.75
                        2nd Quarter                      3.84          2.66
                        1st Quarter                      4.18          3.39

            Fiscal Year 2005 ending May 31, 2005

                        4th Quarter                   $  5.46       $  3.33
                        3rd Quarter                      6.00          4.12
                        2nd Quarter                      5.90          3.21
                        1st Quarter                      3.34          2.90


     The Board of Directors approved and the Company paid a cash dividend of
$1,512,000, or $0.224 per share, to shareholders of record as of the close of
business April 21, 2006. The dividend was not special, and did not represent
that the Company will pay dividends on a scheduled basis. Dividends will be
determined by the Board of Directors in light of the conditions then existing,
including earnings, financial requirements and conditions, opportunities for
reinvesting earnings, business conditions and other factors.

     The number of holders of record of Hi-Shear's Common Stock was 59 and the
number of beneficial shareholders was approximately 1,383 as of July 11, 2006.


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

                                GENERAL OVERVIEW

     The following discussion of Hi-Shear's financial condition and results of
operations should be read in conjunction with the financial statements and notes
thereto included elsewhere in this report. This report, including this
discussion, contains forward-looking statements about business strategies,
market potential, and product launches and future financial performance that
involve risks and uncertainties. The Company's actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors. These include the acceptance and pricing of its new
products, the development and nature of its relationship with key strategic
partners, the allocation of the federal budget for government sponsored military
and aerospace programs and the economy in general.


                                       7
<PAGE>

                          CRITICAL ACCOUNTING POLICIES

     Hi-Shear's revenues are derived principally from long-term fixed-price
contracts that are accounted for on the percentage-of-completion method.
Revenues for those contracts are calculated on the basis of the relationship
between costs incurred and total estimated costs at completion of the contracts
("cost-to-cost" type of percentage-of-completion method of accounting). Revenue
recognition for contracts that require relatively less time to complete than
those contracts accounted for on a percentage-of-completion basis are recognized
as deliveries are made.

     Because of the large amount of contracts in process at any point in time,
changes in estimated costs to complete can have a significant impact on
profitability of the Company. We estimate that each 1% change in the total
estimated costs to complete the contracts in process at May 31, 2006 would
change both the amount of revenue and earnings recognized by approximately
$71,000.

     We evaluate and update estimated costs to complete open contracts on a
regular basis. Those evaluations and updates include the participation of
management and other key employees from all operational areas. Changed estimates
to complete the contracts are then incorporated in the calculations of revenues
and profits.

     Included in the inventories recorded and maintained by the Company are
purchased and manufactured component parts and finished goods that relate to
previously completed contracts. The Company's management periodically assesses
the likelihood that those inventory items will be used in future contracts,
since many of the Company's past contracts relate to on-going programs, for
which it will be awarded similar contracts. The method utilized in management's
assessment is to select a sample of the total inventory that it considers to be
representative of the total inventory. Each sample item is separately evaluated,
and reserve amounts are calculated, based upon its assessment of the likelihood
that the item will be used for a future contract. After similarly assessing and
calculating individual reserve amounts, the resulting total reserve percentage
of each sample is applied to the total inventory. Since the inventory reserve
methodology is subjective, and subject to changes in estimates based upon
updated information, changes in those estimates can be substantial.

                              RESULTS OF OPERATIONS

FISCAL YEAR ENDED MAY 31, 2006 COMPARED WITH FISCAL YEAR ENDED MAY 31, 2005

     Revenues recognized during fiscal year 2006 were $21,052,000, which is 31%
more than the revenues of $16,076,000 recognized during fiscal year 2005. The
increase in revenues was driven by growth in the use of the Company's products
in national missile defense systems, tactical weapons and satellites. Utilizing
an increased workforce, production activities increased during the year to meet
the demand in both the electronic and pyrotechnic-based device product areas.
The Company serviced over 65 separate space and defense projects during the
year, while products used in space applications continued to be the largest area
of product use at 32% of total revenues. Products manufactured for use in
national missile defense, both in the United States and abroad, accounted for
23% of total revenues.

     Cost of revenues for the fiscal year 2006 was $13,340,000, or 63% of
revenues, compared to $10,859,000, or 68% of revenues, for the prior fiscal
year. Cost containment programs, including utilization of new equipment,
absorption of fixed overhead expenses by a larger labor base and continuing
improvements in manufacturing procedures, together with the increased volume of
product activity during the year, contributed to the reduction in cost of
revenues when measured as a percentage of revenues. Increases to inventory
reserves and write-offs of slow-moving inventory items resulted in $113,000
charged to cost of revenues for fiscal year 2006, compared to $179,000 that was
charged to cost of revenues for similar adjustments during fiscal year 2005. The
adjustments to inventory valuations relate to management's estimates regarding
the extent to which the Company's inventory items will be used in generating
future revenues.


                                       8
<PAGE>

     Gross margin continued to improve in both total amount and as a percentage
of revenues, which was the result of increased product activity and production
cost efficiencies noted above. Gross margin for fiscal year 2006 increased
$2,495,000 to $7,712,000, or 37% of revenues, from $5,217,000, or 32% of
revenues, which was reported for fiscal year 2005.

     Selling, general and administrative expenses were $4,020,000 for fiscal
year 2006, compared to $4,900,000 in fiscal year 2005. Last year's expenses
included a $1,645,000 write-down of accounts receivables from a customer,
subsequent to the conclusion of the jury trial of the Company's collection
lawsuit regarding that customers' accounts receivable (See Note 13). The
write-down amount was the difference between the Company's accounts receivable
balance due from that customer and the total amount of damages awarded to the
Company by the jury. The Company is currently appealing the trial verdict.
Offsetting some of the reduction in expense that is attributable to the accounts
receivable write-down were increased legal costs incurred during fiscal year
2006 that were associated with the Company's lawsuit.

     The Company realized operating income of $3,692,000, or 18% of revenues,
for the fiscal year ended May 31, 2006, compared to operating income of
$317,000, or 2% of revenues, for the previous fiscal year. The $3,375,000
increase is the result of increased space and defense product activity and other
factors identified above.

     Income tax expense for fiscal year 2006 was $1,397,000 and 38% of operating
income, compared to $102,000 and 32% of operating revenue for fiscal year 2005.
The increase in income tax expense occurred primarily as a consequence of the
corresponding increase in operating income, upon which reported income tax
expense is principally based. Contributing to income tax expense as a percentage
of operating revenue being less for fiscal year 2005 than for fiscal year 2006
was that the net amount of income tax expense reported for fiscal year 2005
included a partial offset by a tax "benefit" realized through the elimination of
the deferred tax asset valuation allowance that existed at May 31, 2004. A
similar potential future tax "benefit" in the form of a deferred tax asset
valuation allowance did not exist at, or subsequent to, May 31, 2005.

     Net income for the fiscal year ended May 31, 2006 was $2,295,000, or $0.34
per share and 11% of revenues, compared to $215,000, or $0.03 per share and 1%
of revenues, for the previous fiscal year. The increase in net income resulted
primarily from growth in the volume of space and defense product revenues and
product gross margins related to those products. Lower general and
administrative expense contributed further to the increase.

                               FINANCIAL CONDITION

     Accounts receivable balances, which consist of billed and unbilled amounts,
plus claims receivable, were $10,938,000 and $9,149,000 at the end of fiscal
year 2006 and fiscal year 2005, respectively. The billed component of the total
accounts receivable balance at May 31, 2006 was $3,926,000, compared to
$4,258,000 at the end of the previous fiscal year. The accounts receivable
balances at both May 31, 2006 and May 31, 2005 were not reduced for reserves on
doubtful accounts. The $332,000 decrease in the billed and unpaid balance at May
31, 2006 compared to the billed and unpaid balance at May 31, 2005 primarily is
the result of total billings during the last two months of fiscal 2006 being
less than during the same two-month period last year, plus total cash receipts
during the same two-month period being greater for fiscal 2006 than for fiscal
2005.

     Unbilled receivables represent revenues recognized from long-term fixed
priced contracts based upon percentage-of-completion, but in advance of
completing billable events for which invoices are submitted to customers. As
billing events occur for such contracts, previously unbilled receivables are


                                       9
<PAGE>

converted to billed accounts receivable with the preparation and submission of
invoices to customers. Unbilled receivables at May 31, 2006 were $6,994,000,
compared to $4,873,000 at the end of fiscal year 2005. Unbilled receivables at
May 31, 2006 and May 31, 2005 also included reductions of $18,000 and $83,000,
respectively, for anticipated future realization of gross margin losses on
contracts in process. The $2,121,000 increase in unbilled receivables at May 31,
2006 compared to unbilled receivables at May 31, 2005 is reflective of a
combination of a great amount of production activity on the Company's expanding
backlog of customer orders, but without corresponding billing events that
typically lag behind the production activity.

     At both May 31, 2006 and May 31, 2005, an accounts receivable claims
balance, which relates to outstanding amounts due to Hi-Shear for two claims on
two related contracts terminated by the U.S. Army for "convenience", was
$18,000. That balance represents the $17,794 damages awarded the Company by the
United States Court of Federal Claims. The Company is in the process of
collecting its damages award, plus legal fees and interest incurred from May
1997.

     Inventories, net of reserves, decreased from $1,635,000 at May 31, 2005 to
$1,610,000 at May 31, 2006. The $25,000 decrease in net inventory balance
includes increases to inventory reserves and write-offs of slow moving inventory
items amounting to $113,000. Excluding those reserves increases and write-offs,
total inventory increased $87,000. That increase is the result of total costs
for additions to inventory exceeding total costs of inventory consumed in
manufacturing during fiscal year 2006. Inventory reserves, which are established
in accordance with management's estimates regarding the extent to which
inventory items will ultimately be used to generate future revenues, were
$425,000 at May 31, 2006, compared to $512,000 at May 31, 2005.

     Trade accounts payable decreased from $1,055,000 at the end of fiscal year
2005 to $860,000 at the end of fiscal year 2006. The $195,000 decrease is
primarily the result of total costs of material and sub-contract purchase
receipts for work on customer orders during May 2006 being significantly less
than costs for similar purchase receipts during the same month last fiscal year.
There are no disputed amounts included in accounts payable at May 31, 2006.

     At both May 31, 2006 and May 31, 2005, the Company did not have any bank
debt having available borrowing of up to $2,500,000 from its commercial bank
under a revolving line of credit that remains available through its scheduled
December 15, 2006 maturity date (See Note 8).

     As of May 31, 2006, the Company had federal income tax credit carryovers of
approximately $169,000. The realization of deferred income tax assets, including
tax credit carryovers, is primarily dependent upon generating sufficient taxable
income to absorb the tax benefit of the deferred income tax assets. Although
realization is not assured, management believes it is more likely than not that
the net deferred income tax assets ultimately will be realized. That assessment
is based upon the Company's expectations for a continuation of profitable
operations in the foreseeable future. Accordingly, no valuation allowance to
reduce the total deferred income tax asset to a smaller net realizable amount
was deemed necessary as of May 31, 2006.

                         LIQUIDITY AND CAPITAL RESOURCES

     Net cash of $2,429,000 was provided by operating activities during fiscal
year 2006, compared to net cash of $501,000 that was provided by operating
activities during fiscal year 2005. The $1,928,000 increase in net operating
cash flows between the two fiscal years was primarily the result of collections
from billed accounts receivable totaling $5,002,000 more during fiscal year 2006
than during fiscal year 2005, while total disbursements for operating activities
increased by a smaller amount from fiscal year 2005 to fiscal year 2006.

     To supplement cash provided by operating activities, the Company maintains
a business loan agreement including a revolving line of credit with a commercial
bank, for the purpose of having sufficient cash to meet its cash obligations.


                                       10
<PAGE>

There was no outstanding balance under this line of credit at May 31, 2006.
Since the maximum borrowing limit under the line of credit is $2,500,000, the
amount available for borrowing at May 31, 2006 was $2,500,000. The line of
credit is available to the Company through December 15, 2006, which is the
maturity date of the business loan agreement covering the line of credit.
Outstanding amounts under the line of credit bear interest at the Wall Street
Journal's prime rate (8.0% at May 31, 2006) plus 0.5%.

     The business loan agreement contains various financial covenants, including
minimum working capital, minimum tangible net worth, maximum debt to tangible
net worth, minimum cash flow coverage, positive cash flow from operations and
approval of dividend payments. At May 31, 2006, the Company was compliant with
all of the financial covenants.

     The Company's management believes that the current line of credit is
sufficient to enable the Company to meet its projected needs for cash throughout
the period of time during which the revolving line of credit is available for
its use.

     In its attempt to minimize interest expense associated with any outstanding
balance that may exist under the revolving line of credit, the Company has
arranged with its bank to maintain "zero balances" in its disbursement and
depository accounts for the purpose of "sweeping" excess deposited cash to pay
down any revolving line of credit balance. Consequently, the reported "cash and
cash equivalents" amounts reflected on the Company's balance sheet occasionally
are minimal. However, the need to "sweep" excess cash at May 31, 2006 did not
exist, and therefore reported "cash and cash equivalents" at that date was
$1,508,000.

     With the approval of its Board of Directors and its bank, the Company paid
a cash dividend of $1,512,000, or $0.224 per share, to shareholders of record as
of the close of business April 21, 2006. The dividend was not special, and did
not represent that the Company will pay dividends on a scheduled basis.

ITEM 7. FINANCIAL STATEMENTS

     The reports of the independent certified public accountants and financial
statements and notes listed in the accompanying index are part of this report.
See "Index to Financial Statements" on page 15.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.

ITEM 8A. CONTROLS AND PROCEDURES

     The Company conducted an internal evaluation of its disclosure, controls,
and procedures with George W. Trahan, President and CEO, and Gregory J. Smith,
Vice President of Finance and CFO. Based upon that evaluation, the CEO and CFO
concluded that the Company's disclosure controls and procedures were effective.
They concluded that the controls and procedures provided the officers, on a
timely basis, with all information necessary for them to determine that the
Company has disclosed all material information required to be included in the
Company's periodic reports filed with the Securities and Exchange Commission.
Based upon the officers' evaluation, there were not any significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.


                                       11
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT

     Information required by this item will be contained in the Company's Proxy
Statement to be filed with the Securities and Exchange Commission within 120
days after May 31, 2006 and is incorporated herein by reference.


ITEM 10. EXECUTIVE COMPENSATION

     The information required by this item will be contained in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission within
120 days after May 31, 2006 and is incorporated herein by reference.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

     The information required by this item will be contained in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission within
120 days after May 31, 2006 and is incorporated herein by reference.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item will be contained in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission within
120 days after May 31, 2006 and is incorporated herein by reference.


ITEM 13. EXHIBITS

     Exhibits: See "Exhibit Index", page 14.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The information required by this item will be contained in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission within
120 days after May 31, 2006 and is incorporated herein by reference.


                                       12
<PAGE>

                                    SIGNATURE

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

                                   HI-SHEAR TECHNOLOGY CORPORATION


Date: July 28, 2006                By:  /s/ George W. Trahan
                                        ----------------------------------------
                                        President, Chief Executive Officer and
                                        Chairman

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

Date: July 28, 2006                By:  /s/ George W. Trahan
                                        ----------------------------------------
                                        President, Chief Executive Officer and
                                        Chairman


                                   By:  /s/ Thomas R. Mooney
                                        ----------------------------------------
                                        Director, Co-chairman of the Board


                                   By:  /s/ Gregory J. Smith
                                        ----------------------------------------
                                        Vice President of Finance and Chief
                                        Financial Officer


                                   By:  /s/ Jack Bunis
                                        ----------------------------------------
                                        Director


                                   By:  /s/ David W. Einsel
                                        ----------------------------------------
                                        Director


                                       13
<PAGE>

                                  EXHIBIT INDEX
EXHIBIT                                                             SEQUENTIALLY
NUMBER                        DESCRIPTIONS                            NUMBERED
------                        ------------                            --------
3.1           Certificate of Incorporation, as amended(1)
3.2           Bylaws, as amended(2)
4.1           Form of Common Stock(3)
10.1          1993 Stock Option Plan(2)
10.2.1        Consulting Agreement with Thomas R. Mooney(6)
10.2.2        Consulting Agreement with Thomas R. Mooney(13)
10.3          Employment Agreement with George W. Trahan(5)
10.3.1        Amendment to Employment Agreement with George W. Trahan(6)
10.3.2        Employment Agreement with George W. Trahan(13)
10.4.1        Torrance Property Lease(6)
10.4.1.1      Torrance Property Lease Amendment #1(12)
10.5.1        Form of Buy/Sell Agreement(6)
10.6          Southern California Bank Credit Facility (now U.S. Bank)(4)
10.6.1        Promissory Note Relating to U.S. Bank Credit Facility(5)
10.6.2        Promissory Note Related to U.S. Bank Credit Facility(7)
10.6.3        Promissory Note and Amendment Relating to U.S.
              Bank Credit Facility(7)
10.6.3.1      Amendments to Promissory Notes Relating to U.S.
              Bank Credit Facility(8)
10.6.3.2      Amendments to Promissory Notes Relating to U.S.
              Bank Credit Facility(11)
10.6.3.3      Amendment to Promissory Note Relating to U.S.
              Bank Credit Facility(12)
10.6.3.4      Amendment to Promissory Note Relating to U.S.
              Bank Credit Facility(13)
10.6.4        Term Note Related to U.S. Bank Credit Facility(11)
16.2          Letter on Change in Certifying Accountant(9)
16.3          Letter on Change in Certifying Accountant (10)
20            Form 8-K/A filed August 8, 2003(12)
23.1          Consent of Raimondo Pettit Group
23.2          Consent of Grant Thornton LLP(11)
31            Rule 13a-14(a) Certifications
32            Section 1350 Certifications

(1)  PREVIOUSLY FILED AND INCORPORATED BY REFERENCE TO THE COMPANY'S FORM SB-2
     REGISTRATION STATEMENT NO. 33-73972 FILED WITH THE SECURITIES AND EXCHANGE
     COMMISSION ON JANUARY 10, 1994.
(2)  PREVIOUSLY FILED AND INCORPORATED BY REFERENCE TO THE COMPANY'S FORM SB-2
     REGISTRATION STATEMENT NO. 33-73972 FILED WITH THE SECURITIES AND EXCHANGE
     COMMISSION ON FEBRUARY 1, 1994.
(3)  PREVIOUSLY FILED AND INCORPORATED BY REFERENCE TO THE COMPANY'S FORM SB-2
     REGISTRATION STATEMENT NO. 33-73972 FILED WITH THE SECURITIES AND EXCHANGE
     COMMISSION ON MARCH 23, 1994.
(4)  PREVIOUSLY FILED AND INCORPORATED BY REFERENCE TO THE COMPANY'S FORM 10-KSB
     FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1998.
(5)  PREVIOUSLY FILED AND INCORPORATED BY REFERENCE TO THE COMPANY'S FORM 10-KSB
     FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 17, 1999.
(6)  PREVIOUSLY FILED AND INCORPORATED BY REFERENCE TO THE COMPANY'S FORM 10-KSB
     FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 24, 2000.
(7)  PREVIOUSLY FILED AND INCORPORATED BY REFERENCE TO THE COMPANY'S FORM 10-KSB
     FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 2002.
(8)  PREVIOUSLY FILED AND INCORPORATED BY REFERENCE TO THE COMPANY'S FORM 10-KSB
     FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 2002.
(9)  PREVIOUSLY FILED AND INCORPORATED BY REFERENCE TO EXHIBIT 16.2 TO FORM
     8-K/A FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 24,
     2003.
(10) PREVIOUSLY FILED AND INCORPORATED BY REFERENCE TO EXHIBIT 16.3 TO FORM
     8-K/A FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 8, 2003.
(11) PREVIOUSLY FILED AND INCORPORATED BY REFERENCE TO THE COMPANY'S FORM 10-KSB
     FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 19, 2003.
(12) PREVIOUSLY FILED AND INCORPORATED BY REFERENCE TO THE COMPANY'S FORM 10-KSB
     FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 2004.
(13) PREVIOUSLY FILED AND INCORPORATED BY REFERENCE TO THE COMPANY'S FORM 10-KSB
     FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 2005.


                                       14


<PAGE>

                          INDEX TO FINANCIAL STATEMENTS

                                                                            PAGE

Independent Auditors' Report........................................         F-1

Balance Sheet.......................................................         F-2

Statements of Operations............................................         F-3

Statements of Stockholders' Equity  ................................         F-4

Statements of Cash Flows   .........................................         F-5

Notes to Financial Statements.......................................  F-6 - F-22

<PAGE>

                          [LOGO] RAIMONDO PETTIT GROUP

                A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
                          CERTIFIED PUBLIC ACCOUNTANTS


                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Hi-Shear Technology Corporation

We have audited the accompanying balance sheet of Hi-Shear Technology
Corporation as of May 31, 2006, and the related statements of operations,
stockholders' equity, and cash flows for the years ended May 31, 2006 and 2005.
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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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 Hi-Shear Technology Corporation
as of May 31, 2006 and the results of its operations and its cash flows for the
two years in the period then ended in conformity with accounting principles
generally accepted in the United States of America.


/s/ Raimondo Pettit Group


Torrance, California
July 26, 2006


                                      F-1

<PAGE>
<TABLE>
<CAPTION>
HI-SHEAR TECHNOLOGY CORPORATION


BALANCE SHEET
MAY 31, 2006

ASSETS
----------------------------------------------------------------------------------------------
<S>                                                                          <C>
Current Assets
   Cash and cash equivalents                                                   $    1,508,000
   Accounts receivable (Note 4)                                                    10,938,000
   Inventories, net (Note 5)                                                        1,610,000
   Deferred income taxes (Note 12)                                                    810,000
   Prepaid expenses and other current assets                                          170,000
                                                                               ---------------

     TOTAL CURRENT ASSETS                                                          15,036,000

Land (Note 7)                                                                         846,000
Equipment, net (Note 6)                                                             1,872,000
                                                                               ---------------

                                                                               $   17,754,000
                                                                               ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------------

Current Liabilities
   Trade accounts payable                                                      $      860,000
   Accrued liabilities (Note 9)                                                     1,906,000
   Current portion of obligations under capital leases (Note 11)                       40,000
   Deferred revenue (Note 10)                                                         242,000
                                                                               ---------------

     TOTAL CURRENT LIABILITIES                                                      3,048,000

Deferred income taxes (Note 12)                                                       337,000
Obligations under capital leases (Note 11)                                            113,000
                                                                               ---------------

     TOTAL LIABILITIES                                                              3,498,000
                                                                               ---------------

Commitments and contingencies (Notes 8, 13 & 16)

Stockholders' Equity (Note 14)
   Preferred stock $1.00 par value; 500,000 shares authorized;
     no shares issued                                                                     ---
   Common stock, $.001 par value; 25,000,000 shares authorized;
     6,774,000 shares issued and outstanding                                            7,000
   Additional paid-in capital                                                       7,503,000
   Retained earnings                                                                6,746,000
                                                                               ---------------

     TOTAL STOCKHOLDERS' EQUITY                                                    14,256,000
                                                                               ---------------

                                                                               $   17,754,000
                                                                               ===============
See Notes to Financial Statements.

                                              F-2
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
HI-SHEAR TECHNOLOGY CORPORATION


STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31,

                                                                  2006                     2005
-----------------------------------------------------------------------------------------------------
<S>                                                      <C>                      <C>
REVENUES (Note 3)                                           $     21,052,000         $     16,076,000

Cost of Revenues                                                  13,340,000               10,859,000
                                                           ------------------       ------------------

GROSS MARGIN                                                       7,712,000                5,217,000

Selling, General and Administrative Expenses                       4,020,000                4,900,000
                                                           ------------------       ------------------

OPERATING INCOME                                                   3,692,000                  317,000

Interest Expense (Note 8)                                                  0                        0
                                                           ------------------       ------------------

INCOME BEFORE INCOME TAX EXPENSE                                   3,692,000                  317,000

Income Tax Expense (Note 12)                                       1,397,000                  102,000
                                                           ------------------       ------------------

NET INCOME                                                  $      2,295,000         $        215,000
                                                           ==================       ==================

Basic Earnings per Common Share and
     Per Common Share Assuming Dilution                     $           0.34         $           0.03
                                                           ==================       ==================

Weighted Number of Common Shares Outstanding:
     Basic                                                         6,709,000                6,691,000
                                                           ==================       ==================
     Diluted                                                       6,741,000                6,737,000
                                                           ==================       ==================

See Notes to Financial Statements.

                                                 F-3
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
HI-SHEAR TECHNOLOGY CORPORATION


STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 2006 AND 2005


                                     Common Stock             Additional                            Total
                              ----------------------------     Paid-In          Retained         Stockholders'
                                  Shares         Amount        Capital          Earnings            Equity
---------------------------------------------------------------------------------------------------------------
<S>                                 <C>          <C>        <C>              <C>               <C>
Balance, May 31, 2004               6,683,000     $  7,000   $    7,219,000   $    5,748,000    $    12,974,000

  Stock options exercised              18,000            -           59,000                -             59,000
  Net income                                -            -                -          215,000            215,000
                              ----------------    --------   --------------   ---------------   ---------------

Balance, May 31, 2005               6,701,000        7,000        7,278,000        5,963,000         13,248,000

  Stock options exercised              73,000            -          225,000                             225,000
  Dividend                                  -            -                -       (1,512,000)        (1,512,000)
  Net income                                -            -                -        2,295,000          2,295,000
                              ----------------    --------   --------------   ---------------   ---------------

Balance May 31, 2006                6,774,000     $  7,000   $    7,503,000   $    6,746,000    $    14,256,000
                              ================    ========   ==============   ===============   ===============


See Notes to Financial Statements.


                                                       F-4
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
HI-SHEAR TECHNOLOGY CORPORATION


STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31,
                                                                              2006                 2005
-------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                            $     2,295,000      $       215,000
   Adjustments to reconcile net income to net cash
     provided by operating activities:
       Depreciation and amortization                                             417,000              394,000
       Loss (gain) on disposition of fixed assets                                  9,000              (45,000)
       Provision for inventory reserves                                           87,000              123,000
       Write-off of obsolete inventory, net of reserves                           25,000               56,000
       Reduction to accounts receivable reserves                                       0              (27,000)
          Write-down of accounts receivable, net of reserves                           0            1,645,000
       Deferred income taxes, net                                              1,169,000               45,000
   Changes in assets and liabilities:
     Accounts receivable                                                      (1,789,000)          (2,440,000)
     Inventories                                                                 (87,000)            (251,000)
     Prepaid expenses and other assets                                            (5,000)             (11,000)
     Trade accounts payable                                                     (195,000)             309,000
     Accrued liabilities                                                         635,000              205,000
     Deferred revenue                                                           (132,000)             283,000
                                                                         ----------------     ----------------

         NET CASH PROVIDED BY OPERATING ACTIVITIES                             2,429,000              501,000
                                                                         ----------------     ----------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from sale of equipment                                                 2,000              114,000
   Purchase of equipment                                                        (345,000)            (460,000)
                                                                         ----------------     ----------------

         NET CASH USED IN INVESTING ACTIVITIES                                  (343,000)            (346,000)
                                                                         ----------------     ----------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Payments on capital lease obligation                                          (11,000)                   0
   Proceeds from stock options exercised                                         225,000               59,000
   Payment of dividend                                                        (1,512,000)                   0
                                                                         ----------------     ----------------

         NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                  (1,298,000)              59,000
                                                                         ----------------     ----------------

         NET INCREASE IN CASH                                                    788,000              214,000

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                   720,000              506,000
                                                                         ----------------     ----------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                 $     1,508,000      $       720,000
                                                                         ================     ================

Supplemental Disclosure of Cash Flow Information:
   Cash paid for interest                                                $             0      $             0

   Cash paid for income taxes                                            $       105,000               39,000

   Non-cash investing and financing activities
   Assets acquired under capital lease obligation                        $       164,000      $             0

See Notes to Financial Statements.

                                                      F-5
</TABLE>

<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS

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

NOTE 1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS:

Hi-Shear Technology Corporation was incorporated in Delaware in 1993 and designs
and manufactures power cartridges, separation devices, electronic firing units
and other special components used by the aerospace industry, the military and
the National Aeronautics and Space Administration (NASA). The Company's
aerospace products are procured under both long and short-term contracts with
numerous aerospace contractors, subcontractors and agencies of the United States
Government. The Company is dependent on the continuation of government sponsored
military and aerospace programs in order to maintain its revenues.

A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES IS AS FOLLOWS:

USE OF ESTIMATES:

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 both assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates and assumptions made by management are used for, but not
limited to, the realization of claims receivable and certain inventories, costs
to complete contracts, and the carrying value of long-lived assets. Actual
results could differ from those estimates, and such changes could be material.

REVENUE RECOGNITION:

The Company's revenues are derived principally from long-term fixed-price
contracts that are accounted for on the percentage-of-completion method.
Revenues for those contracts are calculated on the basis of the relationship
between costs incurred and total estimated costs to complete the contracts
(cost-to-cost type of percentage-of-completion method of accounting). Revenue
recognition for contracts that require relatively less time to complete than
those contracts accounted for on a percentage-of-completion basis are recognized
as deliveries are made.

Provisions for estimated total contract losses on uncompleted contracts are made
in the period in which such losses are determined. Amounts representing contract
change orders are included in revenues only when the amounts can reliably be
estimated and realization is probable. Changes in estimates of revenues, costs
and profits are recognized in the period such changes are made.

The Company submits claims for cost reimbursement related to contract
requirement changes not yet incorporated into its contract or other contract
costs in negotiation. These claims for reimbursement result from changes to
specifications, additional work required to be performed by the Company to
satisfy customer requests beyond contract scope, failure of customer designed
components and adjustments to contract pricing due to the customer reducing unit
quantities. Claims receivable are recorded to the extent of costs incurred, and
when, in management's opinion, it is probable that the claim will be collected
in full and the amount of the claim can be reasonably estimated.

                                      F-6
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS

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

NOTE 1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ACCOUNTS RECEIVABLE:

Included are amounts billed and currently due from customers under all types of
contracts, plus amounts earned but unbilled on long-term contracts accounted for
under the cost-to-cost type of percentage-of-completion method of accounting.

The Company evaluates all outstanding billed accounts receivable to assess the
potential need for an allowance for doubtful accounts. In that assessment, the
Company considers the financial condition of its customers and the legal and
contractual bases underlying the accounts receivable.

INVENTORIES:

Inventories are composed of raw materials and component parts, work-in-process,
and finished goods available for sale. Raw materials and component parts
consists of purchased and manufactured parts that are not allocated to an
existing production job and are expected to be utilized in anticipated future
customer contracts. Work-in-process consists of costs incurred for non-contract
jobs in process for manufacturing components and sub-assemblies that do not
relate to existing production contracts, but are built in anticipation of future
customer contracts. Finished goods consist of completed manufactured products to
fulfill future anticipated customer contracts.

Inventory costs for component parts, work-in-process and finished goods include
costs for material, direct labor, sub-contracting for manufacturing processes
and testing, and manufacturing and engineering overhead. Selling, general and
administrative costs are not included in inventory, and are charged to expense
as incurred. In accordance with industry practice, inventories are classified as
a current asset, and include items that may be allocated to contracts that will
not be completed within twelve months. Inventory is valued at the lower of cost
or estimated market value, and is determined on a "first-in, first-out" basis.

EQUIPMENT:

Equipment is recorded at cost. The Company also capitalizes certain material and
labor incurred in connection with the construction of assets. Depreciation and
amortization are charged against income using the straight-line method over the
estimated useful service lives of the related assets. The principal lives used
in determining depreciation and amortization rates are as follows: machinery and
equipment, 5 to 10 years; autos, 5 years; tooling, 3 years; furniture and
fixtures, 10 years.

LAND:

Investment in land is recorded at the lower of cost or net realizable value.

IMPAIRMENT ON LONG-LIVED ASSETS:

The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. Assets deemed impaired are recorded to the
lower of carrying value or fair value.

                                      F-7
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS

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

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES:

Deferred income taxes are provided using the liability method whereby deferred
income tax assets are recognized for deductible temporary differences and
operating loss carryforwards and deferred income tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred income tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred income tax assets will not be realized. Deferred income tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.

EARNINGS PER SHARE:

Earnings per share (EPS) are computed as net income divided by the
weighted-average number of common shares outstanding for the period. EPS
assuming dilution reflects the potential dilution that could occur from common
shares issuable through stock options. The dilutive effect from outstanding
options for both fiscal year 2006 and fiscal year 2005 did not change the
earnings per share for either of those fiscal years.

The following is a reconciliation of the numerators and denominators used to
calculate earnings per common share, as presented in the statements of
operations:

<TABLE>
<CAPTION>
                                                                       YEARS ENDED MAY 31,
                                                              --------------------------------------
                                                                      2006              2005
<S>                                                            <C>                        <C>
EARNINGS PER COMMON SHARE - BASIC:

   Numerator: earnings available for common
     Stockholders                                               $    2,295,000            215,000

   Denominator: weighted average shares                              6,709,000          6,691,000

   EARNINGS PER COMMON SHARE - BASIC                            $         0.34               0.03


EARNINGS PER COMMON SHARE - DILUTED:

   Numerator: earnings available for common
     Stockholders                                               $    2,295,000            215,000

   Denominator: weighted average shares - diluted                    6,741,000          6,737,000

EARNINGS PER COMMON SHARE - DILUTED                             $         0.34               0.03

CALCULATION OF WEIGHTED AVERAGE COMMON SHARE - DILUTED:

   Weighted Average Number of Common
     Shares Outstanding during the Period                            6,709,000          6,691,000

   Effect of Dilutive Securities Options                                32,000             46,000
                                                                ---------------    ---------------

   Weighted Number of Common Shares and
     Dilutive Potential Common Stock used
       in Diluted EPS                                                6,741,000          6,737,000
                                                                ===============    ===============
</TABLE>

                                      F-8

<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS

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

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Not included in the calculation of diluted earnings per share because their
impact is antidilutive:

Stock options outstanding                      10,000              49,000
                                       ===============    ================

FAIR VALUE OF FINANCIAL INSTRUMENTS:

The estimated fair value of long-term debt, which approximates the carrying
value, is based on interest rates that are currently available to the Company
for issuance of debt with similar terms and remaining maturities. The carrying
amount of notes payable to the bank approximates fair value since the interest
rate changes with the market interest rate. The carrying amount of cash
equivalents, accounts receivable and accounts payable approximates fair value
because of the short maturity of these instruments.

CASH AND CASH EQUIVALENTS:

For purposes of reporting cash flows, the Company considers all highly liquid
debt instruments purchased with a maturity date of three months or less to be
cash equivalents.

The Company periodically has cash on deposit with its bank that exceeds the
insurance limits of the FDIC. The Company has not experienced any losses on such
deposits.

STOCK-BASED COMPENSATION:

The Company accounts for stock-based employee compensation under the
requirements of Accounting Principles Board (APB) Opinion No. 25, which does not
require compensation to be recorded if the exercise price is equal to or greater
than the fair value of the stock at the measurement date. Nonemployee
stock-based transactions are accounted for under the requirements of SFAS No.
123 ACCOUNTING FOR STOCK BASED COMPENSATION, which requires compensation to be
recorded based on the fair value of the securities issued or the services
received, whichever is more reliably measurable. Accordingly, as the exercise
price equals or exceeds the fair value, no compensation cost has been recognized
for grants under the plan. Had compensation cost for the stock-based
compensation plans been determined based on the grant date fair values of awards
(the method described in FASB Statement No. 123), reported net income and
earnings per common share would have been reduced to the pro forma amounts shown
below:

<TABLE>
<CAPTION>
                                                                            2006             2005
<S>                                                                    <C>               <C>
Net income:

      As reported                                                       $   2,295,000     $     215,000
      Add:   Stock-based compensation cost included in
             reported net income, net of related tax effects                        0                 0
      Less:  Total stock-based compensation cost determined
             under fair value based method for all awards,
             net of related tax effect                                         24,000            24,000
                                                                        --------------    --------------

      Pro forma                                                         $   2,271,000     $     191,000
Earnings per common share and common share assuming dilution:
      As reported                                                       $        0.34     $        0.03
      Pro forma                                                         $        0.34     $        0.03
</TABLE>

                                      F-9

<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS

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

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model. While no options were granted during fiscal
year 2006, the fair value of options granted during fiscal year 2004 was
calculated by using the following weighted-average assumptions: No dividend
rate; price volatility of 20%; risk-free interest rate of 4.4%; and expected
lives of ten years.

NEW ACCOUNTING PRONOUNCEMENTS:

In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 151 "Inventory Costs, an Amendment of ARB No. 43 Chapter 4" ("Statement
151"). Statement 151 requires that items such as idle facility expense,
excessive spoilage, double freight, and rehandling be recognized as
current-period charges rather than being included in inventory, regardless of
whether the costs meet the criterion of "abnormal" as defined in ARB 43.
Statement 151 is applicable for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company will adopt this standard when it
becomes effective, which is not applicable until its fiscal year beginning June
1, 2006. However, Company's management does not expect the adoption to have a
material impact on the Company's future financial condition or results of
operations.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets, an Amendment of APB Opinion No. 29" ("Statement 153"). Statement 153 is
based on the principle that exchanges of non-monetary assets should be measured
based upon the fair value of the assets exchanged. This statement amends APB 29
to eliminate the exception for non-monetary exchanges of similar productive
assets, and replaces it with a general exception for exchanges of non-monetary
assets that do not have commercial substance. A non-monetary exchange has
commercial substance, if the future cash flows of the entity are expected to
change significantly as a result of the exchange. Statement 153 is effective for
non-monetary exchanges occurring in fiscal periods beginning after June 15,
2005. The Company will adopt this standard when it becomes effective, which is
not applicable until its fiscal year beginning June 1, 2006. However, Company's
management does not expect the adoption to have a material impact on the
Company's future financial condition or results of operations.

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes
APB 25, "Accounting for Stock Issued to Employees." This statement requires that
all stock-based payments to employees, including grants of employee stock
options, be recognized as compensation costs in the financial statements based
on their fair values measured at the date of grant.

Prior to June 1, 2006, the Company had accounted for grants of employee stock
options under the intrinsic value method allowed under APB 25 and related
interpretations, and therefore had not recognized any compensation costs for
stock-based awards. As permitted by SFAS No. 123, the Company presented pro
forma financial results including the effects of share-based compensation costs
in this note to the Financial Statements.

SFAS No. 123(R) is effective for fiscal years beginning after December 15, 2005
and permits adoption using one of the following two methods:

  o  Modified prospective method, in which compensation costs will be recognized
     in the Company's Financial Statements for all awards granted after the date
     of adoption as well as for the unvested portion of existing awards as of
     the date of adoption (the "Existing Awards"), and requires that prior
     periods not be restated.

                                      F-10
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS

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

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

  o  Modified retrospective method, which includes the requirements of the
     modified prospective method described above for new awards and Existing
     Awards, but also permits entities to restate prior periods based on amounts
     previously determined under SFAS No. 123 for pro forma disclosures.

The Company will adopt this standard beginning June 1, 2006, using the modified
prospective method. As permitted by Statement 123, we accounted for share-based
payments to employees using Opinion 25's intrinsic value method up to May 31,
2006. Although the adoption of Statement 123(R)'s fair value method will have no
adverse impact on the balance sheet or total cash flows, it will affect net
income and earnings per share. Hi Shear anticipates the adoption of SFAS No.
123(R) will reduce net income by approximately $16,000 for the fiscal year
ending May 31, 2007, increasing the Company's selling, general and
administrative expenses. This expense is related to unrecognized stock-based
compensation costs for Existing Awards as of May 31, 2006 which are expected to
be recognized over a weighted-average period of 1.5 years.

The Company cannot yet estimate what the compensation cost impact will be on the
financial statements for the awards that the Company issues after June 1, 2006,
if any, as it will depend on the terms of any future grants approved by the
Board of Directors and the underlying assumptions used in calculating the fair
value at the time of any such future grants. The calculation of fair value is
very sensitive to changes in the underlying assumptions, especially volatility
and expected option term life.

In addition, SFAS No. 123(R) will impact how income taxes are recorded to the
Company's Financial Statements, as tax deductions for certain tax-qualified
option grants ("incentive stock options") are allowed only at the time a taxable
disposition occurs. This may result in an increase in the Company's effective
tax rate in the early periods after adoption and it could cause variability in
the Company's effective tax rate throughout a fiscal year as these events occur.

Statement 123(R) also requires a portion of the benefits of tax deductions
resulting from the exercise of stock options to be reported as a financing cash
flow, rather than as an operating cash flow. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. Total cash flow will remain unchanged from what would have been
reported under prior accounting rules.

The actual effects of adopting Statement 123(R) will depend on numerous factors
including the amounts of share-based payments granted in the future, the
valuation model we use to value future share-based payments to employees and
estimated forfeiture rates.

Accounting Changes and Error Corrections: On June 7, 2005, the FASB issued
Statement No. 154, Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements. Statement 154 changes the
requirements for the accounting for and reporting of a change in accounting
principle. Previously, most voluntary changes in accounting principles required
recognition of a cumulative effect adjustment within net income of the period of
the change. Statement 154 requires retrospective application to prior periods'
financial statements, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. Statement 154 is
effective for accounting changes made in fiscal years beginning after December
15, 2005; however, the Statement does not change the transition provisions of
any existing accounting pronouncements. The Company's management does not expect
the adoption of Statement 154 will have a material effect on the Company's
future financial position, results of operations or cash flows.

                                      F-11

<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Accounting for Uncertainty in Income Taxes: On July 13, 2006, the FASB issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109. Interpretation 48 clarifies the
accounting for uncertainty in income taxes recognized in an entity's financial
statements in accordance with Statement 109 and prescribes a recognition
threshold and measurement attribute for financial statement disclosure of tax
positions taken or expected to be taken on a tax return. Additionally,
Interpretation 48 provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition.
Interpretation 48 is effective for fiscal years beginning after December 15,
2006, with early adoption permitted. The Company's management does not expect
the adoption of Interpretation 48 will have a material effect on the Company's
future financial position, results of operations or cash flows.


NOTE 2.  FOURTH QUARTER ADJUSTMENTS

During the fourth quarter of fiscal year 2006, a combination of adjustments to
inventory reserves and write-offs of slow-moving inventory items, which were
either ready to sell as finished goods or use to produce finished goods, totaled
$65,000. Those adjustment amounts, which related to current estimates regarding
the extent to which some inventory items would contribute to future sales, were
charged to cost of revenues.

Also during the fourth quarter of fiscal year 2006, the Company recognized a
$70,000 gain from the reduction of a proposed $96,000 fine that was assessed by
the California Occupational Safety and Health Agency during the previous fiscal
year ended May 31, 2005. The fine related to a workplace accident that occurred
during that fiscal year. The reduction of the fine to $26,000 resulted from a
recent pre-trial settlement of the Company's appeal of the original fine. The
$70,000 gain was included in selling, general and administrative expenses in the
Company's statement of operations for the year ended May 31, 2006.


NOTE 3.  MAJOR CUSTOMERS AND SUPPLIER CONCENTRATION

The Company derives a major portion of its revenues directly from sales to
certain large companies that have operations associated with satellite, launch
vehicle and/or government defense contracts, as well as directly from
departments and agencies of the United States Government. Sales to these major
customers, which provided revenues during fiscal year 2006 in excess of 10% of
total revenues, consist of the following:

                                                      2006            2005
                                                    --------        --------
Lockheed Martin                                        26%             31%
United States Government (Including NASA)              27%             29%
Boeing                                                 11%              9%

At May 31, 2006, billed and unpaid accounts receivable included totals of
$802,000, or 20% of total billed and unpaid accounts receivable, due from
Lockheed Martin companies, and $1,489,000, or 38% of total billed and unpaid
accounts receivable, due from the U.S. Government entities, respectively.

During fiscal year 2006, the Company had only one supplier from which it
received purchased materials and/or services that exceeded 10% of all purchased
materials and services. Purchases during the year from that supplier,
Eagle-Picher Technologies, amounted to 17% of all purchases. Disruption of
purchases from Eagle-Picher could negatively impact Hi-Shear's reported
financial results in the short term, in the event of a disruption of purchases
from that key supplier. At May 31, 2006, the Company did not have any
outstanding accounts payable with Eagle-Picher.


                                      F-12
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 4.  ACCOUNTS RECEIVABLE

Billed and unpaid receivables at May 31, 2005                     $  4,258,000
Billed receivables for fiscal year 2006                             18,885,000
                                                                  ------------
                                                                    23,143,000
Collected receivables for fiscal year 2006                          19,217,000
                                                                  ------------
Billed and unpaid receivables at May 31, 2006                        3,926,000
                                                                  ------------

Unbilled receivables at May 31, 2006:
    Unbilled receivables on contracts in process                     6,651,000
    Accrued losses on uncompleted contracts                            (18,000)
    Unbilled receivables on completed contracts                        338,000
    Employee Advance                                                    23,000
                                                                  ------------
                                                                     6,994,000
                                                                  ------------
Claims receivable at May 31, 2006                                       18,000
                                                                  ------------
Total gross accounts receivable at May 31, 2006                     10,938,000
Allowance for doubtful accounts                                              0
                                                                  ------------
Total net accounts receivable at May 31, 2006                     $ 10,938,000
                                                                  ============

Accounts receivable consists of billed and unbilled amounts due from the United
States Government, prime and subcontractors under long-term contracts. Billed
and unbilled accounts receivables at May 31, 2006 were $3,926,000 and
$6,994,000, respectively.

The billed accounts receivable balance includes $58,000 for damages awarded to
the Company by the jury of a concluded trial of the Company's lawsuit against
the United Space Alliance, LLP for alleged breaches of contracts. The Company
has filed a Notice of Appeal of that jury verdict (See Note 13).

The accounts receivable balance at May 31, 2006 also includes $18,000 for two
claims on two related contracts terminated by the U.S. Army for "convenience".
The balance represents the $17,794 damages awarded the Company by the United
States Court of Federal Claims. The Company is in the process of collecting its
damages award, plus legal fees and interest incurred from May 1997.

Unbilled receivables include revenues recognized from long-term fixed priced
contracts under the percentage-of-completion method, but in advance of
completing billable events for which invoices are submitted to customers. The
total costs and earnings recognized from inception-to-date on contracts in
process at May 31, 2006 are as follows:

        Total contracts in process                          $ 36,840,000
                                                            ============
        Total costs incurred                                $ 16,887,000
        Add estimated earnings                                 8,283,000
                                                            ------------
        Total revenue recognized                              25,170,000
        Less amounts billed                                   18,761,000
                                                            ------------
                                                            $  6,409,000
                                                            ============
        Unbilled receivables on contracts in process        $  6,651,000
        Deferred revenue on contracts in process                (242,000)
                                                            ------------
                                                            $  6,409,000
                                                            ============


                                      F-13
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 4.  ACCOUNTS RECEIVABLE (CONTINUED)

Because of the large amount of contracts in process at any point in time,
changes in estimates to complete can have a significant impact on the
profitability of the Company. Management estimates that each 1% change in the
total estimated costs to complete the contracts in process at May 31, 2006 would
change both the recognized revenue and earnings by approximately $71,000.

During the fiscal years 2006 and 2005, the Company generated revenues of
approximately $2,166,000 and $1,684,000, respectively, from sources outside of
the United States.

NOTE 5.  INVENTORIES

Aerospace and defense inventory:
    Raw materials and component parts                               $   310,000
    Work-in-process                                                   1,225,000
    Finished goods                                                      482,000
                                                                    -----------
                                                                      2,017,000
    Less inventory reserves                                            (425,000)
                                                                    -----------
         Total aerospace and defense inventory                        1,592,000

Non-aerospace and non-defense inventory:
         Work-in-process                                                 18,000
                                                                    -----------

              Total net inventory                                   $ 1,610,000
                                                                    ===========

Included in inventories recorded and maintained by the Company are purchased and
manufactured component parts and finished goods that relate to previously
completed contracts. The Company's management periodically assesses the
likelihood that those inventory items will be used in future contracts, since
many of the Company's past contracts relate to on-going programs, for which it
will be awarded similar contracts. The method utilized in management's
assessment is to select a sample of the total inventory that it considers to be
representative of the total inventory. Each sample item is separately evaluated,
and reserve amounts are calculated, based upon its assessment of the likelihood
that the item will be used for a future contract. After similarly assessing and
calculating individual sample item reserve amounts, the resulting total reserve
percentage of each sample group is applied to the total inventory. Since the
inventory reserve methodology is subjective, and subject to changes in estimates
based upon updated information, changes in those estimates can be substantial.

NOTE 6.  EQUIPMENT

Machinery and equipment                                               $4,768,000
Office equipment and furniture                                           219,000
Leasehold improvements                                                   210,000
Production and test tooling                                              173,000
Automobiles                                                              164,000
Projects in process                                                      255,000
                                                                      ----------
                                                                       5,789,000
Less accumulated depreciation and amortization                         3,917,000
                                                                      ----------
                         Total net equipment                          $1,872,000
                                                                      ==========


                                      F-14
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 6.  EQUIPMENT (CONTINUED)

For fiscal year 2006, the Company capitalized costs amounting to $42,000 that
were incurred in the purchase or manufacture of production and test tooling
related primarily to new products designed and qualified for production by the
Company during fiscal year 2006. Each tool, for which costs are capitalized, is
expected to be used repeatedly in the production or test of similar parts for
multiple orders over an extended period of time of at least three years.
Accordingly, capitalized tooling costs are depreciated on a straight-line basis
over three years.

Included in automobiles is $164,000 in capital leases, which is reduced by
accumulated depreciation of $11,000 at May 31, 2006.

NOTE 7.  LAND

The Company owns twelve acres of land in Santa Clarita, CA, on which it has
several buildings that it uses for storage and blending of pyrotechnic powders
utilized in many of its manufactured products.

NOTE 8.  BANK LINE OF CREDIT AND NOTES PAYABLE

The Company has a business loan agreement with a bank for the purpose of
obtaining a revolving line of credit and term loans. Borrowings under this
business loan agreement are collateralized by substantially all of the Company's
assets.

At May 31, 2006 and throughout fiscal year 2006, the Company did not have any
bank debt.

The revolving line of credit, under which the Company can borrow up to a maximum
limit of $2,500,000, is set to mature on December 15, 2006. Outstanding balances
under the line of credit bear interest at sum of the Wall Street Journal's rate
(8.0% at May 31, 2006) plus 0.5%.

The business loan agreement requires bank approval for payment of dividends and
contains various financial covenants, including minimum working capital, minimum
tangible net worth, maximum debt to tangible net worth, minimum cash flow
coverage and positive cash flow from operations. At May 31, 2006, the Company
was compliant with all of the covenants.


NOTE 9. ACCRUED LIABILITIES

As of May 31, 2006, accrued liabilities consist of the following:

Accrued vacation                                                      $  820,000
Accrued salaries, wages and bonus                                        696,000
Deferred compensation                                                    156,000
Accrued commissions                                                       35,000
Accrued income taxes                                                     122,000
Miscellaneous                                                             77,000
                                                                      ----------

                Total accrued liabilities                             $1,906,000
                                                                      ==========


                                      F-15
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 10.  DEFERRED REVENUE

Deferred revenue is composed of amounts billed to customers in excess of
revenues earned and recognized on the related contracts at the end of a
financial period. As the Company continues to perform work on those contracts in
process, revenue is earned and "deferred revenue" on the balance sheet is
reclassified to earned "revenue" on the statements of operations. Deferred
revenue was $242,000 at May 31, 2006.

NOTE 11.  CAPITAL LEASES

The Company leases vehicles under capital leasing agreements which expire at
various dates through July 2010. Future minimum lease payments are as follows:

Year Ending May 31,

     2007                                                  $    49,000
     2008                                                       46,000
     2009                                                       43,000
     2010                                                       36,000
     2011                                                        1,000
                                                           ------------

     Total minimum lease payments                              175,000
     Amounts representing interest                             (22,000)
                                                           ------------

     Present value of net minimum lease payments               153,000

     Current maturities                                        (40,000)
                                                           ------------

                                                           $   113,000
                                                           ============


                                      F-16
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 12.  INCOME TAXES

Deferred income taxes at May 31, 2006 consist of the following:

Current
   Deferred income tax asset:
      Accrued vacation                                             $    366,000
      Income tax credits                                                169,000
      Inventory reserves                                                182,000
      Current year state tax expense                                     91,000
      Supplemental employee retirement plan                              67,000
                                                                   ------------
   Total current deferred income tax asset                              875,000

   Deferred income tax liability:
      Prepaid expenses                                                  (34,000)
      Deferred state taxes                                              (31,000)
                                                                   ------------
   Total current deferred income tax liability                          (65,000)

Net current deferred income tax asset                                   810,000
                                                                   ------------

Non-current
   Deferred income tax liability:
      Fixed assets                                                     (337,000)
                                                                   ------------
   Total net non-current deferred tax liability                        (337,000)

Total net deferred income taxes                                    $    473,000
                                                                   ============



                                      F-17
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 12.  INCOME TAXES (CONTINUED)

Realization of deferred income tax assets is primarily dependent upon generating
sufficient taxable income to absorb the tax benefit of the deferred income tax
assets. Although realization is not assured, management believes it is more
likely than not that the net deferred income tax assets will be realized prior
to expiration. That assessment is based upon the Company's expectations for a
continuation of profitable operations. The amount of the deferred income tax
assets considered realizable, however, could be increased or reduced in the near
term if estimates of future taxable income during the carryover periods are
increased or reduced, or if certain changes in the ownership structure of the
Company occur.

The provision for income taxes consists of the following:

                                                         2006           2005
                                                     -----------    -----------
Current tax expense:
     Federal                                         $ 1,275,000    $   203,000
     State                                               321,000         72,000
     Use of NOL's & tax credit carryovers             (1,359,000)      (218,000)
                                                     -----------    -----------
                                                     $   237,000    $    57,000
                                                     ===========    ===========
Deferred tax expense (benefit):
     Federal                                         $ 1,127,000    $   123,000
     State                                                33,000        131,000
     Change in valuation allowance                             0       (209,000)
                                                     -----------    -----------
                                                     $ 1,160,000    $    45,000
                                                     ===========    ===========
Total tax provision                                  $ 1,397,000    $   102,000
                                                     ===========    ===========

A reconciliation of actual tax (credit) to the amount computed by applying the
federal statutory income tax rates to income before income taxes is as follows:

                                                         2006           2005
                                                     -----------    -----------

Federal income tax computed at statutory rate        $ 1,255,000    $   108,000
Permanent differences                                    (21,000)        45,000
State taxes, net of federal benefit                      211,000         19,000
Other state tax and minimum taxes                              0         56,000
Change in valuation allowance                                  0       (209,000)
Prior year tax credits                                   (48,000)        83,000
                                                     -----------    -----------
                                                     $ 1,397,000    $   102,000
                                                     ===========    ===========

As of May 31, 2006, the Company had federal income tax credit carryovers of
approximately $169,000.

NOTE 13.  COMMITMENTS AND CONTINGENCIES

The Company leases its facilities, automobiles and certain equipment under
operating lease agreements that expire at various dates through 2010. Rental
expense under operating leases for the years ended May 31, 2006 and 2005 was
approximately $631,000 and $632,000 respectively.


                                      F-18
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 13.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

Maximum annual rentals under all non-cancelable operating leases are as follows:

                     2007                      572,000
                     2008                      588,000
                     2009                      605,000
                     2010                      165,000
                                          ------------
                                          $  1,930,000
                                          ============

$1,770,000 of the above lease commitment is for rent of the Company's offices
and production facility in Torrance. The lease agreement for the facility
extends through August 31, 2009.

In November 2000, to recover damages, which included numerous contract invoices
totaling $1,319,000 for specially manufactured aerospace components and an
unbilled amount for work performed of $384,000, Hi-Shear filed suit against
United Space Alliance, LLC, a Delaware limited liability company ("Alliance"),
and its predecessor USBI Company, a Delaware Corporation ("USBI"), in the
Circuit Court of the Eighteenth Judicial Circuit in and for Brevard County,
Florida. The Company also sought compensatory damages alleging that Alliance
fraudulently induced it to enter into contracts that the defendant had no
intention of performing, and subsequently repudiated. Further damages were
sought for defendants' misappropriation of Hi-Shear's confidential, proprietary
and/or trade secret protected designs, drawings, and specifications for other
aerospace components.

A counterclaim was subsequently filed by the defendants for damages in the
amount of $458,004 exclusive of costs, interest and attorney's fees based on the
Company's alleged breach of contract. It also alleged a claim for a declaratory
judgment, a claim for conversion seeking return of certain alleged government
property and an accounting for a claim. As part of its defense in the
litigation, Alliance claimed that it was coerced through duress to enter into a
contract with the Company where the Company was the successful lowest bidder. In
addition, Alliance demanded that Hi-Shear ship uncertified flight hardware to it
for use on the United States Space Shuttle, ahead of its normal certification
schedule.

Regarding events related to the United Space Alliance lawsuit, Hi-Shear filed
suit against Pacific Scientific Energetic Materials Company, a Delaware
Corporation, in July 2004 in the Circuit Court of the Eighteenth Judicial
Circuit in and for Brevard County, Florida. Hi-Shear filed suit to recover
damages resulting from the defendant's misappropriation of Hi-Shear's
confidential, proprietary and/or trade secret protected designs, drawings and
specifications for certain aerospace components, conspiracy to steal and
misappropriate said items, and interference with Hi-Shear's advantageous
business relationships. Pending further resolution of the United Space Alliance
lawsuit, activity in the action against Pacific Scientific has been informally
abated.

Trial of the lawsuit against Alliance and USBI commenced on July 5, 2005 in
Titusville, Florida. Approximately two weeks following the start of the trial,
the court made legal rulings holding that the Company does not own exclusive
rights to all of its technical data, which constitute the trade secrets that the
Company alleged were misappropriated. Accordingly, the court made rulings on
motions for summary judgments in favor of Alliance and USBI, which caused the
dismissal of some of Hi-Shear's claims for misappropriation of trade secrets. In
addition to the summary judgment regarding trade secrets, the court also


                                      F-19
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 13.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

ruled on another summary judgment motion to dismiss Hi-Shear's claims for
willful breach of a non-disclosure agreement against Alliance. As a result of
the court's rulings, and in order to perfect a subsequent appeal of the rulings,
Hi-Shear dismissed, "with prejudice", the remaining claims of its lawsuit
alleging misappropriation of trade secrets. As a consequence of those rulings
and actions, USBI was dropped as an active participant in the trial and USBI did
not seek an award of attorneys fees incurred by it in the litigation. USBI has
made a claim against the Company for recovery of its costs amounting to
approximately $48,000. The Company intends to challenge this claim and
management believes the ultimate amount of fees, if any, will not be material to
the Company's future financial position or results of operations. Due to the
uncertainty surrounding the likelihood and amount of potential fees Hi-Shear has
not made an accrual for a potential amount payable.

On September 2, 2005, the jury of the trial of Hi-Shear's lawsuit against United
Space Alliance, LLC rendered verdicts regarding both Hi-Shear's breach of
contract claims and Alliance's counterclaims. The jury ruled for Hi-Shear on one
breach of contract claim, for which it awarded damages in the amount of $57,781,
and it ruled against Hi-Shear on the remaining breach of contract claims. The
jury also determined that Hi-Shear converted certain property, and awarded
Alliance the amount of one dollar. All of the jury awards were exclusive of
interest and attorneys' fees. The trial court entered a final judgment on May
18, 2006 based on the jury's verdict.

Post-trial hearings before the circuit court regarding this litigation continue.
Among the issues to be addressed in those hearings will be the responsibility
for attorneys' fees in this case. The trial court has retained jurisdiction to
award attorneys fees and costs but has not yet ruled on which party may be
entitled to its fees or costs and, if so, the amount thereof. Both Hi-Shear and
Alliance have filed various motions related to attorney's fees or costs.
Alliance has filed motions requesting an award of $3.4 million in attorney's
fees and costs. The Company has not yet filed its amount of fees and costs and
intends to oppose the Alliance motions and to vigorously pursue collection of
its fees and costs from the defendant. The court will determine to what extent
Hi-Shear may recover its attorneys' fees and costs from Alliance, and to what
extent, if any, Alliance may recover its attorneys' fees and costs from
Hi-Shear. Hi-Shear is not able to estimate either the amount of attorneys' fees
for which it may be reimbursed or liable, if any. Accordingly, no accruals for
potential amounts payable have been made at this time. An award of attorneys'
fees against Hi-Shear could have a material adverse impact on the Company's
financial position and results of operations.

On October 7, 2005 Hi-Shear timely filed a notice of appeal to the Florida Fifth
District Court of Appeal seeking review of the adverse judgment entered in favor
of USBI. The judgment appealed principally involves the trial court's rejection
of Hi-Shear's claims for recovery of damages from USBI for the misappropriation
of its trade secrets and technical data. The Company has also timely filed a
Notice of Appeal to challenge the trial courts final judgment and the myriad of
questionable adverse rulings by the court during the course of the trial.

In addition, the Company is subject to other claims and legal actions that may
arise in the ordinary course of business. In the opinion of the Company, after
consultation with counsel, the ultimate liability, if any, with respect to these
other claims and legal actions will not have a material effect on the financial
position or on the results of operations.


                                      F-20
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 14.  STOCKHOLDERS' EQUITY

The Company had a non-statutory stock option plan, which was in effect from
December 23, 1993 through its termination date of December 23, 2003. Under the
plan, options to purchase common stock, with a maximum term of 10 years, were
granted and vested as determined by the Company's Stock Option Committee.
Options for up to 500,000 shares could be granted to employees or directors.
Termination of the stock option plan did not nullify stock options previously
granted, but not exercised. Those options continue to be exercisable through
their expiration dates, which occur ten years after their grant dates.

A summary of the status of the option plan and changes during fiscal years 2006
and 2005 is as follows:

<TABLE>
                                                          2006                           2005
                                             -----------------------------   ----------------------------
                                                                Weighted-                       Weighted-
                                                                 Average                         Average
                                                                Exercise                        Exercise
         Fixed Options                           Shares          Price           Shares          Price
---------------------------------------------------------------------------------------------------------
<S>                                              <C>            <C>              <C>            <C>
Outstanding at beginning of year                 151,916        $  3.81          191,216        $  3.95
      Granted                                          0              -                0              -
      Exercised                                  (73,416)          3.06          (18,300)          3.25
      Forfeited                                   (7,000)          6.50          (21,000)          5.50
                                             --------------                  -------------

Outstanding at end of year                        71,500           4.32          151,916           3.81
                                             ==============                  =============

Exercisable at end of year                        43,666           5.36           95,999           4.52

Weighted-average fair value during the
year for options outstanding at year end                         $ 7.67                         $  4.62
</TABLE>

A further summary about fixed options outstanding at May 31, 2006, is as
follows:

<TABLE>
                                Options Outstanding                       Options Exercisable
                    ----------------------------------------------   ----------------------------
                                       Weighted-
                                        Average         Weighted-                      Weighted-
                                       Remaining         Average                        Average
   Range of             Number        Contractual       Exercise         Number        Exercise
Exercise Price       Outstanding          Life           Price        Exercisable        Price
-------------------------------------------------------------------------------------------------
<S>                       <C>          <C>              <C>              <C>            <C>
$2.05 to $4.99            41,834       6.9 years        $  2.55          14,000         $ 2.27
$5.00 to $6.99            15,666       1.0 years           5.80          15,666           5.80
$7.00 to $8.50            14,000       1.7 years           7.97          14,000           7.97
                     ------------                                    -----------
                          71,500                        $  4.32          43,666         $ 5.36
                     ============                                    ===========
</TABLE>

NOTE 15.  RELATED PARTIES

A director of the Company performs consulting services for the Company under a
two-year contract that expires February 28, 2007. The Company incurred $194,000
and $182,000 of consulting fees for the years ended May 31, 2006 and 2005,
respectively.


                                      F-21
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 16. 401(K) RETIREMENT PLAN

The Company has a 401(k) Retirement Savings Plan (the "401(k) Plan") that covers
substantially all employees. Employees may elect to contribute a percentage of
compensation to the maximum deferred amount allowed by tax laws. The Company may
make a matching contribution to the 401(k) Plan and/or a profit sharing
contribution which is allocated to all eligible participants, whether they made
deferral contributions or not. Contributions are made solely at the discretion
of the Company's Board of Directors. The Company did not make a matching
contribution or a profit sharing contribution to the 401(k) Plan for the fiscal
years ended May 31, 2006 and 2005.



                                      F-22